Control of concentrations and the functioning of competition
Ex ante regulation of concentrations plays a crucial role in the functioning of competition. The control of concentrations can prevent anti-competitive mergers and acquisitions and thus the creation of a dominant position (including a monopoly).
By ensuring that competition is maintained and that a dominant position (including a monopoly) is not created, the control of concentrations helps to prevent harm that a dominant undertaking could cause to consumers or to the society as a whole. As a monopolistic market structure can be expected to lead to output constraints and reduced economic efficiency, competition policy should not tolerate any activity that disrupts the market structure (in particular activities hindering market access or concentrations leading to a reduction in the number of market participants). However, it is important to note that the control of concentrations can only limit the growth of undertakings through mergers and acquisitions and not organic growth, meaning that the control of concentration does not preclude the creation of monopolies.
At the same time, the control of concentrations is not only about preventing possible future abuses by a dominant position, but also about maintaining pro-competitive market structures, which, in turn, leads to greater consumer welfare. In markets where there is effective competition, there are many undertakings and consumers have the opportunity to choose a product or service at a price and quality that suits them. The lack of competitive pressure, in turn, allows an undertaking to profitably raise prices, reduce the volume, range, or quality of goods and services, as well as reduce innovation, new product development, and so on.
How to measure the functioning of competition? There is no universal measure, as product markets are different and specific market factors need to be taken into account. However, the market shares of undertakings and the general level of concentration in the product market are one of the most common ways of characterising the competitive situation on the product market. The Herfindahl–Hirschman Index (HHI) is generally used to measure the level of concentration in a commodity market. The HHI can range from close to zero to 10,000 (for a monopoly).
The Authority has monitored the level of concentration in the markets for products and services that are important to consumers (banking, retail trade, retail sale of motor fuels). These are areas that are highly concentrated in some neighbouring countries and are therefore subject to special regulation. In Estonia, these areas are moderately concentrated, despite some concentrations and exits from the market.
Swedbank AS has traditionally been the market leader in banking and AS SEB Pank has the second largest market share. At the same time, there are several other banks in the market that exert competitive pressure on the larger ones – in 2021, the largest of them were AS LHV Pank, Luminor Bank AS, and Coop Pank AS.
There have also been some concentrations in the banking sector in recent years. In 2017, the European Commission approved a concentration by which DNB Bank ASA and Nordea Bank AB combined their banking business in the Baltics, establishing Luminor Bank. The Authority processed transactions related to the exit of Danske Bank A/S from the market and the transfer of the customer portfolio. AS LHV Pank received permission to acquire the part of the Estonian branch of Danske Bank A/S which consisted of loan and leasing agreements for private customers with employees serving them , and the part of the Lithuanian branch which offered loan products to business customers. These concentrations have not had a significant effect on the level of concentration, but rather have had a positive effect on the competitive situation.
The Authority observed the market shares of banks and the level of market concentration in bank deposits and bank loans as at 30 June in 2011, 2016, and 2021. The HHI was 2,878, 3,010, and 2,790 for bank deposits and 2,600, 2,484, and 2,668 for bank loans, respectively. Thus, the level of concentration in the bank deposits and loans market has not changed significantly, which shows that although the market leader Swedbank AS has a market share of about 40%, it is still a competitive area where consumers have a choice.
In Estonia, the retail trade of food and consumer goods has been an area that can be cited as an example of a competitive commodity market. Compared to, for example, neighbouring countries, where the product market is divided between a few retail chains, Estonian consumers have a significantly greater choice – Coop Eesti Keskühistu, MAXIMA Eesti OÜ, Selver AS, Rimi Eesti Food AS, AS Prisma Peremarket, public limited company OG ELEKTRA, and public limited company RRLektus. The above is also illustrated by the level of market concentration – in 2017–2020, the HHI was 1,405, 1,454, 1,487, and 1,470, respectively.
In the field of retail trade of food and consumer goods, the Authority has, in recent years, processed one concentration: authorising the concentration of Selver AS and ABC Supermarkets AS.
