GRAND COALITION OPPOSES EUROPEAN COMMISSION'S

C O N F I D E N T I A L SECTION 01 OF 03 BERLIN 002034 SIPDIS SIPDIS E.O. 12958: DECL: 11/06/2017 TAGS: ENRG EINV ETRD PGOV EU RU GM SUBJECT: GRAND COALITION OPPOSES EUROPEAN COMMISSION'S UNBUNDLING DIRECTIVES REF: BERLIN 1958 Classified By: EMIN ROBERT POLLARD FOR REASONS 1.4 (B & D). ¶1. (C) SUMMARY. The German reaction to the European Commission's unbundling directives for the European energy market has been overwhelmingly negative. The Grand Coalition is displaying rare unanimity on this issue and is backed by Germany's major energy companies. The Economic Ministry, responsible for energy policy, has taken the lead in opposing the Commission's proposal. The Government and industry maintain the directives will not achieve the stated goals of increasing competition, lowering prices, increasing investment in infrastructure, and furthering integration of the European energy market. They contend instead that the proposal discriminates against private commercial companies and does not address the issue of state owned companies such as Gaz de France. Even aspects of the proposal which are viewed positively in Washington, such as the limits on third party investors (e.g., Gazprom) and the creation of a European-wide energy regulator, have been met with suspicion and rejected by German officials and industry. The consensus is the Commission is grabbing for power, and the German government and industry is united in its opposition to this move. END SUMMARY. UNBUNDLING: THE HOW, WHY AND WHATFOR -------------- ¶2. (U) On September 19 the Commission released two proposed directives and several ordinances amending rules on the internal gas and electricity markets. The directives call for the separation of energy supply and production activities from network operations. Complete divestiture of supply and production from networks operations is the preferred option to achieve these goals. In lieu of this, the Commission provides the possibility of creating an independent system operator (ISO) which, while technically owned by the original energy company, would be completely independent in terms of operation and investment decisions. In addition to mandating energy unbundling, the Commission also proposes creating a European-wide energy regulator and prohibiting third country entities from acquiring control over an EU transmission system or transmission operator without reciprocity in their own market. This later provision is widely seen as aimed at Gazprom, and is viewed by many as a move to achieve a principal goal of the stalled EU-Russia energy charter. GERMANY FORMS "UNHOLY ALLIANCE" WITH FRANCE -------------- ¶3. (C) The overwhelming German government reaction to the proposals has been negative. On October 25, Hartmut Schneider, the Economic Ministry's Deputy Director General for Energy, told EconOff that the government opposes the Commission's directives on unbundling. Schneider said the coalition is united in its opposition to ownership unbundling in the energy sector. He defended this decision, noting there is a common perception in Germany that unbundling is no guarantee that consumer prices will decrease or that it will lead to more competition. ¶4. (C) Schneider took issue with the Commission's impact assessment of the energy sector, which underpins its arguments in favor of unbundling. Schneider stated the conventional German complaint that the impact assessment was poorly conducted and used outdated data -- gathered before the German energy regulator had assumed its role. In discussing the ISO provision, Schneider was skeptical it was a viable option, echoing industry complaints that the proposal is too complicated to work effectively. ¶5. (C) Schneider added, tongue firmly in cheek, that Germany was forming an "unholy alliance" with France to ensure the Commission does not prevail on this issue. Schneider said Germany can find common cause with France only to a limited extent, as the French have their own priorities, e.g., defending state-owned Gaz de France. However, Germany and France share the perception that the Commission is trying to gain power over energy policy via the EU's competition clause. Schneider also said that if forced to, industry could legally oppose unbundling on constitutional grounds, e.g., forced divestiture of assets, and could conceivably delay resolution of the issue with litigation. He said Germany would adopt a wait-and-see attitude and monitor developments under the Slovenian presidency. INDUSTRY REACTION: OVER MY DEAD GENERATOR BERLIN 00002034 002 OF 003 -------------- ¶6. (C) Over the course of the past several weeks, EconOff met with representatives of the four major energy companies in Germany, E.ON, RWE, Vattenfall and ENBW, to discuss their reaction to the proposal. Not surprisingly, the major energy providers oppose the move to strip them of their assets. The head of E.ON's Berlin office, Joachim Lang, maintains there is no evidence unbundling will lead to more investment or