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‘Private arrangement in Energy Agreement to withdraw production capacity from the market restricts competition’

In the October 25 issue of Dutch financial newspaper Het Financieele Dagblad, Henk Don (member of the Board of ACM) wrote an opinion piece on the SER Energy Agreement.

The opinion of the Netherlands Authority for Consumers and Markets (ACM) about the agreement to close down early five old coal power plants has elicited a considerable amount of reactions. Most of the criticism centered on two points. First, ACM should have looked at the full SER Energy Agreement (Energieakkoord) and not just at this particular element thereof, and second, the benefits (environmental and other benefits) are much greater than ACM had taken into account in its assessment.

First, I would like to note that ACM’s assessment is not an extensive social cost-benefit analysis. This means that ACM has not given an opinion on the social desirability of the planned closures. A private agreement to withdraw production capacity from the market constitutes a restriction of competition. That is why this particular element of the Energy Agreement carried the provision that it should be assessed under competition law, which is the assessment ACM carried out.

If undertakings mutually coordinate their behavior, thereby restricting competition, their actions constitute, in principle, a violation of the cartel prohibition. If enough benefits are associated with an agreement, it may be exempted from the prohibition. To qualify for the statutory exemption, strict requirements must be met, in particular that the restriction of competition is necessary in order to realize the desired benefits, and that buyers are compensated by these benefits for the damages they suffer as a result of the restriction of competition. These strict requirements should prevent producers from being able to decide what constitutes a public interest and harm their buyers in the name of that self-selected public interest by restricting competition.

ACM is obviously aware of the fact that the agreement to close down these old coal power plants is part of a larger whole that serves multiple public interests. However, the assessment under competition law should address the question whether the restriction of competition resulting from the agreement is objectively speaking necessary to realize the associated desired benefits, and whether those benefits sufficiently compensate buyers, who will be paying a higher electricity price because of the restriction of competition. ACM identified the environmental benefits that benefit buyers, and assessed their value at less than half the expected price increase.

Benefits that are enjoyed by other parties than these buyers cannot be taken into account. For example, closing down the coal power plants will reduce demand for CO2 emission allowances. The price of these allowances will decrease, making it cheaper for other undertakings (national or European) to emit CO2. The same goes for benefits generated by the Energy Agreement that can also be realized without the restriction of competition such as lower electricity prices because of wind turbines at sea. At the same time, these are also the most important differences with a social cost-benefit analysis.

A social assessment is broader, and can compensate the drawbacks for buyers with benefits to others. That requires a political assessment. The government can promote or impose socially desirable results through legislation and regulations. That falls outside the scope of competition law, but is subject to democratic approval.