Retail sale of motor fuel
In the field of motor fuel retail, the market is mainly divided between four major filling station chains – public limited companies Olerex, Circle K Eesti, Alexela, and Neste Eesti. In addition, several other undertakings are engaged in the retail sale of motor fuels, such as AS TARTU TERMINAL, public limited company KROONING, and others.
There have also been some concentrations in the retail sector of motor fuels in recent years. In December 2017, the Authority approved the concentration of public limited company AQUA MARINA and a part of the public limited company ‘Johnny’ provided that Aqua Marina fulfils its obligations. AQUA MARINA is related to the public limited company Olerex through control and the public limited company ‘Johnny’ operated Favora’s filling stations. Based on the information gathered during the proceedings (including the results of a consumer survey), the Authority found that after the concentration, the public limited company Olerex would have had significant market power in the Põlva and Võru regions. In order to avoid restriction of competition, Aqua Marina undertook to transfer two filling stations in Võru and one in Põlva.
In February 2018, the Competition Authority approved the concentration of Alexela Tanklad OÜ and the public limited company Euro Oil, provided that Alexela Tanklad OÜ fulfils its obligations. The Authority found that the concentration would strengthen the position of Alexela Tanklad OÜ as the market leader in retail sales of motor fuels in the Karksi-Nuia and Ellamaa regions and Alexela Tanklad OÜ undertook to transfer the Euro Oil filling station in Karksi-Nuia and Ellamaa to avoid restriction of competition. In 2018, the Authority also granted permission for the concentration of public limited company AQUA MARINA and a part of public limited company Circle K Eesti, the object of which was a filling station in Kukruse, Ida-Viru County.
However, the concentrations have not significantly affected the level of concentration in the retail sale of motor fuels. In 2017, the HHI was 2,043 and in 2020, it was 2,280.
The above shows that there are several undertakings operating in Estonia in the field of bank loans, bank deposits, retail trade, and retail sale of motor fuels, and the markets are moderately concentrated. Regulatory deterrence, which is a very important aspect of the control of concentrations, may have a role to play here. The mere fact that concentrations are controlled may induce an undertaking not to engage in an anti-competitive transaction. Thanks to the control of concentrations, it is rare for undertakings to try to concentrate into a monopoly. This is mainly because the undertaking is aware of the possible prohibition of such a transaction by the Authority.
The Authority has taken the maintenance of market structures that promote the functioning of competition in all areas very seriously, but it pays special attention to those product markets where the goods or services in circulation are of primary importance to consumers.
Control of concentrations in 2021
The control of concentrations applies if the total turnover of the parties to the concentration in Estonia in the previous financial year exceeds 6,000,000 euros and the turnover of at least two parties to the concentration in Estonia exceeds 2,000,000 euros each. A concentration that must be controlled by the Authority may not be enforced until a decision approving the concentration has been made.
The concentration must be notified to the Authority after the conclusion of the agreement, the conclusion of a transaction or act for the acquisition of control, or the announcement of a public offer, but before the entry into force of the concentration. A concentration may also be notified to the Authority as soon as the parties indicate with sufficient certainty their intention to complete the concentration.
2021 was a record year in terms of the number of notices of concentration. In 2021, 53 notices of concentrations were filed. In addition, seven proceedings were pending from 2020. Thus, a total of 60 notices of concentrations were processed in 2021. 55 decisions approving the concentration were made within the 30 days prescribed by law, and supplementary proceedings were initiated in respect of three concentrations notified in 2021.
Supplementary proceedings will be carried out to gather additional information and to determine whether there are circumstances restricting competition in case of concentration subject to control. In accordance with the law, the length of supplementary proceedings may be up to four months. In one case of supplementary proceedings initiated in 2021 regarding the concentrations notified to the Estonian Competition Authority, the Authority authorised the concentration on the condition that the parties to the concentration fulfil their obligations (Elektrilevi OÜ / Imatra Elekter AS) and two proceedings will continue in 2022 (A/S Dobeles Dzirnavnieks / AB Baltic Mill, RAGN-SELLS AS / public limited company Väätsa Prügila).
