The Competition Authority's assessment of Elektrilevi OÜ's independence and activities with regard to equal treatment

The Competition Authority conducted an analysis1 in order to ascertain the risks concerning the independence of Elektrilevi OÜ from the Eesti Energia AS group. With the current developments, the activities of Elektrilevi OÜ as Estonia's largest distribution network operator are becoming increasingly important in the organisation of the electricity market. Therefore, it is necessary that the company treats market participants equally when providing and procuring distribution network services, and that its independence from the electricity seller and producer Eesti Energia AS and its subsidiaries, which belong to the same group of undertakings, is guaranteed to the necessary extent.

In the analysis, the Competition Authority assessed whether the equal treatment action plan of Elektrilevi OÜ meets the requirements arising from the applicable regulation, highlighting the possibilities of ensuring the independence of distribution network operators using the example of some member states.

In conclusion, the Competition Authority found that in regard to the issue of whether Elektrilevi OÜ is sufficiently transparently independent from other companies belonging to the Eesti Energia AS Group, the main point of concern is the separation of Elektrilevi OÜ's control centrefrom the undertaking. But also the removal of many other services that correspond to the principal activity of a distribution network operator and transferring them to Enefit Connect OÜ. As part of the process of amending the Electricity Market Act, the Competition Authority has also recommended considering the implementation of the so-called state-within-a-state solution as a way to better ensure the independence of Elektrilevi OÜ. In this way, the independence of the distribution network is ensured, yet at the same time the financial integration and the ultimate right of the parent company to earn a profit from its assets would be preserved. The authority drew attention to the fact that it is important to maintain the financial integration of the parent and subsidiary companies. According to this, the distribution network would be financially integrated into the group, but the distribution network would be completely independent in the rest of its activities (network development and management, specific investment decisions, outsourcing of services, organisation of procurements etc). The parent company has the right to approve the subsidiary's budget, including the investment budget, and to set the profit-making goal, asset productivity criteria and maximum debt load.

Also, in this case, financial integration would be preserved, where the loan capital would be serviced within the group. The parent company also has the right to set the criteria for the quality of electricity supply. It is important to ensure the independence of the distribution network’s management board, where its remuneration and motivation (for example, a resolution to extend the term) is primarily related to the fulfilment of the financial goals set by the owner, and not to the management board’s activities regarding the provision of electricity network services. In conclusion, the relationship between a parent company and a subsidiary can be characterised as a financial investment, where the main interest of the parent company is to make a profit and increase the value of assets.

A member state can also choose maximum independence, ie an option where the undertaking has undergone ownership unbundling. Functionally, the best option would be the formation of an independent distribution network similar to Elering AS, ie ownership unbundling. A good example is the regulation on the independence of the transmission network operator arising from the directive. While the regulation of the transmission network that has undergone ownership unbundling is quite laconic, the regulation of the variants of the so-called administrative unbundling is laid down in a detailed description that is several pages long. At the same time, the possible negative aspects must also be considered when strengthening the independence of the distribution network operator. For example, considering Elektrilevi OÜ and Eesti Energia AS Group, the problem is the composition of the assets of Eesti Energia AS, where the oil shale industry has a very important share: mining, production of oil shale oil and production of electricity from oil shale. By separating Elektrilevi OÜ from the Eesti Energia AS group, the latter would be left mostly with risky assets.

However, in the opinion of the Competition Authority, the ownership unbundling of Elektrilevi OÜ from the Eesti Energia AS Group would certainly contribute to ensuring better transparency and independence of Elektrilevi OÜ's activities.

Available in the document register of the Competition Authority