Institutional change and continuity in German infrastructure management: The case of electricity reform

This article was downloaded by: [University of Kent] On: 06 November 2014, At: 16:13 Publisher: Routledge Informa Ltd Registered in England and Wales Registered Number: 1072954 Registered office: Mortimer House, 37-41 Mortimer Street, London W1T 3JH, UK German Politics Publication details, including instructions for authors and subscription information: http://www.tandfonline.com/loi/fgrp20 Institutional change and continuity in German infrastructure management: The case of electricity reform Burkard Eberlein a a Technische Universität München , Published online: 28 Sep 2007. To cite this article: Burkard Eberlein (2000) Institutional change and continuity in German infrastructure management: The case of electricity reform, German Politics, 9:3, 81-104, DOI: 10.1080/09644000008404608 To link to this article: http://dx.doi.org/10.1080/09644000008404608 PLEASE SCROLL DOWN FOR ARTICLE Taylor & Francis makes every effort to ensure the accuracy of all the information (the “Content”) contained in the publications on our platform. However, Taylor & Francis, our agents, and our licensors make no representations or warranties whatsoever as to the accuracy, completeness, or suitability for any purpose of the Content. Any opinions and views expressed in this publication are the opinions and views of the authors, and are not the views of or endorsed by Taylor & Francis. The accuracy of the Content should not be relied upon and should be independently verified with primary sources of information. 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Terms & Conditions of access and use can be found at http://www.tandfonline.com/page/terms-and- conditions D ow nl oa de d by [ U ni ve rs ity o f K en t] a t 1 6: 13 0 6 N ov em be r 20 14 http://www.tandfonline.com/page/terms-and-conditions http://www.tandfonline.com/page/terms-and-conditions Institutional Change and Continuity in German Infrastructure Management: The Case of Electricity Reform BURKARD EBERLEIN Following the example of telecommunications, German electricity markets were completely liberalised in April 1998. Do these developments signal the erosion of the traditional model of infrastructure management and, thus, of one pillar of the German political economy? The article addresses the issue of change or continuity from a neo-institutionalist perspective, using electricity reform as a case study. After mapping out the pre-reform system and the forces driving liberalisation, the article first discusses current market dynamics and sectoral adjustments, and then describes and assesses the regulatory regime installed after liberalisation. We observe substantial changes in strategic orientations of market actors in response to the new policy environment of market opening. However, we find strong continuity of political and regulatory management structures. The persistance of regulatory patterns can be attributed to the weight of core macro-level institutions of the German political system in which sector-level regimes are embedded. GERMAN POLITICAL ECONOMY AND INFRASTRUCTURE MANAGEMENT The German political economy shows an intriguing paradox. On the one hand, the guiding principle of the social market economy strictly limits the role of the state in the economy. The state is to refrain from direct, ad hoc interventions in the market. The state's proper business is to take care of the ordering principles for a market economy (Ordnungspolitik), and to compensate for the undesirable effects of markets by social policy programmes. The market ideology is hostile to economic planning, even though, in reality, strong private-public co-operation and functional Burkard Eberlein, Technische Universität München German Politics, Vol.9, No.3 (December 2000), pp.81-104 PUBLISHED BY FRANK CASS, LONDON D ow nl oa de d by [ U ni ve rs ity o f K en t] a t 1 6: 13 0 6 N ov em be r 20 14 82 GERMAN POLITICS equivalents (such as banks) make for 'co-ordinated' or 'organised' capitalism.1 On the other hand, and oddly contrasting with the market principle, the state took a very active role in the management of infrastructures and utilities. It is true that infrastructures belong to those sectors for which the state, in most countries, takes particular responsibility. But the scope and depth of monopolisation and public intervention within the framework of German Marktwirtschaft was quite important. Until recently, postal services and telecommunications, energy and water supply, transport systems (roads, railways, air transport), as well as radio and television, and education and research were all state-owned, state-run or at least exempted from market competition. These sectors were considered public services, with access and provision rights for all citizens. And the state often acted as a direct provider of services, as 'produzierender StaaV or 'Leistungsstaat'.2 German unification did not end but rather confirmed this dual pattern. The industrial sector was radically privatised under the auspices of the Treuhandanstalt.1 In the realm of technical infrastructures, by contrast, established West German institutions were 'transferred' to East Germany.4 This picture is about to change dramatically. The general move towards privatisation, liberalisation and deregulation in European economies5 no longer exempts infrastructures and public utilities, and Germany is no exception. Looking back on the 1990s, the entire realm of German infrastructure was undergoing profound transformation.6 Infrastructure bureaucracies were transformed into corporations (postal services, telecommunications, railways) and, provided they sold well, they were privatised on the stock market (telecommunications, air transport). State monopolies were opened to private service provision (radio and TV, postal services and telecommunications), and publicly licensed utility monopolies were ended (electricity and gas). A RADICAL BREAK WITH THE PAST? A NEO-INSTITUTIONALIST APPROACH These developments raise the question of whether we are about to witness the erosion of the traditional German model of infrastructure management. While liberalisation in terms of formal market opening is now, across many sectors, an incontestable fact,7 the actual scope and effects of market reforms in the wider context of the German political system remain a matter of inquiry and debate. The present paper seeks to make a contribution to this debate, on the basis of a sectoral case study. It analyses regime change in electricity, a sector which has recently experienced full market opening. D ow nl oa de d by [ U ni ve rs ity o f K en t] a t 1 6: 13 0 6 N ov em be r 20 14 GERMAN ELECTRICITY REFORM 83 The neo-institutionalist literature provides an adequate theoretical framework to assess and explain the scope of actual change. The 'new institutionalism' focuses on how institutional settings structure and shape political strategies, processes and outcomes.8 Institutions can enable actors to take certain courses of action, but they may also act as a constraint and preclude certain options. Thus, different institutional configurations (for example, national political systems), confronted with the same stimulus (for instance, liberalisation), may produce different outcomes. Authors generally distinguish between three different strands of 'new institutionalism': rational choice, sociological, and historical institutionalism.9 For the purpose of the present analysis, it seems useful to follow a simplified dichotomy of interest-based versus institution-based approaches.10 Interest-based, rational choice approaches see institutions as 'opportunity structure' or intervening variable for self-interested actors with fixed preferences. Institutions arise, persist or change because they provide certain benefits or accord power and resources." Sociological and historical institutionalism, by contrast, share a view of institutional settings as independent variable explaining political outcomes. Sociological institutionalists in particular conceive of institutions as including not only formal and informal rules and norms but also cognitive and symbolic factors. Institutions work as 'frame of reference', moulding actors' preferences, ideas and routines.12 Rational choice institutionalism explains well how market actors adapt their strategies to the new opportunity structure of liberalised markets. The incontestable changes in terms of sectoral adjustments (such as streamlining and internationalisation) can be attributed to the strategic reorientation of self-interested actors. However, we observe strong continuity in the political and regulatory patterns established after liberalisation. This continuity cannot simply be accounted for by 'regulatory capture', or by mutual adjustment of interests among established players. Rather, it reflects the embeddedness of the sectoral regime in well-entrenched macro-level institutions, as hypothesised in sociological and historical institutionalist accounts. The more reforms affect core elements of the macro-level institutional configuration, the less likely, or less deep, actual change is. The article first gives an account of the electricity system prior to reforms and outlines the forces driving liberalisation. It then presents current market developments and sectoral adjustments, triggered by the new policy environment of liberalisation. After a brief discussion of the rationale for the re-regulation of electricity in