EU TriesAgainto Split Utilities

The aim is to boost competition. But Europe's leaders are still divided as to how, or whether, to break up energy giants like EDF and E.ON

The European Union took its latest shot at boosting competition in Europe's energy sector on Sept. 19, outlining plans to reduce the strength of European energy giants by deregulating the power business. Despite last minute horse-trading, Jose Manuel Barroso, the European Commission President, endorsed a tough line against vertically-integrated energy companies such as France's EDF (EDF.PA) and Germany's E.ON (EON) that both generate electricity and supply it to consumers.

Under the plans unveiled in Brussels, Europe's major utilities will either have to sell off parts of their operations to allow independent players to compete on a fairer footing or create separate companies to run their electricity distribution businesses. "An open and fair internal market is essential to ensure that the EU can rise to the challenges of climate change, increased import dependence, and global competitiveness," Barroso said in outlining the plans.

The EU's aggressive stance on breaking up big European utilities has ruffled the feathers of national politicians and industry leaders who resent the interference. The proposals announced Sept. 19 are the third attempt by the EU to liberalize the energy sector by opening up Europe's power and gas sector to more competition.

Investors Seem Unfazed

"There's undiminished political opposition for energy unbundling [separating generation and distribution assets]," says Katinka Barysch, deputy director of London-based Center for European Reform (CER). "Companies in France and Germany would have to sell parts of their businesses, and they are unwilling to do that."

Investors were surprisingly unfazed by the EU's proposal, with most European utilities up slightly on the day. Analysts say that's because even if the utilities' core power generation and distribution businesses are split, the parts will likely retain their value and remain largely unchanged.

This sentiment was reflected in the markets. France's EDF and Gaz de France (GAZ.PA) and Germany's E.ON and RWE (RWEG.DE) rose slightly on a day that saw most European bourses up broadly on the coattails of the U.S. Federal Reserve's Sept. 18 decision to cut interest rates.

Protecting a Vital Industry

Energy giants also have found support for their fight against deregulation from newly-elected French President Nicolas Sarkozy, who intervened personally to push through the $97.8 billion merger of French energy company Gaz de France with its Franco-Belgian counterpart Suez (LYOE.PA) on Sept. 3.

Unlike EU officials, Sarkozy, as well as the leaders of Germany, Austria, Latvia, and Greece, are against further deregulation in the energy sector, preferring to maintain domestic monopolies in order to protect an industry that they see as strategically important.

This has increasingly become a hot-button topic as Russian state-controlled oil and gas giant Gazprom (GAZP.RTS) has taken stakes in assets across Europe, including natural gas hubs in Austria and distribution networks in the former Soviet Union. It now even sells directly to industrial customers in Britain.

With Moscow currently providing 20% of Europe's natural gas, and memories of supply disruptions across Europe—instigated by Russia last year—fresh in people's minds, politicians are wary of any further encroachment from their neighbor to the east.

Must Agree by October

In response, the EU sought to calm nerves on Sept. 13 by outlining limits on what future role non-European companies can play in the continent's energy sector. In a veiled threat to Gazprom, the European Commission said foreign firms also would have to meet the EU's new unbundling requirements if they wished to buy European electricity companies.

But according to CER's Barysch, this attempt to block the Russians misses the point. "Gazprom is already a big owner of energy assets in the EU. No matter what happens it will remain an important gas supplier for years to come."

The rising presence of Gazprom is the least of the Europeans' worries. EU leaders first must agree to the proposed revamping of the energy sector when they meet in October—a seemingly insurmountable task as both sides have staked their reputations on either promoting deregulation or protecting domestic monopolies.

European Commission President Barroso says the changes are necessary to protect the EU's global competitiveness. Whether Europe's politicians and businessmen agree with him, however, is still open to debate.

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