German energy giants accused of conspiracy

Nov 05, 2007 01:00 AM

by Frank Dohmen and Klaus-Peter Kerbusk

A document by Germany's Cartel Office claims that the country's big energy producers have been secretly colluding on strategies and markets, and may even have been manipulating prices. The companies deny the accusations. But the EU Commission sees evidence of "anti-competitive" behaviour.
An investigation launched by the Dutch EU Competition Commissioner, Neelie Kroes, has produced information suggesting that the four top German players have been breaching competition laws for years.

German cartel authorities, working closely with the EU Commission, believe they have found evidence that:
-- leading executives and even the CEOs of the big energy suppliers have been meeting secretly for years,
-- corporate secrets and strategies were exchanged at these meetings,
-- detailed agreements were reached about corporate strategy in a variety of markets,
-- the secret meetings took on an institutional format and were expanded to incorporate seven major EU power suppliers,
-- industry leader E.ON at least is believed to have tried to influence the market prices for electricity. That at least is the conclusion of a report written at the end of last year by Germany's Federal Cartel Office.

Thousands of documents seized in raids
The 30-page report is the outcome of raids earlier this year on E.ON offices by investigators from the EU and from the Federal Cartel Office. The files of top executives were read and the minutes of meetings and draft decisions were copied along with internal e-mails and strategy papers in a raid on the office of E.ON CEO Wulf Bernotat at the group's headquarters in Duesseldorf and on the offices of E.ON colleagues meeting in Munich.
The spectacular document seizure in May lasted three days, and it wasn't the only lightning raid launched by the EU Commissioner who wants to push down energy prices and establish greater competition in the sector. She has launched a number of raids over the last year to get hold of business secrets of the German energy giants E.ON Energie, RWE, Vattenfall and EnBW as well as many competitors across Europe.

The German Cartel Office believes that the confiscated documents show "in an impressive way" that competition in the German energy market is largely prevented by "cooperation inadmissible under cartel rules." Instead of competing with each other, the companies are agreeing on strategies, prices and supply areas with the approval and possibly even on the instructions of the management boards, according to the Federal Cartel Office report.
All the German companies concerned denied the accusations as false and told they amounted to a one-sided interpretation by the cartel authorities.

Politicians call for curbs on energy firms
The allegations have fuelled calls for a crackdown on power companies. The economics minister of the western German state of Hesse, Alois Rhiel, a member of Chancellor Angela Merkel's political party, said Germany's big four energy groups should be forced to sell off their power stations.
He said his state would present a draft bill to the upper house of parliament in the coming weeks to strengthen Germany's law on competition in the energy sector. Rhiel had already called for tighter rules a year ago during a similar debate on electricity price hikes.

"We need more competition to ensure that prices decline for consumers. The current excessive level of electricity prices is highly unsocial because they mainly affect lower earners and families that use a lot of electricity," Rhiel told. Hesse faces a regional election in January.
The economics minister of Schleswig-Holstein, Dietrich Austermann, called for a "break-up of the German electricity cartel." He said the four companies constituted an oligopoly. Austermann, who is also a member of the party, said the Schleswig-Holstein government would boost competition in the power market by allowing smaller electricity companies to build new coal-fired power stations.

The document provides a rich array of indications that back up what consumer watchdogs and critics of the energy companies have been suspecting for months.
The four energy giants have apparently -- despite their repeated insistence to the contrary -- formed a cartel and have for years been ripping off electricity customers in Germany with excessive prices while their own profits have been soaring to record highs.

Working together for higher prices
Since 2000 E.ON, RWE, Vattenfall and EnBW have pocketed more than EUR 90 bn in pre-tax profits, an average of a billion a month. Market leader E.ON announced fresh price hikes earlier, and most competitors said they would follow suit.
Electricity prices are to rise by up to 10 % from January.