the aftermath of liberalisation, the organisational and functional dimensions of the new regulatory regime are portrayed, with special emphasis on persistance in regulatory structure and D ow nl oa de d by [ U ni ve rs ity o f K en t] a t 1 6: 13 0 6 N ov em be r 20 14 84 GERMAN POLITICS substance. This leads finally to an explanation of the limited scope of change in terms of the constraints of the macro-level institutional framework. ELECTRIC POWER MANAGEMENT: FROM THE NATIONAL POWER CARTEL TO THE EUROPEAN MARKET LOGIC The entire electric power system has traditionally been considered a natural monopoly, requiring the exclusion of competition and sustained state intervention.13 In contrast to centralised national monopolies (such as in France), the German electricity system has traditionally been characterised by decentralisation and fragmentation.14 There are over 900 electric utilities on three different territorial levels. The largest eight interconnected utilities (Verbiindwirtschaft) form the national grid and control about 80 per cent of generation capacity. The three big players in the national market were, until recently, RWE Energie AG, PreussenElektra AG and Bayernwerk AG, which, taken together, accounted for 65 per cent of national electric power sales. There are about 80 regional companies and some 800 municipal utilities, which mainly work as distributors and buy most of their power from the grid companies. Through various capital links there was a much higher degree of concentration than the fragmented structure suggested. Also, private producer interests were strongly intermingled with state and municipal bodies who played an active ownership and management role. Both private and public players benefited from the monopolised nature of the industry. The national 'market' for electric power was divided into different regional and local monopolies (Gebietsmonopole) and the industry was exempted from general competition law. Local authorities received generous concessions fees for granting right-of-way for the wires of monopoly suppliers, and were able to generate monopolistic incomes from their municipal plants (Stadtwerke). This privileged position was backed by the constitutional guarantee of kommunale Selbstverwaltung (municipal self- administration), which includes the right to manage infrastructure services. More generally, the organisation of regulatory authority reflected the federal character of German institutions. While the Federal Ministry of Economics was in charge of general policy formulation, the Lander Ministries of Economics supervised the legal obligations of regional and local monopolists, such as the supply to final consumers, and regulated electricity tariffs charged to Tarifkunden (mainly household consumers). For Sondervertragskunden (mainly large users), Lander cartel authorities and the Federal Cartel Office jointly policed the abuse of monopoly power. However, the intermeshing of public (ownership) and private (business) D ow nl oa de d by [ U ni ve rs ity o f K en t] a t 1 6: 13 0 6 N ov em be r 20 14 GERMAN ELECTRICITY REFORM 85 interests ensured that Lander regulatory oversight never constituted a threat to the flow of monopolistic profits.15 Against this background the electric supply industry was often regarded as 'an economic and political power cartel',16 reaping monopoly profits at the expense of consumers. Forces of Change: Liberalising German Electricity under EU Influence The revision of the German energy law (EnWG, Energiewirtschaftsgesetz)," which went into effect on 29 April 1998, radically changed this picture of a cosy monopoly. The law created an immediate and complete market opening. All exemptions from cartel prohibition for the electricity industry in the competition law (Gesetz gegen Wettbewerbsbeschrdnkungen, GWB) were abolished.18 A number of factors played a role in this paradigmatic change from monopoly to competition. First, the 1980s and 1990s brought about a worldwide transformation of the electric power sector.19 The goal was to increase efficiency and drive down costs by introducing competition in electricity generation and supply. Apart from the neo-liberal agenda of liberalisation and deregulation, the reform movement was also driven by some economic and technological developments.20 In Germany, the example of liberalisation pioneers such as Britain demonstrated to decision makers that monopoly was not a sacred necessity in electricity management. Now, ordoliberal-minded economic experts and the advisory Monopolkommission had concrete counter-examples to refer to. Moreover, the general political climate of the 1990s was different: 'Electricity liberalisation was linked to the broader debate about the competitiveness of German industry and of the 'production site Germany' (Standort Deutschland)'.21 The German debate on reform was decisively fuelled by the liberalisation movement at the EU level. EU liberalisation was, however, confronted with a heterogeneous landscape of national electricity systems, including substantial variations in the costs of electricity.22 Member states thus had, much more than in telecommunications, conflicting economic interests concerning market opening.23 Therefore, the Community directive 96/92/EC, adopted in December 1996,24 prescribes only an incremental and moderate liberalisation of electricity markets. In a first step, which took effect on 19 February 1999, the equivalent of the national share of 'large users' (consumption exceeding 40 GWh/year), which corresponds to 26 per cent of national electricity demand, was opened to competition. As from 19 February 2000, the threshold passed down to consumers using more than 20 GWh/year (28 per cent of national demand), and will go down further to those using 9 GWh/year in 2003, which will open up 33 per cent of the market. D ow nl oa de d by [ U ni ve rs ity o f K en t] a t 1 6: 13 0 6 N ov em be r 20 14 86 GERMAN POLITICS Although European market opening requirements were rather moderate,25 the European factor was crucial to tip the German domestic balance in favour of a new 'winning coalition' for liberalisation. Under the impact of EU-level discussions on the merits of competition, the Federal Ministry of Economics revised its position in favour of liberalisation.26 This helped to unsettle the sectoral interest coalition between different producer groups by opening a distributional conflict: consistent with rational choice expectations, some actor groups perceived the prospect of institutional change (liberalisation) as a strategic opportunity to redesign sectoral institutions in their interests.27 Thus, within the sectoral peak association of electric utilities (Vereinigung Deutscher Elektrizitdtswerke, VDEW), the cohesion of which had been built on the mutual benefits of monopoly, a major cleavage intensified. The local utilities, represented within VDEW, by the Association of Municipal Utilities, VKU (Verband Kommunaler Unternehmer), continued to oppose liberalisation strongly, since they feared losing their privileged position in the competition against larger utilities. The latter came to embrace EU-driven competition: first, as a welcome avenue to make inroads into local supply areas, and, second, to make sure that if EU liberalisation was going to happen anyway, it would leave no room for public ownership interests to exempt local utilities from the new competitive regime. Third, the international dynamic of globalising energy markets reshaped the strategic perspectives of larger utility companies: if they were to strive to become international players with stakes in foreign markets, the logic of reciprocity would make home market opening inevitable. In short, the deepening rift within the traditional producer alliance helped to pave the way for liberalisation. MARKET DYNAMICS AND STRATEGIC ADJUSTMENTS Observers agree that liberalisation has unleashed considerable market dynamics and competitive pressures, only comparable to the previous liberalisation of telecommunications markets.28 Electric power has become a commodity, and established operators have been joined by a host of new market entrants: about 100 electricity traders and brokers, almost as many 'Green' suppliers, and more than 20 branches of foreign companies are active in a market which is subject to intense price competition in a context of excess capacity. Up to and right after market opening (on 29 April 1998), large industrial energy consumers (such as the chemical industry) were first to negotiate substantial price cuts using the threat of resorting to independent production. Then, prices began to crumble for the entire range of industrial and business customers. Between March 1998 and July 2000, average industrial consumer prices fell by 28 per cent.29 D ow nl oa de d by [ U ni ve rs ity o f K en t] a t 1 6: 13 0 6 N ov em be r 20 14 GERMAN ELECTRICITY REFORM 87 Much sooner than expected, the price war hit domestic electricity prices. The summer of 1999 saw the first round of fierce price competition for household consumers.30 'Yello Strom', a newly created subsidiary of the Southern German utility EnBW, shocked the market by announcing a cut- price offer of 19 Pf/kWh. While electricity is a perfectly homogenous product, marketing campaigns seek to establish distinct brands of electricity associated with specific company profiles.31 However, very few households (about half a million out of 43 million) have actually changed suppliers so far, not least because of technical and commercial