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EU Energy Giants Could Face Breakup By '09

The European Commission's new energy policy states a preference for "unbundling" but offers a compromise option that appears the more likely result

EU energy giants such as France's EDF or Germany's E.ON could be broken into smaller pieces by 2009 if the European Commission gets its way on "unbundling" under a major new energy policy unveiled Wednesday (10 January), but a semi-unbundling compromise is the more likely outcome.

"Without effective separation of networks of production from energy transport and distribution we do not achieve the competition required," commission president Jose Manuel Barroso said. "The commission sets out a clear preference for the option of ownership unbundling."

Under the status quo, a company such as E.ON that owns gas fields, pipelines and power stations as well as selling electricity directly to consumers can easily block, for example, a Danish firm from selling wind-generated electricity into Germany, even though the gas power is pricier and less green.

Unbundling may seem abstract, but Brussels says the French or German-model energy fortress is holding back EU attempts to combat climate change, drive down consumer prices and convince Russia to let EU firms buy bits of Gazprom or Transneft in an effort to prevent supply shocks such as the Ukraine or Belarus-related breakdowns.

"The coherence of the internal market for energy is a condition of our credibility when we speak to the outside world," Mr Barroso said, with EU member states set to debate his idea in March before the commission tables new legislation in early 2008 that could be voted through before the 2009 EU elections if all goes well.

But despite Brussels' "clear preference" for a full break-up, Wednesday's proposal also offered EU states a second option called "independent system operators (ISO)" under which a firm such as E.ON would continue to own gas pipelines on paper, but a separate, potentially state-owned ISO firm would make all the decisions on how they are used.

THE LESS AMBITIOUS OPTIONAn ISO-type system already exists in Norway and "is working well" according to Oslo's energy giant Statoil, with EU energy firms saying they need to keep pipeline assets on their books in order to secure good credit ratings and raise cheap capital on the international money markets for investments in new gas and oil fields.

"Germany is open to the discussion about ownership unbundling and also open to the idea of an independent network operator," German economy state secretary, Joachim Wuermeling said on Wednesday, while his boss, economy minister Michael Glos, added he would have to check if this would be compatible with the German constitution.

"We do not want to weaken the position of companies with respect to their foreign suppliers, so maybe we would prefer the weaker [ISO] option," a French diplomat told EUobserver, even though initial reactions from EDF suggest the French energy champion is opposed to any kind of unbundling move.

POLITICAL REALISMPolitically speaking, the ISO option represents a climb down from the commission's March 2006 calls for a full energy break-up, with Mr Barroso in a defensive mood on Wednesday saying "We are doing our best...we have both big and small countries that are going to resist this."

But with the UK fully behind the unbundling idea and with Germany and France signalling a fresh will to compromise, the "less ambitious" unbundling model could be the current commission's best chance to put at least one pillar of its new energy policy in place before its mandate expires in 2009.

"If today we just propose directives instead of options their chances of acceptance [by member states] would be zero," Mr Barroso said. "Should we do this in a clash with other EU institutions, or in partnership? I would prefer in partnership."

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