The Italian Competition Authority rejects a freezing prices remedy and blocks a near-monopoly energy merger

The Italian Competition Authority has blocked the Compagnia Valdostana delle Acque (CVA) acquisition of two regional energy firms, Deval and Vallernergie (decision n. 22683 of 4 August 2011, Case C11082, CVA-Compagnia Valdostana delle Acque/Deval-Vallenergie). The ICA found that the proposed transaction would have given CVA a quasi monopoly position in some electricity markets in the northernmost region of Valle d’Aosta, namely in the market for low-voltage retail energy sales to domestic clients and in the market for sales to non-domestic clients.

CVA was active in the market for power generation and in the wholesale and retail markets for sales of electricity in the Valle d’Aosta region. With the notified merger CVA intended to buy 51% of share capital in two Valle d’Aosta-based power operators, Deval and Vallenergie from Enel, the Italian electricity incumbent operator. Deval traded in the market for distribution of power, while Vallenergie supplied power to domestic clients. Competition problems were more likely to arise with regard to retail and wholesale power markets due to a number of factors. Firstly, through the implementation of the merger ICA would have gained a considerable market power in those markets as indicated by almost a 100% and a 90% share, in term of number of points of contact served, of the low-connection domestic and non-domestic markets, respectively. Secondly, the agreements entered by CVA and Vallenergie with the Valle d’Aosta Region would also increase the CVA post-merger market power. According to the agreements, the regional authorities awarded to domestic users a 30% discounts on the charges for the energy component as defined by the Italian energy regulator. Electricity retailers directly applied the discounts to customers and then the regional authorities reimbursed them in accordance with the terms in the agreements. The agreements constituted a relevant entry barrier since, to sign them non Valle d’Aosta-based power suppliers had to comply with several administrative burdens, thereby bearing considerable costs these suppliers were unlikely to recoup due to the small base of potential customers in the region. Third, CVA had a strong brand reputation with the local customers. Fourth, the merger was likely to induce CVA to worsen its commercial policy by keeping the former Vallenergie’ customers under the domestic clients regime instead of applying to them the free market regime for non domestic clients, which would be less profitable for CVA.

In order to resolve these competition problems, CVA offered a set of behavioral remedies, committing to not change its commercial policy, especially prices, for a two-years period. The ICA considered these remedies as unsuitable to attenuate the CVA quasi monopoly post-merger position and prohibited the merger.

The CVA-Vallenergie/Deval case well illustrates the difficulties in resolving structural anticompetitive problems with behavioural remedies. Competing power suppliers were unlikely to successfully contend the CVA post-merger dominant position due to the legal entry barriers represented by discount agreements signed with the regional authorities. Unsurprisingly, the ICA found the two-year long freezing prices behavioral remedy offered by the parties as unsuitable to fix the competition problems. Nor the ICA accepted the remedy to divest a number of clients since, due to the strong reputation locally enjoyed by CVA, the divested clientele would have come back to it soon.

On the contrary, the ICA would have preferred remedies straight going to the root of the problem by amending the regional discount arrangements in order to make them less costly for national operators. Only such measure would have the effect to lower the obstacles which hampered the entry of credible competitors to CVA. Yet since CVA was not in position to commit to amend these agreements, the ICA concluded that the merger was irremediable and blocked it.