barriers to the physical switch of suppliers.32 But some do enjoy lower price levels with their old suppliers: in 1999, household consumer prices declined on average by ten to 15 per cent.33 In response to the new competitive environment, established market players not only react by cutting monopoly prices and launching promotional campaigns. Two obvious avenues of strategic adaptation can be distinguished: internal streamlining and reorganisation; and external co- operation, mergers and internationalisation. First, electricity undertakings seek to bring down costs by cutting jobs and generation capacity. Between 1997 and 1999 employment fell from a total of 171,000 down to 150,000 jobs. To help stop the price decline, the big grid companies plan to put the equivalent of 10,000 MW in power plants out of operation.34 Moreover, managers devise new organisational patterns fit to accommodate the differentiation of market functions (for example, network operation, distribution, marketing). The municipal utilities (Stadtwerke) were afraid to become the main victims of market consolidation. Stadtwerke spent their monopoly profits to cross-subsidise other local services (such as transport). Some used monopoly protection to invest in environmentally friendly forms of electricity generation, namely Combined Heat and Power (CHP, Kraft- Wdrme-Kopplung).35 The majority of municipal utilities, however, mostly buy, resell and distribute electricity; and they have managed, so far, to benefit from lower wholesale prices which have not been fully passed on to domestic consumers. Concession fees paid to local authorities (for granting right-of-way for wires) were also increased after liberalisation. Nevertheless: experts predict that only 100 Stadtwerke will survive as independent companies.36 Second, companies seek to build alliances or mergers: market concentration and consolidation are incontestable trends. Over the first 18 months of liberalisation, the peak association of electric utilities had registered 50 co-operations involving 400 companies, as well as 15 mergers concerning 40 previously independent companies.37 Many Stadtwerke react to the competitive environment by forming regional alliances.38 D ow nl oa de d by [ U ni ve rs ity o f K en t] a t 1 6: 13 0 6 N ov em be r 20 14 88 GERMAN POLITICS The large (grid) utilities feel the need to merge and grow in order to survive in the new European market credited with an estimated 40,000 MW in over-capacity. Market analysts say that only companies with 150 billion kWh or more in annual electric power sales will be able to play a European role. In Europe, only the French state-owned monopolist EDF (455 billion kWh) and its Italian counterpart ENEL (225 billion kWh) clearly achieve this size, followed by the largest German supplier RWE with some 168 billion kWh. Against this European background, two mega-mergers recently transformed German market structures. In February 2000, Veba and Viag sealed the merger fusing their electricity businesses PreussenElektra (106 billion kWh) and Bayernwerk (73 billion kWh) under the new roof of E.ON AG. As part of the merger deal, the state of Bavaria sold ten per cent of its 25.1 per cent share in Bayernwerk to Veba for an estimated 3.1 billion DM. Shortly afterwards, the giant RWE completed the merger with its junior neighbour VEW (35 billion kWh). This deal re-established RWE as Europe's largest private supplier and increased RWE's share of the German electricity market from 30 to 40 per cent. Both mergers have been cleared by the German competition authority (RWE) and the European Commission (E.ON) respectively. The main condition attached to approval is that the companies withdraw from cross-ownerships in smaller west German grid companies and in the east German conglomerate VEAG, which is supposed to develop into a third independent player. Nevertheless, EON and RWE combined control almost 75 per cent of German electricity generation. Market consolidation goes hand in hand with internationalisation. Foreign investors enter the German market (the largest in Europe), by teaming up with German suppliers and acquiring stakes in national grid companies. The two smallest ones, HEW (Hamburg) and BEWAG (Berlin), were the first targets in 1997.39 In 1997, the state of Hamburg concluded a first sale of 25.1 per cent of HEW shares to Swedish Vattenfall, the biggest Scandinavian power producer, yielding some 1.3 billion DM. A second sale of another 25.1 per cent of shares was, in principle, agreed on in November 1999 for an enormous 1.7 billion DM from Vattenfall, which considers HEW as a 'platform' for future activities in Germany.40 In a recent coup, HEW, under the wings of Vattenfall, decided to acquire a majority stake in BEWAG to be sold by E.ON as part of the EU merger requirements. This feeds into a larger plan of Vattenfall to gain control of east German VEAG, thereby supplanting US competitor Southern Energy.41 Maybe the most dramatic deal for the future of the German market is the entry of French giant EDF. In January 2000, the state of Baden- Wiirttemberg sold its 25.01 per cent share of the grid company EnBW, the fourth largest national player so far, to EDF for the inflated sum of 4.7 D ow nl oa de d by [ U ni ve rs ity o f K en t] a t 1 6: 13 0 6 N ov em be r 20 14 GERMAN ELECTRICITY REFORM 89 billion DM.42 For EDF, EnBW serves as 'toehold', to get a firm foot in the German market, and to increase the sales of excess and inexpensive nuclear- based power. Through the acquisition of subsidiaries or company shares in the foreign market, EDF manages to circumvent the principle of reciprocity of market opening laid down in the EU liberalisation directive.43 The EDF and Vattenfall examples demonstrate that the withdrawal of state actors from their ownership and producer role adds to the dynamic of concentration and internationalisation. Shares are privatised and, as in the case of RWE, multiple voting rights of municipal shareholders are ended. For Lander governments, the sale of utility shares constitutes a precious source of income in times of budget deficits, and thus follows the rational logic of 'external budget maximisation', exploiting opportunities offered by the new electricity business. As far as market actors are concerned, the two strategies of internal streamlining and external growth follow even more closely conventional rational choice expectations. They are the logical reaction of former monopolists seeking to defend their market shares in a competitive environment. In line with this reasoning, all market players also have an incentive to pursue a third strategy, namely to try and influence the regulatory framework governing market operations. As some rational choice institutionalists remind us, institutional change or maintenance involves distributional struggles and power conflicts, with the different parties seeking to advance institutional solutions which further their specific interests.44 For example, former monopolists can be expected to advocate regulatory patterns cushioning the full effects of liberalisation and protecting their position at the expense of new entrants. Likewise, the latter group will plead for a rigorous regulatory dismantling of remaining barriers to market entry. And this is pretty much what is actually happening. But do regulatory patterns installed after liberalisation necessarily result from the institutional interests of the more powerful group of actors? Before the new regulatory framework is discussed, the rationale for re-regulating liberalised markets is presented briefly. LIBERALISED MARKETS AND RE-REGULATION We know today that, as a rule, privatisation and liberalisation do not result in the retreat of the state in favour of the free market, but rather in a redefinition of the state's role: from the 'positive to the regulatory state' .45 Government re-regulation of privatised enterprises and liberalised markets in infrastructures and utilities basically stems from two different logics.46 First, regulation is supposed to correct market failures which arise or persist in the aftermath of privatisation and liberalisation (economic logic of D ow nl oa de d by [ U ni ve rs ity o f K en t] a t 1 6: 13 0 6 N ov em be r 20 14 90 GERMAN POLITICS market-making).47 Second, regulation is used to promote social and political goals typically not served by competitive markets, such as equity, by correcting the undesirable results of economic efficiency (political logic of market-correction). In practice, both logics cannot be clearly separated, but rather co-exist and may conflict.48 In the specific case of electricity, the double regulatory challenge can be characterised as follows. For competition to actually work, the owners of the electricity networks, which remain natural monopolies, need to provide competitors access to their lines. The transmission networks are usually owned by the vertically integrated electricity companies which also generate and/or sell electricity. Such companies will be tempted to discriminate in favour of their own group companies and against competitors. Therefore, effective competition crucially depends on non- discriminatory 'Third Party Access'. Viewed from the market failure perspective of economic efficiency (natural monopoly of transmission), this constitutes the main regulatory challenge after liberalisation. However, this is not the sole task of public regulation. In the power sec- tor, two concerns beyond economic efficiency play an important