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French power plays trample Mediterranean sensitivities

An electric storm is raging over the western Mediterranean. French power plays have become a charged issue in Italy and Spain. French state monopoly power company Electricite de France (EdF) caused a furore in Rome last week by grabbing 20.1 per cent of Italian industrial group Montedison.

Montedison has majority holdings in energy producers Edison and Sondel. Together, these two modern and thrusting companies, soon to be merged, have 6,000 megawatts of generation capacity - 12 per cent of Italy's active production capacity. Projects coming on stream will take that share to about 22 per cent within three years.

Italy's shocked response was to rush through a decree limiting voting rights of foreign companies buying into its generation industry to 2 per cent - unless Italian companies are allowed reciprocal access to the buyer's domestic energy markets.

It is a response learned from the Spanish Government, which has suspended the voting rights of the foreign companies that recently acquired its fourth-largest power company, Hidrocantabrico. One of those is Electricidade de Portugal (EdP), 30 per cent owned by the Portuguese Government. The other is Germany's third-largest producer, Energie Baden Wuerttemberg (EnBW), 34.5 per cent owned by the French monopoly EdF.

Spain is acting under a new 'EdF Law' intended to keep state-owned foreign groups from controlling its utilities. The thinking behind it is similar to Madrid's restrictions on shareholdings by foreign telecommuications companies in which governments still hold a 'golden share'. The golden-share law, used to scupper a deal between Spanish phone company Telefonica and Holland's KPN, has been challenged by the European Commission.

This is not what the European Union's single market is supposed to be about. The idea is to foster free movement of capital and investment between member nations, not to give governments the excuse for nationalistic grandstanding and protectionism.

Nor is EdF is the kind of investor the single market was designed to encourage. France is liberalising its electricity market more slowly than many other EU countries, permitting only the minimum outside competition allowed under EU rules. It also bans companies from taking a stake in EdF. In a sense, EdF is doing what state monopolies facing eventual privatisation always do - moving into markets where liberalisation is further advanced and barriers to entry are lower.

It has a war chest overflowing from a high domestic-price policy and can snap up newly privatised shares of other former monopolies abroad or buy stakes in struggling newcomers.

That is what it has been doing in Italy, where the former state monopoly Enel is being forced to sell off capacity. Much would have gone to Montedison, but it may go elsewhere if EdF is seen to be in control.

Eventually, EU pressure to liberalise will mean EdF will have to face serious competition on its domestic market. Some market opening has already been forced on it, despite the best efforts of the French Government.

The company says it has already 'lost 48 clients, representing roughly 3 per cent of sales, to the benefit of the German companies RWE and E.On, America's Enron, Spain's Endesa, the Franco-Belgian company Electrabel and [upstart French rival] Suez,' reports the Paris daily Le Monde . It will also have to put a further 6,000 megawatts, or 6 per cent of production, up for sale later this year as a condition for EU approval of the EnBW purchase.

But that is not enough to satisfy its neighbours, who want EdF tamed, at least for as long as it remains under state protection. The EU's commission would dearly like to be able to agree.

Commission President Romano Prodi, a former Italian prime minister, uncomfortably admits Brussels needs to study what can be done about companies which can buy but cannot be bought. Commissioner for Energy Loyola de Palacio, who happens to be Spanish, has argued fiercely there is no point in privatising state companies only to have them re-nationalised by someone else's government.

Nonetheless, the commission has taken Spain to court over the golden-shares law and is investigating the decision against EnBW and EdP. Mr Prodi has also signalled he will also 'look very closely' at the Italian law.

Fearing the battle could reverse years of painful effort to liberalise the utilities market, the commission argues it is better to pressure Paris to open the French market than to let Rome and Madrid close theirs. That is correct in principle. Market liberalisation is a fundamental pillar of European integration and national barriers cannot simply be re-erected at the first sign of cross-border investment.

In practice, however, the Italian and Spanish reactions may be rather more effective at concentrating French minds than lectures from Brussels.

If EdF finds its foreign forays thwarted, it may decide for itself that some domestic liberalisation is necessary.

After all, a little competition at home may be a relatively small price to pay for the success of an international expansion programme intended to ensure half the company's sales are generated outside France by 2005. That is double the proportion achieved in 2000.

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