By type of concentration, the concentrations were as follows:
- 45 concentrations involved the acquisition of control by an undertaking over another undertaking or a part thereof (clause 19 (1) 2) of the Competition Act);
- seven concentrations concerned the acquisition of joint control by undertakings over a third undertaking or a part thereof (clause 19 (1) 3) of the Competition Act).
- In one case, it was a concentration of undertakings that had previously operated independently (clause 19 (1) 1) of the Competition Act).
In 2021, two court actions concerning the concentration decisions made by the Authority in 2018 were finally resolved.
The Authority had prohibited the concentration of OÜ R-S Valdus and a part of public limited company Väätsa Prügila with its decision No. 5-5/2018-058 of 21 September 2018. OÜ R-S Valdus is controlled by RAGN-SELLS AS, an undertaking engaged in waste collection and transportation. Public limited company Väätsa Prügila manages the landfill. In the course of the concentration proceedings, it became apparent that the concentration would affect, in particular, two vertically integrated waste management services: (i) collection and transport of municipal waste; and (ii) final disposal of mixed municipal waste in landfills. As both product markets were highly concentrated, the Authority assessed that the concentration would have distorted competition in both product markets. The concentration of vertically integrated municipal waste management services to a single undertaking would have given it a significant advantage over a small number of competitors and thus distorted competition.
OÜ R-S Valdus filed an appeal with the Tallinn Administrative Court to annul the decision of the Authority and to establish the admissibility of the concentration. OÜ R-S Valdus also found that the Authority did not make a decision prohibiting the concentration in a timely manner. In the court proceedings, the dispute over the timeliness of the decision was separated from the dispute over the substance of the decision. The dispute over the timeliness of the decision regarding the interpretation of subsection 28 (31) of the Competition Act was resolved in 2020, when the Supreme Court did not accept the appeal in cassation of OÜ R-S Valdus. Both the Tallinn Administrative Court and the Tallinn Circuit Court supported the position of the Authority and found that the Authority had made a decision prohibiting the concentration of OÜ R-S Valdus and Väätsa Prügila in a timely manner.
In November 2020, the Tallinn Administrative Court made a decision dismissing the appeal of OÜ R-S Valdus, after which R-S Valdus filed an appeal with the Tallinn Circuit Court. In October 2021, OÜ R-S Valdus filed an application to withdraw the complaint and the Tallinn Circuit Court terminated the proceedings and annulled the decision of the Tallinn Administrative Court. The waiver of the complaint was due to the fact that RAGN-SELLS AS successfully participated in the public auction organised by the Paide City Government and the Türi Rural Municipality Government for the sale of the shares of Väätsa Prügila. In December 2021, RAGN-SELLS AS submitted a notice of a concentration to the Authority, pursuant to which it wishes to acquire control over Väätsa Prügila.
In November 2018, the Authority approved the concentration of Enefit Green AS, a subsidiary of public limited company Eesti Energia, and Nelja Energia AS. Eesti Energia is a state-owned vertically integrated company operating in several fields of activity. In addition to electricity generation and wholesale and retail, the activities of the undertaking include mining, processing, and transportation of oil shale, distribution network management, balance provider services, and electric discharge services. Nelja Energia AS produces electricity from renewable energy sources (wind, biogas). There was a horizontal overlap between the business activities of the parties to the concentration in the electricity generation and sales market. In line with the practice of the European Commission, the Authority did not differentiate between electricity produced from renewable energy sources and electricity produced from other energy sources and found that the concentration would not significantly impede competition. The Authority had no reason to conclude that Eesti Energia would have been able to significantly influence electricity prices and independently of other electricity producers through the concentration, especially considering the principles of operation of the Nord Pool power exchange, the position of Eesti Energia in the electricity generation and wholesale commodity market, and the dependence of wind energy on weather conditions.