role. First, certain universal service standards continue to be applied, such as that all citizens are guaranteed electricity at fair prices. Second, the protection of the environment remains a fundamental concern. In sum, regulation is faced with the delicate task of balancing competing concerns and interests. ANALYSING THE NEW REGULATORY REGIME: PATTERNS OF PERSISTENCE It seems useful to distinguish between two dimensions of regulation. The functional dimension is concerned with the scope and goals of regulation. The central question is how to balance competing concerns. The organisational dimension deals with the design of regulatory institutions. The central question is: who is to regulate and on which territorial level regulation is to be carried out? The Organisational Dimension of Regulation: Who is to Regulate? Electricity management in Europe is no longer a matter entirely left to the nation states. EU competition rules now apply fully to the electric power sector. This concerns the enforcement of EU-wide market opening, the monitoring of state aids, and merger control. The competition directorate, DG competition (formerly DG IV) of the European Commission exploited the recent Veba-Viag merger case to impose in Germany, as part and parcel of the merger approval, detailed pro-competitive rules regarding the decartelisation of ownership structures and transmission tarification (see D ow nl oa de d by [ U ni ve rs ity o f K en t] a t 1 6: 13 0 6 N ov em be r 20 14 GERMAN ELECTRICITY REFORM 91 below). This procedure helped to advance the pro-competitive agenda of the Internal Electricity Market Unit of the Energy and Transport directorate, DG TREN (formerly DG XVII), which actively monitors the implementation of the liberalisation directive. Also, the European Commission seeks to achieve uniform standards by promoting common regulatory philosophies to be shared by national regulators who are brought together in Commission-sponsored networks.49 This can be labelled 'regulation by networks',50 In sum, we find complex patterns of 'two-tier regulation'51 that entail important interaction effects such as policy diffusion and regulatory learning.52 Nevertheless, member states are given a large margin of choice as to how they seek to achieve the goals defined in the EU liberalisation directive. This logic notably applies to the crucial question of third party access, where the choice is between regulated third party access, negotiated third party access and the so-called single buyer model. And, in principle, disputes in terms of network access are supposed to be settled by national regulatory bodies or competition authorities. How did Germany use this large margin of choice? We turn first to the issue of restructuring ownership prior to market opening, which is considered a crucial element for the introduction of competition.53 Whereas some countries opted for restructuring the sector prior to liberalisation, notably by pro-competitive disintegration of vertically integrated electricity undertakings (structural unbundling) and the transfer of the wires to an independent grid company, German liberalisation happened on the basis of the current industry structure. Obviously, such a transfer is much more difficult to achieve in a country where grid ownership is private and fragmented. Nevertheless, no effort was made to reform the traditional structures. This means that Germany, unlike most member states, continues to have no national pooling mechanism or grid. Furthermore, the lack of structurally independent system operators is seen as inviting discrimination by vertically integrated companies against new entrants. Germany also persists and stands out as far as the design of regulatory authorities and the regulatory approach is concerned. For one thing, the dual split between federal versus Land level as well as cartel versus ministerial regulatory oversight basically remains untouched. More important, most countries, except for Austria and Germany, established a sector-specific industry regulator with the power to regulate, ex ante, the prices and conditions fixed by the transmission system operators. Only Germany continues to rely on ex post oversight by the national competition authority (and the Lander cartel authorities) to prevent the abuse of monopoly power. To reinforce monopoly control of network acces, the 'essential facility D ow nl oa de d by [ U ni ve rs ity o f K en t] a t 1 6: 13 0 6 N ov em be r 20 14 92 GERMAN POLITICS doctrine' (refusal of infrastructure network access to third parties without justification constitutes an abuse of a dominant position) was introduced into the national competition law54 as of 1 January 1999. Thus, transmission rules and prices are not set by a regulatory authority, but are, in principle, the result of bilateral negotiations between the system operator and the user ('negotiated third party access'). Basic rules for access pricing and conditions were laid down in a voluntary industry agreement (Verbandevereinbarung), struck between the VDEW (peak association of electric utilities), VIK (industrial producers and consumers), and the BDI (Federal Association of German Industry) in May 1998. This 'self-regulatory' agreement between peak associations, a traditional sectoral instrument, has been working since as a substitute for public regulation. The first version of the Verbandevereinbarung, which expired on 1 October 1999, had been heavily criticised for tailoring transmission rules to the needs of established grid companies and large industrial users. The needs of domestic consumers and of new market entrants (for example, energy brokers) as well as new market requirements (such as stock market trading) were not sufficiently taken into account. New market entrants complained that incumbent grid companies used their control of grid access to dry out potential competitors.55 After difficult negotiations, a new, substantially improved version of the Verbandevereinbarung took effect on 1 January 2000. Many critical points were removed: rules and pricing mechanism for network use were simplified; barriers to the switch of domestic consumers to new suppliers were removed, and the conditions for electricity trading and stock markets were created. However, as new market entrants point out, many of the new rules still await implementation or are not fully respected.56 Many smaller network operators have not yet published their access tariffs. Many of these tariffs are considered not sufficiently transparent and too high. The detailed technical arrangements necessary for the domestic consumer to switch suppliers easily are not yet fully in place. In short, established market players are accused of doing what they reasonably could be expected to do, namely to exploit the strategic opportunities offered by the self-regulatory framework in order to obstruct full competition. In spite of the criticism provoked by some results of 'self-regulation' through voluntary industry agreements, the Federal Ministry of Economics continues to reject calls for public grid regulation to be exercised by the ministry (let alone by a new, sector-specific regulatory agency), with ex ante powers to fix general access and transmission conditions. To be sure, prior to the renegotiation of the Verbandevereinbarung, the Ministry had stressed that it would be ready to step in with legal grid regulation D ow nl oa de d by [ U ni ve rs ity o f K en t] a t 1 6: 13 0 6 N ov em be r 20 14 GERMAN ELECTRICITY REFORM 93 {Netzzugangsverordnung) in case of failure to renew the industry agreement. But Minister Miiller has always clearly preferred a 'voluntary, state-free solution',57 and this position has not changed since. Therefore, self-regulation, monitored by competition law, Lander cartel authorities and the Federal Cartel Office, continues to dominate the architecture of the German Regulierungsstaat in electricity. The Federal Cartel Office has two main instruments at its disposal. First, on the basis of the 'essential facility doctrine', it can issue orders for grid owners to open their grid to rivals.58 Second, the Cartel Office can use its powers to block industry mergers in order to press for improvements of grid access and transmission rules. Third and finally, the German Cartel Office finds support in European competition rules and enforcement mechanisms as set out earlier. However, despite a series of successfully fought out access cases, it is far from clear if the Cartel Office will be able to cope with the task of regulating a dynamic electricity market without the help of a single-industry regulator. First, the responsible department in the Cartel Office readily acknowledges that it lacks the necessary resources to monitor the liberalised energy market comprehensively.59 Second, interim injunctions or orders issued by the competition authority lack direct enforcement powers (as opposed to court rulings), and the 'Federal Cartel Office lacks certain powers given for example to the Federal Regulator for Telecommunications to promote new market entrants'.60 Third, after approving the RWE-VEW merger deal, the Cartel Office has practically exhausted the credible threat to block mergers in order to press for regulatory improvements. Future, smaller mergers among regional suppliers will have to be approved as well. Finally, the Lander Cartel authorities traditionally responsible for policing regional monopoly power are of little help. For one thing, with few exceptions, such as Bavaria, they are dramatically