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A Continent United? Some Thoughts on Prospects for a Single Energy Market in Europe

Fortnightly Magazine - January 15 2000

significantly precedes the deadlines set by the European Union's Internal Electricity Market Directive for opening power markets to competition.

As summarized by Markus Suessmann, chief executive officer of German utility Energie BadenWürttemberg's trading division in Karlsruhe, "German market competition is now full-blown - truly fierce competition. Germany seems headed toward being the most open market for electricity in the world."

France, however, has lagged in meeting the timetable mandated by the E.C. directive that came into force in February 1999. In late November the European Commission announced that it was initiating legal action against France for its failure to end the monopoly of Electricité de France.

The E.C.'s French compliance action illustrates one of the other most striking differences in U.S. and E.U. power markets. In Europe the E.C. has ultimate authority over member states to compel the market opening, whereas in the United States there is no national authority nor federal law to require states to open their retail markets. That is rather ironic since a united Europe is a relatively new phenomenon by comparison to the U.S. federal structure.

In the United Kingdom, the gradual transition from a single state-owned electric utility to privatized companies and finally to an open competitive market has continued over a number of years. Yet in the highly concentrated U.K. supply structure created by the Thatcher privatization plan, the use of a pool system with formula-based wholesale pricing has not achieved a truly fair-priced market.

U.K. regulators have acknowledged that the current pool system allows pricing "anomalies" and tempts generators to game the system to achieve higher prices. Accordingly, UK authorities plan to reform the pool-pricing model. The difference in demonstrated results between pool operation vs. market-transacted pricing may influence the selection of market structures for the E.U. members that have yet to establish their wholesale market systems.

In Spain there is limited wholesale market trading, but the retail market remains concentrated with the two large, integrated Spanish utilities, Endesa and Iberdrola. Power imports into Spain are feasible but require a rather cumbersome government application. Endesa has expanded aggressively in South America and continues to build a trading and risk management organization to position itself for competition in Europe. One market focus concerns whether there will be cross-border business combinations between Spanish companies and other major European utilities in accessing the Spanish retail market.

France: The One to Watch

Thus far, Germany has been the happening spot in European power market developments. But the giant of European electricity - which has yet to fully exert its power in a pan-European market - is Electricité de France, the French state-owned national utility.

As the exclusive power supplier for all of France, Electricité de France, or EdF, is one of the largest utilities in the world, with more than 100,000 megawatts of generating capacity in France, 30 million customers and 116,000 employees. It is also one of the more interesting energy companies, with a high percentage of nuclear power generation (about 60 percent) and relatively low cost production. That could make EdF a winner in pan-European competition.