The decision of the Authority was contested by ELEON AS, AS Eesti Elekter, Eurowind OÜ, Vaivara Tuulepark OÜ, Roheline Elekter AS, Aidu Tuulepark OÜ, Audru Tuulepark OÜ, and Estwind Energy OÜ (hereinafter together ELEON AS and others). In July 2020, the Tallinn Administrative Court made a decision dismissing the appeal of ELEON AS and others. ELEON AS and others filed an appeal with the Tallinn Circuit Court. In June 2021, the Tallinn Circuit Court made a decision dismissing the appeal. ELEON AS and others filed an appeal in cassation with the Supreme Court. The Supreme Court did not accept the appeal in cassation of ELEON AS and others, which is why the judgment of the Tallinn Circuit Court, which dismissed the appeal and left the resolution of the Tallinn Administrative Court unchanged, remains in force. It is therefore clear that the Authority has made a lawful decision in the concentration proceedings of Enefit Green AS and Nelja Energia AS.
Concentration of Elektrilevi OÜ and the public limited company Imatra Elekter
On 9 June 2021, the Authority approved the concentration of Elektrilevi OÜ and the public limited company Imatra Elekter. The condition for the approval of the concentration was the fulfilment of the obligations assumed by the parties to the concentration. As competition concerns raised by a concentration can be remedied in certain situations by imposing obligations on the parties to the concentration, the parties took on obligations to avoid restriction of competition. The obligations were that Elektrilevi could acquire control over Imatra Elekter only on the condition that Imatra Elekter transfers the part of the undertaking of Imatra Elekter engaged in the retail sale of electricity to contractual customers to an acquirer not connected to Elektrilevi through control. Imatra Elekter will continue to operate independently in the retail sale of electricity and compete in the usual way until the sale of the share of the undertaking.
Both parties to the concentration are engaged in the operation of the electricity distribution network, the provision of distribution network services, including the provision of universal service, and the retail sale of electricity. Elektrilevi OÜ (the acquirer), a party to the concentration, operates in a service area that covers the territory of Estonia, except for the larger areas of Narva and its surroundings, Viimsi, Lääne County, and part of Pärnu County. More than 500,000 private and business customers are connected to the distribution network of Elektrilevi OÜ. The other party to the concentration, Imatra Elekter (acquired undertaking), operates in its service area in Viimsi rural municipality, Lääne County, and Northern Pärnu County. More than 25,600 private and business customers are connected to the distribution network of Imatra Elekter. The parties to the concentration, both Eesti Energia, the parent company of Elektrilevi, and Imatra Elekter, are also engaged in the retail sale of electricity in Estonia.
In assessing the concentration, the Authority had to find out whether the acquisition of control over Imatra Elekter by Elektrilevi would change the structure of product markets in a way that would lead to significant restriction of competition. Therefore, the Authority defined the product markets affecting the concentration and assessed the competition situation and its change in these product markets.
For this concentration, the Authority defined the retail market for electricity, the object of which is the sale of electricity to final consumers and the geographical scope of which is the entire territory of Estonia. As both parties to the concentration – Eesti Energia, the parent company of Elektrilevi OÜ, and Imatra Elekter – are engaged in the retail electricity market in Estonia and accounted for 50–60% of total electricity sales in Estonia in 2020, the Authority concluded that the sale of electricity is a horizontally affected product market and that the concentration will further strengthen the position of the market leader of Eesti Energia in the retail electricity market.
In the case of the distribution network goods market, the Authority concluded that as the distribution of electricity through a distribution network to a particular customer is not substitutable for distribution through any other distribution network, the distribution networks each constitute a separate product market – a market for the provision of distribution network services with a geographic scope covering the distribution network or service area. Thus, distribution system operators are natural monopolies with a market share of 100% in the market for the sale of distribution network services and, unlike other activities, there is no so-called normal competition in the provision of distribution network services.
