The ‘Phantom Menace’

First we had Star Wars, then we had the ‘Beef Wars’ – both entertaining, long running, sagas with an element of epic rivalry, mystery and suspense. Whether either is fit for public consumption depends on your taste and how well you discern science from fiction.

Now enter the next epic battle: the utility wars. Competition in Europe continued to hot up this month with the merger of RWE and VEW. The deal puts RWE back in the number one spot as Germany’s biggest electric utility. The company had to suffer second place only for a short time following Veba’s tie-up with Viag in September.

But with such alliances there is a hidden danger – a phantom menace, like BSE in British beef. Jonathan Green, head of the UK Department of Trade and Industry’s Energy Utilities Directorate told the Institute of Economic Affairs: “Acquisitions and alliances are in full flow and there are some dangers in this for Europe. There is a potential for a small number of dominant players to emerge, and that’s an issue for concern which needs to be addressed at policy level.

“One element of the European debate is about creating players to challenge the big American operators, the need to create national champions…but it’s not clear to me that EU and national [antitrust] provisions are adequate to protect the development of EU wide competition.”

The Americans, meanwhile have their own thoughts on policy affecting their chances in Europe. Reacting to the draft German power grid agreement, Enron Corp. said it was an improvement but still has several flaws.

Getting the right rules in place is one thing but getting companies to play by them is another. Consider what many EU players see as the currently the biggest ‘phantom menace’. EDF is to European electricity competition what the “Dark Emperor” is to Star Wars – a formidable counter-current to the accepted order. Its feet dragging continues to cause friction in the EU. The company has bid for a 25 per cent stake in EnBW, a move which has been described by German economics minister, Werner Màƒ¼ller as “not very fair”. Màƒ¼ller said that Germany would join other EU member states in putting pressure on France to implement the directive in full.

France, however, has no plans to go beyond the EU Directive. Jean-Claude Hulot, deputy director for Electricity Gas and Coal at the French Ministry of Economy, Finance and Industrie said: “France sees it as important not to destroy the strength of EDF on the world market.”

This may be so, but sooner or later it will have to conform and adapt. The warning signals are there, as they are for any utility which thinks it can maintain a go slow approach to the new market.

The Swedish paper group Svenska Cellulosa’s French company (SCA) recently signed an electricity supply agreement with RWE rather than with EDF. Industry commentators have estimated that about 190 French industrial plants would prefer to buy their electricity from suppliers other than EDF as the market matures.

RWE has been aggressive in its pricing. In September it slashed electricity prices as the price wars began in Germany. Commenting on RWE’s aggressive strategy, an EDF spokesman said that EDF would reduce prices in France from about 20 centimes/kWh to 18 centimes/kWh as a result of market pressure. However, RWE is offering potential clients even lower prices of between 13 and 15 centimes/kWh. Speaking at an industrial conference in Paris, EDF’s president Francoise Roussely said it plans to reduce its costs by 30 per cent over the next three years but admitted it would be difficult, especially in the nuclear sector.

No doubt a company as successful on a global scale as EDF knows how to adapt to the new rules of the game, but will only do so at a pace which suits its own needs.

We all know France can adapt and rise to the occasion when necessary. Watching its victory over the mighty All Blacks of New Zealand in the semi-finals of the Rugby World Cup and even winning the support of a UK crowd at the height of the beef wars was truly amazing. It did not go on to win the tournament but gained the respect and support of fellow Europeans. I wonder if it can do the same in the deregulation game?

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