In the highly specialised business of offshore wind, often competed over by only a handful of companies or consortiums, the threat of prices pushed artificially high by supplier cartels is a distinct worry. The European Commission's (EC) recent success in busting a high-voltage cable cartel — the fines were announced on 2 April — is a positive sign in this respect. But whether it has really put paid to future cartels, or if fines and damages have to soar further to keep competition clean remains an open question.
For about ten years from 1999, the 11 cable manufacturers – ABB (Switzerland), Brugg (Switzerland),
Exsym [formerly SWCC Showa and Mitsubishi Cable] (Japan), J-Power Systems [formerly Sumitomo Electric and Hitachi Metals] (Japan), LS Cable (South Korea), Nexans (France), NKT (Denmark), Prysmian [formerly Pirelli] (Italy), Silec Cable [formerly Safran] (France), Taihan (South Korea), and Viscas [formerly Furukawa Electric and Fujikura] (Japan) — had been agreeing allocation of important high-voltage power cable projects in the European Economic Area, including large infrastructure and renewable-energy projects such as offshore wind farms. They were sharing markets and allocating customers between themselves on an almost worldwide scale, said the EC, which has imposed a total of EUR 302 million in fines (see CARTEL FINES - HOW THEY ARE CALCULATED, below).
This is not the only example of corrupt business practice in the industry. For four years, again from 1999, a power transformer cartel was operated, involving ABB, Areva T&D, Alstom, Fuji Electrics, Hitachi, Toshiba and Siemens. The EC imposed fines totalling EUR67.64 million for their "gentlemen's agreement" in October 2009, with Siemens exempted for blowing the whistle.
Cracking the cable cartel began when ABB turned whistleblower. The EC reported the launch of inspections in the high-voltage power-cable sector in February 2009 and issued its statement of objections to suspected participants in July 2011.
In the resulting decision of April 2014, the EC said most of the world's largest high-voltage cable producers had participated in illegal agreements. The companies agreed that European and Asian producers would stay out of each other's home territories, and most of the rest of the world would be divided among them, the EC found. They agreed price levels, or exchanged information on price offers so that the agreed project winner bid the lowest price. The others pitched deliberately unattractive offers or did not bid at all. The EC also recorded that cartel members regularly met each other in hotels. A Nexans employee tried to delete thousands of documents, many closely linked to the illegal cartel activities, but the EC's forensic IT technology was able to recover the information.
Despite the constant threat that a whistleblower will break ranks, and that big fines were imposed after previous cartel busting in the electricity sector, the illegal activity seemed to remain too financially attractive to be resisted. "Infringing competition rules exposes the players to the risk of discovery and fines, but the fact that they still engage in such agreements means they expect to reap substantial benefits from their actions," the EC observed in a staff working document on quantifying harm incurred by cartels, dated June 2013.
Cartels may be especially lucrative due to the long tail of follow-up business. When the EC fined a lift and escalator cartel a total of EUR 990 million in 2007 it noted: "The effects of this cartel may continue for 20 to 50 years as maintenance is often done by the companies that installed the equipment in the first place; by cartelising the installation, the companies distorted the markets for years to come." The same could apply to specialised equipment installed at offshore wind farms.
French company Nexans, hit by a fine of more than EUR70 million for its role in the cable cartel, has decided to appeal against the EC ruling following a detailed review of the "voluminous decision".
Italy-based Prysmian has been particularly active in northern Europe, having acquired and completed offshore projects that include Ormonde, Walney I and II, Greater Gabbard, Thanet, Gunfleet Sands, Robin Rigg and Gwynt y Mor in the UK, and several projects by transmission system operator (TSO) Tennet - BorWin2, HelWin1, HelWin2, SylWin1 and DolWin3 - in Germany. Prysmian argues that the EC's decision "is based on a superficial and erroneous analysis of the relevant facts and is unlawful". It intends to bring an appeal before the European Court of Justice. The company was fined EUR 106.4 million, spread across previous owner Pirelli and its owner since 2005, investment bank Goldman Sachs.
