REGULATORY: EU Competition Law: Spain fines Endesa for “Unfair” Competition by Suzanne Rab

by King & Spalding

A decision by Spain’s National Competition Commission (“CNC”) has further highlighted the increasing competition law scrutiny of the energy sector in the European Union and the delicate balance between general competition law enforcement and sector-specific regulation. The CNC fined Spain’s largest electricity company, Endesa, EUR 5.5 million (approximately USD 6.9 million) for alleged anticompetitive practices in the electricity market, relying on a controversial provision of Spanish competition law that sanctions “unfair acts which damage competition.”

Findings of the Spanish National Competition Commission

The CNC maintains that Endesa switched some of its customer accounts to contracts that were more favourable to Endesa, without obtaining the individual customers’ consent. The CNC concluded that the practices, apparently affecting over 300,000 customers, violated Spanish competition law in distorting competition. As such, the practices were considered by the CNC to be capable of affecting the public interest.

The case should be understood against the background of ongoing liberalisation of the Spanish electricity market. In 2009, a new law allowed for a partial opening up of the electricity market in Spain. Customers consuming less than 10 kilowatts per hour (kw/h) are subject to a regulated (lower) tariff, whereas customers consuming above that threshold are subject to either a 20 per cent surcharge above the regulated tariff or may choose a provider in the open market and pay their non-regulated prices. The CNC maintains that Endesa manipulated this regulatory framework by transferring customers consuming above the 10 kw/h threshold to its own non-regulated tariff and without the customers’ consent, as required by law.

When will “unfair” practices be a violation of competition law?

The CNC based its decision on an exceptional provision in the Spanish Competition Act that prohibits unfair practices in so far as they substantially affect the public interest (Article 3). The CNC, however, has rarely applied this provision. In Spain, unfair practices are usually prosecuted through a civil action.

The allegedly “unfair” activity in the case involving Endesa is the infringement of a sector-specific regulation in the distribution of energy. The CNC has alleged that Endesa infringed the regulation that serves to “prevent vertically integrated companies from implementing strategies that aim to enhance customer loyalty or force customers to remain within the group due to information asymmetries.

Commentators are divided on the question of whether and in what circumstances the Spanish competition authority should pursue violations of sector regulation as competition law infringements. Yet this relationship between competition law and sector regulation is often at the core of competition law cases in the utility sector.

The Spanish law provision on unfair practices has been considered outside the energy sector. In May 2011, the CNC considered alleged unfair practices carried out by an association of real estate agents (Decision of 12 May 2011, S/0308/10, Agrupación Técnica Profesional de Asesores de la Propiedad Inmobiliaria). The CNC stated that the association used misleading terminology when advertising its training services. Departing from the opinion of the Directorate of Investigation, the Council of the CNC considered that the practices could be considered as unfair under the Spanish Unfair Practices Act. However, the CNC confirmed that in this particular instance the practice should not be considered as a violation of the Spanish Competition Act since the public interest was not affected (i.e., competition in the relevant markets was not found to be restricted).

Balancing competition law and sector regulation

The case is timely in view of a plan by the Spanish government to merge the CNC and seven other sector regulators, including the electricity regulator. Again, views are mixed as to whether such a move would be beneficial with some commentators maintaining that the concentration of enforcement in one body would lead to more predictable and consistent enforcement, while others believe this combination could dampen enforcement.

The interface between sector-specific regulation and competition law has been considered extensively by policy-makers and academics in the energy and other sectors. In general, a number of key distinctions can be identified as marking a dividing line between sector regulation and competition law.

First, sector specific regulation tends to be “ex ante(i.e., prior to any perceived wrongdoing or market failure), thus enabling “regulators” greater flexibility to control the activities of natural or unnatural monopolies such as transportation networks. Once markets have been opened up to competition, it is believed that competition law can be applied to commercial practices only if there are demonstrable impediments to competition (“ex post”).

Second, sector regulators are supposed to have more of an ongoing relationship with the regulated companies and tend to benefit from a flow of information as part of their regulatory functions. Competition authorities, by contrast, may only obtain such information as part of active enforcement interventions or market investigations where there is already evidence that markets may not be working effectively for consumers.

Third, sector regulators tend more typically to impose behavioural or conduct-based remedies such as commitments by an incumbent electricity transmission operator to offer access to its system on fair, reasonable, and non-discriminatory terms. While competition authorities deploy a variety of measures, on the whole, they tend to prefer cleaner structural remedies (at least where mergers are concerned) that require limited ongoing supervision.

Fourth, sector regulators tend to have a range of objectives beyond the promotion of competition. These objectives may extend to industrial policy issues. Competition authorities, on the whole, tend to be charged with the specific or primary objective(s) of promoting competition or consumer welfare.

As a caveat, each of the above observations on the key areas of delineation between sector regulation and competition law may be taken as broad generalisations. In the instant case, Endesa’s practices allegedly straddled both the regulated and non-regulated sectors and were alleged to be problematic since, according to the CNC, they resulted in the leveraging of customer loyalty from the regulated sector into the contestable or ‘free’ market.

Competition law enforcement in the energy sector shows no let-up

The CNC’s track record in enforcing competition law in the energy sector sends a signal that the regulator will not likely be shy to pursue infringement cases even in situations that blur the line between competition law and sector regulation.

This is not the first competition law allegation involving Endesa itself. The CNC fined the company EUR 23 million (approximately USD 29 million) in February 2012 for allegedly using its privileged access to data on electricity purchasers to try to exclude competitors from the market for electricity installations. Endesa maintained that a decree issued by the Spanish Minister of Industry required operators of electricity grids to send a proposal to customers who request information on how to create new installations, which was the very practice that the CNC considered to be an abuse of dominance and as such a violation of competition law. The CNC nevertheless held that there was a violation of competition law even though Endesa argued that its conduct was in conformity with and even required by the sector regulatory framework. The CNC also fined the company for charging customers for works that should be supplied free of charge under sector regulation, categorising such practices as an abuse of dominance.

Three months earlier, the CNC fined E.ON approximately EUR 600 million (approximately USD 758 million) for abusing its dominant position by using knowledge gained in electricity distribution activities to increase its business in connecting customers to the grid. The fine followed similar penalties against Hidrocantábrico and Union Fenosa in September 2011. In all these cases the complainant was the same.

Comments and next steps

The CNC’s decision is far from straightforward and emphasises that energy companies should pay attention to practices that may engage sector regulation and may still be challenged under competition law. Endesa indicated that it will challenge the decision. The company maintains that far from operating against the public interest, its practices actually produced a pro-competitive effect in that it was otherwise obliged to disconnect the customers when they reached the regulated threshold. According to Endesa, in order to avoid cutting off its customers it informed them of the change. The company asserts that no barriers were created for competitors. It will be interesting to see how such arguments fare on appeal since there is both a dispute over the facts – whether in fact relevant consent was obtained – and also over the alleged effect on the public interest.

Companies assessing the prospects of entry and expansion in the EU energy sector and Spain in particular should be watchful of the outcome of this case and ongoing regulatory reform. It is hoped that the coming months may bring clarity on the difficult issue of whether and in what circumstances infringement of sector regulation can be a competition law violation or, whether, and conversely, compliance with the sector regulatory framework is exculpatory.

  Suzanne Rab
  +44 20 7551 7581

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