Preliminary findings of investigation into profits of energy companies

The Netherlands Competition Authority has completed the initial phase of its investigation into the level of profits obtained by the four largest energy companies. The investigation, as carried out by the Office of Energy Regulation (DTe), aims to gain further insight into returns yielded by network activities performed in a regulated monopolistic market structure.

An important conclusion to the investigation sets out that the regulatory system does indeed create incentives for companies to raise efficiency. The regulatory system has already resulted in price cuts amounting to EUR 1.9 billion over the period 2001-2007. DTe takes the view that further research is necessary in order to finalise results. The regulatory body will further comment on subsequent findings in approximately ten weeks' time.

Preliminary findings of investigation into profits energy companies
Various circumstances prompted the investigation into the four largest energy companies:

• growing socio-political debate on the issue of profit levels of integrated energy companies. To what extent do these profits stem from the return on network operating activities that are of a monopolistic, regulated nature?
• in mid-2006 network operators simultaneously gave out signals that tariff regulation caused a lack of financial means for future investments. Does regulation lead to a level of returns that is sufficiently high for investments to take place?
• with a view to the two issues mentioned above, DTe needed an evaluation of the effectiveness of the regulatory regime involving transport tariffs. Does this regime provide incentives sufficient to raising efficiency? To what extent does this regime result in profit levels that are either too high or too low?
• signals indicated the occurrence of cross subsidisation within integrated companies by means of non market-related internal charges between company divisions dealing with network operations and remaining commercial activities.

The investigation carried out by DTe focuses on the four largest integrated energy companies: Delta N.V., Eneco Holding N.V., Essent N.V. and N.V. Nuon. In combination these companies operate more than 90 per cent of the Dutch energy network.

The investigation is being carried out by DTe, in conjunction with an external audit bureau. Due to the complex nature of the subject, research work is still underway. In the meantime, the investigation has yielded a number of important preliminary conclusions, which may already be publicly disclosed.

Cutting down on energy bills
The first conclusion relates to the fact that the regulatory regime has provided network operators with considerable incentives to raise efficiency. As a result, end users' energy bills have been cut by EUR 1.9 billion over the period 2001-2007. In order to make a sound assessment of the effectivity of the regulatory regime and fine-tune procedures wherever necessary, DTe would like to determine whether further cuts to energy bills are feasible in future.

Further insight into profits
During the investigation it became apparent that further insight is required into network operators' profits and their use.
This part of the investigation is still underway. In order to draw sound conclusions further validation of results is warranted. The investigation has made clear that it is impossible for DTe to establish profit levels in any quick and effective way, despite the fact that the companies concerned were fully cooperative and accounts proved fully accessible. DTe would like to gain further insight into profits in order to guarantee that efficiency profits, as resulting from the regulatory regime, for the most part benefit consumers through relatively lower tariffs.

The second conclusion concerns the Act on Independent Netwerk Operations [Wet Onafhankelijk Netbeheer]. Further implementation of this Act requires particular facilities allowing quicker insight into profits of energy companies. DTe will soon further advise the Minister of Economic Affairs on this matter.

Financial scope for investments
The investigation shows that network operators realise sufficient profits. There are no indications, therefore, that network operators lack the financial means for making investments in the network. Investments are important to maintaining the quality of the networks and guaranteeing supply security. DTe queried network operators on whether or not they considered their financial scope to be sufficient for securing future investments. Consultees answered in the affirmative.
In short, the third conclusion sets out that the regulatory regime does not lead to profit levels in network operating that fall short of what is required for necessary investments.

Sound internal charges
DTe has also investigated the regime for internal charges, on the basis of signals indicating the occurrence of cross subsidisation by means of non market-related internal charges. DTe has concluded, with the help of an audit bureau, that companies have set up transparent, well documented and adequate systems for dealing with internal charges. This system is firmly rooted in internal processes within these companies. As a result, the chances of cross subsidisation occurring – by imposing excess charges on network operators – are considered to be very small.
The fourth conclusion sets out that the system for internal charges is sound. The chance of competition being disrupted as a result of cross subsidisation is deemed to be very small. The investigation has not yielded any indications for such disruptions.

Completing the investigation
DTe estimates that the investigation into profits generated by network activities in a regulated monopolistic market structure will be completed within a period of approximately ten weeks. On completion of the investigation, DTe will further comment on results.