Italian power partnership triggers alarm

Date: 05/03/1998

By Chris Johnstone

EUROPEAN competition officials may step in if a proposed joint venture between two of Italy's biggest energy groups threatens the liberalisation of the country's power industry.

Competition Commissioner Karel van Miert has already warned that the planned partnership between state-owned ENEL and partly privatised oil and gas group ENI appears to be aimed at frustrating the phased opening of Europe's electricity and gas markets.

Italy's own anti-trust authority has also highlighted a risk that the alliance “will represent an obstacle to the introduction of effective competition in the liberalised market”.

The joint venture, in which ENEL would spin off enough of its power generation plants to allow the partnership to retain around one-third of Italy's electricity market, is the subject of a memorandum of understanding between the companies, although the finer details have yet to be sorted out.

These should become clearer before the summer when the Italian authorities decide how they should reform the 30-year-old laws which established monopolies across most of the country's energy sector.

The way the government and regulators reshape Italy's energy legislation and how they deal with the planned venture are seen by industry observers as important tests of how successfully electricity markets are being liberalised.

EU ministers have agreed that in the first stage of liberalisation of Europe's electricity markets a minimum of 23&percent; of supplies should be open to competition by January 1999.

The European Commission is worried that ENEL and the joint venture might be given 'sweetheart' terms for gas supplies from ENI which could undermine liberalisation. The partnership would also prevent ENI from competing directly with ENEL in the generation and supply of electricity.

ENEL already supplies around two-thirds of Italy's electricity needs, while ENI is one of the biggest independent producers of electricity, supplying its own prodigious petro-chemicals industry needs. It also has a monopoly on gas supply and procurement in the country.

Competition in energy supply is relatively underdeveloped in Italy and independent producers control only 19&percent; of the market. Around 15&percent; of Italy's electricity is imported, mostly from France and Switzerland.

ENEL counters criticism by arguing that the joint venture is a stepping-stone aimed at boosting short-term competition in the sector, and says that it will sell off its stake in the partnership once it has become established. Even so, it admits that winning approval from Italian or EU anti-trust regulators will not be easy.

The basic argument for the partnership is financial. ENEL is seeking to get the best price for some of its electricity generation capacity, which it fears being forced to offload by regulators. The company says that joint ownership could bring in new funds for the refurbishment of some of the plants.

“If we decide to sell the units now or in six months' time, it is unlikely we would get a good price because of the uncertainty over the regulatory framework,” said an ENEL spokesman. ENI had been pondering the creation of an independent electricity supply company before the joint venture was raised, he added.

Italy's anti-trust authority has said that the proposed privatisation of ENEL must be accompanied by the dismantling of its existing quasi-monopoly and the selling off of some of its capacity. It would be unrealistic to expect new power generation to spring up overnight, even though the maximum capacity for electricity imports into Italy would meet only 24&percent; of demand, considerably lower than in most other EU countries, adds the authority.

Because of its own high production costs, ENEL has no incentives to encourage cheap electricity imports. According to the company's own information, it employs more than three times as many workers per power plant as equivalents in the US.

In these circumstances, says the authority, ENEL - which is in charge of the interconnection networks necessary for cross-border trade in electricity - will have no wish to remove obstacles so as to increase the flow of cheap power.