TCS Daily

A Cuckoo in Europe's Nest

By Jeremy Slater - November 5, 2002 12:00 AM

The recent €900-million fine slapped on Electricit√© de France (EdF) by the European Commission was not the first time the company's relationship with the French government has come under scrutiny.
There was an uproar in the European press last summer when state-owned EdF was found to have increased its stake in Italian rival Montedison from 4% to 20%, which led to Brussels considering further changes to the regulations governing the European electricity market.

The intense press campaign was driven by a feeling of unfairness in the way EdF is protected by Paris. Italy was not the only European market the French power company has pushed itself into, like a cuckoo chick taking over the nest from smaller fledglings. EdF already has a significant presence in major European markets such as Germany, the UK and Spain.
The feeling of anger was further aggravated by the fact that is so difficult for rivals to establish themselves in France, despite the Commission's partial liberalization of the European electricity market in 1996.

The French government currently owns EdF and keeps it safe from being a potential takeover target, to use the terms financial markets would understand. This, along with the fact that the government would never allow it to be wholly owned by a foreign company, has enabled EdF to run roughshod through Europe, some claim, in a style of Napoleon's armies - or in the case of Montedison, of Francis I's troops and mercenaries in Renaissance Italy.

Even when outside forces try to create a level battlefield, such as an initiative from the European Commission on "golden shares" that would have defined the ownership role a government can have in a domestic industry, they are mercilessly destroyed by French diplomats.

French President Jacques Chirac also threw a massive spanner in the works at the EU's Barcelona summit in early 2001 when he refused to agree to package that would have further opened the European electricity market.

The company seems to enjoy the fact that, because of the EU electricity liberalization directive of 1996 it can enter foreign markets but can also block entrants to the French market that want to supply power from abroad to France. Competitors from the UK and Belgium have complained to Brussels that it is very difficult to gain access to the trans-connectors vital to the operation.

Quite brazenly EdF acknowledges that Britain is "the most open electricity market in Europe" - this it says in a press release regarding its ownership of UK power supplier London Electricity, which it took control of 1998. To some it seems to want to have its cake, eat it, and charge others for watching the spectacle.

During the summer of 2001 Commission officials admitted there was a problem. Energy chief Loyola de Palacio said at an electricity industry conference that Brussels would seek to impose "additional measures that should ensure fairer trade". She added that a reciprocity clause in the 1996 directive did not offer "enough protection against market deregulation inequalities, or any protection against the planned acquisitions and mergers that have taken place."

The latest investigation of EdF, which is not related to de Palacio's initiative as it was opened by the Commission's competition experts but may have been tacitly supported by her, follows a one-year inquiry by Brussels into subsidies given to the power generator by the French government. The EU executive also said it had serious concerns with the bond guarantee and expects the company to pay the fine, and in future, the market rate for any such similar guarantees.

Competition Commissioner Mario Monti said, on announcing the fine, that the investigation into the exemption EdF from French insolvency laws acts as "an explicit state guarantee".

"We want to eliminate distortions in the marketplace," he said. "EdF enjoys a better credit rating, and can raise money at better conditions, than others that do not enjoy state protection."

The Commission's investigation took place as Brussels tries mightily to fully liberalize the European electricity sector. The 1996 directive was intended to open up national marketplaces to rival and foreign competitors. However, using its lucrative state backing EdF moved into various other European markets before the directive became law.

Brussels officials believe this support has distorted competition and trade in the European marketplace. They gave France a month to say how it will halt the current subsidies to the company.



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