The EU's Major Electricity and Gas Utilities Since Market Liberalization

The EU’s Major Electricity andGasUtilities sinceMarket Liberalization

GOUVERNANCE EUROPÉENNE ETGÉOPOLITIQUE DE L’ÉNERG10 IE

ChristianSCHÜLKE 2010 fri, ©I The EU’s Major Electricity andGasUtilities sinceMarket Liberalization 2010 fri, ©I ©Ifri, 2010 The EU’s Major Electricity andGasUtilities sinceMarket Liberalization

GOUVERNANCE EUROPÉENNE ET GÉOPOLITIQUE DE L’ÉNERGIE T ome 10

ChristianSCHÜLKE 2010 fri, ©I The InstitutFrançais des Relations Internationales (IFRI)isaresearchcenter and aforumfor debate on major internationalpoliticalandeconomicissues.Headed byThierrydeMontbrialsinceits founding in 1979,IFRI is anon-governmental andanon-profit organization. Asanindependent think tank,IFRI sets its ownresearchagenda, publishing its findings regularlyforaglobalaudience. Using aninterdisciplinaryapproach, IFRI brings together politicalandeconomicdecision-makers,researchers and internationallyrenownedexperts to animate its debate andresearchactivities. With offices in Paris andBrussels,IFRI standsoutasone of the rare Frenchthink tanks to havepositioneditself atthe veryheart of Europeandebate.

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The objectiveofthe “EuropeanGovernanceandthe GeopoliticsofEnergy”program is to promote acoherent andsustainable Europeanenergypolicythrough seminars, debates,andpublications.This series covers the main aspects of the energytopic.

Tome 1: Abatement of CO2 Emissions in the EuropeanUnion (2007) Tome 2: L’Énergie nucléaire et les opinions publiques européennes (2008) Tome 3: The ExternalEnergyPolicyof the EuropeanUnion (2008) Tome 4: Gazet pétrole vers l’Europe. Perspectives pourles infrastructures (2008) Tome 5: La Gouvernancemondiale del’énergie :enjeux et perspectives (2009) Tome 6: GovernanceofOil in Africa: UnfinishedBusiness (2009) Tome 7: Energyin India’s Future:Insights (2009) Tome 8: Atthe Speedof Light? ElectricityInterconnections for Europe (2010) Tome 9: Ukraine –unpaysdetransit dans l’impasse ?Quatre scénarios (2010– available at Ifri.org)

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W eBsite: Ifri.org 2010 fri, ©I Contents

ExecutiveSummary ...... 7

Introduction ...... 13

Seven CaseStudiesof ChangingStrategies of MajorEuropeanEnergyUtilitiesSinceMarketLiberalization . . 27 E.ON ...... 27 GDF Suez ...... 46 EDF ...... 60 Enel ...... 74 RWE ...... 84 Iberdrola ...... 99 Vattenfall ...... 107 Other EuropeanUtilities ...... 117

Overviewof MajorNationaland RegionalElectricity and GasMarkets in the EU ...... 127 Germany ...... 129 France ...... 135 UnitedKingdom ...... 140 Italy ...... 146 Spain ...... 151 Nordic ...... 158 Belgiumandthe Netherlands ...... 164 CentralandEastern Europe ...... 167

Conclusions ...... 171

Annex ...... 192

Bibliography ...... 209 2010 fri, ©I ©Ifri, 2010 ExecutiveSummary

This studyfocuses on the evolution of major European energyutilities sincethe 1990s,when the liberalization of the Europeanelectricityandgasmarkets started.The author uses case studies in order to analyzehowthe largest companies in the sector adaptedtheir strategies in the last fifteen years.All of them enteredthe markets of other EU countries,with some of them nowbeing present in nearlyall Member States.All utilities diversifiedtheir business activities in the energysector, notablybydeveloping their activities in electricityandgas. Thanks to numerousmergers andacquisitions,alimited number of big companies (the “Big-7,”or“seven brothers” as some call them mockinglyin areferencetothe “seven sisters” of oil majors) haveanincreasing share of the EU electricity andgasmarket. Inthis study,weanalyzeinmore detail the EU’s seven largest utilities (byrevenues in 2008):E.ON,GDF Suez,EDF,Enel,RWE, Iberdrola, andVattenfall. The first part of the studyconsists of detailedcase studies of these seven companies.Agroupofmid-sizeutilities is presentedin shorter paragraphs.Ouranalysis focuses on strategies,operations andassets,andgives less attention to finan- cialaspects andenergytrading.Asfor energybusiness sectors, weconcentrate on electricitygeneration,transmission,distribution andsupply,aswell asnaturalgasdownstream. By analyzing the evolution of the seven largest utilities since market liberalization,weaim to present the statusquo of the companylandscape of the Europeanelectricityandgasmarket. Inthe secondpart,wegiveashort overviewof the situation in major Europeanelectricityandgasmarkets today,presenting 2010 fri, ©I 8 The EU’s Major ElectricityandGasUtilities sinceMarket Liberalization

the main companies in everymarket,their market shares and specificities of eachmarket.

Main Conclusions Inthe conclusion,weidentifysome common features of major Europeanelectricityandgascompanies.Inthe context of liberalization –even before the first directives were passed– there wasalot of movement in the sector.For manycompanies, weobservethe diversification of traditionalbusiness sectors,as theyenteredthe water,waste andtelecommunications sectors. Butmanyof them leftthese sectors again shortlyafterwards andconcentratedon their “core business,”i.e.energy.Itisalso notable thatseveralenergyutilities spunoff participations in non-energysectors (industry,realestate); this is forexample verymuchtruefor the twolargest Germanutilities E.ON and RWE. Atthe same time,astrong generaltrendtowardsdiversification of activities within the energysector canbeobserved forall major utilities.All the companies nowhaveelectricity andnaturalgasactivities,even if this is not truefor all their countries of operation. The synergyeffects between electricity andnaturalgas are obvious,asmanycustomers needto be suppliedbyboth products.Moreover,naturalgasplaysan increasinglyimportant role forelectricitygeneration. The respectiveimportanceofelectricityandgasdiffers among major utilities:electricityandgasaccount formore or less equallyimportant shares of totalrevenues in the case of E.ON andGDF Suez.For EDF,Enel,IberdrolaandVattenfall,electricityclearlydominates,even if all of them are currently developing their gasactivities.RWEis somehowin between these twogroups. Itisimportant to note thatthese seven companies dominate the Europeanelectricitymarket,astheyaccount for around55 percent of the EU’s electricitygeneration. The picture is different in naturalgas,where major utilities like E.ON,GDF SuezandRWE share the market with other important players likeEni,GasTerraor Wingas. Itisobvious(even if sometimes overlooked)thatthe important differences 2010 fri, ©I ExecutiveSummary 9 between naturalgasandelectricity–whichare twofundamen- tallydifferent products –haveanimportant impactonmarket structures. All major utilities haveusedthe opportunities of market liberalization forentering newmarkets in other European countries.Besides purelyeconomicfactors –whichare,of course,the most important –, geographicalandculturalprox- imity haveplayedadecisiverole in expansion strategies.Many utilities have,atleast in the earlystages of market liberalization, investedin countries surrounding their home market,or in countries thatare culturallyclose.For instance,utilities from manyWestern Europeancountries haveparticipatedin the (still ongoing) privatization of the energysector in Centraland Eastern Europe –butGermancompanies are byfarthe most present. The UnitedKingdom is aspecialcase,asnearlyall of the large utilities are present there:the openness of the British energymarket hasattractedmanyinvestors from other EU countries,andledto asituation where most of the UK’s utilities are controlledbyforeign groups. Companies from outsidethe EU playaverylimitedrole in the Europeanelectricityandgasmarket:trans-border mergers andacquisitions are mostlyintra-EU/European. The case of US energycompanies is interesting in this context,asmanyof them investedin Europe in the 1990s,butthen quicklydivested their assets again duetoeconomicfailure.One shouldnote, however,the growing presenceofGazprom in the wholesale andretail gasmarkets. Manyof the larger Europeanutilities haveassets outsidethe EU,with investments in the Americas being the most significant. SeveralEuropeancompanies have investedin the US (especiallyin the renewable energysector). Spanish,Portuguese andItalianutilities haveacquiredsizeable assets in Latin America, too.Another important market is Russia, where E.ON,Enel andFortum–companies headquarteredin countries thathavetraditionallyclose links with Russia–have madelarge investments in electricitygeneration. Wedonot discuss the legalaspects of Europeanlegislation in detail,butbrieflyassess their impact. Ownership unbundling of transmission networks is still not required, even under the EU’s thirdliberalization package whichpassedin 2009. However, 2010 fri, ©I 10 The EU’s Major ElectricityandGasUtilities sinceMarket Liberalization

wecanobserveacleartrendtowardsthe divestment of transmission and, to alesser degree,distribution activities bylarge utilities.Most major utilities nowfocusonelectricitygeneration andsupplyof electricityandnaturalgas,with increasing interest in naturalgasproduction aswell. Butlarge parts of the transmission anddistribution networks in the EU are still ownedbyincumbent utilities that,of course,remain activein other parts of the valuechain,likegeneration andretail. Some of the major utilities continuetoconsider transmission asone of their keyassets andwant to keep these regulatedactivities. Itwill beinteresting to watchiftheywill sticktothis strategy given the newregulatoryconditions set bythe thirdpackage. Asfor companyownership,weobservethatalarge number of utilities are partlystate-ownedtoday.This marks animportant change,if comparedto the situation twentyyears ago,when nearlyall energyutilities were state-ownedat100 percent. The overall trendis clearlytowardsalesser degree of state ownership,andhenceacontinuation of privatization. Onlyone of the “seven brothers” is still state-ownedat100 percent (Vattenfall). Onthe other hand, onlyin twoofthem,public bodies donot haveanysignificant participation (E.ON and Iberdrola). The picture is similarfor the mid-sizeutilities, i.e.the groupofcompanies thatfollowthe “seven brothers” in terms of revenues. All Europeanutilities nowpubliclyunderline their big interest in renewable energies andcommit themselves to reducing their CO2 emissions.Acloser look attheir production portfolios,however,showsthatmost of them have,forthe time being,onlyasmall part of “new”renewable production (i.e.electricityproducedfrom renewable sources other than hydro). All major utilities are “latecomers” forwind, solarand biomass energy,butmost of them currentlyplantostrongly develop offshore wind. EU ETS hashad onlyalimitedimpact in this contextuntil now ,asithaschangedmerit orders in some cases,butithasnot yet ledto asignificant change of energymixanddecisivedecarbonization. Inthe viewof many economists,cartel authorities andNGOs,EUETS hasrather producedwindfall profits forcompanies,aspermits havebeen distributedforfree.Companies,of course,denythis accusation. 2010 fri, ©I ExecutiveSummary 11

Itisnot ourintention to contribute to this debate,butwe believethatthe start of full auctioning of emission permits in 2013 in the EU-15 will bring anendto this problem. Once utilities will needto payforthe totalityof their CO2 emissions, renewable energies andnuclearpower will become more attractiveoptions.Atleast to acertain extent,this is also true fornaturalgas,aspower production from gasemits roughly 50percent less CO2 thanpower production from coal. The perspectivefor Carbon Capture andStorage (CCS),on the contrary,seems more limited.Atleast forthe time being,major Europeanutilities are not readyto invest asignificant amount of capitalinthis technology,whichstill needstoproveits reli- abilityandalreadyencounters sizeable localopposition in manyplaces. The EU-wideexpansion of major Europeanutilities hasbeen muchfaster thanthe integration of nationalmarkets.Important differences between the markets of everyMember State remain. Itturns outthatEuropeandirectives havebeen implementedin different waysandwith significantlydifferent results byMember States.Moreover,most countries havenot yet totallyimplementedthe directives of the secondpackage. Nationaltraditions andlegacies from the past needto betaken into account –theyoften havealong life andpresent important politicalobstacles forliberalization. Italso needstobe underlinedthatmanygovernments favor,in onewayor another,the creation andprotection of “nationalchampions,” whether theyare ownedbythe government or private business. Utilities havelargelyenteredother Europeanelectricity andgasmarkets.This factassuchcertainlycontributes to the gradualintegration of the markets,even if this will bearather indirectside-effect. One needstostress thatfor the time being the relevant market for electricityandgasisstill nationalin most cases,with the notable exception of the Nordicelectricity market. Encouraging progress is madeinsome other regions: the integration of the “CentralWestern European”1 electricity market forinstancehasseen some important advances lately.

