Spain plans unconventional deregulation strategy

Oct. 13, 2000 (Financial Times)à‚–Spain’s unconventional deregulation strategy has helped to put the country firmly on the radar screens of global operators.

Madrid’s centre-right government has accelerated its plans for deregulating both the domestic electricity sector and the gas business.

Interest has been further heightened by the fact that Spain, which is growing at double the rate of the EU average, faces a looming shortage of power capacity.

The dual deregulation is not coincidental because the next phase of the government’s national energy plan is based on new technology combined-cycle plants fired by gas instead of the traditional mix of coal, hydroelectric and nuclear power used by Spanish generators.

This sets the scene for the emergence of multi-utility power groups in which energy and power businesses combine to transform gas into electricity.

Two competing efforts to create multi-utility groups are already under way. They involve three of Spain’s biggest corporations, the energy group Repsol-YPF and rival electricity generators Endesa and Iberdrola.

Two foreign players, Eni, the Italian energy group, and the Egyptian General Petroleum Company have recently signed agreements to supply gas to Spain.

Meanwhile, Germany’s Energie Baden Wurttemberg (EnBW) is embroiled in a battle for control of Hidrolectrica del Cantabrico, the smallest of the domestic power groups and which has been at the centre of takeover attempts for the past six months.

Oiling the wheels of change has been legislation passed in June placing a ceiling on the level to which local power companies can grow. The law says that Repsol cannot open new petrol stations, nor can Endesa and Iberdrola build new power plants. The move is designed to encourage new entrants. The three companies have thus turned to domestic deal-making instead.

Endesa and Iberdrola fired the opening shots last month when they said they were negotiating a friendly merger. Technically, Endesa, the larger group, will take over its rival.

Repsol responded this week saying it was studying a bid for Iberdrola which would be unsolicited and hostile. A year ago the power group successfully rejected Repsol’s advances.

A deal between Endesa and Iberdrola would create a group accounting for some 80 per cent of Spain’s power supplies. In order to gain regulatory approval for a combination of their businesses they will have to sell electricity generating and distribution assets which account for some 30 per cent of Spain’s power market.

That 30 per cent would likely attract interest from power groups from abroad. People familiar with their negotiations say they are preparing a package of sales to, and asset swaps with, foreign power groups in order to obtain government approval for their merger. “There is a long list of power groups in the US and in continental Europe lining up for whatever Endesa and Iberdrola place on the block,” a London-based electricity sector consultant said yesterday.

After absorbing Iberdrola, the enlarged Endesa is expected to rationalise the combined business before making disposals that ensure the enlarged Endesa sticks to the 40-50 per cent national share that it had built up on its own.

Repsol is concerned that any sale of Endesa and Iberdrola’s assets might reduce the number of clients relying on gas supplies from Gas Natural, Repsol’s gas affiliate and dominant gas importer, and could encourage the buyers of those assets to go elsewhere for gas.

Another spark for Repsol’s move was an announcement by Iberdrola last week that it had signed a wide-ranging agreement with Eni that included the supply by the Italian group of 1.5bn cubic metres of gas to two of its combined-cycle generators. Iberdrola and Eni said they aimed to gain a 20-25 per cent share of Spain’s gas market by 2005.

A similar industrial alliance, involving the Egyptian General Petroleum Corporation, was unveiled, also last week, by Union Fenosa, Spain’s third-ranked power group. Union Fenosa has earmarked investments worth $1bn to build a liquefaction plant in Egypt, lease LNG maritime transport and create regasification facilities in Spain and Union Fenosa also plans to account for 25 per cent of gas sold to domestic generators by 2005.

The challenge for the government in the next weeks will be to reconcile its objectives for creating a lean, efficient power sector with the competing interests of fiercely competitive domestic rivals and the foreign operators prowling on the sidelines.

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