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Elsam A/S - abuse of dominant position by charging unfair prices

30. november 2005

Journal nr. 3/1120-0204-0150/ISA/LKF/CS The Council meeting 30th November 2005

On 30 November 2005 the Danish Competition Council adopted a decision concluding that Elsam A/S had abused its dominant position under section 11(1) of the Danish Competition Act and art. 82 of the Treaty on the relevant market by charging unfair prices. The abuse has taken place in 900 hours during the period from 1 July 2003 to 31 December 2004.

Elsam A/S produces electricity on central and decentral powerplants and windmills situated in Jutland and Funen.

The electricity market is characterized by some special features which are important when considering the behaviour of dominant players in the market. Thus the inflexible nature of the demand is important in relation to the definition of the relevant market and in relation to the ability of dominant players to abuse their position. Likewise is the inflexible nature of alternative production methods like production from decentral powerplants and windmills important. Of equal importance is the limited capacity on the transmission cables connecting the Nordic countries and the cables between Denmark and Germany.

Based on the special features of the electricity market the Competition Council defined the relevant market as the wholesale market for electricity sold on OTC and spot terms in Western Denmark.

The relevant geographical market equals the West Danish price area on the Nord Pool spot exchange. Despite the possibility of having access to de-tailed spot price data in each of the neighbouring price areas, price data was not used to delineate the relevant geographical market. The reason for this is the “cellophane fallacy”. Using spot market prices in this case for the purpose of delineating the geographical market would result in delineating the geographical market too largely due to the possibility of Elsam to affect prices.

The Competition Council found that Elsam is able to a very large extend to act independently of competitors in all hours due to the existence of bottlenecks on the Nordic transmission cables, due to the inelastic demand and due to the inflexible production ability of windmills and decentral power-plants. The investigation has shown that Elsam is residual monopolist in more than 90 pct of the peak hours during the investigated period. Sup-ported by very large market shares the Competition Council concluded that Elsam holds a dominant position on the relevant market.

Elsam adopts a strategy when placing bids on Nord Pool (the Nordic stock exchange for electricity) which results in very high prices in some hours. The investigation has shown that Elsam creates and prevents bottlenecks on the Nordic transmission cables in order to obtain high prices. Furthermore, Elsams bidding curve has limited slope. This makes it very probable that Elsam obtains high prices almost irrespective of the volumes of electricity put on the market by other sources.

When considering the abuse the Competition Council adopted the test set out by the European Court in the United Brands case . The United Brands test examines whether the difference between the costs actually incurred and the price actually charged is excessive, and if this is the case whether a price has been imposed which is either unfair in itself or when compared to competing products.

In the Competition Councils decision in the Elsam case it is concluded that prices in several hours exceed costs (ATC) plus a markup. The markup is calculated as the sum of a standard rate of return (a basic earning equal to the average of the industry) and a term for loss in hours with prices below the basic earnings level.

In the Competition Councils decision it was also tested whether Elsams prices in it self were excessive. Prices in hours identified in the first test were compared to prices in other identical hours (same hour of the day and same month). It was concluded that prices in the identified hours in themselves were excessive.

The tests show that Elsam has charged unfair prices in 900 hours during the period from 1 July 2003 to 31 December 2004. The tests show that the abuse has resulted in losses of app. 187 mill. DKK.

The Competition Council ordered Elsam not to charge prices on Nord Pools spot market above the thresholds set out by the Competition Council. The order concerns the average price during periods of 3 and 10 hours respectively. The order expires on 31 December 2008 or at such earlier date where Elsam is no longer considered to be dominant by the Competition Authority.

Elsam has appealed the decision of the Competition Council to the Competition Appeals Tribunal.