May 15 (Bloomberg) -- A2A SpA, Italy's largest municipal utility, is seeking mergers with competitors in northern cities as part of its strategy to challenge Enel SpA, the country's biggest power generator.

``The plan is for A2A to form a protective umbrella involving economies of scale for supply costs and natural resources,'' A2A Chairman Giuliano Zuccoli said yesterday in an interview with Bloomberg Television.

Italy is encouraging municipal utilities to join forces as a way to cut fuel costs and compete with Enel, the former state monopoly. Italian power generators use natural gas to fuel more than half of the country's electricity. The price of gas tracks oil, which has surged 27 percent in New York trading this year.

The northern cities of Milan and Brescia merged their utilities this year, creating A2A, a company with a market value of 7.5 billion euros ($11.7 billion) that provides electricity services to 1.1 million customers.

A2A holds stakes in utilities controlled by the cities of Monza and Como near Milan and is encouraging alliances between them, Zuccoli said. ``We've talked to other shareholders to make a decision'' because the utility industry can't continue to be so fragmented, he said.

He also is interested in a combination with Enia SpA, the utility controlled by the northern city of Parma, though it already is in merger discussions with rival Hera SpA of Bologna.

Power Generation

A2A, which yesterday said first-quarter net income fell 2 percent to 143 million euros, advanced 4 cents, or 1.6 percent, to 2.41 euros in Milan trading today.

The utility will increase its power generation in part by buying some assets of Spain's Endesa SA by the end of the year, Zuccoli said today on a conference call with analysts. ``We could come into possession of the Endesa Italia plants by December 31, possibly before October,'' Zuccoli said.

A2A agreed to purchase some of Endesa's Italian generation assets after Enel acquired the Madrid-based utility last year. Rome-based Enel is prohibited by Italian law from expanding its market share in the country.

A2A may also complete a transaction to buy the rest of holding company Delmi SpA and incorporate the unit ``by summer,'' Zuccoli said today. A2A may use stock or cash to buy the stakes of partners including utility Enia, he said.

Delmi shares control of Italy's No. 2 power producer, Edison SpA, with France's Electricite de France SA.

To contact the reporters on this story: Adam L. Freeman in Rome at afreeman5@bloomberg.net; Tommaso Ebhardt in Milan at tebhardt@bloomberg.net

Last Updated: May 15, 2008 11:54 EDT