Dark days for electricity sector dim hopes of French volte-face

Date: 01/02/01

By Tim Jones

Given control of events 9,000 kilometres to her east, Loyola de Palacio would undoubtedly have chosen a better time to launch round two of the EU's electricity liberalisation drive.

In California, an ambitious deregulation programme that promised cheaper energy prices and greater efficiency has delivered alright: blackouts, retail suppliers poised on the edge of bankruptcy and a state of emergency requiring a €650-million government bail-out.

The impact has been felt across the world as the crisis knocked billions of euro off the share prices of power companies. The Italian treasury's plans to sell a second installment of stock in giant electricity generator-supplier Enel have been put on hold until "market conditions can ensure adequate returns".

Similar sinking feelings were felt in pro-liberalisation ministries. "I realise that there is a threat that the California crisis will discourage people over here," said Swedish Energy State Secretary Lars Rekke, who will chair meetings of EU ministers until the summer. "It should be noted that there are differences between our situation in Scandinavia and that in California but of course we have to study and take on board experiences from what has happened there."

The Socialist French government, under intense pressure from the Electricité de France (EdF) labour unions, is expected to wave California like a shroud even before De Palacio's proposal arrives in member states' permanent representation mail boxes.

At the EU's first economic reform summit in Lisbon last March, French Prime Minister Lionel Jospin fought attempts to set deadlines for full liberalisation of the energy and rail markets. With presidential elections approaching in spring 2002, look for him to drag his feet on setting firm dates.

"We're expecting a re-run of Jospin's position at the Lisbon summit," said a diplomat from a pro-liberalisation country.

Paris ran into trouble with the European Commission in 1999 for failing to pass a law implementing the original electricity liberalisation directive, so maintaining EdF's domestic monopoly. Since then, the government has opened only the minimum 26% by allowing customers consuming 20 Gigawatt hours (GWh) per year to shop around for cheaper power. This compares with an average across the EU of 60% market-opening.

"Politically, for most member states, deregulation has been a success story but for the French, it's very difficult to get this across to the general public and impossible to get it past the EdF unions," said another diplomat.

Yet, against this backdrop, a new proposal designed both to right the wrongs of the flawed law agreed and to achieve full market-opening by 2005 must be drawn up this month if De Palacio is to meet her obligation to get the new programme onto the agenda of the Stockholm economic reform summit on 23-24 March.

This package will be bulging. De Palacio wants operators' commercial interests fully separated from production and sales businesses; third-party access to grids on the basis of fixed, regulated tariffs approved by an independent authority; and cross-border rules to deal with congestion.

Across the EU as a whole but with notable exceptions, some two-thirds of consumers today can choose their supplier with a resulting drop in prices in almost every member state.

Prices in the UK have fallen steadily since liberalisation began in 1990 but it is the latecomers who have seen the most dramatic falls.

In Germany, competition drove down wholesale electricity prices by 55% over two years and individual customers saw their prices slashed by 30% - a key element in the suppression of domestic inflation in the euro zone. The threat to profitability created a wave of industry consolidation culminating in the creation of E.ON - a merger of Veba and Viag - into a company with nine-month sales revenues of 70 billion euro. Previously sleepy utilities are slugging it out for a pan-European presence. In just the latest battle, Electricidade de Portugal, EdF-backed German generator-supplier Energie Baden-Württemberg (EnBW), Belgium's Electrabel and Germany's biggest utility RWE are scrambling to buy Spain's Hidroeléctrica del Cantábrico.

It is this very need for EdF to expand abroad that is the French government's Achilles' heel. The company's board does not want to rely on domestic contracts and wants to shake off the 'group contract' agreed every three years with the government, which forcesthe state-owned firm to set industrial, financial and employment-conditions targets.

"The management is dying to break free," said a company source, citing the aggressive commercial activities of EdF's UK businesses under the London Electricity banner.

London Electricity's EdF-appointed chief executive Bruno Lescoeur has even floated the idea of taking his company back to the stock market; a movethat would represent a part-privatisation of the state-owned group.

With EU legislation likely to proceed slowly without a deadline, it is these piecemeal measures driven by market logic that are likely to bust open the French market. The Commission's competition directorate-general is already doing De Palacio's work for her. The conditions attached to the decision this week to clear EdF's 25% stake in EnBW - the abandonment of the company's 16% stake in Compagnie Nationale du Rhone and improved interconnection with the German market - represent more backdoor deregulation.

The concessions, while irksome to Paris, are considered a price worth paying among EdF managers fearful that their largely-closed market will provoke retaliation from those countries where the firm wants to expand.

For example, the Spanish authorities have already hindered EnBW's attempts to take over Hidroeléctrica because of EdF's stake in the firm. Madrid bans the sale of privatised assets to foreign state-owned firms - a law that is currently being challenged (albeit reluctantly) by De Palacio through the European Court of Justice. Similar noises have been made in the UK, Germany and the Netherlands.

The great danger, however, is that a market opened up by competition officials and the marketplace will be lopsided and insufficiently regulated. In other words, California.

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