lower prices, citing the U.K. as an example, where he said prices were cheaper before liberalization. Lang argued any investor is likely to engage in asset stripping and would not invest the funds needed to upgrade networks. ¶7. (C) Instead of unbundling, which is likely only to affect privately held companies, Lang said the logical step is for the industry to focus on regional integration. This will help introduce economies of scale, further investment and is more likely to lower consumer prices. Lang said German companies are working to integrate energy markets with France and the Benelux countries. ¶8. (C) Michael Engelhart, head of the Berlin office of RWE, agreed that there is no evidence the proposals will lead to new competition. He said the industry would actively oppose any unbundling moves in court, a move that could tie up the issue for years. Olaf Litwiakow, Head of Energy Policy for Vattenfall's Berlin office, noted that one major factor rarely considered in the debate over rising consumer energy prices is the cost of renewable energy and emissions trading. He refuted the idea that energy prices are too high in Germany, stating that this is due to the lack of a genuine internal European energy market. Litwiakow said the ISO provision will not work. While it may be modeled on the U.S., he says it is far more complicated and would mean that individual companies would lose control over their investment decisions. THIRD COUNTRY CLAUSE SEEN AS TOO RESTRICTIVE -------------- ¶9. (C) One of the more controversial sections of the Commission's proposal is the third country aspects, or so-called "Gazprom Clause." The Economic Ministry has been vocal in its rejection of this move. Schneider claimed it is too broad and could likely stifle investment in the energy sector. Economic State Secretary Bernd Pfaffenbach also stated this position publicly in recent press interviews. E.ON's Lang said the provision for excluding third country investors was unnecessary and would only tie companies up in regulation, which could affect German investment interests abroad. He fears this could needlessly complicate investment deals in the future. Lang added that the principle of reciprocity is important but believes national governments are best suited to defend this. RWE, Vattenfall and ENBW supported E.ON's opposition to instituting a prohibition on third country investment without reciprocity. German interlocutors have said they believe other means can be used to block troubling investment in this strategic sector, including use of existing anti-cartel legislation and a CFIUS-like review process that is currently under discussion (reftel). EUROPEAN WIDE REGULATOR: A TROJAN HORSE? -------------- ¶10. (C) Another aspect of the proposal greeted with suspicion is the call to create a European-wide energy regulator. The Economic Ministry's Schneider said Germany is not opposed to coordinating regulation at the European level. However, he sees no need for the creation of a new bureaucracy and generally opposes this aspect of the Commission's proposal as well. Schneider argued that the Bundesnetzagentur (BNetzA) has only been regulating the energy market since 2005 and should be allowed to prove itself. Representatives from all the major energy companies confirmed this view of BNetzA, although they are divided on the need for a European-wide regulator. Lang flatly said E.ON opposes EU-wide regulation. RWE agreed with this position, as does ENBW. However, Litwiakow said Swedish-based Vattenfall does not oppose the creation of an European energy regulator. He believes that in theory a supra-national regulator could be useful for the integration of European energy markets. Despite this, Litwiakow said the Commission's proposal for an EU energy regulator is too focused on the national level to spur real market integration. Instead, he argued the Commission should work to harmonize regulations among European member states. BERLIN 00002034 003 OF 003 COMMENT -------------- ¶11. (C) Germany's opposition to the Commission on unbundling is not surprising; the government has maintained this position since the issue was first raised in Brussels earlier this year. It is, however, a rare show of unity among the Coalition and industry. This can be ascribed to the widespread German perception that is a move by Brussels to seize control over an economic sector with significant national security ramifications. Added to this is the widespread belief that Germany's energy infrastructure operates efficiently as is. While there are government concerns over the recent rise in energy prices and the desire for more competition in the sector, this does not translate into German support for unbundling. Even the fear of Russian downstream investment is not enough to gain support for ceding national authority over energy policy to the Commission. Instead, both industry and government prefer to maintain their independence and maneuvering room rather than gamble on Brussels defending German interests. TIMKEN JR