Appeals for damages
As the whistleblower, ABB escaped a EUR 33 million fine, but this does not mean the Swiss company will get off scot-free. Any firm affected by the anti-competitive behaviour may take the matter before their national courts to seek damages. The EC says its decision is binding proof that illegal behaviour took place. And even though the EC has fined the companies concerned, "damages may be awarded without these being reduced on account of the commission fine," it states.
A milestone cartel damages judgment was made in the Netherlands in January 2013 in connection with a gas-insulated switchgear cartel. Tennet lodged a damages claim in 2010 against ABB for its participation in the European cartel, which ran between 1988 and 2004.
Here too, ABB had first participated in the cartel and then been the whistleblower, avoiding its share of an EC fine totalling EUR 750 million for the other players. Again, these were well-known firms: Alstom, Areva, Fuji Electric, Hitachi Japan AE Power Systems, Mitsubishi Electric Corporations, Schneider, Siemens, Toshiba and VA Tech.
The East-Netherlands district court established that ABB is liable for payment of damages to Tennet due to its role in the cartel as established by the EC. The court overturned ABB's arguments in mitigation, which included that Tennet would probably have passed on any overcharge to its customers and therefore not have suffered loss. The court held that the overcharge itself constituted a damage, but that damage claims from indirect purchasers (Tennet's customers) were unlikely "as long as Tennet, after having been compensated by ABB for the entire overcharge, in turn compensates its customers through lower electricity transport charges", commented law firm Linklaters at the time. The amount of damages to be paid is currently being calculated in a separate legal proceeding.
Further litigation possible
Companies potentially affected by the recent cable-cartel case are now considering their options. Danish TSO Energinet.dk told Windpower Monthly that it is very aware of the announcement from the EC on the cable cartel and takes the matter very seriously. It bought cables in the cartel period identified by the EC, and is investigating whether it has been exposed by the cartel.
"Our investigations, and the result as to the extent to which Energinet.dk has been exposed, depend on the market which the EC has determined to be the 'relevant market'," says Annette Ikast, the company's head of legal affairs. Publication of the EC's April 2014 decision, which covers only high-voltage underground cables and submarine cable, is awaited, which "will enlighten and bring us forward in our investigations", she adds.
Energinet.dk may be encouraged by the EC's proposal, adopted in June 2013, for a directive aimed at making it easier for victims of anti-competitive practices to obtain such damages. "The objective of the commission's fines is deterrence, but the point of damages claims is to repair the harm suffered because of an infringement," it states.
The harm can be substantial. The EC's guide on quantifying it, published in June 2013, cited findings that most cartels have an overcharge of 10-40%, the average being 20%. With the offshore wind sector under huge pressure to cut costs, a 20% saving in any link of the value chain would help.
In view of repeated cartel transgressions in the electricity sector, vigilance remains a necessity.
SUPPLIER SHORTAGE - FEW PLAYERS DOMINATE
The offshore wind cable market is dominated by a few names. The main inter-array cable suppliers to European offshore wind farms for 2013 installations were Nexans (39%), JDR (27%), NSW (12%), Prysmian (8%), Parker Scanrope (6%) and ABB (4%), with others at 4%, according to the European Wind Energy Association's assessment of key trends and statistics, released in January. In the export cable-to-shore sector, Prysmian led with 27% of the market. Nexans, NKT and ABB had 21% each, and JDR and Parker Scanrope shared the last 10%.
CARTEL FINES - HOW THEY ARE CALCULATED
The fines are calculated in line with EC guidelines for setting fines in anti-trust cases adopted in June 2006.
Companies may be fined up to 10% of their total annual turnover. Within this limit, the fines may be based on up to 30% of the company's annual sales to which the infringement relates, multiplied by the number of years of participation in the infringement. A part of the fine, the so-called "entry fee", may be imposed irrespective of the duration of the infringement.