One step forward, two steps back.
So it goes for the European Commission as it works to create a borderless and competitive European energy market. A sought-after June agreement on regulations to encourage the unbundling of vertically integrated energy companies -- breakups, in other words -- was quickly followed by two high-profile retreats.
The most recent was the July 30 agreement by Gas Natural SDG SA, Spain's largest gas supplier, to buy a domestic utility, Unión Fenosa SA. The deal values the target at around €16.75 billion ($26.1 billion). The combined group would rank as Spain's biggest gas trader and its No. 3 electricity group. It would also serve to reinforce the status quo in Spain's energy market and create a vertically integrated power company. In short, it would create just the sort of company that the EC, which oversees competition in the European Union, had hoped to avoid.
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The Spanish takeover followed the finalization of the €90 billion merger of French utility giants Gaz de France SA and Suez SA, another setback for the EC's energy-market vision. The merger, completed July 22 -- more than two years after it was first announced -- created Europe's No. 1 buyer of natural gas and its No. 2 utility by market capitalization.
GdF Suez SA, like its new Spanish peer, is also an integrated gas, electricity and distribution network utility. Worse, the French government cobbled it together to protect Suez from Italy's Enel SpA and to create a French energy giant, in direct conflict with the spirit if not the letter of the European Commission's rules on cross-border acquisitions.
Both the French and the Spanish utilities might argue that their deals actually demonstrate the free market at work. Certainly, privately held Suez was free to reject the GdF bid, yet its shareholders overwhelmingly backed the deal when they voted in July.
The EC, meanwhile, could rightly claim that it has no power to stop anticompetitive deals where they do not involve more than one member state.
Yet the truth is that both GdF Suez and the combination of Unión Fenosa and Gas Natural are proof of the continued primacy of national interest over the European free market and the European Commission's goals.
In the case of GdF Suez, Italy's Enel backed off plans to make a bid for Suez only after the French state engineered the GdF offer and made clear that it would not welcome a counteroffer. The Spanish state has taken no direct role in promoting Gas Natural's offer for Unión Fenosa, yet analysts, including Steven de Proost of Brussels-based Dexia Securities, can see the hand of politics in the deal.
"Both Unión Fenosa and Gas Natural are focused on gas-fired combined-cycle generation and at a strategic level would be better served by adding other forms of generation," says Proost. "The only way in which they are a natural fit is that they are both Spanish."
Proost maintains that Electricité de France SA, Europe's biggest utility, or E.ON AG, Europe's No. 3 and Germany's No. 1, would be a better fit for Unión Fenosa.
The problem for the foreign suitors, and indeed for the European Commission's hopes for cross-border energy deals, is that many of Europe's biggest countries remain wedded to the belief that the best way to secure energy for domestic consumption (not to mention energy-sector jobs) is to foster national energy champions.
The theory goes that only these large utilities have the muscle to successfully negotiate with suppliers, such as Russian gas giant OAO Gazprom. Domestic energy champions can also be leaned on to keep energy prices under control.
The policy has its critics, chief among them the EC. They say government interference breeds inefficiency and ultimately harms the domestic consumers it purports to serve. As for negotiations with suppliers, why not present a common EU front in discussions, in much the same way as Japanese steel companies negotiate with coal providers?
Yet on one front, at least, the evidence from the current energy markets seems to support the interventionist argument.
Gas prices in Britain, the only European Union member that can truly be said to have a competitive domestic market for energy, have leaped in recent weeks. At the end of July, Centrica plc, the owner of British Gas, and EdF announced U.K. gas price rises of 35% and 22%, respectively. British consumers might be forgiven for looking longingly at their protectionist French neighbors, who, shielded by their own state-controlled utility giants, including EdF, have seen their energy prices rise by single digits.
