Hollande Faces Defeat on Energy Price Caps as Gas Suppliers Sue

French President Francois Hollande has made capping energy prices a centrepiece policy to help households pressed by stagnant economic growth. It’s a campaign he’s likely to lose.

The government capped the latest rise in natural gas at 2 percent, far below the 7 percent former monopoly GDF Suez SA deemed necessary to cover supply costs. The move is a necessary part of “protecting consumer purchasing power,” Finance Minister Pierre Moscovici and Environment Minister Delphine Batho said this week.

The problem for Hollande is that judges are likely to say consumers have to pay higher prices. For the past year, a convoluted price-setting system has emerged in France that has seen GDF Suez and rivals sue the government over increases they deem too low to cover costs and enable competition in the domestic market. The country’s highest court has consistently ruled in favor of the companies.

“It’s pure political posturing,” Per Lekander, a utilities analyst at UBS AG, said by telephone. “The government knows it will be taken to court so the situation is ridiculous.”

A weakening economy has seen Hollande’s approval rating drop to 40 percent from 62 percent in May, the month he was elected, a poll in Le Parisien newspaper this month showed. France has shown no economic growth in three quarters and unemployment has risen to a 13-year high.

‘Spiralling Upward’

“Energy prices are a very sensitive subject politically,” said Jerome Fourquet, a pollster at Ifop in Paris. “The government’s decisions may buy some time, but prices are spiraling upward.”

The French government’s ability to control prices stems from the past monopoly positions of GDF Suez and power utility Electricite de France SA, which remain dominant on the domestic market more than five years after it was thrown open to competition.

Other than setting tariffs, Fourquet said, the government can allow shale gas development to boost local supply, an option Hollande has rejected, or try to encourage home insulation to lower energy demand over the longer term.

France’s gas suppliers want the pricing regime changed, according to Fabien Chone, president of Anode, the organization representing gas companies other than GDF that took legal action against the previous government’s tariff freeze.

“The regulator should be given real power to set prices so the government isn’t involved,” he said.

Gas for Heating

Anode is considering another round of legal action against the latest government decision on rates from Oct. 1, according to Chone. GDF Suez hasn’t excluded it either. The three-month period when homes start using natural gas for heating is more important for utilities’ earnings than the previous quarter, when a 2 percent increase was also granted.

French gas companies’ tariff tussles have spanned the political spectrum. After years of back room wrangling, it was a rate freeze under former President Nicolas Sarkozy that pushed GDF Suez Chief Executive Officer Gerard Mestrallet to take the utility’s biggest shareholder to court last October ahead of the crucial winter heating season.

GDF Suez, which is 35 percent owned by the state, said last year’s rate freeze would result in a shortfall of 290 million euros. Under Sarkozy, the utility had already accumulated an earnings shortfall of about 2 billion euros between mid 2007 and the end of 2009, when a deal was reached with the government that was supposed to take politics out of the process.

Recoup Shortfall

Even with the court backing, GDF Suez investors face uncertainty about revenue in its home country. The French regulator had advised an increase in tariffs of as much as 10 percent a year ago and the government allowed 4.4 percent from Jan. 1 and no change in March, when the election campaign was heating up. The utility has said it will recoup an average of about 40 euros per French household for the 2011 shortfall, but this will be spread out through the middle of 2014.

“Although courts have ruled that GDF Suez was entitled to recoup its loss from customers, this is not a sustainable solution since the French government is currently working on changing the tariff law with the aim of keeping gas prices in check,” Michel Debs, analyst at Credit Suisse Group AG, wrote in an e-mail.

Hollande’s government has unveiled a draft of a so-called progressive tariff law aimed at lowering utility bills for energy-efficient households. At the same time, it stipulates a four-fold increase to 4 million poor households eligible for lower so-called social rates.

Debate Erupts

Before debate over gas rates erupted this month, the government turned its sights on fuel prices at the pump. It announced a three month tax rebate of three cents a litre, which will cost the government 300 million euros, and strong-armed distributors including Total SA and supermarket chains Carrefour SA and E. Leclerc to match the cut.

In addition to pushing carmakers to improve fuel efficiency, Prime Minister Jean-Marc Ayrault has promised “structural measures” to lower fuel prices, which have yet to be detailed.

Distributors are skeptical the government can do anything about rising prices at the pump, especially amid budget cuts to reduce the deficit. The immediate effects of Hollande’s fuel rebate were wiped out within four days, according to Christian Roux, president of an organization known as CNPA that represents about 6,000 independent fuel distributors in France.

“Crude prices are global so there isn’t much the French government can do,” Roux said by telephone. “Hollande’s measure was like putting a bandage on a wooden leg. It served absolutely no purpose.”

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