“It’s a great dayࢀ¦”

Berndt Bendsen, Danish minister for economic affairs and business affairs was jubilant and with good reason, perhaps. It has taken ten years of negotiation but at last the EU has agreed on a deadline for full competition in the electricity and gas sectors. Ministers agreed that homeowners will be able to choose their electricity and gas suppliers by July 1, 2007. But while it has been hailed as a landmark agreement and a “great day” for the EU it does, unsurprisingly, have strings attached.

France said a 2007-2009 timeframe looked acceptable but with certain conditions. “France is willing to accept the setting of a date, on two conditions,” said industry minister Nicole Fontaine.

The deadline has been set for three years after liberalization of the business market. France insists that the EU governments should only move at that stage if they are satisfied with the impact of liberalization in the business sector. Furthermore, the deal still needs final approval in the first few months of 2003 from the European parliament. This deal, however, goes much further than a compromise reached at the Barcelona summit in March and gives fresh impetus to a stumbling programme which has so far left the market fragmented.

The EU sees full opening of energy markets as a key factor in Europe’s competitiveness in global markets. EU Commission President Romano Prodi has warned that failure to open energy markets could cost the European economy $15 billion a year. Yet the whole market opening process has been dogged since day one, notably by objections from France and issues raised by Germany.

France has so far only opened its market for large industrial users while many have complained that Germany, although in

theory 100 per cent open, remains closed to foreign entrants.

Even at the start of these most recent negotiations France and Germany resisted the key proposal to give separate legal status to those parts of electricity and gas companies that are natural monopolies. But they gave in after a majority of ministers backed this ‘legal unbundling’ which is likely to force groups such as EDF and E.On to restructure internally.

The final deal confirmed the agreement in Barcelona to open the market for businesses by July 1, 2004 and unbundle the energy groups’ national infrastructure. The deal also meant a delay to the Commission’s original date for full liberalization (wholesale and domestic) from 2005 to 2007 and introduced a similar deadline for the legal unbundling of local networks.

By attempting to separate business units, the EU is hoping to end unfair discrimination of third parties on the grids and prevent cross-subsidies.

France and Germany had argued that the unbundling measures were too bureaucratic. Patricia Nicolai, a spokesperson for VDEW (the association of German manufacturers) said: “If the unbundling proposals went ahead, German utilities would lose important synergies which they have created between various sectors such as power and gas. At a time when liberalisation in other EU countries lags years behind, this would be unfair.”

VDEW and BGW (the national gas distributors lobby) urged the German government to accept a voluntary commitment to ensure non-discrimination of third parties in the EU’s biggest energy

market with 900 power companies and 750 firms active in gas.

Both countries eventually agreed to a Commission proposal which would allow them or any other member country to propose their own alternatives to prevent cross-subsidies.

Yet it is France’s condition to measure the impact of wholesale market opening before committing which could prove to be a major hurdle when the time comes. Fontaine argues that “this compromise will allow a measured, progressive liberalisation.”

By attaching this condition, France has made sure it can resist domestic liberalization if experience in the industrial sector did not meet its expectations.

If it is not just a another delaying tactic, what France is suggesting is perhaps not unreasonable at all. Experience with liberalization is still limited and markets are still making adjustments to see how an open market can work while supporting security of supply, meeting environmental targets and promoting investment. The UK, one of the pioneers of deregulation, is a case in point.

Indeed it may be prudent to wait and see what the impacts are across Europe. But the real question is: on what will France base its decision on whether to go further or not? It is a complex

question and different countries will no doubt draw different

conclusions from and any liberalization impact report.

And so, once again France has agreed to run but at its own pace. Well Mr. Bendsen may have called it a “great day” but he should also note that the night is still young.

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