1 . TrilateralmarketcouplingbetweenFrance,Belgium,and the Netherlandssince2006; Germanyand Luxembourgaretojoinin2010 . 2010 fri, ©I 12 The EU’s Major ElectricityandGasUtilities sinceMarket Liberalization

Onthe other hand, the relevant market caneven besub- national(i.e.regionalorlocal) forsome parts of the value chain:supplyin the residentialmarket,forinstance,is very muchdominatedbylocalcompanies in some countries. Overall,there is agreater tendencytowardsmarket integration on the Europeanlevel in recent years.This canbeseen, forinstance,atthe institutionallevel,where mergers of power exchanges havetakenplaceandenhancedcooperation between regulators emerges.The crucialrole of interconnections (electricitylines andcables,gaspipelines) must beunderlinedin this context:in manyplaces,this basiccondition formarket integration is still lacking or underdeveloped.This problem is widelyrecognized, butthe construction of interconnectors has turnedouttobedifficult in manyplaces:sometimes the economicinterests of the involvedplayers on both sides are diverging,andin manycases there is ahigh level of local resistance. Moreover,the rules governing the access to interconnectors andthe harmonization of overall market rules must be improved.Given these problems,the EuropeanCommission andEuropeanregulators haveproposed, andnowgradually implement,aregionalapproachtomarket integration.This approachisagoodstart,even if it onlyconstitutes anappropriate intermediate step towardsanEU-widemarket. 2010 fri, ©I Introduction

The EuropeanUnion (EU)startedto liberalizeits electricity andgasmarkets in the mid-1990s. The British andScandinavian examples of electricityandgasmarket liberalization some years earlier,aswell aspositiveexperiences in the liberalization of the telecommunications sector,had been amotivation for the EuropeanCommission to propose EU-widelegislation on the issue. The first directives were adoptedin 1996 forelectricity(96/92/EC)and1998 fornaturalgas(98/30/EC). Asecond liberalization package waspassedin 2003(directives 2003/54/EC forelectricityand2003/55/EC forgas),whichimposedfurther measures in order to liberalizeandintegrate the European energymarket. Athirdenergypackage wasadoptedin early 2009andwill come into forceinMarch2011.1 The reforms imposedbythese legislativepackages are intendedto create or increase competition in those parts of the valuechain where this is feasible,i.e.electricitygeneration,electricitysupply,gas production,gasimport andgassupply.Competition cannot be agoalinthe network-basedpart of the valuechain,astrans- mission anddistribution are naturalmonopolies in electricity andgasalike. The EU’s energyliberalization legislation also hasasecondobjective:creating anintegratedEuropeanelec- tricityandgasmarket. The “single market” asone of the main features of the Europeanintegration is therebyalso appliedto electricityandgas. Duetothe particularities of these goods,it

1 . Directives2009/72/EC forelectricity and 2009/73/EC forgas,aswellasthree regulations: 713/2009establishing anAgencyforthe CooperationofEnergyRegulators,714/2009on conditionsforaccess tothe networkforcross-borderexchangesin electricity,715/2009on conditionsforaccess tothe naturalgastransmissionnetworks . 2010 fri, ©I 14 The EU’s Major ElectricityandGasUtilities sinceMarket Liberalization

is,of course,muchmore difficult to realizeasingle market for this sector thanfor most other economicgoodsorservices.We donot discuss the different aspects of market liberalization as suchhere,asthis hasbeen done extensivelyelsewhere. 2 The liberalization of the Europeanelectricityandgas markets hashad important effects on the companies operating in the sector.Europeanenergyutilities haveindeedundergone profoundchanges in the process of liberalization,asthey became exposedto competition. Moreover,arapidprocess of Europeanization of the sector took place,asall major utilities startedto invest abroad.The capacityof most utilities to adapt to the newmarket conditions hasbeen asurprise to many observers.Inarelativelyshort amount of time,the company landscape haschangedsignificantly:one must bearinmindthat less thantwentyyears ago,there wasstrictlyno competition between utilities in Europe.Industrialandresidentialcustomers had no choicebuttobuy electricityandgasfrom asole supplier,whichinmost cases wasapubliccompany.Utilities enjoyedamonopolyposition in their nationalorsub-national market. Cross-border electricityexchanges existedon arather small scale (for example,using hydropower potentialofneigh- boring countries),butthis didnot lead to competition. Aquote byPer Högseliusonthe development of the Europeanelectricityindustrynicelysummarizes these changes under the framework of “institutionalrevolution.”With some adaptations,this analysis couldalso beappliedto gas:“During the past twodecades the Europeanelectricityindustry–defined in terms of the production,transmission,distribution andsale of electricity–hasgone through whatmaybecalledan‘institutionalrevolution.’Politically,this revolution hascentered aroundthe issueofliberalization andcross-border integration of electricitymarkets,with –failedandsuccessful–attempts to create newlegalframeworks,newregulatorymechanisms andnewmarketplaces.From abusiness perspective,the institutionalrevolution hastakenthe form of newfirm strategies, newcompetitiveandcooperativerelations among actors and not least aradicalwaveofmergers andacquisitions.The

2 .See forexample Glachantand Lévêque(2009) orPercebois(2008) . 2010 fri, ©I Introduction 15 ownership landscape in the Europeanelectricitymarket has been radicallyaltered, both within individualcountries and through afar-reaching internationalization.” 3 Before liberalization started, substantialdifferences existed between Member States in terms of companystructure in electricityandgasmarkets.Some had nationalstate-ownedmonopolies (likeElectricité deFrance[EDF] andGazdeFrance[GDF] in France,or the CentralElectricityGenerating Boardin the UnitedKingdom [UK]),whereasothers had amixof public andprivate companies whichoperatedin their respective region (for example,Germany). The case of CentralandEastern Europe wasdistinctagain,asthese countries had communist- style centrally-plannedeconomies until 1990.Inmanycases, the structure of the energymarket reflectedthe general approachofacountrytowardsthe organization of its economy (strong role of the state vs. strong role of the private sector) andpublicadministration (centralizedor federal). Moreover, the energymixof everyMember State wasthe result of its endowment with energyresources andpoliticalchoices (for example,fororagainst nuclearpower). These characteristics are factors with along life andcan–atleast partly–explain whythe different Europeandirectives andregulations have not (yet) ledto more similarelectricityandgasmarkets all over the EU.Moreover,nationaleconomictraditions are indeed anobviousobstacle to the unification of nationalmarkets. Some examples canillustrate the differences between the Member States’ energymarkets: –The number andmarket shares of major electricityandgas companies differ:in some Member States,there are still (near-) monopolies forelectricityproduction andelectricityandgas supply.Inothers,alarge number of companies are activein these sectors,with no single companyhaving amarket share above25percent. –Some Member States haveoptedforownership unbundling of electricityandgastransmission systems; others havenot. Some form of unbundling short of ownership unbundling (legal,functional,accounts) has,however,been introduced

3 .Högselius (2009),p . 258 . 2010 fri, ©I 16 The EU’s Major ElectricityandGasUtilities sinceMarket Liberalization

everywhere,andthe thirdpackage imposes afurther tight- ening of unbundling. 4 –Some Member States haveprivatizedstate-ownedelectricity andgascompanies; others havenot. Acleartrendtowards privatization canbeobserved, though. –In15Member States,regulatedprices still exist forelectricity(alongsidemarket prices). In13Member States,regulatedprices still exist forgas. Inthe remaining Member States, the market fixes electricityandgasprices. 5 Inthe 1990s,electricityandgascompanies,aswell as nationalgovernments,haveaddressedtheupcomingmarket liberalization in globallysimilarways. Manyarguedthatonly larger andfinanciallystrong companies wouldbeable to compete in the liberalizedmarket. Manycompanies therefore triedto growbigger in the earlystages of market liberalization byacquiring or merging with other companies insidetheir country.Another strategyconsistedof entering newbusiness sectors likewater or telecommunications.Severalgovernments, especiallythose of countries with afragmentedelectricityand gassector,promotedthe creation of strong “nationalchampions” (for example,E.ON andRWE in Germany,Endesaand Iberdrolain Spain,Electrabel in Belgium). Inother countries, strong “nationalchampions” were kept intact(EDF andGDF in France,Vattenfall in Sweden). GreatBritain is the onlymajor Europeancountrywhere nationalmonopolies (CentralElectricity Generating BoardandBritish Gas) were split upinorder to create acompetitivemarket. InItaly,the incumbent electricity company,Enel (Ente Nazionale per l’EnergiaElettrica),was forcedto sell animportant part of its production assets,but Eni’sstrong position in the Italiangasmarket hasbeen left intact. Inasecondstep whichwasatits height in the late 1990s andearly2000s,most major utilities startedto look abroad for acquisitions.Inthis process,all major utilities enteredother Europeancountries.Their motivation wasthreefold: first,

4 . Ownership unbundlingisimplemented in 15 electricity TSOsand 12gasTSOs .European Commission(2009),p . 10 . 5 . ERGEGpress releaseof27 March2009 . 2010 fri, ©I Introduction 17 growth in the home market wasbarelypossible formost of them. Second, newbusiness opportunities emergedin neighboring countries in the contextofmarket liberalization. Third, manylarge historicincumbents also benefittedfrom large surpluses in their regulatedhome markets,easyaccess to capitalandmoneyavailable from divestments –theywere cash-long atthattime.Per Högselius,in his studyof Vattenfall’s internationalization,gives still another motivation forlarge utilities to growabroad: Vattenfall’s“internalculture was [always]heavilyorientedtowardsexpansion andgrowth,”to the point thatthe management wasconvincedthat“acompany withoutgrowth wouldnot beable to surviveonthe long-term.” Asgrowth opportunities insidethe Swedish electricitysector barelyexistedanymore,the companyeventuallychose to enter the electricitysectors of other Europeancountries –also fearing thatitmight lose “its respectedposition in the communityof major Europeanelectricitycompanies unless it [...]became more internationallyactive.” 6 Wesuppose thatsimilarargu- ments were madeatother large utilities andusedin order to justifyinvestments abroad.The perception of peer pressure, forinstance,wascertainlyanimportant factor in the decision- making processes. The waveofverylarge mergers andacquisitions seems over now,butone cannot rule outfurther deals.Still,market concentration is more likelyto continueviasmaller or mid- sizedacquisitions.In2009,forinstance,GasNaturalacquired Union Fenosa, Vattenfall acquiredNuon andRWE acquired Essent. Manyformerlypurelynationalutilities havebecome important players abroad andnowrealizelarge parts of their business outsidetheir traditionalhome market –inmanycases more than50percent of their revenues.The largest utilities are nowpresent in nearlyall Member States of the EU.Some of them clearlyconsider the EuropeanUnion asthe relevant strategiclevel. Bydoing so,theyproceedfaster thanthe market realityon the ground: in the absenceofasufficient level of interconnections,energymarkets in the EU are still mostly national.

6 .Högselius (2009),p . 259-260 . 2010 fri, ©I 18 The EU’s Major ElectricityandGasUtilities sinceMarket Liberalization

One of the leading scholars on Europeanelectricitymarkets, DavidNewbery,hascalledthe merger activities following market liberalization a“dramaticmerger wave,”andhascriti- cizedthatmanymergers with adverse consequences for competition havebeen allowedbythe competition authorities: “manymergers havebeen allowedto proceedthatwouldcause economists considerable disquiet.” 7 Inthe contextofmerger control –butalso when considering the electricityandgas markets in general–the question of the “relevant market” has been widelydiscussed.Nosimple answers are possible.The EuropeanCommission (Directorate Generalfor Competition [DG Competition]),whichisthe relevant authorityforthe approvalofcross-border mergers in the EU,mainlyconsiders nationalmarkets asthe relevant markets.This might beright in manycases,butthere hasbeen debate aboutthe demarcation of the relevant market in some competition cases.Indeed, electricityandgasmarkets are larger thannationalinsome cases, butsmaller (i.e.sub-national) in others.The definition of the “relevant market,”ofcourse,also dependsonthe part of the valuechain under consideration. Given the large number of “mega-deals” in the last decade, anoutsideobserver might indeedwonder whyEuropeanenergy utilities havebeen so keen to merge andacquire.The point thatonlybig companies surviveinaliberalizedmarket canbe questioned.The ideathatlarger companies will enjoyhuge synergyeffects after mergers andacquisitions is rarelytrue. Indeed, smaller players often havehigher profits.According to Michel Godet,“in reality,more thanone outoftwo,perhaps even twooutofthree,mergers fail. This is essentiallydueto the incompatibilityof formerlyseparate anddistinctcorporate cultures.Indeed, onlyaboutone outoften mergers creates valuefor the acquiring firm.” 8 DavidNewberyunderlines the personalinterest of utilitymanagers,asthey(andtheir bank advisors) canearn more moneywhen spending profits on acquisitions rather thanreturning them to shareholders.But

7 .Newbery (2007),p . 1-2 . 8 . MichelGodetanalyzed mergers and acquisitionsin all economicsectors,but hisfindings areprobablyjustasvaluable in the energyutility sectorasin othersectors .Godet(2006), p . 57 . 2010 fri, ©I Introduction 19

