Thursday, March 12, 2009


It should now be a clear consequence of the latest Gazprom/Ukraine/European Union gas crisis that the EU must take at least two steps to protect itself from future Gazprom blackmail and the adverse impact that could have in U.S.-EU relations and energy security. Ignoring Gazprom’s gas dominance is all the more puzzling given the EU’s continued attacks on Microsoft, whose Windows operating system poses much less of an economic and security threat than Gazprom’s monopoly.

There is a European consensus to connect various segments of the EU grid into a coherent, integrated whole with respect to both gas transit and electricity interconnectivity. This is essential to the creation of a common external energy policy, but the regulatory and competition tools that would work to achieve this result have been blocked by certain member states in an effort to protect internal national champions.

More specifically, the EU has sought unbundling of production and transit so that cross-border transmission can develop without opposition from incumbent producers, whose retention of control over transmission could permit them to block competition. Rather than use its unquestioned competition authority, however, the EU chose instead to use its internal market power, which requires approval of both the Council of the European Union and the European Parliament.

As a result, the EU’s plan did not require clean unbundling, allowing generators instead to retain ultimate control of both production and transmission.

In part as a result of permitting continued local monopolization, there is virtually no U.S. investment in the EU utility sector, while EU companies have significant investment in the much more deregulated U.S. energy market. There is little the U.S. can do about this situation except to complain that the bias against outsiders is a barrier to trans-Atlantic investment in violation of the open investment declaration agreed to by the Transatlantic Economic Council in June 2008. But the competition failure has even greater consequences for relationships with Russia.

If its competition authority were fully utilized, the EU could trim Gazprom’s monopoly power, which is what has made it possible for Russia, twice, to terminate gas deliveries to Europe. If third party gas suppliers, both inside and outside Russia, had non-discriminatory access to Gazprom’s pipeline system, it is questionable whether Gazprom could successfully cut off European gas. The minute Gazprom limited the delivery of its own supplies, other suppliers, whether Rosneft with its associated gas or other independent producers, would have quickly jumped in to pick up market share in Europe at Gazprom’s expense.

The EU has the authority to open Gazprom’s grid to outside suppliers, just as it is exercising its authority to curb “abuse of dominance” to force Microsoft license access to Windows to third party software suppliers. The EU has recently argued that Gazprom has no position of dominance, or even if it does it has never abused that dominance, or that there is no legal way to reach into Gazprom itself because it is headquartered in Moscow.

These positions have no merit. Gazprom is clearly the dominant 80 percent-90 percent supplier in Eastern Europe. Even before the recent cutoff there were many documented examples of abuse; now there can be no question about it. Unlike Microsoft, which has employees in a few research facilities in Europe, Gazprom owns or has significant investments in at least 60 energy entities strewn across Europe.European Commission President Jose Manuel Barroso was confident enough of the EU’s authority to raise it at lunch at last year’s EU-Russia Summit.

According to participants at the lunch, Russian Prime Minister Vladimir Putin became agitated, threatening to cut off European supplies if the EU even raised the issue publicly. Since then, the EU has done little to Gazprom beyond limiting its future investment in energy facilities inside the EU. EU countermeasures now would seem to be in order, beginning with a DG Comp investigation of the relevant facts.

The EU’s inaction is especially troubling in light of its new demands of Microsoft that it unbundle the Internet Explorer browser. The Financial Times reported that the EU’s purpose is “to turn Windows into a distribution vehicle for other companies’ software.” Why not ask Gazprom to distribute other companies’ gas?

However, as the Russians are quick to point out, it is difficult for the EU to apply competition law to Gazprom without also applying it to European energy monopolies. Thus, applying EU competition law internally remains the necessary first step, after which its application to Gazprom would be an easier if not also essential next move. On the other hand, the Russians should welcome more access to Gazprom’s grid. They should remember that John D. Rockefeller’s wealth quadrupled within a very few years after his monopoly was opened up, and Gazprom is badly in need of cash.

Finally, there is also the climate change issue of the 40-50 billion cubic meters of gas flared by Russian producers because they cannot sell the gas into Gazprom’s grid. This flaring is equivalent to about one-third of the EU’s greenhouse gas reduction target and could be attributed to the EU since the EU has done nothing to stop it by challenging Gazprom. Both Mr. Putin and Igor Sechin, the chairman of Rosneft’s Board of Directors, have reportedly called for an end to Gazprom’s export monopoly; the least the EU can do is ask for the same.

&#8226 Ambassador C. Boyden Gray served as President George W. Bush’s ambassador to the European Union from 2006 until 2008.

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