Joint buying of gas at EU level: good that the EU is giving up the idea of mandatory mechanism. Voluntary joint purchasing still discussed.

 

 

On 13 November 2014, media reported that EU Member States and the European Commission decided not to follow-up the proposal consisting in establishing a mandatory gas-purchasing body at EU level. This was confirmed by K.D. Borchardt, European Commission's director in charge of the internal energy market. The idea was proposed as part of the concept for Energy Union ahead of an EU summit on EU energy dependence in June. It was promoted by Donald Tusk, former Polish PM and forthcoming president of the European Council, but also relayed by the European Commission in its May 2014 Communication on a European Energy Security Strategy.

 

In a comment, I referred to the idea as an "EU contradiction". After receiving questions on that qualification, I hereafter give the reasons why.
 

Joint purchasing of gas at EU Level: an EU contradiction

 

In short, joint buying or joint purchasing of goods - like gas - is a behaviour which is critically regarded under EU competition law as it may infringe Article 101 of the Treaty on the Functioning of the European Union (TFEU). Article 101.1 TFEU prohibits anti-competitive agreements between business, provided some few exemptions (Article 101.3 TFEU). A joint buying agreement for gas on the behalf of the main European gas companies would result in a horizontal co-operation agreement encompassed by the prohibition.

 

As mentionned in the European Commission's Guidelines on the applicability of Article 101 TFEU (OJEU of 14.1.2011, C11, p.1):

"Joint purchasing arrangements usually aim at the creation of buying power which can lead to lower prices or better quality products or services for consumers. However, buying power may, under certain circumstances, also give rise to competition concerns." (para. 194)

An EU joint gas purchasing co-operation agreement may limit competition in several ways: it would limit European companies' ability and willingness to compete between each other; it may reduce their decision-making independence and increase coordination of strategies; it may exclude the buyers  who remain outside the joint system and limit their access to the market; it may also have direct consequences on resale prices by increasing them. Due to the size of the European companies which would be involved by such co-operation agreement, it is also unlikely that they qualify for exemption under the criteria of "low combined market share" (de minimis rule).

 

Finally, "if the pro-competitive effects do not outweight a restriction of competition [Article 101.3], Article 101.2 stipulates that the agreement shall be automatically void." (para. 20 of the Guidelines).

 

The Commission's practice in the area is extensive, which tends to make the idea even less relevant although it has been relayed by the European Commission itself as referred to below.

 

A response to security of energy supply concerns

 

The idea is clearly motivated by reasons of security of energy supply and balancing power in price negotiations with dominant European providers like Russia.

 

In a column published in the Financial Times on 21 April 2014 ahead of the June European Council, Donald Tusk made the following argument:

 

"A dominant supplier has the power to raise prices and reduce supply. The way to correct this market distortion is simple. Europe should confront Russia's monopolistic position with a single European body charged with buying its gas."

 

D. Tusk goes further in detailing the content of the co-operation mechanisms to be established:

 

"Europe should develop a mechanism for jointly negotiating energy contracts with Russia. It would be created in stages. Initially, bilateral agreements would be stripped of any secret and market-distorting clauses; then, a template contract would be created for all new gas contracts; finally, the European Commission would be required to take a role in all new negotiations."

 

Beside other anti-competitive elements of that proposal which may infringe EU law, such as standard contracts on behalf of all buyers, the proposal seems to single out Russia compared to other suppliers of gas to Europe, which is also noticeable.

 

An initiative relayed by the European Commission ... to some extent

 

In its May 2014 Communication on a European Energy Security Strategy, the European Commission addresses what it calls the "voluntary demand aggregation mechanisms". It recognises that such mechanisms could have as benefits to increase the bargaining power of European buyers, but makes also clear that any such mechanism must comply with EU competition and international trade law. As noted above, this represents a real legal challenge and the Commission services have probably now come to the conclusion that a radical approach consisting of establishing a single-purchase body, would not pass the test. This does not mean that other mechanisms can be proposed in the future, but not under the shape of a single buyer system.

Voluntary or mandatory mechanism? Tusk's proposal does not precise whether the joint purchasing system should be voluntary or mandatory, while the Commission primarily refers to voluntary mechanisms. In practice, the consequences of a voluntary mechanism between the main European gas companies may have the same relative effects than a mandatory one. But the nuance is not discussed further.

 

References have also been made to the "collective purchasing mechanism" of the European Supply Agency. Here again the Commission recalls that the mechanism is functioning quite differently and that the market shape is different too.

 

Conclusion

 

In conclusion, the decision not to pursue the idea of a joint-purchasing body for gas at EU level should be welcomed as it is contrary to the spirit of EU competition rules and Commission's practice. However, it should not be excluded that the Commission, after a thorough assessment and some creative thinking, comes with other proposals for "voluntary demand aggregation mechanisms" as referred to in the May 2014 Communication.

Based on the latest statements from the newly appointed vice-president for Energy Union, Šefcovic, on 17 November, the idea of voluntary common gas purchasing mechanisms should still be explored. This is in accordance with other statements from Mr. Borchardt that the idea of a voluntary scheme is still on the table. From his side, Cañete, the new Commissioner for climate change and energy, said during his confirmation hearing that he may support the idea of 'joint negotiating' as far as it is consistent with the rules of the World Trade Organization. WTO Law might not be against some forms of joint purchasing, but this would need to refer to the specific provisions of the GATT Agreement on, inter alia, the establishment of a State Trading Enterprise (STE).

There is no secret about the position of the Member States - some of them strongly oppose the idea - , but a rapid clarification as to what is actually the Commission's official stance would be very welcome.  Another representative from the Commission, the Director for energy policy, announced the forthcoming publication of a discussion paper on both energy union and single purchase mechanisms.

 

References:

"EU rules out obligatory gas-purchasing body", Natural Gas Daily, 13 November 2014

"A United Europe can en Ruddia's energy stranglehold", by Donald Tusk, Financial Times, 21 April 2014.

Communication from the Commission, European Energy Security Strategy, COM(2014 330 final), 28.5.2014.