Table 1. MajorMergers and Acquisitionsin the EuropeanElectricity and GasSector(1998-2009) YearDealValue(€ bn) 2007Enel +Acciona/Endesa43.4 2000 Veba /Viag(E.ON)38.0 2008GDF /Suez29.2 2002 NationalGrid/Lattice19.2 2007Iberdrola/Scottish Power 18.3 2009GasNatural/Union Fenosa16.7 2001E.ON /Powergen 15.3 2008EDF /British Energy13.5 2008E.ON /EndesaandEnel assets 11.8 2003E.ON /Ruhrgas11.2 2003Suez/Electrabel 11.2 2005EDF +AEM /Edison 11.0 2009Vattenfall /Nuon*10.3 2002 RWE/Innogy8.5 1999 Suez/Tractebel 7.5 2009RWE/Essent 7.3

* Acquisition in severalsteps:Vattenfall acquired49 percent of Nuon in 2009andwill acquire the remaining shares in the coming sixyears. Source: LévêqueandMonturus(2008),p. 297 andownresearch. he also points to the factthatmergers between generation and supplycompanies are anattractiverisk-reducing,andhence, synergisticstrategy. 9 Moreover,weneedto underline that some activities in the energyutilitysector likenuclearorcoal generation are verycapitalistic: it is clearthatcompanies need acertain sizeinorder to beable to financeandbuildlarge plants.Ofcourse,this favors large groups. The seven largest utilities in 2009–EDF,E.ON,Enel,RWE, Vattenfall,GDF Suez,Iberdrola(listedbyelectricityproduction in Europe in 2008) –account foraround55 percent of electricitygeneration in the EU.The share of the largest companies hasbeen on the rise in recent years,duetomergers andacquisitions.Backin2004,it wasstill ataround50percent forthe

9 . Newbery (2007),p . 1 . 2010 fri, ©I 20 The EU’s Major ElectricityandGasUtilities sinceMarket Liberalization

Table 2.The EU’sLargest Electricity Producers (2007 and 2008)* 20072008 Production %ofoverall Production %ofoverall in TWh production in TWh production EDF** 647 20 641 20 E.ON 217 7243 8 Enel 94 3197 6 RWE173 5187 6 Vattenfall 168 5161 5 GDF Suez 141 4145 5 (Electrabel in 2007) Iberdrola66 295 3 CEZ 74 268 2 Fortum52253 2 Statkraft 45 1532 British Energy58 2522 DEI/PPC 54 2522 Scottish&Southern 47 1461 EDP 47 1401 Union Fenosa34 1321 Verbund281281 Drax271271 Dong 20 1191 Nuon 17 1161 PVO17 1151 Endesa(included 1214n.a.n.a. in Enel in 2008) Overall generation 3,183 –3,206 – in EU27

* Wehavedecidedto use these figures publishedbyPwC/Enerpresse,asthe authors have calculatedthe numbers according to acommon methodology,whichfacilitates comparison. According to this data, the eight largest companies generated51 percent of electricityin Europe in 2007. Thetop 22 produced67.5 percent. In2008,the seven largest companies producedaround52percent of electricityin Europe andthe top 20 produced68 percent. Sincethen,the share of the seven largest companies hasstill increased, inter aliaduetothe acquisitions of British EnergybyEDF,Essent byRWEandNuon byVattenfall. Production aspublishedbythe companies differs when comparedto databyPwC/Enerpresse, mainlyduetodifferences in accounting andconsolidation,butalso because of differences in geographicalscope.For comparison,production aspublishedbythe seven largest companies in their 2008AnnualReports:EDF 595 TWh,RWE 224TWh,E.ON 224TWh,Enel 208TWh, GDF Suez164 TWh,Vattenfall 163 TWh,Iberdrola94 TWh. ** EDF includes 100 percent EnBW and100 percent Edison. N.B.:TWh:terawatt hour. Sources: 2007data: PwC/Enerpresse,Climate Change andElectricity,November 2008,http:// www.pwc.fr; 2008data: PwC/Enerpresse,Changement climatiqueetélectricité,November 2009, http://www.pwc.fr; owncalculation formarket shares. 2010 fri, ©I Introduction 21 seven largest producers atthattime.Asthe share in electricity generation is seen asthe most important element when assessing market power in electricity,one couldask if weare moving towardsaEuropeanoligopolywith asmall number of companies dominating the market. RichardGreen,forinstance, argues thatthese large utilities couldsee little incentives to compete:duetothe relativelylimitednumber of large companies thatare activeinmanynationalmarkets (theoryof multi- market contact),he argues thattheycouldchoose not to compete aggressivelyacross Europe. 10 Inouropinion,it is still too earlyto analyzeclearlythe effectofEuropean-wideexpansion of major utilities via mergersandacquisitions.Onlythefuture will showif a Europeanoligopolywith limitedcompetition emerges,or if,on the contrary,the expansion strategies of Europe’slargest utilities bring along competition. After all,if between fiveandten big groups remain,this couldbeenough to see competition develop.Moreover,the effects of further market integration on companystructures andcompetition remain to beseen. Electricityandgasare indeedveryspecificsectors of the economywith high fixedcosts andsubstantialinvestment needs. This necessarilylimits competition. Maybeasmall number of large groups is the onlywayto make competition work? Bethis asitmay,one trendis obvious:asmall number of large groups is controlling anincreasing part of the European market. Asmentionedabove,this is truefor electricitywhere seven groups control about55percent of electricityproduction. Butthis also applies to downstreamgasmarkets.Interestingly, the twolargest gasmarketers (in volumes sold)inthe EU are also major electricityproducers:E.ON andGDF Suez.These twocompanies were also the twolargest Europeanenergy utilities in terms of totalrevenues in 2008. Eni,anoil andgas companywith vast upstreamactivities,andGasTerra, agas trading company,are the twoother large gasmarketers in the EU.Following the trendtowardsintegratedelectricityand gascompanies,most of the big players (butnot all of them)

10 .Green(2006),p . 2540 . 2010 fri, ©I 22 The EU’s Major ElectricityandGasUtilities sinceMarket Liberalization

Tables3and 4. The EU’sLargest GasCompaniesbyGasSalesVolume1

In2008according to RWE CompanySales (bcm) GDF Suez115 E.ON 114 Eni 104 GasTerra84 Wintershall 39 RWE31 GasNatural25 Centrica* 21 Distrigas18 VNG 16 Gassales byTop-10567 Overall gasconsumption in the EU 490

N.B.:1TWh=0.093 bcm(billion cubicmeter). * Centrica: estimation byauthor,no exactinformation available. Sources: RWE, Facts &Figures,May2009,p. 135,BP(2009) andownresearch.

In2006according to Harris (2008) CompanySales (TWh) E.ON 937 Eni 844 GasTerra770 GDF 762 Statoil 589 RWE361 Botas336 GasNatural295 EDF 290 Wingas228 Gassales byTop-105,412 Overall Europeangasconsumption 5,993

Sources: Harris (2008) andBP(2009). 1. Unfortunately,reliable figures aboutgassales to end-customers in the EU are not available. This makesestimations aboutmarket shares verydifficult. Therefore,wedecidedto present twodifferent tables using different sources.Inthe first table,gassales bythe ten largest companies are obviouslylarger thanoverall EU gasconsumption. Inthe secondtable,sales bythe ten largest companies are nearlyashigh asoverall Europeangasconsumption. This is duetothe factthatgassales volumes sometimes includegassoldoutsidethe EU andgasthat is resoldafterwards. 2010 fri, ©I Introduction 23 are nowactiveinboth markets.Electricityandgasremain,of course,distinctmarkets andone alwaysneedstoremember thedifferences betweenthe twoproducts.Butthe larger use of naturalgasfor electricityproduction hascreatedgreater synergies between the twomarkets in recent years.Oil majors andother companies activeingasupstreamare less present todayin the downstreamgassector thaninthe past,and formerly“pure” electricitycompanies havebecome increas- inglyactivethere.One canalso expectthis trendto continue because manycustomers prefer to besuppliedbyone company.

Sources Companysources (annualreports,websites,press releases) havebeen the main sourceofinformation. The extent to which some companies disclose more information thanothers is remarkable.This makescollection of comparable datadifficult. The reader shouldkeep this caveatinmindin relation to all numericaldata(for example,production andsales volumes) andmarket shares given in this book. Where possible,wehave footnotedthe sources of data;ifnocoherent datawasavail- able,weundertook ourownestimates comparing different sources.Some information given bycompanies is contradic- tory,asdifferent calculation andconsolidation methodologies are used.Dataon sales volumes canbeespeciallymisleading, asdistinctions between sales to end-customers,sales to resellers andintra-groupsales are not alwaysmade. One couldeven suspectcompanies of intentionallymisguiding the publicand publicauthorities in some cases.More transparencyandbetter market monitoring byregulators andother publicauthorities –leading to freelyaccessible publications with comparable data–wouldbeveryhelpfulinthis context. Variouspress reports andpublications byenergyregulators were other important sources of information. The website of the EuropeanRegulators’ Groupfor ElectricityandGas(ERGEG) provides usefulinformation on nationalelectricityandgas markets andmarket shares of companies (“NationalReports” bynationalregulators),butthe qualityof information differs greatlybetween countries.Reports of the EuropeanCommission (likethe results of the sector inquirypublishedin 2007) and 2010 fri, ©I 24 The EU’s Major ElectricityandGasUtilities sinceMarket Liberalization

nationalauthorities havealso been used.Secondaryliterature hasbeen consulted, mainlyforoverall assessments of European energymarkets andthe process of liberalization. Unfortunately, there are fewpublications aboutthe strategychanges after liberalization andthe internationalization process of European energyutilities.Aninteresting studyon Vattenfall by Per Högseliusisone of the rare examples. 11 In-depth studies of everysingle major Europeanutilitywouldindeedfacilitate understanding anddeepen analysis.Inthis book,however,we havechosen to giveanoverviewof the seven major companies –hoping forfurther criticalresearchtobeundertakentostudy single utilities in greater detail. The respectiveentries in the “InternationalDirectoryof CompanyHistories” contain veryvaluable information on the historyof Europeanutilities sincethe beginnings of the industry. 12 Anextensivestudyof mergers andacquisitions within the Europeanpower andgassectors,compiling ahuge amount of dataforeverycase,is averyusefultool foranalyzing the numerousactivities in this area. 13

Acknowledgments Iwant to thank Jacques Lesourne forthe ideato write this book,his important advice,helpfulremarks andsubstantive comments.Ournumerousmeetings in the course of the elabo- rationofthisbookwereessentialfor itsaccomplishment. WilliamC.Ramsay,Susanne Nies andMaïté Jauréguy-Naudin havealso providedveryusefulcomments andIequallywish to thank them fortheir help.Moreover,Iamdeeplyindebtedto Delphine Renard, Marielle RoubachandDevon Weidemann for their excellent proofreading andediting work. Manythanks also go to IFRI’s publications department forlayoutandfabrication. Inthe course of myresearch,Ihad the opportunityto meet anddiscuss with manyrepresentatives of companies,the EuropeanCommission,Europeanenergyregulators andother experts.Their comments andinsights greatlyhelpedto improve

11 .Högselius (2009) . 12 .Available onlinefree of charge athttp://www .fundinguniverse .com/company-histories . 13 .Lévêqueand Monturus(2008) . 2010 fri, ©I Introduction 25 the qualityof this book,andItherefore want to thank them all forthe time devotedto interviewsande-mail exchanges. Specialthanks go to DavidGroßekathöfer (StadtwerkeMünchen) who providedmanyusefulcomments on afirst draft,aswell asMatthiasDürr (RWE)andRobert Klotz(Hunton &Williams) who agreedto comment on the main conclusions of this book atan“IFRI EnergyBreakfast Roundtable” in December 2009. All errors are the sole responsibilityof the author.

