July 1, 2007 is the deadline for European Union member states to comply with the second phase of European energy liberalization. However, with many countries likely to fall well short of the required standard, the final phase of energy market liberalization in the EU will precipitate a new of era of European Commission activism in the energy sector.  According to the terms of the EU’s Second Gas and Electricity Directives, by July 1, 2007, all retail customers in Europe are supposed to be able to freely choose their gas and power supplier, as they can in the UK. However, it is expected that, by July, many EU member states will have either failed to properly transpose the directives into national laws, or will simply be implementing these laws ineffectually.  Unfortunately, the options for the EU, or EU citizens, to take a member state to task for these failures are limited, even though it is possible for the EU, or indeed an EU citizen, to take legal action against member states in the European Court of Justice. Due to the long timelines involved, instigating legal action is an ineffective option to ensure compliance with the directives in the short term.  Individual citizens may undertake legal action, effectively suing for personal damages due to their country’s failure to implement the directives. This is unlikely though, as continental societies are less litigious than either their US or British counterparts, and their civil legal systems provide less incentive to undertake litigation.   Consequently, it looks likely that the onus for ensuring Europe’s energy markets operate effectively will fall to the European Commission (EC) and, in particular, the Competition Directorate General (DG).  This year’s liberalization deadline coincides with the culmination of the energy sector inquiry launched in 2005 by the Competition DG, and it will pass just months before the EC releases a strategic plan, and perhaps Third Gas and Electricity Directive, to resolve continuing problems.  The legislative difficulties faced by the EU will push the onus for ensuring effective competition and energy market liberalization onto the Competition DG. This department will step up investigations and enforcement proceedings against Europe’s large, vertically-integrated energy companies, based primarily in France and Germany. The EC has already stated its intention to get tough on these vertically-integrated ‘national champions’ by ensuring a clear separation, or unbundling, between the company’s generation and distribution assets.

Insufficient enforcement of transmission and distribution unbundling can lead to cross-subsidization to distribution company’s retail arms, as well as network access discrimination against new retail market entrants. The EU remains committed to energy market liberalization, convinced that Europe’s consumers will stand to gain through lower gas and electricity prices. However, the probable failure of liberalization deadlines to be met this July means that an inevitable confrontation will be created between the Competition DG and Europe’s largest energy utilities. Competition law will be used to push liberalization further than contemplated by the directives. Even if the gas and electricity directives are fully implemented and complied with by July, if European consumers are still harmed by anti-competitive behavior then the Competition DG may push the industry much further than the legal and functional unbundling envisioned by the EU directives. Potential Competition DG actions are much quicker and tougher than the EU-member state censure processes. All signs point to the Competition DG adopting a tough, activist stance with respect to market liberalization: in May 2006, the Competition DG investigated seven energy companies in six countries as a part of antitrust investigations focused on potential collusion and abuse of market dominance, and it has also indicated that it will be stricter in its review and approval of energy sector mergers and acquisitions. Compliance with the EU directives is expected to be pushed from the governmental to corporate level.

If the Competition DG becomes very involved in enforcing the Gas and Electricity Directives, then energy market liberalization will happen piecemeal, one company at a time, through a procession of costly legal battles.