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French Gas Suppliers May Push for Scrapping of Regulated Prices

French natural-gas distributors, encouraged by legal victories against the goverment’s pricing system, may now push for its elimination by the European Commission.

France’s highest court last week suspended a government cap on household gas rates, paving the way for winter price increases. The legal challenge was the latest by an organization called Anode that represents gas distributors and which is seeking to compete in France with former monopoly supplier GDF Suez SA.

The court ruled there is “serious doubt” about the legality of a 2 percent increase in natural gas prices allowed by the government from Oct. 1. It gave the state one month to announce new rates. Like previous rulings, the court referred in its decision to France’s energy regulator, which for the period in question had ruled prices should have increased 6.1 percent to allow utilities to cover their costs of supply.

“If the government fails to abide by the court ruling the only solution will be to seek to eliminate regulated rates completely,” Olivier Freget, a partner at Allen & Overy in Paris which represents Anode, said in an interview. “The government won’t let go of a system that is absurd, archaic and outdated.”

The Anode group of gas distributors would file a complaint to the European Commission to have France’s regulated price system for natural gas scrapped. The move would follow the French court cases that have been aimed at loosening the government’s control over gas pricing.

Legal Challenges

GDF Suez, which is 35 percent owned by the government, and Anode, which represents companies including Direct Energie, have mounted six legal challenges to state-set gas prices over the past year. The Conseil d’Etat has ruled on four cases so far, each time in favor of the the gas companies. It has cited findings by the energy regulator Commission de Regulation de l’Energie that state-set rates should have been set higher to allow companies to cover their costs and compete in the market.

The decisions show “the French system of regulated gas prices is unraveling,” according to Freget.

The government will announce revised tariffs on Dec. 10, Environment and Energy Minister Delphine Batho said in a statement Nov. 29 following the latest court ruling. The new rates will take effect at the start of next year.

President Francois Hollande has vowed to extend a system of so-called social tariffs for gas and power that would allow more low-income families to benefit from reduced rates.

The government is also pushing for “structural reforms” to lower gas prices, Batho has said. It has asked GDF Suez to renegotiate supply contracts to reduce their link to oil prices.

Under Pressure

Setting gas and power prices in France has proved politically difficult for successive governments under pressure from consumer groups and voters to cap rate increases. Even though GDF Suez has said gas tariff shortfalls at home have shaved about 2 billion euros ($2.6 billion) from earnings since mid-2007, it first went to court over the issue only about a year ago. Jerome Chambin, a spokesman for GDF Suez, declined to comment on last week’s decision.

“I don’t have a magic wand, it’s the government and lawmakers that decide” on prices, Philippe de Ladoucette, head of the regulator, said in an interview. “We can’t force open the market, we can’t invent new rules.”

Under the current system, GDF Suez applies each quarter for a rate revision based on a formula that takes into account supply costs. The government decides on the change after getting an opinion from the regulator, which it is under no obligation to follow.

Price Freeze

A year ago, the Conseil d’Etat suspended a price freeze put in place by the previous government under former President Nicolas Sarkozy. At that time, the regulator had ruled rates for households should have increased by 8.8 percent to 10 percent. In response to that court ruling, the government lifted tariffs by 4.4 percent. The court allowed GDF Suez to recoup a shortfall from consumers.

This time, Anode’s lawyer Freget says the government has to pass on the full extent of the price increases as allowed by the regulator.

“Regulated gas prices are not effective in protecting the really vulnerable consumers,” he said. “This can be done through social tariffs. The current system of subsidizing gas prices helps people who don’t even need it.”

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