Focus and Structureofthe Book The main focusofthis studyis to present andanalyze the changes of the Europeanenergyutility“landscape” since market liberalization. Who are the main players in the European electricityandgassector today?Whatistheir past,present andlikelyfuture? Howhavetheychangedtheir strategies in the last twentyyears,in terms of business sectors andgeograph- icalscope? Inourcase studies of the EU’s seven largest utilities, wefocusonthe evolution of these big groups,their reactions to market liberalization andhowtheyadaptedtheir strategies to the newmarket environment. Ouranalysis puts more emphasis on strategies,operations andassets; it is not our intention to thoroughlyanalyzefinancialaspects. Inthe first part,the studypresents the seven largest electricityandgasutilities in the EU (sortedbyrevenues in 2008). Theyhavebeen chosen foroverall size,butalso forhaving a major presenceoutsidetheir home market in other EU countries.Asfor energybusiness sectors,weconcentrate on electricitygeneration,transmission,distribution andsupply,as well asnaturalgasdownstream. Weespeciallydiscuss European strategies andthe presenceofcompanies in different national markets of the EU.Internationalactivities outsidethe EU are onlybrieflymentioned.Inalast section,weshortlypresent eleven other large electricityandgascompanies activeinthe Europeanmarket,whose overall sizeissmaller or whichhave amore limitedgeographicalscope. Inthe secondpart,wegiveashort overviewof the situation in major Europeanelectricityandgasmarkets today:whatare the main companies in everymarket,whatare their market 2010 fri, ©I 26 The EU’s Major ElectricityandGasUtilities sinceMarket Liberalization

shares andwhatisthe degree of competition? Howhasnational policyinfluencedthemarket structure?Itturnsoutthat Europeandirectives havebeen implementedin different ways andwith significantlydifferent results byMember States. Nationaltraditions andlegacies from the past needto betaken intoaccount –theyoften havealong life andcanpresent important politicalobstacles forliberalization. 2010 fri, ©I CaseStudiesof MajorEuropeanUtilities Seven CaseStudiesof ChangingStrategies of MajorEuropeanEnergyUtilities SinceMarketLiberalization

Inthis chapter weanalyzethe seven largest Europeanelec- tricityandgasutilities.Wepresent the history,development sincemarket liberalization andpresenceinEuropeanelec- tricityandgasmarkets of everyutility.Theyare listedaccording to their totalrevenues in 2008.1

E.ON Ofthe seven utilities studiedhere,E.ON probablyconsti- tutes the most interesting case.This companyhasarguably experiencedthe most radicalchanges when comparedto its peers.E.ON had the highest revenues of all the companies in the sector in 2008andit is activeinmore EU Member States thananyof its competitors.E.ON distinguishes itself most by its numerousacquisition andmerger activities thatfollowed after the divestment of non-energybusinesses.The company resultedfrom aninitialmerger between twoGermanindus- trialconglomerates in the earlyphase of market liberalization. The newlycreatedE.ON decidedto concentrate on electricity andgas,whichimpliedaseries of divestments,whichprovided E.ON with necessarycash to acquire energycompanies in Germanyandelsewhere.The numerousacquisitions have significantlychangedthe nature of the company.E.ON’s

1 . Acomparativeanalysisof theirchoicesin termsof energymixcanbefound in the conclusion . 2010 fri, ©I 28 The EU’s Major ElectricityandGasUtilities sinceMarket Liberalization

acquisition activityhasslowedin recent years andthe company hasannouncedthatitwill focusonorganicgrowth forthe nearfuture.Italso plans to divest € 10billion (bn) in operations by2010. 2 Asaresult of its acquisitions,E.ON is atrulyinte- gratedelectricityandgascompanytoday,with both activities having comparable sizeandimportance. Unlikemost of its peers,E.ON is ownedbyprivate investors, with 70.1 percent of shareholders being locatedoutside Germany. 3 ButitisclearthatE.ON onlycame into being with the strong support of the Germangovernment,whichover- turnedsubstantialcompetition issues when allowing E.ON to acquire Ruhrgas. Itwasalreadyobviousatthe founding stages of E.ON thatthe sheer sizeofthe companywouldgiveit considerable influenceonGermanenergypolicy.Butatthe same time,decisions bythe Germangovernment haveimportant implications forE.ON.Likeinthe case of other large utilities,this is verymuchatwo-wayrelationship.The ongoing discussions aboutthe partialreversalofthe nuclearphase-outare agood example in this context.4 E.ON also closelycollaborates with the Germangovernment when it comes to relations with Gazprom andRussianauthorities (for example,concerning the NordStreampipeline project). E.ON wascreatedin 2000,when twomajor Germanholding companies thatwere both listedin Germany’s bluechip index DAX30,VEBA5 andVIAG 6 ,merged.Their respectiveelec- tricitybranches,PreussenElektraandBayernwerk,mergedto

2 .E .ON press releaseof12August2009 . 3 .The onlyexceptionbeing the 1 .9percentshareholdingbythe Free StateofBavariawhich isthe onlyGermanpublicentity withsharesin E .ON .But thisshareholdingdoesnot givethe BavariangovernmentanyinfluenceoverE .ON’sdecisions,http://www .eon .com/de/ downloads/100316_geografische_verteilung_de .pdf (asof February 2010) . 4 . See Schülke(2010)onthisissue . 5 . VEBA: VereinigteElektrizitäts-und BergwerksAG (“United Electricity and MiningCorporation”) . Founded in 1929,VEBAwasaholdingcompanyownedbythe stateofPrussiaand then the GermanFederalGovernment .Itwasprivatized in severalstepsbetween1965and 1987 . The VEBAholdingincludedseveralsubgroups,activeinelectricity,mining,oil,chemical industry,logistics,electronics,realestateand telecommunications . 6 .VIAG: VereinigteIndustrieunternehmungen AG (“United IndustrialUndertakings”) .Founded in 1923,VIAGwasaholdingcompanyforindustrialshareholdingsof the Germangovernment . Itinitiallyfocused on electricity generation,aluminumand chemicalindustries .Privatization of VIAGstarted in 1986; itownedmorethan100 companiesatthattime . Inthe following years,VIAGimplemented animportantdiversificationstrategy,acquiringcompaniesand shareholdingsin various sectors .Italsobecame amobilephone operatorin 1997 . 2010 fri, ©I Case Studies of Major EuropeanUtilities 29 form the core of E.ON,E.ON Energie.AsVEBA, VIAGand their sub-groups were locatedin severalGermanregions andcities,E.ON had, andstill has,averydecentralizedstructure whichposes some problems forinternalcoherence–E.ON’s structure is henceagoodillustration of Germanfederalism.7 Butefforts to streamline the structure are underway. The EuropeanCommission allowedthe merger between VEBA andVIAGunder severalconditions.Among other measures,the newgrouphad to sell its shareholdings in several Germanregionalandlocalenergycompanies,likeVEAG (Vereinigte EnergiewerkeAG,foundedin 1990to take over power plants andtransmission networks of the former German DemocraticRepublic[GDR])andthe Stadtwerke8 of Berlin (Berliner Kraft- undLicht (Bewag)-Aktiengesellschaft,BEWAG) andHamburg (Hamburgische Electricitäts-WerkeAG,HEW). These three companies were later acquiredbyVattenfall and eventuallybrought together under the umbrellaof Vattenfall Europe.ButE.ON wasallowedto keep shareholdings in many other regionalenergysuppliers in Germany( Stadtwerke and other). In2007,E.ON wasthe majorityshareholder in 37 regional andsupra-regionalGermanpower suppliers,andminority shareholder in 193 of suchgroups. 9 InJuly2009,however, E.ON finalizedadealwith agroupofGerman Stadtwerke for the sale of Ruhrgas’ subsidiaryThüga, whichholds90minority stakesinmunicipalenergyutilities.E.ON hastherebydivested averyimportant part of its distribution business in Germany. 10 E.ON’s management decidedin 2000 to focusontwomain business areas:energyandchemicalindustry(chemicalindustry hasbeen abandonedlater,see below). This resultedin anumber of divestments in the first years of the newgroup’sexistence,

7 .Today,E .ON’scorporatecenterisin Düsseldorf,its “CentralEurope”marketunitin Munich, its “Pan-EuropeanGas”(E .ON Ruhrgas)marketunitin Essen .E .ON Kraftwerke,whichruns conventionalpowerplants,and E .ON Kernkraft,whichrunsnuclearpowerplants,arelocated in Hanover,whereasE .ON Wasserkraft,whichrunshydroelectricpowerplants,islocated in Landshut . 8 . Stadtwerke aremunicipalutility companiesthatsupplythe populationwith(usually)electricity,gas,heatand water .Inmanycases,theyarealsoresponsible forsewage and waste management,and sometimeseven publictransport . 9 . AccordingtoMonopolkommission(2007),p . 54 . 10 .E .ON press releasesof 12August2009and 1December2009 . “E .ON seals € 2 .9bnThüga sell-off,” FinancialTimesonline ,12August2009 . 2010 fri, ©I 30 The EU’s Major ElectricityandGasUtilities sinceMarket Liberalization

Table 5. E.ON:MajorDivestments (transaction valueofatleast € 2bn) Transaction Company/shareholding Business sector Year volume ( € bn) VIAGInterkom Telecommunications 200111.4 DegussaChemicalindustry2003-20068.8 ViterraRealestate 20057.0 VEBA Oel Oil 2002 6.8 E-PlusTelecommunications 2000 4.3 VAWaluminumAluminum2002 3.1 Thüga(shareholdings Electricityandgas20092.9 in municipalutilities) Stinnes Logistics2002 2.8 VEBA ElectronicsElectronics2000 2.6 Schmalbach-Lubeca Packaging 2002 2.3

Source: E.ON Strategy&KeyFigures 2007,p. 8andownresearch.

whichhad anoverall volume of more than € 60bn(see table 5): E.ON soldcompanies andshareholdings in non-core businesses liketelecommunications (VIAGInterkom,E-Plus),oil (VEBA Oel) or realestate (Viterra). These companies were mostlyactiveonthe Germanmarket,butthe moneygained from these sales wasreinvestedmainlyin energycompanies activeoutsideGermany(with the notable exception of Ruhrgas). E.ON hencetransformeditself from aGermanmulti-business grouptoaEuropeanenergygroup. Around60percent of its workforcetodayis employedoutsideGermany,andaround 66 percent of its power generation capacityis locatedoutside Germany. 11 Basedon variousdatain E.ON’s annualreports,we estimate thatE.ON realizes 45-50percent of its electricitysales in Germany,andapproximately85 percent insidethe EU.After recent divestments andasset swaps,the share of electricity business outsideGermanywill increase further.Ingas,the share of the Germanhome market is still higher:60-65 percent of E.ON’s gassales are realizedin Germany.

11 .Owncalculationbased on E .ON data . 2010 fri, ©I Case Studies of Major EuropeanUtilities 31

MajorAcquisitionsbyE.ON Severalacquisitions playedakeyrole in this transformation of E.ON.Wedescribemajor deals belowin chronologicalorder, andgiveageographicaloverviewof current E.ON activities afterwards. E.ON announcedin 2001its intention to acquire the British electricityandgasutilityPowergen,whichhad been one of the three power generators foundedin 1990after the split-upof the CentralElectricityGenerating Board.The acquisition was completedin July2002 andalso includedPowergen’sUS subsidiaryLG&E EnergyCorp.AsUS lawonlyallowspure energycompanies to acquire companies in this sector,E.ON changedits business strategyandsincethen hasonlybeen focusing on energy:in order to acquire LG&E (Louisville Gas &Electric),E.ON announcedits intention to sell remaining non-energyassets likeDegussa(chemicalindustry),whichwere effectivelysoldin the following years.Hencethe acquisition of Powergen had important consequences forE.ON’s overall business strategy. 12 Powergen became the base of E.ON’s UK activities,whichwascompletedthrough the acquisitions of TXU’s UK retail business later in 2002 andthe distribution network operator MidlandsElectricityin 2004. Also in 2001,E.ON acquiredfurther shares in the Swedish utilitySydkraft from HEW,the Stadtwerk of Hamburg,where Vattenfall wasabouttobecome the main shareholder.The initialshareholding in Sydkraft datedbacktothe 1990s,when one of E.ON predecessors,PreussenElektra, acquiredstakesin Sydkraft. The dealin2001liftedE.ON’s stake to 60.6 percent of Sydkraft’scapitalstock. E.ON’s share,however,decreased again in the following years,when the Norwegianstate-owned utilityStatkraft increasedits stakes. E.ON further developedits position in Sweden byacquiring the country’s fourth-largest integratedutility,Graninge,in 2003,whichpreviouslyhad been partlyownedbyEDF.In2005,Sydkraft wasrenamed E.ON Sverige.After long andcomplicatednegotiations,E.ON andStatkraft finallyagreedin July2008onadealthatallowed

12 .“E .ON will Powergenübernehmen und reinerEnergiedienstleisterwerden,” Energie-Chronik, April 2001,http://www .udo-leuschner .de/energie-chronik . 2010 fri, ©I 32 The EU’s Major ElectricityandGasUtilities sinceMarket Liberalization

E.ON to acquire Statkraft’sremaining 44.6 percent interest in E.ON Sverige.The € 4.5bntransaction includedasset swaps in Sweden,Germanyandthe UK.Statkraft also received E.ON shares equaling 4.17 percent of the company’s capital stock.13 Another major acquisition wasinitiatedin 2001,when E.ON steppedupits efforts to gain majoritycontrol of Ruhrgas.14 Ruhrgas,byfarthe biggest Germannaturalgas company,wasownedviaindirectshareholdings byseveral companies (including oil majors BP,Shell,andExxonMobil). The dealwasextraordinarilycomplicatedandtook more than twoyears to materialize. Onthe one hand, E.ON neededto negotiate with manydifferent shareholders andthusagreed on variousswapdeals (for example,giving VEBA Oel to BP). Onthe other hand, andeven more importantly,along battle with competition authorities startedin November 2001,when E.ON notifiedthe FederalCartel Office(Bundeskartellamt)of its intention to acquire amajorityshare of Ruhrgas. The FederalCartel Officehad strong objections to the acquisition of RuhrgasbyE.ON andhenceprohibitedthe deal,asitwould decrease competition in the Germanelectricityandgas market.15 The Monopolies Commission ( Monopolkommission) , anindependent bodythatadvises the Germangovernment on competition issues,also opposedthe deal.16 However,the Germanmerger lawforesees the controversialpossibilityof a “ministerialapproval” ( Ministererlaubnis):the Minister of Economicscanoverrule the Cartel Office’sdecision if he considers “macroeconomicadvantages” asbeing more important thancompetition issues.E.ON appliedfora“ministerial approval,”andthe Ministryof Economicsindeedgrantedits

