– The appropriate route to increased competition? –

Ownership Unbundling

Brussels, February 13 2008

Results of an A.T. Kearney study

2A.T. Kearney 77/01.2008/4729w

Agenda

Effects of Ownership Unbundling 3

Drivers of competition in the electricity market15

Page

3A.T. Kearney 77/01.2008/4729w

Effects of Ownership Unbundling

4A.T. Kearney 77/01.2008/4729w

In EU-15 the majority of countries have implemented Ownership Unbundling on transmission level

• Ownership Unbundling postulated by the EU Commission has already been implemented on transmission level in many countries

• Germany, France, Austria and Greece are the only countries in the EU-15, that have implemented Legal Unbundling

• Ownership Unbundling on distribution level has been realized in Great Britain only, while Legal Unbundling is a European-wide standard

• According to the EU Commission "ownership unbundling has a number of positive impacts on the market by stimulating investment in particular in interconnectors, reducing market concentration and bringing down prices."

Unbundling among EU-15 Transmission Operators – Overview1)

Legal Unbundling Ownership Unbundling Independent System Operator

1) Status 1. January 2007 incl. Norway, excl. LuxemburgSource: Regulatory authorities, EU Commission, A.T. Kearney

Effects of Ownership Unbundling

Is this a fact?

5A.T. Kearney 77/01.2008/4729w

Networks in countries with Legal Unbundling have been more reliable in recent years

Unplanned Interruption(minutes lost per customer, average 2004-2006)

Legal Unbundling Ownership Unbundling Independent System Operator

95

174162

152140 135

124

9184

54

36 30 29 24

Ø NOR IRL FIN PT IT ESP SWE UK FR AT DK NL DE(1) (2) (2) (3) (2) (2) (4) (2)(3)

Effects of Ownership Unbundling

1) Norway started detailed interruption recording in 2005; 2) 2004-2005; 3) only 2004; 4) only 2005 Source: E-Control, Fingrid, VDN, TenneT, CEER, EU Commission

6A.T. Kearney 77/01.2008/4729w

4

6

8

10

12

14

16

18

1998 1999 2000 2001 2002 2003 2004 2005 2006 2007

Development of Prices for Households 1998-2007(1)

(in ct./kWh)

Average CAGR 1998-2007Ownership Unbundling: +3.0%Legal Unbundling: +0.7%

Electricity prices for household customers increased across all countries in Europe…

IT

IRLDEPTNLNORUKBEDKSWEATESFFIN

GR

1) Consumption of 3.500 KWh p.a without taxSource: EUROSTAT, A.T. Kearney

Effects of Ownership Unbundling

Legal Unbundling Ownership Unbundling

7A.T. Kearney 77/01.2008/4729w

2

3

4

5

6

7

8

9

10

11

12

1998 1999 2000 2001 2002 2003 2004 2005 2006 2007

Development of Prices for Industry 1998-2007(1)

(in ct./kWh)

IT

IRL

URDEBEPTES

NORGRDKSWEFINF

1) Consumption of 2.000 MWh p.a without taxSource: EUROSTAT, A.T. Kearney

Effects of Ownership Unbundling

Average CAGR 1998-2007Ownership Unbundling: +4.0%Legal Unbundling: +0.9%

…for industrial customers the trend is the same

Legal Unbundling Ownership Unbundling

8A.T. Kearney 77/01.2008/4729w

103,6 100,0 93,4 94,0 87,1 79,7 76,8 74,4 81,1108,6

145,9

94,3

1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006

In 1998, liberalization started for all customer groups in one step

Gradual liberalization between 1996 and 1999

Gradual liberalization between 1991 and 1998

Germany

Sweden

Great Britain

EEX Spot prices (Base in Cent/kWh)

Nordpool Spot prices in (SEK/kWh)

IEA Wholesale index in %; (1996 = 100)

1)

Liberalization Period

Wholesale prices in legal unbundled countries did not rise faster than in ownership unbundled countries

-54%

-28%

-31% CAGR +15.2%

CAGR +21.2%

CAGR +25.2%

1) until 1999 IEA Wholesale price index, as of 2000 EEX Spot BaseSource: EEX, Nordpool, IEA Wholesale price index, A.T. Kearney analysis