Companies deny collusion
E.ON CEO Wulf Bernotat says that has nothing to do with "any collusion among the companies." The price of electricity, like that of any other product, is determined by supply and demand, he said. That is exactly what the cartel authorities doubt, however. The Cartel Office alleges that energy executives exchanged specific "corporate parameters and strategies" at regular meetings between 2003 and 2006 -- data that can be classified as company secrets, the exchange of which can in certain cases be subject to prosecution.
The minutes of one meeting between Bernotat and his counterpart at rival company RWE, Harry Roels, reveal how the two industry leaders discussed how to prevent the justice authorities from intervening in the gas market. And Roels demanded a "generous consideration" for his company's approval of E.ON’s takeover of Ruhrgas.

Records of secret meetings
Things got even more concrete one management floor down. The Cartel Office has records of many secret meetings by RWE managers such as Johannes Lambertz or Berthold Bonekamp with E.ON colleagues such as Johannes Teyssen or Walter Hohlefelder. All apparently agreed that "relations between the companies must and can continue to be relaxed."
Duringthe regular meetings the executives exchanged concrete information about their investments over recent years and their plans for a further expansion of power generating capacity. They also agreed on the need to counter tiresome "newcomers" such as the planned gas-fired power stations in Huerth near Cologne and in the Baltic resort of Lubmin.

The managers were also on friendly terms when it came to discussing sales markets. In 2003 RWE offered E.ON "stakes in Germany, Hungary, Czech Republic, Italy and Slovakia", writes the Cartel Office, in exchange for allowing RWE "majority positions" in the various companies and markets concerned. The aim was, apparently, discussed in detail at subsequent meetings and implemented in part.
The good cooperation was by no means confined to the two groups E.ON and RWE. Southern German EnBW under then-Chief Executive Utz Claasen and Swedish group Vattenfall under its then-Germany chief Klaus Rauscher held meetings not just to "clarify common positions on electricity and gas issues" but also on "concrete individual projects," writes the Cartel Office.

And because all this was going so well, the meetings were expanded to a European level. Under the name "Meeting Club 7", managers from Belgium, Germany, France, Italy and Sweden regularly visited each other, according to the Cartel Office. Between May and September 2004, 11 meetings were allegedly held to prepare such summit conference.
All completely harmless, is the unanimous response of the companies. The meetings merely served to discuss European energy policy. That may be so. But there appear to have been conflicting views about the purpose of the meetings. British energy giant BP refused outright to take part in the meetings, according to the Cartel Office. The reason: "Cartel problems."

Signs of price manipulation
The most sensitive aspect for lawyers is the indication of price manipulation. The Cartel Office says it has found indications to that effect in the documents seized at E.ON. The heads of the four companies vehemently deny any such behaviour. E.ON CEO Bernotat points out that the electricity price is set by the market on the European Energy Exchange in Leipzig, and that companies have no influence on that process.
But the documents seen by the Cartel Office appear to tell a different story. According to those documents, E.ON’s subsidiary company Sales & Trading (EST) tried to drive up the price of electricity, and succeeded.

"From March until June 2003," says an E.ON management document, intensive use of the so-called own-account book helped "initiate market price jumps and to hedge against market price slumps." That refers to purchases and sales of electricity in the market.
The managers proudly declare that EST "as driver of the market had a very big role in pushing through a target price." Which means that the E.ON subsidiary pushed up the price.
According to the Cartel Office, the management document, which deals with prices right into 2007, ends with the recommendation: "Continuing the electricity price policy with the aim of stabilizing prices at a high level is approved."

The Cartel Office says E.ON also resorted to the closure of power generating capacity to push up prices -- a practice critics had consistently complained about but were never able to prove.
The companies themselves deny any manipulation or collusion. When managers did meet, says RWE, those meetings were ordinary gatherings of the type seen in any industry or innocent lobby or association work. There was no price manipulation and no cartel collusion, they insist.

E.ON says the Cartel Office report contains a "totally selective collection of information" with "one-sided interpretation and many unproven claims." The company said it had already given a comprehensive response to the accusations and proven that the accusations are false.
The investigation is being led by the European Commission, but analyzing the 60,000 seized documents will take time. Competition Commissioner Kroes is willing to take her time because she doesn't want to make any mistakes before she launches her long-awaited assault on the energy suppliers.
But one thing is already clear, says a member of her staff: "We have gathered enough evidence to be able to prove anti-competitive behaviour by the big energy suppliers."

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