understaffed or inactive. Second, they seem powerless in a new market environment, with companies increasingly operating on a national or even European scale. More generally, legal experts raise serious doubts as to whether the German system of (legally non-binding) self-regulation monitored by ex post competition oversight will be able to ensure non-discriminatory third party access, which is the single most important prerequisite for effective competition.61 In this context of 'regulatory blank', the civil courts have progressively acquired the role of an Ersatz-Regulator. While, to some extent, the peak sectoral association VDEW tries to act as a mediator between network and trading interests, conflicts over network access and tarification often travel the long, legal-judicial road.62 To rely on courts as regulatory enforcement mechanism results in substantial delays and can constitute serious barriers to market entry. D ow nl oa de d by [ U ni ve rs ity o f K en t] a t 1 6: 13 0 6 N ov em be r 20 14 94 GERMAN POLITICS The Functional Dimension of Regulation: Balancing Regulatory Goals What about the balance between effective competition and competing concerns such environmental protection in the context of liberalised electricity markets? Germany operates within an EU framework which recognises that the goal of economic efficiency must co-exist not only with security of supply considerations but also with public service objectives, notably universal service and environmental protection. The Commission recently presented a proposal for a directive on access of electricity from renewables to the internal electricity market.63 It calls for member states to commit themselves to reach 'indicative targets', with compliance to be monitored by the Commission. Existing national support schemes will remain intact for another five years, so that they are unlikely to be attacked as state aids under competition rules. Thus, in this field as well, European regulations promise to leave a considerable margin of choice to member states.64 In the realm of universal service and consumer protection, the German energy law65 contains various provisions pursuing public service objectives. The general obligation for electricity suppliers or grid operators to connect and supply final customers, and the control of prices charged to tariffs consumers (households) were already part of the former regime and remain intact. However, new legislation fails to introduce transparent price cap regulation (like the one developed in the UK) and statutory bodies representing consumer interests. As in the case of market entrants, the protection of consumer interests is, to a considerable extent, entrusted to market forces and market monitoring by competition authorities. Environmental protection, too, is not a new concern in Germany, but it now belongs to the general policy goals of the energy law, which also amends the former Stromeinspeisungsgesetz (Grid Feed Act), regulating priority of electricity generated from renewables including guaranteed take- off by local distributors at minimum purchasing prices.66 Based on the environmental objective, the revised energy law even includes the option to refuse network access in order to protect production based on combined heat and power (CHP) and renewables. However, the market dynamic unleashed by liberalisation constitutes a serious challenge for the established sectoral goal of environmental protection. Free market price competition, unless corrected by public interventions, favours inexpensive primary energy inputs such as nuclear power or coal, regardless of ecological consequences. The dramatic erosion of prices threatens to depreciate investments in more costly electricity generation based on renewables. Moreover, 'stranded investments', such as CHP-based production on the municipal level, are under particular threat.67 D ow nl oa de d by [ U ni ve rs ity o f K en t] a t 1 6: 13 0 6 N ov em be r 20 14 GERMAN ELECTRICITY REFORM 95 In February 2000, the Red-Green parliamentary majority passed a new law to promote renewables.68 It replaces the Grid Feed Act, and aims at doubling the share of renewables in electricity generation by 2010. In order to help the competitiveness of renewables, the bill continues purchase obligations at guaranteed, fixed prices (disconnected from the market price of electricity, but degressive over time) for a broader list of renewables (including biomass and photovoltaics). The guaranteed take-off price for solar energy climbs steeply from 17 to 99 Pf/kWh. In addition, parliament approved an immediate scheme to support CHP-based generation.69 The scheme restricts (degressive) support at a rate of 9 Pf/kWh to power stations with a minimum CHP content of 25 per cent, and to those companies which supply final consumers directly. This emergency scheme is supposed to be replaced, in the near future, by a long-term legislative solution based on CHP-certificate trading. Finally, Germany continues to pursue a third and country-specific welfare concern, namely to accommodate the special interests of the new Lander. Germany successfully applied, with the European Commission, for a transitional regime to protect the investments for the construction and modernisation of lignite power plants in east Germany.™ This regime allows the refusal of network access on the grounds that a sufficiently high level of power generation from lignite might be impaired. Nevertheless, the east German conglomerate VEAG has not escaped downward price and cost pressures, and is now in urgent need of more funds, to recover stranded investments. The current VEAG shareholders," which had so far refused to bail VEAG out in the context of a 'stabilisation model' worked out by the Federal Ministry of Economics,72 seek to sell their shares under the decartelisation requirements of the merger approvals. Whoever will emerge as the new investor and big market player (Vattenfall/HEW or Southern/BEWAG) will have to honour costly public commitments in terms of jobs and lignite-based production. The protection of this special east German interest remains a political priority for the Schroder government." EXPLAINING CONTINUITY: THE WEIGHT OF MACRO-LEVEL CONSTRAINTS In sum, while notably the new EU framework introduces important changes, the German regulatory regime after liberalisation shows remarkable continuity in both organisational and functional terms. Although many regulatory patterns result in favouring established market players, it would be wrong to jump to the conventional, interest-based conclusion that they have managed to 'capture' public regulation and to design institutions D ow nl oa de d by [ U ni ve rs ity o f K en t] a t 1 6: 13 0 6 N ov em be r 20 14 96 GERMAN POLITICS according to their interests. Nor can regulatory continuity be sufficiently accounted for as a simple revival of the old producer coalition. Why? First, the liberalised environment has produced a more complex landscape where interests converge much less than before: A small Stadtwerk with costly CHP-based generation now has even less in common with an internationalised player like HEW than before, with the big difference that now competition puts them one against the other. Also, grid owners need grid access (to other networks) themselves if they want to compete nationally as suppliers - which is why established big companies did not stand in the way of improvements to the industry agreement on access and transmission, while smaller utilities did. In short, market opening has definitely eroded the cohesiveness of the old producer coalition.74 It is hard to see which kind of unified interest should capture public regulation, let alone how such a coalition would take control of a fragmented regulatory structure (see below). Second, the withdrawal of public actors from ownership reduces their interest to protect established players. To be sure, municipal utilities in particular continue to mobilise public support, but less so on ownership than on political grounds (for example, jobs), since they increasingly operate as de facto independent businesses. Third, and finally, rational-instrumental approaches which conceive regulatory solutions as the logical result of power struggle or mutual adjustment of interests overrate the malleability of institutions. 