Sparks fly over electricity liberalisation

Date: 20/01/2000

By Renée Cordes

WHEN hurricane-force winds left tens of thousands of homes in south-western France without power at the end of December, state-owned Electricité de France (EdF) appealed to utilities elsewhere in Europe for help.

Germany, Belgium, Italy and Spain dispatched teams to repair the battered high-tension power grid network which had lost nearly a quarter of its capacity, forcing many to ring in the new millennium by candlelight. Germany and Spain also provided pylons, cables and generators. The UK's Eastern Electricity and London Electricity, which is owned by EdF, shipped over more than 100 generators, including those used for the Millennium Dome celebrations in London, by ferry.

But while France's neighbours may have been willing to help out during the crisis, the holiday spirit has not lasted into the new year.

Tired of waiting for Paris to open up its electricity market to outside competitors, the Netherlands, Germany and the UK - all of which have already gone beyond the level of market-opening required by Union law - are fighting back by blocking French electricity imports.

They are able to do this by invoking the reciprocity principle enshrined in Union law, which allows governments to block imports above a certain level from another member state which has not yet complied with EU liberalisation rules.

Although this is perfectly legal, the increasing tendency for countries to invoke this principle to gain leverage over rivals is worrying Internal Market Commissioner Frits Bolkestein and some large industrial power users. They fear that after an impressive start in at least some of the Union's largest countries, liberalisation of the EU's electricity market may be beginning to falter.

"I am unpleasantly surprised by a chill wind arriving at the beginning of the millennium, as much in the Netherlands as well as anywhere else in Europe," said Bolkestein in a speech to a Dutch utility company earlier this month. "It is a polar wind against liberalisation."

The Dutch Commissioner called on member states not to use the reciprocity clause, which Commission officials view as an unnecessary trade barrier, to protect their own energy markets.

"Reciprocity implies that everything can be based on a bilateral arrangement, but if you introduce it in European Community law, you might end up with a fragmentation of the internal market," said one. "It can be very dangerous and should only be used in limited circumstances."

As the EU prepares to clarify the rules governing reciprocity later this year, chemical manufacturers, other large consumers of electricity and industry experts are growing impatient with the lack of progress by some member states in opening up their markets in accordance with the Union's common rules for the electricity sector.

"The liberalisation of the electricity market per se is a good idea and the

Commission has used the right methodology to try to open up a very closed shop," said Stefan Singer, head of the European climate energy unit at the World Wide Fund for Nature. "But the way it was done was completely imperfect - one step forwards, two steps back."

All member states except Greece, Belgium and Ireland were supposed to have put the directive, which allows the largest power users to choose their suppliers, onto national statute books by last February, with Dublin and Brussels given until next month to follow suit and Greece allowed to delay implementation of the market-opening measures until February next year.

But both France and Luxembourg have dragged their heels, prompting anger in other member states and warnings from the Commission that it will take them to the European Court of Justice if they fail to comply with the directive's requirements within a month. Both countries have said their laws could be ready by the deadline and Commission officials are watching developments closely.

But even in countries where liberalisation is moving forward quickly, the situation is far from perfect. There is still a long way to go before ordinary customers will be able to reap benefits such as cheaper prices or the ability to choose more environmentally-friendly power.

For example, the 20% of customers in Germany who are now able to choose their suppliers have to pay thousands of euro if they want to switch to a new company to cover grid access and other costs.

The same is true in Spain. "The problem is you have a very complicated price for accessing the grid," said Antonio Perez Porteballa, president of the Spanish association for large industrial electricity users.

Even where markets are opening up to private companies, this has not always delivered the benefits which everyone hoped for.

There are fears that in some cases, the power base is merely shifting from state monopolies to markets dominated by a handful of mighty players who are merging and becoming even more powerful.

Although consolidation per se is not necessarily harmful to competition, it can be when these companies do not allow unrestricted third-party access to the transmission grid.

Union competition officials have expressed particular concern about a draft agreement struck by the German industry which, they fear, will give an unfair competitive advantage to the country's four biggest electricity companies - Veba and Viag, which are planning to merge, and VEW and RWE, which also intend to join forces.

The pact divides the country's power grid into two zones and requires operators to pay a fee for energy which crosses the border, but the merged companies would have a presence in both zones and would therefore be exempt from the fee. German cartel authorities have already warned that the firms involved will have difficulty in getting approval for their mergers if the zone-based system is not scrapped.

In the long run, however, such mergers will undoubtedly do more good than harm as long as countries find ways to ensure that all players have fair access to the grid. "In Germany, I really believe if you have four of five strong players you are going to get much more competition than if you have 900," said Lueder Schumacher, an analyst at Deutsche Bank in London. "If you truly want to have competition in the market, it is better to have fewer players who are more powerful."

Merrill Lynch analyst Chris Rowland agrees. "I would guess that there will be a process of consolidating not just within countries, but across Europe," he said. "But there is still room for smaller niche operators. You should not expect a wildly competitive market, but there will be some competition there."