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
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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
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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


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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
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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