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EU maintains tough stance over Suez-GdF merger

THE EUROPEAN Commission has maintained its tough line over the rise of Europe's mega-utilities. In approving the merger of Suez and Gaz de France (GdF), it has insisted both companies dispose of several large assets.

In addition, on 30 October, the competition commissioner, Neelie Kroes, indicated that the Commission is looking to end vertical integration by breaking up utilities if necessary. "With the infrastructure in the hands of the incumbent supply companies and electricity generators, opportunities for discriminating against competing suppliers abound," Kroes said. "I see only one way forward if we are to restore credibility and faith in the market ... there has to be a structural solution that separates infrastructure from supply and generation – ownership unbundling."

Europe, she said, has had enough of Chinese walls and quasi-independence. In May, the EU Competition Directorate-General investigated seven energy companies as a part of anti-trust investigations into alleged abuse of market dominance and in June it introduced much stricter penalty provisions.

Regarding the forced unbundling, Kroes stressed she was speaking personally and analysts note she has yet to receive public backing from Andris Piebalgs, the energy commissioner. However, her outspoken remarks will worry many of Europe's largest utilities, such as E.On and GdF, which have spent the last few years rapidly consolidating ahead of next year's full opening of the region's gas and power markets to competition.

Already, the Commission's hard line appears to be having some effect. On 13 November, the Dutch Senate began debating a controversial energy bill that will force the country's utilities to split off their grid businesses from other commercial activities. The bill would pave the way for the privatisation of energy companies' commercial assets, while leaving the national grid under state control. "The implementation of ownership unbundling would bring the Netherlands beyond the European Commission's requirements on energy-market competition," the consultancy Global Insight said in a research note.

Still, utilities are expected to put up a fight. "Kroes has powerful arguments for why networks should be independent, but they are by no means guaranteed to carry the day," says Anton Krawchenko, an analyst at Datamonitor. For instance, the large integrated companies defend industry consolidation and the vertical-integration model by arguing that such moves give them the scale and power to deal more effectively with the likes of Russia's Gazprom, which alone is responsible for supplying 37% of Europe's gas supply.

The issue of supply security has been used by utilities when there are grumblings over planned mergers – and was used to justify the merger of GdF and Suez. Nevertheless, the Commission has made plain its distaste for what is widely considered a politically driven tie-up to create a national champion and launched a far-reaching five-month review, which ended up forcing the two French firms to agree to make large divestments.

These asset sales include Distrigaz, a Suez-owned Belgian gas distributor, and GdF's 25.5% stake in Société de Production d'Electricité, or SPE, Belgium's second-largest electricity supplier after Suez's Electrabel. In addition, the partners will also reduce their stake in Fluxys, Suez's other Belgian gas distributor, to 45% from 57%, and GdF will sell its heating subsidiary, Cofathec Coriance.

"The Commission has insisted on far-reaching remedies in this case to ensure effective competition in the Belgian and French energy markets," the Commission said. "Our intervention in this case is part of our action to ensure there is effective competition in newly liberalised energy markets to the benefit of consumers and business." If Kroes is taken at her word, this is likely to be just the beginning of such interventions.

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