Effects of Ownership Unbundling

260,0

143,8 119,4 120,4210,9

252,4333,0

256,3 276,5

459,6

120,5

1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006

Development of Wholesale Prices

30,1 30,1 30,226,1 25,9 25,6 24,6

20,824,1 22,5

29,5 29,0

48,746,3

30,3

199219931994199519961997199819992000200120022003200420052006

9A.T. Kearney 77/01.2008/4729w

Except for Great Britain, there is no clear correlation between type of unbundling and investment activities

Legal Unbundling Ownership Unbundling

Effects of Ownership Unbundling

Investments into the grid/transmission volume1)

(in €/GWh)

1) 2004 to 2006Source: A.T. Kearney Analysis

Selection

2466

1456 1376 13691284

1146 1099

847738 718

279 233

NationalGrid

RedElectrica

StatNett Verbund EON Energinet TenneT Terna Vattenfall FinGrid SvenskaKraftnät

RTE EDF

10A.T. Kearney 77/01.2008/4729w

Even the development of cross-border transmission capacity lacks consistency

Development of cross-border transmission capacity 2000-2006(in %)

Source: UCTE, Nordel, A.T. Kearney Analysis

70%

225%

157%

115%

96%

61%54% 54%

39%26% 23%

2%

-9%Ø BE PT AT ES IT NL FIN DE F NO SE DK

Legal Unbundling Ownership Unbundling

Effects of Ownership Unbundling

11A.T. Kearney 77/01.2008/4729w

No clear correlation in the ratio import capacity/generation capacity can be identified

10%

50%

29%25% 24%

17% 16%14% 14%

12%9%

2%6%6%6%

EU-Ziel

DK SW BE AT NL DE FR FIN GRE PT IRL ES IT UK

Average import capacity/generation capacity1)

(in %)

1) 2006Source: ETSO, A.T. Kearney

Effects of Ownership Unbundling

Legal Unbundling Ownership Unbundling

12A.T. Kearney 77/01.2008/4729w

In absolute terms, grid access tariffs in Europe differ widely and are not linked to ownership unbundling

Transmission tariffs 20061)

(in €/MWh)

7

10,3 10,1

8,6 8,47,5 7,1

6,45,5 5,3 5,3 5

43,1 3 2,9

2,2

Ø DKEast

IT IRL UK GRE DE POR DKWest

ES FRA AT BE NL NOR FIN SWE

Legal Unbundling Ownership Unbundling Independent System Operator

1) Except for other regulatory changes that are not directly linked to TSO activities such as standard costs, public interest, renewable energies etc. Source: ETSO, A.T. Kearney

Effects of Ownership Unbundling

13A.T. Kearney 77/01.2008/4729w

No correlation between grid tariffs development and type of unbundling can be observed

Development of Transmission Tariffs 2003-2006(Index 2003=100)

0

20

40

60

80

100

120

140

160

180

200

2003 2004 2005 2006

CAGR 2003-2006

-11,3%

-8,4%

-5,3%

-4,0%

-3,7%

-3,2%

-1,5%

-1,0%

-0,6%

3,4%

3,8%

4,1%

7,2%

21,7%IT

ES

DE

DK EAST

UK

FRA

PT

SWE

FIN

AT

NL

DK WEST

BE

NOR

Effects of Ownership Unbundling

Source: ETSO, A.T. Kearney

Average CAGR 2003-2006Ownership Unbundling: +0.1%Legal Unbundling: -0.1%

Legal Unbundling Ownership Unbundling

14A.T. Kearney 77/01.2008/4729w

Networks in countries with Legal Unbundling are more reliable – grid tariffs below average

Grid Access Tariff TSO (in €/Mwh)

Interruption Time in minutes lost per customer (Ø 2004-2006)

Ownership Unbundling ISO

Legal Unbundling

Effects of Ownership Unbundling

Summary Unplanned Interruptions vs. Grid Tariffs

Source: E-Control, Fingrid, VDN, TenneT, CEER, EU Commission, ETSO, A.T. Kearney analysis

Backup

0

5

10

15

0 25 50 75 100 125 150 175 200

DK East

DK West

DE

NL

AT FR

UK

SWES

IT

IRL

Ø 91

Ø 7.0

FIN NOR

15A.T. Kearney 77/01.2008/4729w

Drivers of competition in the electricity market

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In competitive development certain stages with certain characteristics can be observed

Source: A.T. Kearney

Grid Accesstariffs

Retailmargins

Churn rates

2,97

1,42

0,510,86

3,14

1,26

0,46 0,25

2,10

0,44 0,26

3,04

UK S D A

+551%

+290%

0

0,5

1

1,5

2

2,5

3

3,5

0% 10% 20% 30% 40% 50% 60%

Re

tail

Mar

gin

Ho

us

eh

old

s 2

006

(in

ct/

kWh)

