Commentary: Brussels Needs to Crack the Whip on Energy

By Gail Edmondson

The single European market was certainly not supposed to work like this. That's the dismayed reaction at ministries and companies across the region to the stealth attack by Electricite de France (EDF) on Italy's Montedison last month. By amassing a 20% stake in Montedison, a conglomerate that controls Italy's No. 2 energy provider, Edison, EDF is taking advantage of the European Commission's drive to open electricity markets to competition. One little catch: EDF, still controlled by the French state, faces almost no competition at home.

No wonder EDF'S move has unleashed howls of collective protest across Europe. The socialist government of Prime Minister Lionel Jospin has delayed the opening of France's electricity market, taking only the minimum steps required by a European Union energy directive. Paris has blocked the latest bid by the EU to open the market to full competition by 2005. Other countries, meanwhile, have passed laws to open their markets much faster.

Indeed, French resistance sabotaged EU energy liberalization from the start, resulting in a weak directive in 1996 that panders to anticompetitive forces. The directive basically stipulates that member governments offer at least a third of their consumers a choice of energy suppliers by 2003. It fails entirely to limit the powers of former monopolies or to guarantee a level playing field to new entrants.

"IT'S A PITY." Bad laws breed bad results: Competition in electricity in Europe is still effectively stalled. Take the case of Italy. Rome offers only 35% of electricity customers a chance to buy power from a rival to ex-monopoly Enel. But that doesn't mean 35% of the market has been thrown open to real competition.

Why? Demand for electricity exceeds supply and there is no quick way to increase it, since grids in the north are running at full capacity. So Italian chief executives who are eligible to buy from a competing supplier--and want to--say they can't even find suppliers. True, prices of imported energy are much lower than the high tariffs imposed by Enel, which relies on old, inefficient plants. But complex regulations prevent new players who import energy from passing along the total savings to consumers. Building a new power plant, meanwhile, requires some 130 regulatory approvals. "It's a pity. We could do much more for our customers," says Massimo Orlandi, chief executive of Energia, a new power company that's fighting to import lower-cost electricity to its clients.

The antitrust authority in Rome is at last forcing Enel to sell 15% of its generating capacity. That won't solve the shortage of supply, though, which means Italy's electricity prices will remain among the highest in Europe. The government could do a lot more, but it still owns 68% of Enel and wants to float additional shares. Protecting its ex-monopoly from more competition ensures a higher share price in the offering, and Rome needs the cash.

France and Italy aren't the only countries gaming the system. Even Germany, which has liberalized its power markets aggressively, has mainly carved up the national pie among local ex-monopolies, which control access to power grids. So only 2% to 3% of German households at the end of last year were served by new rivals.

The European Commission badly needs to sanction France and draft a new directive that will dismantle such anticompetitive practices. It must also move fast to avoid a protectionist backlash. Spain and Italy have already imposed limitations on EDF's investments in those countries, and Germany is drafting legislation to protect domestic utilities from unfair incursions by foreign companies. National governments should hold back on passing laws until the Commission has a chance to finish its own investigation into whether EDF has benefited from illegal state aid. The EU should also consider limiting the market share of former monopolies: EDF and Enel still control some 80% of their markets.

Brussels cannot afford to dither. If it fails to resolve the EDF dilemma quickly, the bickering will just grow. That would waste an opportunity to rein in the forces opposed to the single market.

Edmondson covers Italian business and finance from Rome.

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