July 1 (Bloomberg) -- Germany's new energy regulator, set up to increase competition in Europe's biggest power market, may take years to cut prices and enable more companies to compete for customers, helping earnings at RWE AG and E.ON AG.

The regulator, which starts today, will oversee transport prices on electricity and natural-gas networks to enable companies that don't own grids to transmit power to customers at competitive prices. It can hold off until the end of 2006 to set price caps, according to the law passed on June 17 in German parliament.

``The task the regulator faces is massive,'' said Alfred Steiof, who runs Frankfurt-based Ensys AG, one of about 10 independent power suppliers. ``It will take at least until 2007 to get a grip on prices, and it doesn't even touch key issues.''

Earnings at RWE, based in Essen, and E.ON, based in Dusseldorf, Germany's largest utilities, have risen more than 30 percent since 2001 as they benefited from soaring power prices and grid access fees that kept out competitors such as Dutch Essent NV. Electricity prices in Germany are now higher than they were when the market opened to competition in 1998.

``The regulator is more beneficial to E.ON and RWE than a threat to their earnings,'' said Knut Mueller, who helps manage the equivalent of $58 billion at Commerzbank AG in Frankfurt. ``I prefer German utilities to their European peers, as the regulator finally gives them certainty and doesn't really help rivals.''

Surging Shares

RWE shares have risen about 70 percent since January 2004, valuing the company at 30 billion euros, and E.ON shares have increased 44 percent, making it Germany's third-largest publicly traded company, worth 51 billion euros. The 17-member Bloomberg Europe Electric index has risen 42 percent in the period.

A commission that advises the German government on competition issues, the so-called monopoly commission, said less than a year ago that competition in the German energy market is declining and that Germany's largest utilities have ``virtually closed'' the market for new entrants.

Ensys, which supplies power to companies such as Heidelberger Druckmaschinen AG, the world's largest maker of printing machines, spends as much as 60 percent of its pretax costs on network fees, Steiof said. Overall, grid fees make up a third of consumer prices, while the rest stems from taxes and generation costs.

Network costs are more than twice as high in Germany than they are on average in the European Union, the association of industrial electricity consumers said.

Earnings Impact

German network prices are justified as they take into account investments to maintain the networks, E.ON and RWE have repeatedly said. German power companies will have to spend as much as 40 billion euros to replace 40,000 megawatts of generating capacity and maintain their grids by the end of the next decade.

``Utilities are quite efficient already and grid prices aren't that high,'' said Werner Brinker, chief executive officer of Oldenburg-based EWE AG, the country's fifth-largest utility. ``Regulation can only then start to have an effect on some utilities when the regulator starts putting caps on prices.''

Regulators across Europe are slow in trying to clamp down on power companies as the region opens up its $300 billion power and gas market. The European Union has already delayed the start of power-market regulation in the 25 member states by a year after countries such as Germany and France had pushed for a delay.

Too Little, too Late?

Wrangling between the government and the opposition-led upper house delayed regulation in Germany by a year. Chancellor Gerhard Schroeder, whose government backs renewable energy subsidies and decided to phase out of nuclear power, is seeking elections in September, which it's set to lose, according to opinion polls.

The opposition Christian Democratic Union has said it will reconsider the nuclear power law that calls for a phaseout.

Germany has the second-highest electricity prices in Europe, prompting Norsk Hydro ASA, the world's fourth-largest aluminum producer, to announce plans to shut two German plants. Corus Group Plc, the U.K.'s biggest steelmaker, is considering closing its Voerde aluminum plant because power prices are too high.

``We can shop around for power and go to different suppliers, but they all make us virtually similar offers,'' said Werner Marnette, chief executive officer of Norddeutsche Affinerie AG, in an interview on June 17. ``The regulator will lower power prices by a fraction, he won't lead to more competition though.''

Europe's largest copper refiner uses about 1 terawatt hour of electricity a year, enough to light 1 billion homes. It pays 20 percent of its annual costs for electricity, and buys its power from Electrabel SA, Belgium's largest utility.

To contact the reporter on this story: Peter Dinkloh in Frankfurt at pdinkloh@bloomberg.net.

Last Updated: July 1, 2005 04:01 EDT