13 .The dealwasfinalized on 31December2008 . See E .ON press releasesof 24July2008 and 2January 2009 . 14 .Ruhrgaswasfounded in 1926 byminingcompaniesin the Ruhr,in ordertoexploitcoal gas .Itbecame the biggest GermannaturalgascompanyafterWorld WarII,enjoyingaquasi- monopolyin gasimport and supply .Itwasthe majorpartnerforgascooperationwiththe SovietUnion,whichstarted in 1973 .Its precisemarketshareisdifficulttoestablish,but certainlyamounted tomorethan60 percentin 2001 . 15 .Bundeskartellamtpress releasesof 21January 2002:BundeskartellamtuntersagtFusion E .ON/Gelsenberg(Ruhrgas)and 28February 2002:BundeskartellamtuntersagtE .ON Übernahme derMehrheitanRuhrgas . 16 .Monopolkommission(2002) . 2010 fri, ©I Case Studies of Major EuropeanUtilities 33 approvalinJuly2002.The government’smain argument was thatthe acquisition will improveGermansecurityof supply andimprovethe internationalcompetitiveness of Ruhrgas. The decision was,however,broughttocourt bynine Germanenergycompanies:the Oberlandesgericht Düsseldorf prohibitedthe application of the ministerialapproval,asthem- inistryhad not fullyrespectedthe rules of procedure.The procedure wasthen repeated, andE.ON eventuallysettled the differencewith the claimants outofcourt. The acquisition wasfinalizedin January2003. Inits approval,the Ministry imposedthe divestment of shareholdings in severalregional suppliers in order to increase competition. This condition was fulfilledbyE.ON,butithasnot ledto anyincrease in competition in the Germangasmarket. The impactofthe second requirement,agasrelease programof33TWhannually,was also verylimited. 17 The Ruhrgasdealgot high publicattention in Germany, duetothe long andcontroversialapprovalprocess.The German Ministryof Economicswasheavilycriticizedforits decision to approvethe deal,especiallyasthe minister Werner Müller and his deputyAlfredTacke were seen asbiased, duetotheir links to the energybusiness. 18 Most mediacomments andacademic experts opposedthe acquisition,asdidthe EU competition commissioner atthattime,Mario Monti. The European Commission,however,didnot havejurisdiction in the affair, asatleast two-thirdsofboth companies’ turnover wasobtained in Germany(“two-thirdsrule”). Itisnot ourintention to further discuss the case here, 19 butitseems obviousthatthe German government preferredcreating a“nationalchampion” in the electricityandgasbusiness to improving competition in these markets.

17 L. ohmann (2006),p . 122 and 126 . 18 .WernerMüllerindeed preferred nottodealwiththe issuepersonallyand delegated itto Alfred Tacke,asMüllerhadworkedinleadingpositionsatVEBAbetween1980and 1997 .Toadd tothesecriticisms,WernerMüllerbecame CEOof RuhrkohleAG (RAG)in2003 –acompanyin whichE .ON wasamajorshareholderatthattime . Moreover,Alfred Tacke became CEOof STEAG (asubsidiary of RAG)in2004 . 19 .See various entriesin Energie-Chronik between2001and 2003 and Lohmann (2006), p . 110-127 . 2010 fri, ©I 34 The EU’s Major ElectricityandGasUtilities sinceMarket Liberalization

InNovember 2004,E.ON declaredits intention to acquire the gasbusiness of the Hungarianincumbent MOL.E.ON first plannedto acquire all of MOL’s gasbusinesses,including trading,storage,import,domesticproduction andtransport, whichwouldhaveresultedin adealwith acombinedvalueof upto € 2.1bn. The EuropeanCommission didnot approvethis acquisition plan,asitwould, in the DG Competition’sview, limit competition in the Hungariangassector.E.ON was alreadyactiveingasandelectricitydistribution in Hungary thanks to prior acquisitions,andwouldhavehad averystrong position in all parts of the gasvaluechain. After negotiations with the EuropeanCommission,E.ON agreedto acquire only the trading (at100 percent),storage (at100 percent) and import businesses (50percent of Panrusgaz;the other shareholders are Gazpromexport andCentrexHungaria)from MOL. Gasproduction in Hungaryandtransport remainedwith MOL. Moreover,E.ON agreedto release significant amounts of importedgasfor aduration of eight to ten years (16 bcm,equiv- alent to 14 percent of Hungarianconsumption). The transaction wasfinalizedin 2006andits valuewasabout € 1.1bn.20 In2006,E.ON announcedits interest in acquiring Spanish utilityEndesa.Endesa’s shareholders andthe Spanish government,however,opposedE.ON’s plan. Long andcomplicated negotiations took place,butwhen Enel andthe Spanish holding Accionapresentedacommon bidforEndesa, E.ON abandoned its plantoacquire Endesa(see Enel section fordetails). Instead, it foundanagreement with Enel,EndesaandAccionathat allowedit to acquire some of Endesa’s andEnel’sassets.Inthe end, E.ON acquiredassets in Italy,Spain,France,Polandand Turkeyforatotalof € 11.8bn. These assets include: –inSpain,EnelViesgo andsome of Endesa’s Spanish generation capacities,making it the fourth-largest power producer in Spain; –inItaly,EndesaItaliawith over 7.2gigawatt (GW)ofinstalled capacity,equallymaking it the fourth-largest power producer in Italy;

20 .E .ON press releasesof 4November2004and 13January 2006 .EuropeanCommission press releaseof21December2005(IP/05/1658) . 2010 fri, ©I Case Studies of Major EuropeanUtilities 35

–inFrance,65 percent in EndesaFrance/SNET,with almost 2.5 GW of installedcapacity,making it the third-largest power producer in France. These deals were finalizedin June 2008.21 InOctober 2007,E.ON realizedthe acquisition of amajority stake in OGK-4,amajor Russianpower generator thatwas privatizedfrom the state-runformer monopolyRAOUES (UnifiedEnergySystem of Russia). E.ON had previouslytried to acquireother Russiangenerators(TGK-10andOGK-5; the latter wasacquiredbyEnel,see Enel section),butthen paid € 4.1bnfor 69 percent of OGK-4. E.ON’s shareholding in OGK-4 increasedto 78.3 percent atyear-end2008. OGK-4 had 8.3 GW of production capacity(basedon naturalgasandcoal). Many analysts havecriticizedthe acquisition priceasbeing too high, andapress report in October 2008revealedthatthe stock market valueofE.ON’s shares in OGK-4 wasonly € 1.4bnat thattime,whereasthe acquisition pricefor the severaltranches had amountedto € 4.6bn. E.ON also confirmedproblems in the cooperation with OGK-4 management,whichhasledto several changes of senior managers. Some observers haveseen the acquisition of OGK-4 mainly in the contextofE.ON’s desire to enter the Russianupstreamgas sector,asthe acquisition of OGK-4 might facilitate negotiations on the latter issue.22 Bethatasitmay,E.ON hasfoundanagree- ment with Gazprom on the Yuzhno Russkoyegasfieldin June 2009,where E.ON will havea25percent stake.Gasfrom this fieldis scheduledto betransportedto GermanyviaNord Stream,the pipeline projectE.ON is pursuing with Gazprom, BASF/Wintershall andGasunie.The negotiations concerning the entryinto Yuzhno Russkoyehavelastedforfiveyears; it wasannouncedthatthis major acquisition wouldbefinalized bythe endof 2009,butthere wasstill no newsconcerning its finalization atthe time of writing in March2010. 23

21 . Lévêqueand Monturus(2008),p . 122-123 .E .ON press releasesof 2April 2007 and 26 June 2008 . 22 .E .ON press releasesof 24May2007,15 September2007and 15 October2007 .E .ON FinancialReport 2008 . “Russische KraftwerkstochtermachtE .ON keine Freude,” Energie- Chronik,October2008 . 23 .E .ON press releaseof5June 2009 . 2010 fri, ©I 36 The EU’s Major ElectricityandGasUtilities sinceMarket Liberalization

Table 6.E.ON:MajorAcquisitions (transaction valueofatleast € 1bn) Business Transaction Company/shareholding CountryYear sector volume ( € bn) Powergen /LG&E Electricity UK andUS2002 15.3 andgas Endesa/Enel assets ElectricitySpain,Italy, 200811.8 France RuhrgasGasGermany200311.2 OGK-4 ElectricityRussia20074.1 TXU Electricity UK 2002 2.5 (UK retail business) andgas MidlandsElectricityElectricityUK 20031.6 Graninge ElectricitySweden 20031.1 MOL GasHungary20061.1 (gastradeandstorage) AirtricityNorth America Renewable US 20071.0 energies andCanada Sydkraft ElectricitySweden Several * steps

* Totalunknown, € 4.5bnfor Statkraft’s44.6 percent in 2008. Source: E.ON Strategy&KeyFigures 2007,p. 8,andownresearch.

CurrentSituation:E.ON’sPresenceinMoreThan30 Countries Today,E.ON is present in over 30countries in Europe (insideandoutsidethe EU),Russiaandthe UnitedStates.Itis activeinmost electricityandgasmarkets in the European Union –noother utilityhassuchbroad activities there.E.ON’s positions in the respectivemarkets range from limitedpartici- pation in alocalcompanyto market leader.Wegiveanover- viewof E.ON’s position bycountryor region below,preferring (aswewill dofor other companies) ageographicalapproach to asectoralapproach.24 Wehencedonot followE.ON’s companystructure,whichisorganizedfollowing amixof sectoralandgeographicaspects.The corporate center in Düsseldorf is leading ten market units:

24 . Weonlyshortlydiscussgasexplorationand production,whichisoutsideour main scope, and do notdiscussenergytradingactivities .Likeits peers,E .ON isactiveinenergytradingin nearlyall Europeancountries . 2010 fri, ©I Case Studies of Major EuropeanUtilities 37

Table 7.Salesand Adjusted EBIT byMarketUnit

2007adjusted 2008adjusted Branch2007sales 2008sales EBIT EBIT CentralEurope 32.041.1 4.7 4.7 Pan-EuropeanGas22.7 27.4 2.6 2.6 UK 12.6 11.1 1.1 0.9 Nordic3.3 3.9 0.7 0.8 US Midwest 1.8 1.9 0.4 0.4 EnergyTrading –31.8 –0.6 NewMarkets 0.25.9 0.010.1 Corporate Center –4.0–36.2–0.2–0.3 Total68.7 86.8 9.29.9

N.B.:EBIT:Earnings before Interest andTaxes. Source: E.ON Strategy&KeyFigures 2009,p. 9.

