E.ON offers to sell power grid to satisfy EU regulators

E.ON offers to sell power grid to satisfy EU regulators

By Stephen Castle, James Kanter and Carter Dougherty
Thursday, February 28, 2008
International Herald Tribune


BRUSSELS: The European Commission won a crucial opening victory
Thursday in its battle to require the Continent's biggest energy
companies to open up to more competition when E.ON, a leading German
utility, unexpectedly agreed to sell part of its power grid.

The announcement from E.ON, which could set a precedent for other
utilities, took even German policy makers by surprise. It came as
European Union ministers went into battle against a broad commission
plan to break up energy behemoths that control both production and
distribution networks.

Berlin's representative at the talks in Brussels, Peter Hintze, the
deputy economy minister, described E.ON's move as "astounding," as his
negotiating position was spectacularly undermined.

But while some of the EU's 27 members struggle to safeguard national
champions, the commission, the EU's executive arm, is wielding its
cartel-busting authority to push the pace of change in one of the most
sensitive areas of policy making under discussion: energy security.

The EU competition commissioner, Neelie Kroes, has been investigating
energy companies like E.ON for suspected abuse of their dominant
position in the market. E.ON's offer to sell its power grid was made
in an effort to settle two antitrust investigations - and was
immediately praised by the commission.

"E.ON's announcement is definitely very much welcome," said Andris
Piebalgs, the EU's energy commissioner and one of the leading
proponents of breaking up the energy giants. "It definitely makes a
huge impact on the debate."

EU member states are trying to reach agreement on proposals to pry
open energy markets, which the commission argues would bolster
competition and reduce consumer prices. On Thursday they debated a
plan - opposed by eight countries led by France and Germany - to
require utilities to "unbundle" or separate energy producers from
distribution networks.

No decisions were reached. But Colette Lewiner, who monitors energy at
the Capgemini consultancy in Paris, said that the move by E.ON was the
beginning of energy unbundling in Europe. "The other German utilities
now could follow, and the French now might say, 'OK, we'll agree to do
this for electricity too,' " she said.

In the case of France, Lewiner said, Electricite de France could sell
its grid operator RTE.

EDF declined to comment.

But Lewiner said the French and Germans were likely to take a very
different approach to natural gas pipelines because they are more
sensitive assets - both in terms of their value and of national energy
security - than power grids.

"Gas companies are more dependent on their network than the
electricity companies," she said, adding that the overall value of Gaz
de France would be eroded by separation from its network.

Lewiner said another concern about gas networks was the growing power
of Gazprom, the mighty Russian gas company, which could purchase newly
separated pipelines in Europe and assume more power over vital energy
supplies - despite EU efforts to impose conditions on its access to
European markets.

Kroes, who has extensive powers, last year identified widespread
problems in the energy sector. She has already fined E.ON �38 million,
or $57.8 million, over an incident in which a seal was broken at
premises raided by antitrust regulators.

She has also demonstrated her willingness to take on some of the
world's biggest corporations, including Microsoft.

"Kroes has the power and she has shown she is quite willing to use it,
" said Dennis Oswell, managing partner as Oswell & Vahida law firm in
Brussels.

The commission said it would ask for comments from E.ON customers and
competitors before deciding whether to approve E.ON's proposed
settlement. The offer involved the sale of 4,800 megawatts of
generation capacity.

E.ON said that it would sell to a company that did not already produce
electricity itself, a condition that effectively ruled out a sale to
big German competitors like EnBW and RWE, and opens the door for the
rest of Europe. Dalkia, an energy firm controlled by the French
company Veolia Environnement, would be one possible buyer, an
executive with a major European energy company said.

Yet despite E.ON's move, the German government refused to shift its
position on the package and still backed an option that would avoid
the mandatory break-up of vertically integrated companies.

Ministers failed to overcome those differences Thursday, but the
Slovenian economy minister, Andrej Vizjak, who was chairman of the
talks, said he still expected a deal by June.

But there was no doubting the damage to Berlin's negotiating position.

"This is a slap in the face to the German policy," said Claudia
Kempfert, an energy policy analyst at the German Institute for
Economic Research in Berlin. "They have been fighting for a solution
for months that has always favored the German companies."

Moreover, the EU could find itself without the need for the provisions
on unbundling if other utilities followed suit.

"I think it's a very clever move by Mrs. Kroes to have targeted the
power companies and launched raids," said Claude Turmes, a Green
member of the European Parliament. "At the same time that the German
and French governments are trying to build up a symbolic war on this
issue, the pressure of Kroes' campaign means that power companies are
now going to go one-by-one down the route to unbundling."

James Kanter reported from Paris and Carter Dougherty from Frankfurt.