'Institutional engineering' or functional adaptation is not a realistic option or outcome, especially if 'design' or reform requires changes to core elements of a well-established institutional configuration. This is the case in German electricity reform. The substantial continuity of regulatory patterns and choices reflects the embeddedness of sectoral governance in well-entrenched macro-level institutions of the German political system. Three macro-level institutional factors which shape regulatory sector-level changes can be identified. The first one is structure-oriented, looking at the organisation of political authority: the federal and fragmented structure of political organisation. The second one is process-oriented: the corporatist style of state-society relations. The third is regarding the ideas and norms which inform the substance of regulatory choice: the norms of the social market principle.75 First, the federal and fragmented structure of political organisation in Germany accounts for the fact that there has been no centralisation or reinforcement of regulatory power. After the end of regional monopolies and with the transition to a national market the creation of a federal regulatory body seems like a logical solution. However, such a reform would require changes to the constitutional balance between Bund and D ow nl oa de d by [ U ni ve rs ity o f K en t] a t 1 6: 13 0 6 N ov em be r 20 14 GERMAN ELECTRICITY REFORM 97 Lander. There is no political majority for such changes, not least because there is profound disagreement on energy policy across different Lander. Thus, even though Lander regulatory oversight is largely dysfunctional or ineffective, the split of regulatory competences between Bund and Lander remains untouched, to the detriment of rigorous, pro-competitive regulation. Moreover, the federalist heritage of decentralised (and legally private) ownership structures obstructs the transition to unified grid management in an integrating market. The constitutional protection of private grid ownership precludes the simple transfer of transmission wires to an independent grid company. Finally, the protection of decentralised supply structures (for instance, the support scheme for municipal CHP-based electricity generation) demonstrates the influence of municipal interests in the national political arena, another core element of the German political system. On the horizontal level of decision making, the Federal Ministry of Economics continues to share limited powers with the Federal Cartel Office which is ill-equipped to monitor market competition fully. In line with the tradition of fragmented executive powers no strong regulatory body centralising sectoral management was created. Unlike in telecommunications, there is no tradition of a federal bureaucracy responsible for sector management on which a new regulatory body could build. Second, the corporatist style of state-society relations, with large powers granted to private associations and interest groups, helps to explain why Germany is the only country to rely on associational, voluntary 'self- regulation', within the terms of the Verbiindevereinbarung, to ensure non- discriminatory third party grid access. The normative frame of 'organised market capitalism' legitimises a strong, self-regulatory input of sectoral interests in regulatory decision making. In line with its non-interventionist credo, the Federal Ministry of Economics views itself as a partner bringing market actors together and helping them to reach consensual solutions. The 'shadow of regulatory hierarchy' appears to be shelved for emergency situations. All sectoral actors continue to value voluntary consenus as a mode of conflict resolution, even those actors with rational interests to 'defect' (for example, industrial consumers). Moreover, the instrument of voluntary industry agreements is a deeply entrenched feature of sectoral governance. Thus, to deal with the new challenge of liberalised markets, sectoral actors fell back on established routines and applied an old pattern to a new situation. Third, the German concept of the 'social market economy' and the norm of co-operative and consensual decision making call for a rather broad D ow nl oa de d by [ U ni ve rs ity o f K en t] a t 1 6: 13 0 6 N ov em be r 20 14 98 GERMAN POLITICS inclusion of welfare concerns in market-based infrastructure management. Therefore, while the new market paradigm of competition is welcomed, it is also balanced or corrected by a host of well-established 'general interests' or public concerns. For example, the concern with environmental protection has not been cast aside with liberalisation. On the contrary, recent legislative steps (for example, renewables) point to a reinforcement of ecological concerns. And, in spite of liberalisation, the issue of public sector jobs (Stadtwerke) and the protection of east German economic interests (the VEAG case) continue to rank high in electricity management. To be sure, the weight of 'welfare concerns' reflects the strength of veto players and particular interests in the German political system. Also, the current constellation of political forces (Red-Green coalition) goes some way to explain current policy choices.76 Nevertheless, it can be argued that the strong emphasis on the broad inclusion of different concerns resonates well with the consensual German style of decision making. CONCLUSIONS While the German electric supply industry is in a state of complete upheaval, undergoing profound changes in response the shock of full market opening, the regulatory management after liberalisation is characterised by remarkable continuity, in both structure and substance. This is because the sectoral regime is embedded in core macro-level institutions of the German political system which act as constraints on policy changes.77 The constellation of macro-level constraints has, so far, frustrated certain changes intended by market reforms, notably the smooth access of market entrants to the natural monopoly of transmission systems, which is a crucial requirement for effective competition. However, in spite of regulatory shortcomings and barriers, market reforms unleashed considerable dynamics which caught many observers by surprise. It might be too early in the reform process to say if we are only seeing the shock waves of a regime 'punctuated' by the crisis of liberalisation but are about to return to old-style 'institutional equilibrium',78 or if we are witnessing the arduous transition to a new model of sectoral governance. What we do know today is that, across different sectors of German infrastructure management, privatisation and liberalisation do not signal the simple retreat of the state, and even less 'the victory of ordoliberalism' .79 The actual consequences, in terms of change and continuity, of the transition from the 'positive', interventionist to the 'regulatory state' in the new context of the EU framework deserve further study.80 D ow nl oa de d by [ U ni ve rs ity o f K en t] a t 1 6: 13 0 6 N ov em be r 20 14 GERMAN ELECTRICITY REFORM 9 9 NOTES This article was written in the context of a larger, DFG-funded research project directed by Professor Edgar Grande at the Technische Universität München. A first version of this article was delivered to the session 'Sacred Cows and Gored Oxen: The Germany Economy in Flux', moderated by Wade Jacoby at the 23rd Annual German Studies Association Conference in Atlanta (Georgia), 7-10 Oct. 1999. I would like to thank Roland Czada, Christian Kleinschmidt and Wade Jacoby for their helpful comments on this first version. I am particularly indebted to two anonymous reviewers for highly constructive comments on the second draft. 1. Andrew Shonfield, Modern Capitalism. The Changing Balance of Public and Private Power (London: Oxford University Press, 1965), pp.265-97. 2. These terms are used, for example, by Edgar Grande, 'Vom produzierenden zum regulierenden Staat: Möglichkeiten und Grenzen von Regulierung bei Privatisierung', in Klaus König and Angelika Benz (eds.), Privatisierung und staatliche Regulierung. Bahn, Post und Telekommunikation, Rundfunk (Baden-Baden: Nomos), pp.576-91, and Gunnar F. Schuppen, 'Vom produzierenden zum gewährleistenden Staat: Privatisierung als Veränderung staatlicher Handlungsformen', in König and Benz (eds.), Privatisierung und staatliche Regulierung, pp.539-75. The terminology borrows from Harold Seidman and Robert Gilmour, Politics, Position, and Power. From the Positive to the Regulatory State (Oxford: Oxford University Press, 4th edn. 1986). 3. Roland Czada, '"Modell" Deutschland am Scheideweg: Die verarbeitende Industrie im Sektorvergleich', in Roland Czada and Gerhard Lehmbruch (eds.), Transformationspfade in Ostdeutschland (Frankfurt a.M.: Campus, 1998), pp.367-410. 4. Gerhard Lehmbruch, 'Die ostdeutsche Transformation als Strategie des Institutionentransfers: Überprüfung und Anti-Kritik', in Andreas Eisen and Helmut Wollmann (eds.), Institutionenbildung in Ostdeutschland: Zwischen externer Steuerung und Eigendynamik (Opladen: Westdeutscher Verlag, 1996), pp.63-78. For a sectoral perspective see Tobias Robischon, 'Letzter Kraftakt des Staatmonopols: Der Telekommunikationssektor', in Czada and Lehmbruch (eds.), Transformationspfade, pp.61-86; Martin Richter, 'Zwischen Konzernen und Kommunen: Die Strom- und Gaswirtschaft', in Czada and Lehmbruch (eds.), Transformationspfade, pp.113-41. 5. See for example Vincent Wright (ed.), Privatisation in Western Europe. Pressures, Problems and Paradoxes (London: Pinter, 1994); Jan-Erik Lane (ed.), Public Sector Reform. Rationale, Trends and Problems (London: Sage, 1997). 6. Ira Denkhaus and Volker Schneider, 'The Privatisation of Infrastructures in Germany', in Lane (ed.), Public Sector Reform, pp.64-113. 7. My main concern is not to explain why liberalisation in terms of formal market opening happened in the first place (see the literature quoted in the two preceding endnotes). 8. For a general statement of the neo-institutionalist agenda see James G. March and Johan P. Olsen, Rediscovering Institutions (New York: Free Press, 1989); Walter W. Powell and Paul J. DiMaggio (eds.), The New Institutionalism in Organizational Analysis (Chicago: Chicago University Press, 1991); Kathleen Thelen and Sven Steinmo, 'Historical Institutionalism in Comparative Polities', in Kathleen Thelen, Sven Steinmo and Frank Longstreth (eds.), Structuring Politics. Historical Institutionalism in Comparative Analysis (Cambridge: Cambridge University Press, 1992), pp.1-32. 9. For an overview, see Peter Hall and Rosemary Taylor, Political Science and the Three New Institutionalisms, MPIFG Discussion Paper 6/96 (Cologne, 1996). 