–CentralEurope (E.ON Energie,Munich):electricitygeneration, electricitytransmission,electricityandgasdistribution,electricityandgassales in continentalEurope; –Pan-EuropeanGas(E.ON Ruhrgas,Essen):gasexploration andproduction,transport andstorage,wholesale andsupply in Europe andRussia; 25 –UK (Coventry):electricitygeneration,electricitydistribution, electricityandgassupplyin the UnitedKingdom; –Nordic(Malmö):electricityandheatgeneration,electricity, heatandgasdistribution andmarketing in the Nordiccountries (mainlySweden); –Italy(Milan):electricitygeneration,gasdistribution,electricity andgasmarketing in Italy; –Spain (Madrid):electricitygeneration,distribution andsales in Spain; –Russia(Moscow):electricitygeneration,sales to large industrialcustomers andwholesale marketing in Russia;

25 . One of the conditionsof the ministerialapprovalconcerningE .ON’sacquisitionofRuhrgas obligesE .ON tokeepthe formerRuhrgaslargelyasaseparateentity .E .ON and E .ON Ruhrgas thereforeoperateastwoindependentcompanies,withE .ON Ruhrgasmainlyresponsible for gasup- and midstreamand E .ON Energieforgasdownstream . See Lohmann (2006),p . 119 . 2010 fri, ©I 38 The EU’s Major ElectricityandGasUtilities sinceMarket Liberalization

–US Midwest (Louisville):electricityandgasbusiness in the UnitedStates (mainlyKentucky); –Climate &Renewables (Düsseldorf):globalrenewables and carbon-sourcing businesses; –EnergyTrading (Düsseldorf):Europeantrading activities in 26 electricity,gas,coal,oil andCO 2 allowances. Germany Germanyis E.ON’s home market. E.ON is the market leader in gasandthe second-largest companyin electricitythere.Due to variousmajorityandminorityshareholdings in regional andlocalenergycompanies ( Stadtwerke andother),it is difficult to establish E.ON’s precise market share in the different market segments,especiallyin distribution andsales.Inpower generation,E.ON formedaduopolywith RWE“with adomi- nant position andno competition” according to the German FederalCartel Officeandthe Germanenergyregulator in 2008.27 WhereasRWEhasamarket share of more than30percent in net generation,E.ON’s share hasbeen ataround25percent until recently.E.ON’s share hasdecreasedin recent years,as E.ON swappedsome assets with Statkraft in 2008andaddi- tionallydivested4,800 megawatt (MW)ofproduction capacity in Germanyin 2009. The latter divestment stems from an agreement with the EuropeanCommission in February2008 thatallowedE.ON to avoidtwocompetition procedures linked to its electricityactivities. 28 The 4,800 MW of generation capacity havebeen sold(or swappedwith assets outsideGermany),to GDF Suez(Electrabel),EnBW (Energie Baden-Württemberg AG), EDF,Verbundandthe Stadtwerke Hannover.After these transactions,E.ON claims thatits market share in electricity production in Germanyis nowat15percent –whichprobably means thatitdoes not form aduopolywith RWEanymore. 29

26 .E .ON,likeothercompanies,isalsotradingincountrieswhereithasno physicalassets and whicharehencenotlisted below . 27 .The third- and fourth-largest utilitiesin Germany,EnBW and Vattenfall withmarketshares of 12-15percentof generation,arenotable toexercisemarketpoweraccordingtothe Federal Cartel Office . Bundesnetzagentur(2008),p . 10 . 28 . E .ON press releaseof28February 2008and EuropeanCommissionpress releaseof 28February 2008(MEMO/08/132) . 29 . InterviewwithWulf Bernotat, Handelsblatt,30 November2009 . 2010 fri, ©I Case Studies of Major EuropeanUtilities 39

Animportant issuefor E.ON’s position in the Germanelec- tricitygeneration market is the future of nuclearenergyin Germany:E.ON is operating 6ofthe 17 working reactors in Germany,andhasatotalof8.6 GW of nuclearcapacityin Germany. Inits agreement with the EuropeanCommission,E.ON also committeditself to selling its high-voltage electricitytransmission gridin Germany(E.ON ownedabout10,700 kilom- eters [km]of 220 and380kilovolts (kV)lines,of atotalof 36,000 km in Germany). This offer wasreceivedasabig surprise,asE.ON had previouslyopposedownership unbundling.Moreover,the Germangovernment wasthought to defendthe interests of Germanutilities when stronglyopposing ownership unbundling in the negotiations concerning the 3 rd energyliberalization package,whichenteredinto their finalphase in early2008. TenneT, the state-ownedDutchelec- tricityTransmission System Operator (TSO),acquiredE.ON’s network in November 2009for € 1.1bn.30 Itismore difficult to evaluate E.ON’s share in electricity distribution andsales in Germany.Participations in regional andlocalsuppliers probablygiveE.ON aposition thatis stronger thanmarket shares show.The sale of Thüga(see above),however,hasclearlydiminishedE.ON’s position in this market segment.31 The FederalCartel Officein2007estimated thatE.ON hasashare of more than15percent in the elec- tricitywholesale market.32 According to another source,E.ON’s share of sales to endcustomers wasaround16 percent in 2007 (including consolidatedparticipations).33 The Bundesgerichtshof (the Germancourt of last resort in all matters of criminaland civil law)hasconfirmedadecision bythe FederalCartel Office in 2008thatprohibitedthe acquisition of shares in aregional supplier byE.ON,asthis wouldfurther decrease competition

30 .E .ON press releaseof10November2009 . 31 . Itisinterestingtonotethatmanyof E .ON’scompetitors demanded adivestmentof Thüga atthe timeofthe E .ON-Ruhrgasmergerin 2002-2003 .E .ON wanted tokeepThügaatthattime (and gotpermissiontodoso),but changed its mindin2008-2009 . See Lohmann (2006), p . 118 . 32 .Monopolkommission(2007),p . 54 . 33 .RWE, Facts &Figures ,May2009,p . 119and 127,and owncalculations . 2010 fri, ©I 40 The EU’s Major ElectricityandGasUtilities sinceMarket Liberalization

in the Germanelectricitymarket.34 This decision effectively preventedE.ON (andalso RWE)from further increasing their market shares in Germany.After the sale of Thüga, however, one might expectthe FederalCartel Officetochange its opinion andallowE.ON to acquire shares in localorregionalsuppliers if the companyhad the intention to doso. Duetothe complexstructure of the Germangasmarket andits lowlevel of transparency,it is even more difficult to establish E.ON’s actualshare in this market,where it also has severalshareholdings in other gascompanies andsuppliers. Some estimations putE.ON’s overall market share ataround 60percent. Its share of gasimports to Germanywasputat 54 percent in arecent study; 35 the Monopolies Commission even putitat60percent. E.ON Ruhrgasisalso byfarthe largest gasTSO in Germany,owning around50percent of the gastransmission network directlyandbeing animportant shareholder in severaljoint-ventures thatownother transmission pipelines in Germany. 36 Besides transmission,E.ON also owns around30percent of distribution network operators through its shareholdingsinmanyGermangascompanies. 37 The EuropeanCommission hascriticizedE.ON fornot granting sufficient access to its transmission network,notablyatentry points.Inorder to avoidafine bythe EuropeanCommission, E.ON Ruhrgashasproposedto reduceits long-term capacity reservations in December 2009.38 Overall,E.ON is byfarthe biggest companyin the German gasmarket. Its market share hashowever decreasedin 2009 duetothe factthatlong-term “take-or-pay”contracts with Gazprom oblige E.ON to buy fixedquantities of naturalgas atapriceindexedon the oil price. The priceE.ON paysto Gazprom hasbeen muchhigher thanthe spot market gasprice in 2009. This situation hasofferednewopportunities to E.ON’s competitors,whichoften relyon spot market gas. Ifthis trend continues,E.ON’s share in the Germanmarket couldfall below

34 . Bundesgerichtshof,BeschlussKVR 60/07,11 November2008:E .ON/Stadtwerke Eschwege . 35 . Harmsand Leprich(2009),p . 27 . 36 .Formoredetails,see E .ON Strategy&KeyFigures2009,p . 80-81 . 37 .Monopolkommission(2007),p . 112 . 38 . EuropeanCommissionpress releaseof17December2009(MEMO/09/567)and E .ON Ruhrgaspress releaseof17December2009 . 2010 fri, ©I Case Studies of Major EuropeanUtilities 41

50percent. This wouldbeasomewhatparadoxicalreversalof the situation in the Germangasmarket,asthe same long-term contracts thatnowcause problems to E.ON had been aguar- antee forE.ON Ruhrgas’ dominant position in the Germangas market in the past.39

United Kingdom Thanks to its acquisition of Powergen in 2002 andseveral smaller acquisitions,E.ON is todayone of theleading electricityandgascompanies in the UnitedKingdom,activein power generation aswell aselectricityandgasdistribution andretail. E.ON is the second-largest power generator in the UnitedKingdom with amarket share of around10percent, andthirdin power andgassales,with amarket share of 24percent in power suppliedand7percent in gassupplied. Asthe owner of twoofthe fourteen electricitydistribution areas(East andWest Midlands),E.ON has17percent of the distribution networks. 40 E.ON’s generation portfolio is mainly basedon coalandnaturalgas,whicheachamountedto 49 percent of generation in 2008. E.ON plans to buildnuclear plants in a50-50joint-venture with RWE.Theywere successful in bidding forlandattwosites reservedfornuclearnewbuild in April 2009. The twocompanies aim to deliver atleast 6GW of newnuclearcapacityataround2020. 41 The UnitedKingdom is also one of the most important markets forE.ON’s renewables division,whichispursuing severaloffshore windprojects there.One of these projects is London Array,whichcould become the largest windfarm in the world.

Scandinavia E.ON andits predecessors havebeen activeinthe Swedish market sincethe 1990s. Inseveralsteps (see above),it acquired different assets to become the second-largest energyutilityin Sweden. Sweden clearlyconstitutes the center of E.ON’s activities in the Nordicregion. In2008,E.ON suppliedaround16 percent

39 . “Germany:E .ON isnegotiatingareductioninRussiangassupplies,” OSWEastWeek , 9December2009 . 40 .E .ON CompanyReport 2008,p . 5 . E .ON Strategy&KeyFigures2009,p . 86 . 41 .E .ON press releaseof29April 2009 . 2010 fri, ©I 42 The EU’s Major ElectricityandGasUtilities sinceMarket Liberalization

of the electricityconsumedbyendusers in Sweden. Furthermore, it hasamarket share of 53 percent in the small Swedish naturalgasmarket (byquantities of suppliedgas). E.ON also hasminor shareholdings in FinlandandDenmark.42 E.ON enteredthe Finnish market in 2001,when it acquiredshares in the utilityEspoon Sähkö,whichwasthen renamedE.ON Finland.Itdivestedthis participation again in 2006,buthas kept its shareholding in the Finnish gascompanyGasum. For power production,the relevant market is the well inte- gratedNordicregion (Sweden,Norway,Finland, andDenmark). Inthis market,E.ON is the fourth-largest electricityproducer with amarket share of 8percent (its share in Sweden is around 20 percent). Moreover,E.ON is the third-largest player in power/gasretail in the Nordicregion,with 0.9 million (m) customers. 43 ItisnoteworthythatE.ON is the onlyforeign companythathasasignificant position in the Nordicelec- tricityandgasmarket –all theother big players comefrom the region.

Belgiumand the Netherlands E.ON is amajor power producer in the Netherlandsanda supplier of electricityandgastoprivate andbusiness customers in the NetherlandsandBelgium. Moreover,E.ON hasrecently finalizedaswapdealwith GDF Suez(Electrabel) which provides it withsignificant generation capacityanddrawing rights in Belgium.44 E.ON’s presenceinthe Netherlandsdates backto1999,whenPreussenElektraacquiredElectriciteitsbedrijf Zuid-Holland(EZH),aDutchpower generation company. TodayE.ON hasamarket share of around10percent in the Dutchgeneration market. Following the swapwith Electrabel, E.ON nowhasacomparable market share in Belgium,making it the third-largest power producer there.Inelectricitysupply, E.ON hasshares of 10-12percent in the BelgianandDutch markets,with industrycustomers accounting forthe largest part of sales.

42 .E .ON Ruhrgasalsohasupstreamactivitiesin Norway . 43 .E .ON Strategy&KeyFigures2009,p . 96and 100 . 44 .E .ON acquired onecoalplant,onegasplantand drawingrights from nuclearpowerplants . E .ON press releaseof31July2009 . 2010 fri, ©I Case Studies of Major EuropeanUtilities 43

France E.ON onlyrecentlyenteredthe Frenchelectricitymarket: in June 2008,it took over 65 percent of the Société Nationale d’Electricité et deThermique(SNET)from Endesa.E.ON announcedin October 2009thatitwill acquire the remaining 35 percent of SNET from EDF viaanasset swapthatgives EDF’s GermansubsidiaryEnBW drawing rights from E.ON power plants in Germanyandastake in acoalplant. E.ON will also obtain drawing rights from EDF’s nuclearplants in France.45 SNET’s coalpower plants andsome windfarms make E.ON the third-largest power generator in France,butits market share is only2-3 percent. E.ON,however,plans to develop its position,andhaseven declaredits readiness to take part in future nuclearprojects (EuropeanPressurizedReactor, EPR)inFrance.46 Besides power production,E.ON also sells electricityto industrialcorporate customers andmunicipal energysuppliers in France. ViaE.ON Ruhrgas,E.ON is also activeinthe Frenchgas market. E.ON usuallydoes not publish its gassales per country, butwhen commenting on anti-trust proceedings bythe EuropeanCommission in July2009,it revealedthatitsold 8.7 TWhofgasinFrancein2008,making it the foreign companywith the largest market share in France(according to E.ON’s ownstatement; its market share amounts to around 2percent).47 Inits anti-trust proceedings,the European Commission imposedfines of € 1.1bnonE.ON andGDF Suez ( € 553m foreach) formarket sharing between 1975 and2005. The market sharing startedwhen RuhrgasandGDF jointly constructedthe MEGAL pipeline ( Mittel-Europäische- Gasleitung),andthe Commission claims thatthis practice continuedafter market opening in 2000. 48 E.ON andGDF Suez immediatelyannouncedanappealagainst the Commission’s decision.49

45 .E .ON press releaseof1October2009 . 46 .E .ON’sCEOhasunderlined thisrecently:E .ON Press Talk withWulf H .Bernotat,Paris, 7July2009,http://www .snet-electricite .fr/documents/discours-Bernotat .pdf . 47 .E .ON Ruhrgaspress releaseof8July2009 . 48 .EuropeanCommissionpress releaseof8July2009(IP/09/1099) . 49 .E .ON Ruhrgaspress releaseof8July2009and GDFSuezpress releaseof8July2009 . 2010 fri, ©I 44 The EU’s Major ElectricityandGasUtilities sinceMarket Liberalization

Italy E.ON establishedE.ON Italiawith the goaloffurnishing energyto major industrialcustomers in 2000.Sincethen,E.ON hasacquiredseveraladditionalassets andequityinvestments there.Today,E.ON hasalarge presenceinItaly,encompassing electricityandgas,generation,distribution andsales.Major steps were the integration of Thüga’s shareholdings in several gasdistribution companies in early2008,and, most importantly,in June 2008,the acquisition of 80percent of Endesa Italia(following the dealwith EndesaandEnel; the acquisition wasfollowedbyamajor reorganization of E.ON’s Italianactiv- ities). Today,E.ON is one of the principalplayers in the Italian energymarket; it claims to beItaly’s fourth-largest energy company. 50 E.ON hasaround6percent of installedelectricity generation capacityandit supplies electricpower andnatural gastomore than800,000 customers,householdsandcompanies, giving it amarket share of around7percent in electricitysales (byquantity).51 E.ON recentlydeclaredits intention to sell its gasdistribution network in Italy,butthe dealwasnot finalized atthe time of writing. 52

Iberia After its failedtakeover bidforEndesa, E.ON enteredthe Spanish market in 2008through the acquisition of several Spanish assets from Enel andEndesa.After these transactions, E.ON hasamarket share of around5percent in the Spanish energymarket. Itowns severalcoal,gasandhydro power plants andhaspower distribution andretail activities.

