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[IMAGE] [IMAGE] May 29, 2001 EDF Pursues Italy's Montedison; Lack of Reciprocity Still a Factor By Will McNamara Director, Electric Industry Analysis [IMAGE]Power giant Electricit,de France (EDF) has sent shock waves through Italian financial markets and government ministries by attempting to raise its stake in electric firm Montedison to 20 percent from about 6 percent. However, Romano Prodi, the European Union commissioner for competition, is considering an intervention in the battle between EDF, the French electricity monopoly, and the Italian government. The latter has passed an ad hoc law restricting EDF to 2 percent of the voting rights for Montedison, the Italian electricity supplier spun off by Enel. Analysis: Once again, the issue of reciprocity has taken center stage in the European power market, with EDF playing the staring role. For the last year or so, as the European Union (EU) has enacted electric competition across the Continent, France's EDF has taken advantage of competitive opportunities in other European countries while resisting any penetration of its own market by foreign suppliers. Although EDF has a presence in the United Kingdom through its ownership of London Electricity, the French power firm has wanted for some time to increase its position in Spain and Italy. However, the neighboring governments continue to fight any expansion by EDF until France reciprocates and allows further liberalization of its own market. As I have mentioned before in this column, France has been criticized by other European nations for delaying energy liberalization in its own country. As a result, EDF (which controls approximately 90 percent of the French electric industry) may not be allowed to make additional acquisitions abroad until it further opens its own market to competition. To date, France has only opened its power and gas markets by the minimum amount imposed by the EU, and EDF has played a large role in this resistance. While other European countries such as Germany have opened 100 percent of their markets to competition, France has opted for a phased-in approach, opening a third each of its power and gas markets by February 2003 and August 2008, respectively. Thus, although other companies such as Spain's Endesa have attempted to push through barriers to obtain entry into France, it is questionable when true competition will emerge in the country. Nevertheless, EDF has now set its sights on Italy through an expansion of its holdings in Montedison, one of Italy's main electricity companies. Reports are mixed about how much EDF currently owns of Montedison. EDF recently said that its stake increased from 3.971 percent to 5.971 percent. However, other reports have indicated that EDF already controls about 20 percent of the capital assets of Montedison. Both increases in Montedison were made recently, which EDF was forced to confirm to the Italian stock market regulatory Consob. EDF has claimed that its holdings in Montedison were made strictly as a minority financial holding to diversify the company's financial assets across Europe. However, at the same time, EDF has also indicated that any increase it makes in its holdings on Montedison would be for trading purposes. In other words, EDF wants to control the generating assets of Montedison for resale across Europe's wholesale market. Further, with a 20-percent stake, EDF would become Montedison's largest shareholder and a major presence in Italy's power market even as France remains mostly closed. EDF's argument that it has secured a stake in Montedison solely for financial diversification purposes is not flying with the European Union or the Italian government. The consensus across the Continent is that EDF is making a strategic increase of its electric holdings and plans to make as many additional acquisitions as will be allowed by EU regulators. In fact, EDF has admitted that its strategy is to "make 50 percent of its turnover from activities abroad by the end of 2005, compared with 25 percent currently." Consequently, it is clear that the French power firm is looking beyond its home country for expansion opportunities, and these opportunities typically have been in distribution and generation assets. Moving forward, the company has expressed an interest in expanding its trading operation For instance, last month I discussed a report that EDF is preparing a bid for the regional U.K. electricity company Seeboard, which is owned by American Electric Power (NYSE: AEP). Serving about two million connected customers in England, Seeboard owns, operates and maintains an electricity network of over 45,000 km (28,000 miles) of overhead lines and underground cables. An acquisition of Seeboard would factor into EDF's overall expansion efforts in Europe and be a nice complement to London Electricity, one of 12 regional electricity companies in England and Wales, which EDF bought from Entergy in 1998. In addition, EDF has also made acquisitions in Sweden (Graninge) and Germany (EnBW) and reportedly is Poland's largest electricity distributor. These acquisitions were made by EDF International, which is wholly owned by the French government, and thus subject to EU oversight. Perhaps due to EDF's size and presence in Europe, these previous acquisitions were allowed without a great deal of EU intervention. However, now that other countries have voiced criticism of EDF and put pressure on the EU to intercede, it is unlikely that further acquisitions will proceed without intense scrutiny. As noted, trading appears to be the next wave of EDF's expansion efforts. Toward this end, EDF partnered with Louis Dreyfus in 1999 to create an energy trading company called EDF Trading. The various companies that EDF has invested in across Europe support the company's efforts to both learn about new competitive techniques and financially benefit when competition opens fully across the Continent. For its part, the Italian government has responded that it will block any increase of EDF's ownership of Montedison, based primarily on the argument that EDF is not offering the same opportunity for expansion in France. Specifically, Italy is working on a decree that would freeze the voting rights attached to the shares that EDF holds in Montedison. Further outlining its position, the Italian government has said that Italy must protect the imminent privatization of the power stations in the country that will soon be sold by Enel, one of the country's main power firms. As Montedison will be one of the main contenders of the assets owned by Enel, the Italian government wants to block EDF from increasing its share in the company and thus having access to additional power assets in Italy. For instance, Enel is planning to sell Elettrogen, a generation company that produces about 15 percent of the production capacity in Italy. If EDF were to increase its stake in Montedison before or after Montedison makes a play for Elettrogen, then EDF, as a foreign entity, would gain a lock over the Italian power supply market. Italy's anti-EDF law is an interesting development, but it does not mark the first such legislation that has been initiated across the Continent. Spain also has created a similar law that is specifically targeted against EDF with regard to the French company's pursuit of Hidrocantabrico, Spain's fourth largest supplier. However, despite the efforts by Spain and Italy to restrict any expansion of EDF, the laws, although they are already in place, may ultimately be deemed anti-competitive and a breach of the Treaty of Rome, which calls for unlimited freedom on the movement of capital within the EU. Similar to how the Federal Trade Commission investigates anti-trust allegations in the United States, any attempt to overturn the laws in Spain and Italy would result in lengthy legal battles. EDF also remains interested in the Spanish's largest power utility Endesa, which is about the only foreign company that has been able to penetrate the French electricity market (through a 30-percent acquisition of French electricity generator Sociét,Nationale d'Electricit,et de Thermique). Endesa, which recently terminated an attempted merger with Iberdrola, Spain's second largest power firm, has been viewed as a takeover target for larger companies such as EDF. At last report, the EU Commission said that it would base any decision to intervene in the battle between EDF and the Italian government on "how far control was being exercised." In other words, EU intervention will be based on how much foreign control EDF might wield in the Italian market with an increased stake in Montedison. The fact that France remains resistant to electric competition in its own country remains a key factor in this debate, and it certainly adds heat to the criticisms leveled against EDF by the governments of Italy and Spain. An archive list of previous IssueAlerts is available at www.scientech.com [IMAGE] The most comprehensive, up-to-date map of the North American Power System by RDI/FT Energy is now available from SCIENTECH. 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The opinions expressed in SCIENTECH's IssueAlerts are not intended to predict financial performance of companies discussed, or to be the basis for investment decisions of any kind. SCIENTECH's sole purpose in publishing its IssueAlerts is to offer an independent perspective regarding the key events occurring in the energy industry, based on its long-standing reputation as an expert on energy issues. Copyright 2001. SCIENTECH, Inc. All rights reserved.
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