Press Interpreter

02/25/06 -- Analysis* -- With all due respect to the European competition commissioner, concentration in the energy sector will continue apace in the next few years. The two most recent mergers announced since the beginning of the week -- the 29 billion Euro takeover bid of German E.ON for the Spanish electric utility Endesa and the appetite of Italian Enel for French Suez -- undermine Neelie Kroes. Since Europe must completely liberalize its electricity and gas markets by July 1, 2007, a question arises: is the emergence of giants centered on the core business of these markets and on the Old Continent compatible with the creation of a unified competitive market?

The end of monpolies in many countries of the Union has made possible the gradual creation of an oligopoly dominated by a handful of actors. Concentration has followed, with vertically integrated groups (from production to distribution) going off to divide up a fully developed market of 450 million people. "At the end of the process, there will be a small number of energy groups playing at the European level," predicted Wulf Bernotat, president of E.ON, in an interview with the Financial Times published Monday, February 20 -- the eve of his announcement of his offer to purchase Endesa!

In the game of giants Mr. Bernotat sees only three players: French EDF, Italian Enel and his own group, which he wants to make "the world number one in electricity and gas." The great enterprises in the sector have their own lives and hardly trouble themselves with competition rules. E.ON did not take into consideration the negative judgment of the German competition authority in 2003 in its acquisition of its compatriot Ruhrgas with the support of Chancellor Gerhard Schroder.

Everything pushes them to grow, notably through new acquisitions in Europe. At first this is because rates are low and they have the means to do it. These last few years, certain companies have accumulated real war chests through the sale of non-strategic assets (telecom, real estate...), refocusing on core business, reducing costs and raising the price of electricity and gas. The traditional operators must also find new clients abroad in order to make up for the reduction of their domestic market imposed by the liberalisation of the sector. And all these enterprises want to make dual offers (gas and electricity) to their customers, which also pushes them into mergers (the purchase of Ruhrgas by E.ON, the hostile takeover of Gas Natural by Endesa...).

There is another factor favoring concentration: the very capital-intensive character of the sector. After more than ten years of under-investment, energy companies must invest considerable sums in new plants in order to replace aging installations and to respond to a doubling of world electricity consumption by 2030 according to estimates by the International Energy Agency (IEA). In Europe, this investment is estimated at 700 billion Euros over 25 years. If the construction of units using fossil fuels (fuel oil, gas, carbon...) is within the reach of small operators, the cost of a nuclear plant (2.5 billion Euros for the new EPR) or of high tension lines is only bearable by enterprises standing on firm legs.

Finally, add to this a political dimension. A number of governments -- which are sometimes inclined toward liberalism -- favor "economic patriotism" and worries about the security of their supplies to the detriment of competition. With the exception of very liberal Great Britain, every large European country has its national champion: EDF in France, E.ON and RWE in Germany, Enel in Italy. Spain also wants its jewel. In the name of the defense of its "national interest" and of its influence in Latin America (where Endesa is well established), Jose Luis Rodriguez Zapatero, the head of state, opposed the takeover bid by E.ON to preserve the option of a 100% Spanish Gas Natural.

"Antitrust Investigations"

In opposition to this powerful trend toward concentration, Bussels is hoping for more competitors in order to obtain more competition. Why not "amend the European legislation" in order to strengthen its control over mergers, suggests Ms. Kroes, who considers the actual markets too concentrated -- usually a legacy of the recent period of national and regional monopolies. New entrants are so few, and the "historic operators" manipulate such markets too frequently, according to the European commissioner, in order to increase their prices. Opacity in price formation on wholesale markets, price fixing agreements, abuse of dominant position: Ms. Kroes's complaint is long and should emerge in "antitrust investigations."

It is true that the weight of history and the formation of large conglomerates risks distorting competition, while the global rise in the price of energy strengthens doubts about the wisdom of liberalization. In Germany, the federal office of industrial cartels denounces regularly the strangehold over the market of two large operators, E.ON and RWE, and their politics of high prices.

In France, there are few players still in competition -- EDF** in electricity and GDF*** in gas. If Suez**** aims at eventually 15% of the hexagonal electricity market, Enel***** believes that for a long time EDF has been reluctant to allow it to achieve the height of its ambitions.

Domestic markets are not the relevant scale at a moment when policymakers in Brussels are themselves fighting for the creation of a European energy market. With national regulators endowed with real oversight powers and the creation of a European energy market regulator, nothing prevents one from thinking that these institutions have the power to enforce competition and to give a place in the markets to operators of lesser importance.

But the Russo-Ukranian gas conflict has raised the more important question of the security of the supplies of the Old Continent. Confronted with a company with the power of Gazprom -- the Russian gas monopoly -- which is tempted to acquire European companies and intent on selling its production at the best price, the European Union can only with difficulty allow itself to advocate a market of medium-sized enterprises. Competition will intensify, but without doubt between energy giants.

[Full Article]

By Jean-Michel Bezat

*This analysis ran alongside a news story announcing the merger of Gaz de France and Suez, two large French utilities. The merger was a response to designs of Enel, an Italian utility, on Suez. See http://www.nytimes.com/reuters/business/business-utilities-suez-gazdefrance.html .

**British energy company. See http://www.edfenergy.com/html/showPage.do?name=welcome.til

***Gas de France, France's leading natural gas supplier. See http://www.gazdefrance.com/EN/public/page.php?idespace=33

****French public utilities manager. See http://www.suez.com/groupe/english/index.php

*****Italy's biggest power company. See http://www.enel.it/azienda_en/chi_siamo/

--Translated by Ramsi Woodcock

This article was translated using the Translation Wiki ( http://www.translationwiki.net ). To see the original text side by side with the translation and to make additions or improvements, go to the Translation Wiki for this article: http://www.translationwiki.net/index2.php?action=trans&type=view&id=56 (works best in Firefox, http://www.mozilla.org/products/firefox/ ).

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