Low competitive retail markets

High competitive retail markets

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

SW

EF

IN UK IT

IRL

DK

NO

RD

EA

TL

UX

ES

BE

PO

RF

RA

GR

EN

L

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

UK

NO

RF

IN

SW

EE

SP

OR

DK

NL

BE

IRL

DE

AT

FR

A

GR

EL

UX IT

N/A N/A

Industry Households

N/A

N/A

N/A

4,7

7,26,7

6,2

5,3 5,1 5,0 4,8 4,8

4,0 4,03,7 3,7

3,3

2,5

DK FRAAT FINSWEDEIT UKLUX ESPORIRL NLØ 2)BE

2005 1989-19981999-2001Tenure of regulatory authorities

Household customers

market opening 2007

Household customers market

opening 2007

Stages of competitive development

Drivers of competition in the electricity market

1

2

3

Market opening Market development

Competitive market

17A.T. Kearney 77/01.2008/4729w

First the regulator reduces grid tariffs through cost and incentive regulation

4,7

7,26,7

6,2

5,3 5,1 5,0 4,8 4,8

4,0 4,03,7 3,7

3,3

2,5

DK FRAAT FINSWEDEIT UKLUX ESPORIRL NLØ 2)BE

2005 1989-19981999-2001Tenure of Regulatory Authorities

Household Customers

Market Opening 2007

Household Customers Market

Opening 2007

Grid Access Tariffs Low Voltage1)

(in ct./kWh)

1) Status 20052) Estimated mean valueSource: Eurelectric, CEER, A.T. Kearney

Drivers of competition in the electricity market

18A.T. Kearney 77/01.2008/4729w

2,97

1,42

0,510,86

3,14

1,26

0,46 0,25

2,10

0,44 0,26

3,04

UK S D A

A decrease in grid tariffs increases retail margins and makes alternative suppliers more competitive

2004 2005 2006

0

0,5

1

1,5

2

2,5

3

3,5

0% 10% 20% 30% 40% 50% 60%

Cumulated churn rates(in %)

Re

tail

Ma

rgin

Ho

us

eh

old

s 2

00

6

(in

ct/

kWh

)

High Competitive Retail Markets

Retail Margins Electricity – Households1)

(in ct/kWh)

1) GWh2) Annual Consumption: 3.500 kWh; Retail margin is calculated by taking the energy component (retail prices less taxes and grid tariffs) and deducting wholesale future prices. For UK spot prices where taken.Source: EUROSTAT, UKPX, Nordpool, EEX, EEXA, EU Kommission, regulatory authorities, A.T. Kearney Analysis

Drivers of competition in the electricity market

Low Competitive Retail Markets

19A.T. Kearney 77/01.2008/4729w

• Countries with a longer regulatory experience have lower grid tariffs and higher retail margins

• New suppliers require comfortable retail margins for a sustainable interest in the electricity market

• The longer a regulator is installed in a market, the better the competition• Experience shows (e.g. in Great Britain and Scandinavia), that establishing

a working regulatory system as prerequisite for competition requires a few years

• Only an integrated European electricity market ensures variety and increase in number of suppliers on the generator side large market shares in regional markets reduce in a European market

In particular lengths and type of regulation drive competition in the European electricity markets

Competition drivers

Drivers of competition in the electricity market

Low grid tariffs/attractive retail margins

Regulatory experience

Market integration

20A.T. Kearney 77/01.2008/4729w

Effectively harmonized regulation

in all markets

• Across Europe the current legal framework is not leveraged in the sense of the objective

• Intensification of Legal Unbundling, e.g. asset transfer, increased independence through incorporated company with independent representatives in advisory board and allocation of grid activities to grid company

• Raise transparence standards on a common level across Europe, e.g., in terms of invoice information on utilities, price changes etc.

• Simplify and accelerate churn process• Ensure grid access for new players, e.g., improve data provision through

grid operators

Investment guidelines to all EU-countries for cross-border transmission

capacities

Tougher implementation of

Legal Unbundling on all grid levels

• A domestic electricity market in Europe can in the long term only be achieved by high performing transportation grid connections

• Legally binding provisions for the realization of grid connections are imposed for all EU-member states

Actions to stimulate competition should orientate towards identifiable drivers of competition

Drivers of competition in the electricity market

1

2

3

Actions to stimulate competition