Centraland EasternEurope E.ON’s antecedents had alreadyacquiredvariousassets andshareholdings in CentralandEastern Europe,asthey participatedin the privatization process in the 1990s. Early targets were companies in Hungary,Slovakiaandthe Czech

50 .Interestingly,GDF Suezalsoclaimsthisposition . 51 .http://www .eon .itand ownresearch . 52 .“Snaminterested in E .ON’sItalygasnetwork,”Reuters,27 May2009 . “Snamtomake non- bindingbid forE .ON Italygrid-sources,”Reuters,22 July2009 . “E .ON tocompleteItaliangrid sale in Q1,”Reuters,15 December2009 . 2010 fri, ©I Case Studies of Major EuropeanUtilities 45

Republic.More recently,E.ON successfullyparticipatedin privatization bidsinBulgariaandRomania.E.ON Ruhrgasalso acquiredsignificant shareholdings in the gasbusinesses of the three Balticstates.HenceE.ON todayhasimportant activities andassets in nearlyall CentralandEastern Europeancountries thatjoinedthe EU in 2004or2007. According to the Polish newspaper Rzeczpospolita, E.ON is the seventh-largest foreign investor in Central-Eastern Europe,andthe foreign energy utilitywith the largest revenues there ( € 8.3bnin2008).53 InHungary,SlovakiaandtheCzechRepublic, E.ON is activeinpower production aswell asgasandelectricitydistri- bution andsales.Ithasaparticularlystrong position in Hungary,where it hasamarket share of around35 percent in electricityretail,andis the dominant gascompanysincethe acquisition of gasstorage andtrading activities from MOL.In Slovakia, E.ON Ruhrgasalso operates,together with GDF Suez, the gastransmission network,whichiscruciallyimportant for the transport of RussiangastoWestern Europe.Moreover, E.ON hasamarket share of around30percent in electricity retail there.Inthe CzechRepublic, its share of the electricity retail market amounts to 25percent. InRomania, E.ON is activeingasandelectricitydistribution andsales (market share of around15 percent in electricity),andin Bulgariaonly in electricitydistribution andsales.InEstonia, Latviaand Lithuania, E.ON is one of the twomain shareholders in the three nationalincumbent gassuppliers,the other main shareholder being Gazprom.

Outsidethe EU E.ON’s activities outsidethe EU are concentratedin the UnitedStates andRussia.Its US business stems from the acquisition of the UK utilityPowergen andincludes power generation andtransmission,aswell aspower andgasdistri- bution andsales,primarilyin Kentucky.E.ON’s US branch realizedsales of € 1.9bnin2008. Moreover,E.ON’s renewables branchdevelops severalrenewable energyprojects in the US. InRussia, E.ON Ruhrgashasalong-standing partnership with

53 .http://grafik .rp .pl/grafika2/368638 . 2010 fri, ©I 46 The EU’s Major ElectricityandGasUtilities sinceMarket Liberalization

Gazprom,dating backtothe 1970s. E.ON holds3.5 percent of Gazprom’sshares (after having aneven higher share in the past). Itiscurrentlyabouttoenter the Russianupstreamgasmarket. E.ON enteredthe Russianelectricitymarket in January2008 with the acquisition of OGK-4 (see abovefor details).

GDFSuez GDF Suez,the second-largest energyutilityin Europe by revenues,is the result of amerger between GazdeFrance,the former Frenchgasmonopoly,andSuez,aFrenchcorporation with worldwidebusiness activities.The merger,completedin 2008after more thantwoyears of intense discussions,allowed the creation of atrulyintegratedelectricity-gasutilitywith a broad presencethroughoutEurope andsignificant activities in other parts of the world.Eighty-fivepercent of the company sales ( € 83bnin2008) are realizedin the energysector,whereas the remaining 15 percent come from the subsidiarySuez Environnement,the second-largest water treatment andwaste processing companyin the world. The twoparties to the 2008merger were eachofavery different nature.GazdeFrancewasset upasastate-owned companybythe Frenchgovernment in 1946,when France nationalizedits energysector.Sinceits beginnings,GDF has had aclose relationship with EDF,especiallyin the distribution segment,where both companies share acommon service(see box1). Inter alia, duetothese close relations,amerger between EDF andGDF had been proposedin the 2000sinstead of the GDF-Suezmerger.GDF enjoyedaquasi-monopolyposition in the Frenchgasmarket until 2000,when the liberalization of the Europeangasmarket started.GDF beganits internationalization in the 1990s,byacquiring stakesingascompanies in Germany,Italy,theUnitedKingdom,Slovakia, Mexicoand some other countries.After initialideastodevelop important activities outsideEurope,GDF hasthen,in the contextof market liberalization in Europe,chosen to focusits strategyon Europe. 54 Asaconsequenceofits internationalization,GDF hassoldmore gastoindustrialandcommercialclients outside

54 .Vignonand Grandclement(2008),p . 12 . 2010 fri, ©I Case Studies of Major EuropeanUtilities 47

Graph 1. GDFGasSalestoIndustrialand CommercialCustomers 2000-2007

250

200

150 ( TW h)

100 V olumes 50

0 2000 20012002 20032004200520062007

Volumes FranceVolumes Europe except France

Source: Vignon andGrandclement (2008),p. 22.

FrancethaninsideFrancesince2006. Atthe same time,and asaconsequenceofmarket liberalization,the quantityof gas soldin Francehasdeclined(see graph 1). Another indicator of GDF’s internationalization is the repartition of the company’s revenues.In1998,only10percent of its revenues were real- izedoutsideFrance. This share grewto 41 percent in 2007.55 GDF wasone of the pioneers of liquefiednaturalgas(LNG) andstronglydevelopedits LNG activities over the years, becoming the Europeanleader in the field.From 1998 onwards, the companystartedexploration andproduction activities.In the 2000s,GDF also enteredthe electricitysector,butonlyata verylimitedscale.Finally,the Frenchgovernment decidedto change the nature of the company(from state-ownedto public) in 2004andGDF’s capitalwaspartiallyfloatedon the Paris Stock Exchange in 2005. The Frenchgovernment kept 79.8 percent of the shares until the merger with Suez.In2007,the last year before the merger,GDF’s revenues amountedto € 27.4bn, whereasSuezrealized € 47.5bn.

55 .Vignonand Grandclement(2008),p . 4 . 2010 fri, ©I 48 The EU’s Major ElectricityandGasUtilities sinceMarket Liberalization

Suez’s historygoes backto1858,when it wasfoundedto build andoperate the SuezCanalinEgypt.56 After the canal’snationali- zation bypresident GamalAbdel Nasser in 1956,the companyhad to change its activities andbecame amultinationalcorporation thatwasactiveinvarioussectors (banking,television andothers). Itbecame amajorityshareholder in Lyonnaise des Eaux,aleading water utility,whichhad been activeinenergybefore WoldWarII. Suezenteredthe energysector when it took over Société Générale deBelgiquein1988,whichhad amajor holding in the Belgian energycompanyTractebel. 57 WhenGérardMestrallet became CEO of Suezin 1995,he restructuredSuezandeventuallyreduced its activities to energy,water,andwaste treatment. The merger with Lyonnaise des Eaux in 1997 –after thirtyyears of strong links between the twocompanies –wasamajor step in this context,as well asthe gradualacquisition of the remaining shares in Tractebel (then Electrabel’sparent company). In2007,Suezfinallybecame the single owner of Electrabel,the largest electricityproducer in the Benelux countries.Electrabel wasmainlyactiveinelectricity, buthad also diversifiedinto gas. Ithad significant activities outside the Benelux countries in France,Italy,Germany,Poland, Hungary andother countries.Suezalso wasamajorityshareholder in Distrigas,the largest Belgianwholesale gassupplier.

The Merger Suezwasthe objectofseveralmerger attempts andspecu- lations in the 1990sand2000s. In2000,newsreports indicated thatamerger between E.ON andSuezwasabouttobefinal- ized, butthe dealwasnever concluded. 58 Ataroundthe same time,the ideaof arapprochement between SuezandGDF emerged.Atleast in public, the ideaonlygainedmomentum in early2006,whenEnelannounceditsintention to acquire

56 .The companywasfounded as La Compagnieuniverselle ducanalmaritimedeSuez .Ithas repeatedlychanged its name sincethenbeforeits rebrandingto“Suez”in2001 . Forthe sake of simplicity,weonlyusethisname . 57 .Suez’sentryin Tractebel wasamovetoblockahostiletakeoverbid forSociétéGénérale de BelgiquebyCarlo de Benedetti,the Italianindustrialist .Hencethe 2008mergerbetween GDFand Suezhassomeparallelstothis1988 transaction,asblockingthe entryof anItalian investor(thistimeEnel) was,accordingtomanypress reports,animportantmotivation . 58 .“E .ON und SuezLyonnaisedementieren Berichteüberbevorstehende Fusion,” Energie- Chronik,September2000 . 2010 fri, ©I Case Studies of Major EuropeanUtilities 49

Suez.The Frenchgovernment wasstronglyopposedto an acquisition of SuezbyEnel. Then Prime Minister Dominique deVillepin announced, onlytwodaysafter Enel had made publicits interest in Suez,thatthe Frenchgovernment would favor amerger of SuezandGDF.The twocompanies confirmed this first publicannouncement of their merger plans,which had alreadybeen preparedin advance. CriticsinFrancethere- fore arguedthatthe “danger” of atakeover byEnel wasonlya pretexttorealizethe long-plannedmerger,whichalso meant thatthe Frenchgovernment’spart in GDF wasreducedto a minority(butblocking) share.The Italiangovernment complainedto the EuropeanCommission aboutthis actof “economicpatriotism” to the disadvantage of Enel. Inresponse, the EuropeanCommissioner in charge of the internalmarket, Charlie McCreevy,statedthatthe Frenchposition is “legally correct,butagainst the spirit of the Europeaninternalmarket.” 59 Long discussions among Frenchpoliticians,managers and workers of the twocompanies andthe generalpublictook place after the announcement of the merger plan. The tradeunions, the left-wing opposition andGDF workers were stronglyopposed to the government’sidea.Theydidnot agree to the industrial logicof the merger andfearedthatthe French servicepublic model couldsuffer.Heateddebates andtwocourt rulings delayedthe merger,butitfinallycame into existenceon 22 July2008. The FrenchParliament neededto pass aspecial lawallowing the privatization of GDF,asthe Frenchstate only hasaminorityshare of 35.6 percent (asof31December 2008) in GDF Suez,after having been the majorityshareholder of GDF before the merger. 60 The Frenchgovernment,however,keeps a “golden share” in the newcompanythrough whichitcanoppose the sale of gasinfrastructure in France. Moreover,the French government clearlyannouncedits intention to control the strategyof the newgroup.61 Itisofcourse difficult to know with certaintyto whatextent this happens in reality.