As Elektrilevi and the undertakings connected to it through control are major undertakings engaged in the provision of distribution network services and retail sale of electricity in Estonia, the Authority considered the specific nature of non-horizontal concentrations (in particular the risks that may arise from the concentration of undertakings active in the same field but in different geographic markets for the production and distribution of goods and services) in assessing the concentration. The Authority also analysed whether, as a result of the concentration, an undertaking may have the opportunity to significantly restrict competition, i.e. in this case, the effect of the concentration in the field of electricity distribution network services.
In approving the concentration, the Authority proceeded on the basis of the need to maintain and develop competition. In the assessment of the concentration, the Authority reached the following conclusions:
- the turnover area (geographical scope) of Elektrilevi related to the provision of distribution network services will increase, but as the distribution of electricity through a distribution network is not substitutable for distribution through any other distribution network for consumers and as distribution networks form a separate product market, the structure of the goods market for the provision of distribution network services after the concentration will remain at the pre-concentration level, i.e. the share in the goods market, which is 100% for each network operator, will not change. Therefore, the concentration will not have a significant effect on the structure of the product market for the provision of distribution network services or on the competitive situation. After the concentration, only the control structure of Imatra Elekter will change so that the owner of Imatra Elekter will change – Elektrilevi OÜ will replace the company Imatra FNW Oy.
- In essence, there is no potential competition in the market for the provision of electricity distribution network services. The share of competitors entering the goods market is also very small, i.e. the number of undertakings that would enter the goods market through the construction of electricity distribution networks is marginal. Therefore, the concentration will not have a significant effect on the entry of the product market or the potential for competition.
- The purpose of the control of concentrations is to prevent undertakings from being in a position to increase their prices independently of competitors, suppliers, and buyers. The parties to the concentration are, by their very nature, undertakings with a natural monopoly operating in an area where competition is generally not possible and therefore the legislator has enacted specific laws, regulations, and guidelines to regulate this area. As the connection charges of network operators are regulated in accordance with the Electricity Market Act and approved by the Estonian Competition Authority, there is no reason to conclude that Elektrilevi would be able to significantly influence prices independently of other market participants.
- The concentration will not eliminate competition in any of the purchasing markets, as the products and services will continue to be provided by a number of undertakings after the concentration. Elektrilevi must carry out a public procurement for the purchase of products and services; after the concentration, the obligation to purchase products and services through public procurement will also extend to the electricity distribution network operated by Imatra Elekter prior to the concentration. Thus, undertakings interested in the provision of electricity distribution network services and products have the opportunity to participate in the relevant procurement.
- The obligations of the parties to the concentration, pursuant to which Elektrilevi will not acquire control over the part of the undertaking of Imatra Elekter whose business activity is the retail sale of electricity, will have a balancing effect on the possible restriction of competition resulting from the concentration. Thanks to the obligation, the concentration will not strengthen the leader position of Eesti Energia in the electricity retail goods market, where other competitors are significantly smaller. According to the Authority, the obligations will not change the competitive situation in the retail electricity market and will not reduce the competitive opportunities of the undertakings engaged in the retail sale of electricity as a result of the concentration.
The Authority approved the concentration of Elektrilevi and Imatra Elekter on the condition that the parties to the concentration fulfil their obligations. In reaching its decision, the Authority relied on the information and evidence gathered during the proceedings and took into account the views of the parties to the concentration and other undertakings, including the arguments against the concentration and the replies of the parties to the concentration, as well as the position of the Ministry of Economic Affairs and Communications. The Authority concluded that the concentration, together with the obligations, will not create or strengthen a dominant position on any of the goods markets related to the concentration and that the concentration will not lead to circumstances that would necessitate a prohibition of the concentration.
On 17 June 2021, Elektrum Eesti OÜ submitted a notice of concentration to the Authority requesting the approval of the concentration to acquire from the company Imatra Elekter a part of the undertaking – the retail electricity business. As a result of the transaction, Imatra Elekter fulfilled its obligation to transfer a part of the undertaking to an independent buyer of the electricity retail business meaning that Elektrilevi OÜ acquired the right to acquire control over Imatra Elekter.