Commentary: Time To Tame This Electrical Storm

Workers may be up in arms, but France should privatize its giant utility

Early on the morning of June 7, commuter rail service across a wide swath of suburban Paris ground to a halt, stranding more than 500,000 passengers. The cause was an electrical outage, but it was no accident. Employees of Electricité de France shut off the power for four hours to protest a government plan to open the way for privatization of the state-owned electric utility. With parliamentary debate on the plan set for June 15, the workers are promising more disruptions, and there were scattered power outages in other cities on June 8 and 9. "The government's obstinance demands a firm reaction," the leftist General Confederation of Labor cgt) announced.

Can France's beleaguered center-right government win this battle? A year ago, Prime Minister Jean-Pierre Raffarin withstood a wave of labor protests to adopt a long-overdue reform of the publicly financed pension system. But there has been no major progress on other reforms since then, and a stagnant economy has voters in a sour mood. Raffarin is widely seen as living on borrowed time after the conservatives suffered a crushing defeat in regional elections in April. Even the combative new Finance Minister, Nicolas Sarkozy, has been making conciliatory noises to the unions, promising in May that the government will retain at least a 70% stake in EDF and that employees will keep their civil-servant status. With those guarantees in place, Sarkozy said, "there will be no [full] privatization...neither today nor tomorrow."

Well, maybe not today or tomorrow. But France can't wait much longer to privatize the $55 billion-a-year EDF. It's under pressure from the European Union to end EDF's status as the last major European utility to operate as a protected monopoly. Rival utilities in Britain, Italy, and Spain have complained bitterly as EDF has pushed into their markets, while France remains closed to them. France also showers the company with tax breaks that EU authorities have ruled are anticompetitive. The government plan would change EDF and its sister utility, Gaz de France, into corporations, strip them of subsidies, and fully open the French market to competition by 2007.

EDF also could be a source of desperately needed funds to reduce France's budget deficit, which is set to breach euro zone limits for the third consecutive year. Simply converting the utility to a corporation would help, because EDF would immediately have to transfer up to $18 billion to the government to cover employees' future pension liabilities. That wouldn't be a long-term fix, because the pensions eventually would have to be paid. But floating 30% of EDF on the stock market could bring an additional $25 billion or so, analysts figure.

Privatization would be good for EDF, too. The company's chairman and CEO, François Roussely, has long pressed for privatization, arguing that EDF could grow far more rapidly if it could raise money from investors and expand into new lines of business, which it's now prohibited by law from doing. That has been the experience of privatized utilities such as Germany's E.ON (EON ), which over the past four years has bought up European energy assets. E.ON profits rose 67% last year, to $5.6 billion.

EDF, by contrast, looks like a throwback to another era. Its 110,000 French employees can retire at 55 with pensions totaling 75% of their salaries. The company is required by law to set aside 1% of revenues, or more than $550 million annually, in a workers' welfare fund managed by the CGT that pays for such luxuries as ski chalets and beach houses. No wonder EDF's unions are on the warpath.

But the unions' tactics could backfire. The June 7 power cutoff -- which, unlike most French strikes, was done without warning -- outraged politicians, including some leading Socialists. The unions face a tough adversary in Sarkozy, who as Interior Minister won public acclaim for thwarting a truckers' strike by threatening to revoke the strikers' driver's licenses. And dire warnings that privatization will hurt consumers and destroy a national champion may not sway the public, now that other privatized giants such as France Telecom (FTE ) and Air France are improving service while turning in solid financial performances. Maybe this time, France can short-circuit the protests and get on with reform.

By Carol Matlack

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