10. I borrow this distinction from Christoph Knill, 'The Transformation of National Administrations in Europe. Patterns of Change and Persistence' (unpublished Habilitationsschrift, FernUniversität-Gesamthochschule Hagen, January 1999), pp.20-29. 11. See, for example, Kenneth A. Shepsle, 'Studying Institutions. Some Lessons from the Rational Choice Approach', Journal of Theoretical Politics, 1 (1989), pp.131-47. 12. See, for example, Ronald L. Jepperson, 'Institutions, Institutional Effects and Institutionalism', in Powell and DiMaggio (eds.), The New Institutionalism in Organizational Analysis. D ow nl oa de d by [ U ni ve rs ity o f K en t] a t 1 6: 13 0 6 N ov em be r 20 14 100 GERMAN POLITICS 13. This is because electricity is a non-substitutable good with some features typical of utility systems: dependence on integrated networks with high coordination requirements; economies of scale and scope; and long-lived specific assets. 14. For an overview of the German electricity system prior to liberalisation, see Helmut Gröner, Die Ordnung der deutschen Elektrizitätswirtschaft (Baden-Baden: Nomos, 1975); Gerd Bruche, Elektrizitätsversorgung und Staatsfunktion. Das Regulierungssystem der öffentlichen Elektrizitätsversorgung in der Bundesrepublik Deutschland (Frankfurt a.M.: Campus, 1977); Lute Mez, 'The German Electricity Reform Attempts: Reforming Co-optive Networks', in Atle Midttun (ed.), European Electricity Systems in Transition. A Comparative Analysis of Policy and Regulation in Western Europe (Oxford: Else vier, 1997), pp. 231-52. The best comparative British-German perspective before 1998 is provided by Roland Sturm and Stephen Wilks, Competition Policy and the Regulation of the Electricity Supply Industry in Britain and Germany (London: Anglo-German-Foundation for the Study of Industrial Society, 1997). For an excellent historical perspective (1890-1950), see Bernhard Stier, Staat und Strom (Ubstadt-Weiher: vertag regionalkultur, 1999). Information on current market structures in the energy sector including eiectricity is provided by Hans-Wilhelm Schiffer, Energiemarkt Deutschland (Köln: TÜV-Verlag, 7th edn. 1999). 15. Jürgen Müller and Ingo Vogelsang, Staatliche Regulierung: Regulated Industries in den USA und Gemeinwohlbindung in wettbewerblichen Ausnahmebereichen der Bundesrepublik Deutschland (Baden-Baden: Nomos, 1979), pp.204-16. 16. Mez, 'The German Eiectricity Reform Attempts', p.231. 17. Gesetz zur Neuregelung des Energiewirtschaftsgesetz (EnWG), 24 April 1998 (BGBl. 1998 I, S. 730ff.) 18. The most comphrensive legal account of these reforms is provided by Jens-Peter Schneider, Liberalisierung der Stromwirtschaft durch regulative Marktorganisation (Baden-Baden: Nomos, 1999). For an English summary, see Jens-Peter Schneider, 'The German Model of Cooperative Energy Regulation' (paper presented to the Regulation Initiative Conference ('Regulation in Europe'), London Business School, 4 and 5 Nov. 1999). 19. Richard J. Gilbert and Edward P. Kahn (eds.), International Comparisons of Electricity Regulation (Cambridge: Cambridge University Press, 1996); Masayuki Yajima, Deregulatory Reforms of the Electricity Supply Industry (Westport, CT: Praeger, 1997); OECD, The OECD Report on Regulatory Reform, Vol. I: Sectoral Studies (Paris: OECD, 1997); International Chamber of Commerce, Liberalisation and Privatisation of the Energy Sector: Full Report (Paris: ICC, 1998). 20. The development of the combined-cycle gas turbine (CCGT) reduced the minimum efficiency scale in generation and facilitated the decentralisation of generation, making smaller plants a viable option. Furthermore, advances in information technology reduced the costs of sophisticated metering and grid control equipment. This facilitated decentralisation of supply, while making system coordination easier; see OECD, The OECD Report on Regulatory Reform, pp. 162-4. 21. Rainer Eising and Nicolas Jabko, 'Moving Targets: Institutional Embeddedness and Domestic Politics in the Liberalization of EU Electricity Markets' (paper presented to the Sixth Biennal International Conference of the European Community Studies Association, Pittsburgh, 2-5 June 1999), pp.27-8. 22. For a comparative perspective on national electricity systems in Europe, see Eugene D. Cross, Electric Utility Regulation in the European Union. A Country by Country Guide (Chichester: John Wiley & Sons, 1996); Francis McGowan (ed.), European Energy Policies in a Changing Environment (Heidelberg: Physica, 1996); Midttun (ed.), European Electricity Systems in Transition. 23. Susanne Κ. Schmidt, 'Commission Activism: Subsuming telecommunications and electricity under European competition law, Journal of European Public Policy, 5 (1998), pp.169-184; David Levi-Faur, 'The Governance of Competition: The Interplay of Technology, Economics, and Politics in European Union Electricity and Telecom Regimes', Journal of Public Policy, 19 (1999), pp. 175-207. 24. Directive 96/92/EC concerning common rules for the internal market in electricity, Official Journal No. L27/20, 30 Jan. 1997. D ow nl oa de d by [ U ni ve rs ity o f K en t] a t 1 6: 13 0 6 N ov em be r 20 14 GERMAN ELECTRICITY REFORM 101 25. However, some member states are moving more quickly than required by the EU directive; see Andy M. Klom, 'Effects of Deregulation Policies on Electricity Competition in the EU', Journal of Energy and Natural Resources Law, 15 (1997), pp.1-22. Radical privatisation of the English electricity industry started as early as 1989. The Nordic countries also took the lead; Finland and Sweden started market opening in 1995 and 1996 respectively, following the 1991 Norwegian example. It is estimated that two-thirds of all EU consumers are now able to freely choose their electricity supply. 26. Rainer Eising, 'Reshuffling Power. The Liberalisation of the EU Electricity Markets and its Impact on the German Governance Regime', in Beate Kohler-Koch and Rainer Eising (eds.), The Transformation of Governance in the European Union (London: Routledge, 1999), pp.208-28. 27. This distributional and power aspect of institutions is emphasised by one strand within rational choice institutionalism, see for example Jack Knight, Institutions and Social Conflict (Cambridge: Cambridge University Press, 1992), and Terry M. Moe, 'Political Institutions. The Neglected Side of the Story', Journal of Law, Economics, and Organization, 6 (special issue, 1990), pp.213-53. 28. The Economist, 28 Aug. 1999, p.51. 29. Based on Dow Jones/VIK-Strompreisindex, available at http://www.vik-online.de/. 30. For accounts of the 1999 summer price war see for example: Handelsblatt, 10 and 12 Aug. 1999; The Economist, 28 Aug. 1999; Financial Times Survey 'World Energy', 23 Sept. 1999. 31. In 1999, the electric supply industry spent some 400 million DM on promotion campaigns, that is an increase of about 200 per cent compared to 1998 (VDEW annual report 1999, Frankfurt, p.48.). 32. Süddeutsche Zeitung, 22 Aug. 2000. 33. VDEW annual report 1999, Frankfurt, p.47. 34. Handelsblatt, 22 Aug. 2000. 35. However, only some 65 Stadtwerke (out of a total of 800) are engaged in substantial CHP- based generation, while a minority of 390 Stadtwerke generate some part of the electricity they sell themselves. 36. Handelsblatt, 9 Feb. 2000; Public-sector unions warn that streamlining in the electric power sector will cost at least 40,000 jobs over the next few years, including policy areas which benefited from cross-subsidisation. Local public transport will lose an estimated 3 billion DM per year in subsidisation from electricity profits (Süddeutsche Zeitung, 28 Sept. 1999). 37. Handelsblatt, 31 Jan. 2000. 38. A few ambitious local utilities like the Stadtwerk Mannheim seek to survive the consolidation process through an active acquisition and diversification policy, and by listing the company on the stock market. A detailed report on the impact of liberalised markets on German Stadtwerke can be found in Süddeutsche Zeitung, 17 Sept. 1999. 39. 'The State of Berlin sold its majority of Bewag to a consortium of PreussenElektra, Viag and Southern Electric. ... Southern Energy Holding Beteiligungsgesellschaft mbH, a subsidiary of Southern Energy Corp. (USA) could achieve as first foreign investor with 26% of Bewags capital stock a strategic gain in the core business of German ESI', quoted from Lutz Mez, 'Corporate Strategies in the German Electricity Supply Industry: From Alliance Capitalism to Diversification', in Jean-Michel Glachant (ed.), Electricity in Europe in the 21st Century: What Performances and What Game Rules? (Proceedings, International Conference, Paris, 13 and 14 Nov. 1998, University Paris I Panthéon Sorbonne, Program and Proceedings), p.347 (pp.333-57). 40. Handelsblatt, 17 Nov. 1999. 41. Currently, the hostile takeover of BEWAG by HEW is contested in court by Southern Energy, which had hoped to take over both BEWAG and VEAG. The Land government of Berlin equally opposes the E.ON-HEW deal (Handelsblatt 17, 11/12, 10 Aug. 2000). 42. Süddeutsche Zeitung, 20 Jan. 2000 43. The slow opening of the French market would otherwise constitute a break on the expansion plans of EDF in European markets. The French Parliament passed the bill to implement the minimum requirements of the EU liberalisation directive only in February 2000, one year after the required deadline (Handelsblatt, 3 Feb. 2000). 