June 1 , 2002
Better-Financed Europeans Vie for "Cozy" Oligopoly Position
The major European energy companies are far bigger than most U.S. utilities, and they are in much better financial shape. Anthony White, managing director of European Utilities Equity Research at Salomon Smith Barney, says that market rules have been liberalized in some countries, including the United Kingdom, and can be changed in the other European nations so that anyone can build a generator.
However, if the present trend toward consolidation continues, a few companies could occupy all the markets of the United Kingdom and Europe and keep prices just below the point where it would be profitable for new market entrants, White says.
"Maybe it is better to have a cozy oligopoly where the generators keep price stability just below the new entry level. [Then] there is the threat of competition. If these guys set prices too high, they lose market share, so you've got some protection there.
"Electricity is incredibly capital-intensive and very political. I don't think governments tolerate highly volatile prices. Therefore, why not go for a cozy oligopoly where customers are protected from higher prices?" White asks.
Meanwhile, despite the expressed intent of the European Union to have open competition, the incumbents have the money and the political connections to enter markets elsewhere without having to face serious threats from competitors at home.
"We are finding very strongly that promulgating legislation does not translate necessarily into effective competition," says Scott Foster, an analyst in the Paris office of Cambridge Energy Research Associates (CERA). "In other words, the legislation is necessary, but not sufficient."
The move toward liberalization has lost momentum. A worldwide recession, depressed energy prices, worries over security of supply, fears of price spikes, environmental issues, and employment concerns have taken the air out of the impetus for a competitive market that could bring lower prices.
As a consequence, incumbents are protected. For example, Italy's Enel is 68 percent state-owned, and the big dividends reaped from consumers of overpriced electricity are diverted to other government expenditures.
Tanjuy Le Quenven, director of European Power Research for CERA in Paris, says that not every E.U. member is on the same page, despite E.U. pronouncements.
"The French state has always been very reluctant toward liberalization," he says, partly due to concerns about what that would mean for its nuclear complex. "In the French tradition there is always a suspicion against market opening because there is more of a tradition of centralized planning for energy."
The government has said it would move to privatize EDF, but no timeline has been given, he says.
"The opponents of liberalization in Europe have gained some arguments because of the California crisis and the withdrawal of U.S. merchant players from Europe," Le Quenven says.
Add to this severe physical limitations in the transmission of power across national borders throughout much of Europe, depressed power prices, and a debilitated trading market, and what emerges is a food-chain form of competition in which the big compete for opportunities to gobble up the small.
"The path we are on is