Contract Law, Regulation and Competition in Energy Markets

Abstract

Energy markets in the United States and the European Union are in the midst of a transition from a monopolistic structure to a competitive one. This paper argues that the outcomes of the reform process should be understood in the context of existing regulatory institutions. Successes and failures are as much the result of the economic and technological characteristics of energy markets as of the main components of the surrounding legal landscape. To document this claim, regulation of long-term energy contracts in the US and the EU is employed as a case study. Two divergent approaches can be detected: Whereas European regulation focuses on the anti-competitive side, American regulation emphasizes the pro-competitive side of long-term contracts. Drawing on economic theories of contract, the paper points out that both systems must address the trade-off between reducing the costs of contractual rivalry and reducing the costs of competition. To strike a balance between these two aspects, American and European institutions rely on regulatory tools deeply entrenched in their respective legal cultures.