44. See, for example, Moe, 'Political Institutions'. D ow nl oa de d by [ U ni ve rs ity o f K en t] a t 1 6: 13 0 6 N ov em be r 20 14 102 GERMAN POLITICS 45. See Wolfgang C. Müller and Vincent Wright (eds.), The State in Western Europe. Retreat or Redefinition? (London: Frank Cass, 1994); Steven K. Vogel, Freer Markets, More Rules. Regulatory Reform in Advanced Industrial Countries (Ithaca: Cornell University Press, 1996); Giandomenico Majone, 'From the Positive to the Regulatory State: Causes and Consequences of Changes in the Mode of Governance', Journal of Public Policy, 17 (1997), pp. 139-67; Grande, 'Vom produzierenden zum regulierenden Staat'. For a comprehensive and excellent discussion of how Anglo-American theories of the regulatory state can inform current theoretical debates on the transformation of the state (Staatlichkeit) in Germany see Markus M. Müller and Roland Sturm, 'Ein neuer regulativer Staat in Deutschland? Die neuere Theory of the Regulatory State und ihre Anwendbarkeit in der deutschen Staatswissenschaft', Staatswissenschaft und Staatspraxis, 9/4 (1998), pp.507-34. 46. Burkard Eberlein, 'Regulating Public Utilities in Europe: Mapping the Problem', EUI Working Paper RSC No. 98/31 (Florence: EUI, 1998); Burkard Eberlein, 'L'État régulateur en Europe', Revue Française de Science Politique, 49 (1999), pp.205-30. 47. The best example is the fact that the 'non-contestable', physical network portion of infrastructure systems is considered a natural monopoly, in which case the market fails to be the most efficient form of allocation (William Baumol et al, Contestable Markets and the Theory of Industry Structure (New York, 1982). 48. Tony Presser, 'Theorising Utility Regulation', Modern Law Review, 62 (1999), p. 199 (pp. 196-217). 49. To promote common regulatory approaches, the Commission claims that 'an active policy through benchmarking is clearly appropriate. These objectives are pursued notably via the organisation of the bi-annual meeting of EU electricity regulatory forum in Florence' (European Commission, Second Report to the Council and European Parliament on Harmonisation Requirements, Directive 96/92/EC concerning common rules for the internal market in electricity, presented by the Commission, COM(1999) 164 final, Brussels, 16 April 1999, p.25). 50. Renaud Dehousse, 'Regulation by Networks in the European Community: The Role of European Agencies', Journal of European Public Policy, 4 (1997), pp.246-61. 51. Francis McGowan and Helen Wallace, 'Towards a European Regulatory State', Journal of European Public Policy, 3 (1996), pp.560-76. 52. Also see Burkard Eberlein and Edgar Grande, 'Regulation and Infrastructure Management. German Regulatory Regimes and the EU framework', German Policy Studies (http://spaef.com/GPS_PUB/vlnl.html), 1 (2000). 53. OECD, The OECD Report on Regulatory Reform, p. 165. 54. Article 19, par. 4, no. 4, Gesetz gegen Wettbewerbsbeschränkungen (GWB). 55. See, for example, the report, commissioned by prominent market entrant Enron Europe, Transmission Access in Germany Compared to Other Transmission Markets (prepared by Johannes Pfeifenberger and Wolfgang Pfaffenberger, London, Dec. 1998). 56. See, for example, the report about barriers to network access prepared by Greenpeace energy, Hamburg (Dokumentation der derzeitigen Hindernisse bei der Nutzung des bundesweiten Stromnetzes, Hamburg, May 2000). The report, which was sent to the Federal Cartel Office and the Ministry of Economics, denounces in detail which network operators erects which kind of barriers to obstruct network access. 57. See the quote ('freiwillige, staatsfreie Lösung') in Handelsblatt, 30 Sept. 1999. The energy law includes a provision that gives the Federal Ministry of Economics the power to erect detailed rules for grid access and transmission pricing. The government has explicitly refused, so far, to make use of these regulatory powers. 58. In a pilot case, the Cartel Office successfully ordered BEWAG to open its Berlin network to a rival group formed by EnBW, Vasa Energy and RWE (Handelsblatt, 2 Sept. 1999). 59. The responsible department has not received any new resources (personnel) as compared to the situation prior to liberalisation. It had explicity warned the legislator that it would not be able to provide a complete regulatory oversight of liberalised markets (Interview with department official). 60. Schneider, 'The German Model of Cooperative Energy Regulation', p. 10. 61 Ibid., p.9. D ow nl oa de d by [ U ni ve rs ity o f K en t] a t 1 6: 13 0 6 N ov em be r 20 14 GERMAN ELECTRICITY REFORM 103 62. So far, law cases concerning the level of network access charges have not much gone beyond the first, i.e. Landgericht level. Since the issue of property protection (network owners) is at stake, cases might travel all the way up to the Constitutional Court. The Verbändevereinbarung also provides for some arbitration proceedings, but they obviously do not enjoy the same legal status as court rulings. 63. It aims at doubling the share of renewables from at present six per cent to 12 per cent in 2010. However, the Commission is very reluctant to impose legally binding EU-wide quota for renewables, which member states are known to oppose (Proposal for a Directive of the European Parliament and Council concerning the promotion of electricty from renewables energy sources in the internal electricity market (Brussels, 10 May 2000, COM (2000) 279 final)). 64. These developments are in line with provisions in the liberalisation directive which enables member states to individually define public service obligations 'in the general economic interest', provided that they are objective, transparent and non-discriminatory, and that they fall into one of the following five categories: security of supply, regularity, quality and prices of supplies, and environmental protection. 65. Gesetz zur Neuregelung des Energiewirtschaftsrechts, 24 April 1998 (BGBI I S. 730, 734). 66. Gesetz über die Einspeisung von Strom aus erneuerbaren Energien in das öffentliche Netz (Stromeinspeisungsgesetz), 7. Dezember 1990 (BGBI I S. 2633) (BGBI III 754-9) zuletzt geändert durch Gesetz zur Neuregelung des Energiewirtschaftsrechts vom 24. April 1998 (BGBI I S. 730, 734). 67. Public sector unions, the Association of Municipal Utilities, environmental pressure groups and some Social Democratic MPs had called for guaranteed take-off provisions for CHP- based electricity applicable to all market suppliers (Süddeutsche Zeitung, 28 Sept. 1999). 68. Erneuerbare-Energien-Gesetz (EEG) vom 29. März 2000, BGBI. 2000,1, S. 305-9. 69. Kraft-Wärme-Kopplungsgesetz vom 12. Mai 2000, BGBl. 2000, I, S. 703-4. 70. Commission Decision of 8 July 1999, Official Journal L 319, 11 Dec. 1999, pp.18-29. 71. These are the the big west German grid companies which had bought the east German company after privatisation, in exchange for commitments in the future. 72. For a more detailed account of the problem see Süddeutsche Zeitung, 20 Jan. 2000 and Frankfurter Allgemeine Zeitung, 7 Feb. 2000. 73. See Handehblatt, 23/24 June 2000. 74. This is reflected, for example, in the current internal restructuring process of peak association VDEW, in reaction to membership defection. To survive as an associational 'roof over diverging interests, VDEW creates specific departments for different groups such as network operators or traders (Interview with VDEW representatives, VDEW Kontakt 7/2000, Frankfurt, p.13). 75. For a more detailed presentation of how specific institutional configurations can explain the diversity and resilience of national regulatory patterns within the EU framework see Burkard Eberlein, 'Configurations of Economic Regulation in the European Union: The Case of Electricity in Comparative Perspective', Current Politics and Economics of Europe, 9/4 (2000), pp.407-25. 76. The generous support for renewables (Green) and for CHP-Stadtwerke (Red) certainly reflects party-political preferences. Also, it has been suggested (by interview partners) that Federal Minister Müller decided to reward big grid companies with lenient market regulation in exchange for their agreement to the Atomausstieg, a top priority of the Red-Green coalition. While this argument sounds politically plausible, it cannot fully explain the continuity of regulatory patterns. 77. This result concurs with a host of earlier studies of different sectors which stress the comparatively high institutional barriers to change in the German system. See, for example, Edgar Grande und Volker Schneider, 'Reformstrategien und staatliche Handlungskapazitäten. Eine vergleichende Analyse institutionellen Wandels in der Telekommunikation', Politische Vierteljahresschrift, 32 (1991), pp.452-78. 78. I adapt the famous thesis by Stephen Krasner on the 'punctuated equilibrium': Stephen D. Krasner, 'Sovereignty: An Institutional Perspective', Comparative Political Studies, 21 (1988), pp.66-94. D ow nl oa de d by [ U ni ve rs ity o f K en t] a t 1 6: 13 0 6 N ov em be r 20 14 104 GERMAN POLITICS 79. Kenneth Dyson, 'German Economic Policy after Fifty Years', in Peter Merkl (ed.), The Federal Republic of Germany at Fifty (London: Macmillan, 1999), p.229 (pp.219-30). 80. See Edgar Grande and Burkard Eberlein, 'Der Aufstieg des Regulierungsstaates im Infrastrukturbereich. Zur Transformation der politischen Okonomie der Bundesrepublik Deutschland', in Roland Czada and Helmut Wollmann (eds.), Von der Bonner zur Berliner Republik? (Leviathan-Sonderband) (Opladen: Westdeutscher Verlag, 2000), pp.631-50. For the EU dimension see Eberlein and Grande, 'Regulation and Infrastructure Management'. D ow nl oa de d by [ U ni ve rs ity o f K en t] a t 1 6: 13 0 6 N ov em be r 20 14