59 .http://www .melchior .fr/Enel-Suez-GDF-l-annee-20 .5558 .0 .html . 60 .The lawwaspassed on 8November2006,havingreceived 137,449amendmentproposals duringthe debateinParliament . 61 . PrimeMinisterFrançoisFillon asquoted byBloomberg(3September2007):“With 40percent,the statekeepsthe control .Whatisimportantistohavecontrol .Wehavethe control,wecontrol the strategy .” 2010 fri, ©I 50 The EU’s Major ElectricityandGasUtilities sinceMarket Liberalization

The EuropeanCommission approvedthe merger under severalconditions,whichincludedthe divestment of Distrigas (acquiredbyEni) andSPE (the second-largest electricityproducer in Belgium,acquiredbyCentrica). Suezalso agreedto relinquish control over Fluxys,the Belgiangasnetwork operator,and GDF agreedto divest its subsidiaryCofathecCoriance,adistrict heating companyin France.62 Inthe contextofthe merger,Suez’s water andwaste assets were spunoff into anewpublicly-tradedcompany,Suez Environnement,in whichGDF Suezhasa35.4 percent stake (asof31December 2009). For along time Suezhad resisted spinning off these activities,andthe solution is acompromise thatallowsGDF Suezto fullyincorporate the revenuestreams of SuezEnvironnement. Asreasons forthe merger,both companies statedthateach of them wouldbetoo small to compete on the Europeanmarket andtoo weaktobeastrong globalplayer.Moreover,theypointed to the synergyeffects of the merger,whichconcern both geographicandindustrial(gas-electricityintegration) aspects.It wasalso arguedthatGDF Suezcouldbecome apowerfulcompet- itor to EDF in France–whichisasurprising argument,given the dominant position of EDF in the Frenchelectricitymarket (with amarket share of around90percent of production) andthe fact thatthe Frenchgovernment is the biggest shareholder in both companies.Itisdifficult to imagine thatthe Frenchgovernment wouldallowforrealcompetition between twocompanies in whichitisthe single largest shareholder.Still,GDF Suezis often describedasthe biggest challenger to EDF,andEDF’s management wasreportedlyrather unhappyaboutthe GDF-Suez merger. 63 Moreover,the situation might change oncethe “NOME” (acronymfor Nouvelle organisation dumarché électrique )law –under discussion atthe time of writing –isinforce. One yearafter the merger,most commentators underline thatthe merger hasbeen asuccess.Itisindeedinteresting to

62 .EuropeanCommissionpress releasesof 14 November2006 (IP/06/1558 and MEMO/06/424) . 63 .“EDFwasoutraged whenthe Frenchgovernmentallowed the mergerof quoted utility Suez withstate-controlled Gazde France . Thatdealwill presentthe biggest challengetoEDF’shold on the Frenchenergymarket .” “EDFplays apoliticalgame in its attemptatinternational expansion,” FinancialTimes ,7April 2008 . 2010 fri, ©I Case Studies of Major EuropeanUtilities 51 note thatthere hasbeen little talk of rebellion or boardroom quarrels –whichaccompanynearlyeverymerger process,and were well documentedbythe mediain the case of the GDF-Suez merger.Amanagement reorganization,giving upthe strict paritybetween managers coming from the twomergedcompa- nies,markedthe first anniversaryof themerger.64 However, problems doexist:insideElectrabel,some complain aboutthe factthatthe former Belgianenergyflagship is losing its “Belgian” identity.The companyalso hashad anuneasylife with Belgian authorities recently,whichsome havelinkedto the factthat Electrabel is now“less Belgian.”Moreover,it is increasinglydiffi- cult to explain whypaydifferentials exist between former GDF workers earning civil servicesalaries andformer Suezworkers earning the better wages of the private sector.Atradeunion representativeunderlinedthis:“Wehavethe oldGDF people asking whytheyshoulddothe work for30percent less pay.”65

GDFSuez’sPosition in the DifferentEuropeanMarkets Sincethe merger,GDF Suezis among the energyutilities with the largest presenceinEurope (albeit less broad geograph- icallythanE.ON). Itisalso one of the Europeanutilities with the most important activities outsideEurope,whichaccount for14percent of totalsales.FranceandBelgiumare the single most important countries forthe company,respectivelycontrib- uting 37 and16 percent to totalsales in 2008. The company does not specifythe respectiveshares of gasandelectricityin its sales or profit. Inoverall terms,it qualifies its position on the Europeanmarkets as: –largest gascompanyin Europe (largest gasbuyer andmarketer, largesttransport anddistribution network,second-largest storage operator); –largest LNG companyin the world, largest importer and buyer of LNG in Europe,second-largest LNG terminaloperator in Europe; –fifth-largest electricityproducer andmarketer in Europe. 66

64 . “Unanaprèssanaissance,GDF Suezréorganiseson management,” LesEchos ,6July2009 . 65 . Quoted in:“Benefits of GDFSuez’sbittertie-upcleartosee,” FinancialTimes ,23 July2009 . 66 .GDFSuezActivitiesand Sustainable DevelopmentReport 2008,p . 29 . 2010 fri, ©I 52 The EU’s Major ElectricityandGasUtilities sinceMarket Liberalization

Table 8. GDFSuezRevenuesand EBITDA byBusiness Line (2008) Contribution to Contribution to Business line revenues EBITDA € bnpercent € bnpercent EnergyEurope &International * 30.5 37 4.4 32 EnergyFrance14.5 17 0.21 EnergyServices 14.017 0.9 6 Environment 12.4 15 2.1 15 GlobalGas&LNG 10.8 13 3.7 27 Infrastructures 0.9 12.9 21 Total83.1 100 13.9 100

N.B.:EBITDA: Earnings before Interest,Taxes,Depreciation andAmortization. *“EnergyEurope &International” wasdividedinto Benelux &Germany( € 14.2bnrevenues, € 1.8bnEBITDA),other Europe ( € 8.7bnrevenues, € 0.8bnEBITDA),andInternational(€ 7.6bn revenues, € 1.8bnEBITDA)in2008. Source: GDF SuezActivities andSustainable Development Report 2008,p. 8,andowncalculation.

GDF Suezis organizedin sixbusiness lines: –EnergyFrance:electricityproduction,gasandelectricity supply,energyservices forprivate individuals,professionals, companies andterritorialcommunities in France; –EnergyEurope &International:production,distribution and supplyof gasandelectricityoutsideFrance,organizedin fivesub- divisions “Benelux &Germany,”“Europe” (other thanFrance, Benelux andGermany,including Russia),“North America,” “Latin America,”“Middle East,Asia&Africa;” –GlobalGas&LNG: exploration andproduction of gasand oil,procurement androuting of gasandLNG,energytrading andsupplying major accounts in Europe; –Infrastructures:transmission of naturalgasandelectricity, gasification of LNG,storage of naturalgas,distribution of naturalgas(primarilyin France); –EnergyServices:offers effectiveandsustainable energyand environmentalsolutions through multi-technicalservices in the areasofengineering,installation or energyservices to customers in industry,the tertiarysector andinfrastructures; –Environment:water,sanitation andwaste management services to communities andmanufacturers (GDF Suezowns 35.4 percent of SuezEnvironnement). 2010 fri, ©I Case Studies of Major EuropeanUtilities 53

France Franceisthe traditionalhome market of the former GDF, whichenjoyedamore or less monopolisticposition on the Frenchgasmarket before 2000. 67 Franceisbylarge the single most important countryforGDF Suez,especiallyconcerning gas. GDF Suezis the dominant companyin the Frenchgasmarket, owning andmanaging most of the transport,distribution and storage infrastructure (with the exception of the South-West region,controlledbyTotal’ssubsidiaryTIGF). GDF Suezis by farthe largest gassupplier in Francewith more than10m customers.In2008,the companyrealizedaround60percent of its worldwidegassales in France. Its position is most dominant in the householdsector (market share of 91 percent), 68 butithaslost to competitors in the important sector of big industrialclients (its market share declinedfrom 75 percent in 2000 to 59 percent in 2008).69 Duetothe regulatedgastariff in France,the profitabilityof supplyactivities is limited. According to press reports,GDF Suezeven lost moneyin this segment in 2009.70 Its distribution activities are managedby the subsidiaryGazRéseauDistribution France(GrDF),whichhas common structures with ERDF,EDF’s Frenchdistribution subsidiary(see box1). The EuropeanCommission suspectedGDF Suez of abusing its dominant position in the Frenchgasmarket. After negotiations withthe Commission in December 2009, GDF Suezagreedto graduallydecrease its share of import capacityto Francefrom 2010onwards. The company’s share will beless than50percent by2014. These commitments prompted the EuropeanCommission to endits investigations. 71 GDF Suezis also the second-largest electricityproducer andmarketer in France. Itproduces around5percent of French electricity,mainlyfrom hydroelectricplants,butalso increas- inglyfrom combinedcycle gasturbine (CCGT)plants.Several plants are under construction or planned, asGDF Suezwants

67 .Onlysomeminormunicipalsuppliers co-existed withGDF .GDFwasthe onlycompany allowed toimport gas . 68 . E-mail from GDFSuezrepresentativetothe author,22 February 2010 . 69 . Vignonand Grandclement(2008),p . 22 .GDFSuezDocumentde référence2008,p . 92 . 70 .GDFSuezperdrade l’argenten 2009surlaventedegazen France,http://www . usinenouvelle .com,27 August2009 . 71 . EuropeanCommissionspeech/09/569,3December2009 . 2010 fri, ©I 54 The EU’s Major ElectricityandGasUtilities sinceMarket Liberalization

to increase its production capacityin Francefrom 6.4 GW to 10GW in 2013. Italso hasdrawing rights from twonuclear plants,andwill beaminorityshareholder in the secondFrench EPR plant. Itisalso developing renewable energyprojects,and hasthe objectivetoincrease its share of Frenchhydroelectric capacitythrough bidding in plannedconcession auctions. Inelectricitysales,GDF Suezhasanoverall market share of around5-7 percent today.Itplans to develop this position,as it hasindicatedalong-term objectiveofamarket share of 20 percent in the electricityretail market.

Box1. Cooperation Between GDFSuezand EDFin Distribution

Sincetheir beginnings,EDF andGDF havehad some common structures,in particulartomanage gasandelectricitydistribution networks andcustomer service. Until July2007,customer services for residentialcustomers were managedin common (this meant in prac- ticethatcustomers receivedonlyone bill covering services from both companies). ERDF andGrDF havecontinuedtheir close cooperation in distribution,even if eachcompanynowindependentlymanages its portfolio of clients.Some of their personnel are employedbycommon structures,whichalso dealwith manyclient contacts (repairs,meter readings etc.). This provides both companies with synergies,as approximatelyone-thirdof technicalandmetering services carried outatcustomer premises relate to both electricityandgas. Itwill be interesting to observeifthis cooperation will continueinthe future: the influentialtradeunions favor maintaining the common structures,butasboth companies havestartedto compete forresidential customers –GDF Sueznowalso provides electricityto residential customers,andEDF also offersnaturalgas–,their cooperation in distribution couldbecome more difficult. EDF’s CEO Henri Proglio recentlyputinto question the future of this common structure. 1

1 . “Distribution:EDF remeten causesafiliale commune avecGDF Suez,” Lesechos.fr ,4February 2010 .

Belgiumand the Netherlands InBelgiumandthe Netherlands,GDF Suezis particularly strong in electricity,butalso hasasolidposition in gas. Its subsidiaryElectrabel (Suezhasbeen Electrabel’smajority shareholder since2003),the incumbent electricitysupplier of 2010 fri, ©I Case Studies of Major EuropeanUtilities 55

Belgium,is the largest power producer in the Benelux region today.Itproducedaround86 percent of electricityin Belgium in 2008. Moreover,the companyhasaround20 percent of production capacityin the Netherlands,also making it the single largest producer there.However,its market share in Belgiumdecreasedto around65 percent after the swapagreement with E.ON in 2009.72 GDF Suezis the operator of the seven Belgiannuclearplants –indeedthe onlynuclearplants GDF Suezis currentlyoperating.The companyhasrepeatedly had difficult negotiations with the Belgiangovernment concerning nuclearpower,asthe Belgiangovernment has severaltimes changedits opinion concerning the future of Belgiannuclearplants.Notably,it hasimposedaspecialtax on the producers of nuclearpower.A“globalagreement” concerning the cooperation between GDF Suezandthe Belgian government wassignedin October 2009,butitremains to be seen if it hassolvedall outstanding issues. 73 Inresponse to respectivelegislation,Electrabel ceasedits operationalactivities in electricityor gasnetwork operations in Belgiumin2005. Butithaskept minorityparticipations in Elia, the electricitytransmission network operator,andFluxys, the gastransmission network operator.However,the company announcedto divest these participations in March2010. 74 Onthe supplyside,GDF Suezis the largest gasandelec- tricitysupplier in Belgium,andis also activeinthe Netherlands through Electrabel Nederland.According to the Belgianregu- lator,GDF Suezhasamarket share of 84 percent in electricity sales to big industrialcustomers (connectedto the network at more than70kV).75 For electricitysuppliedviathe distribution network,Electrabel had amarket share of 70percent in 2008.76 Ingassupplyin Belgium,GDF Suezhad amarket share of around30percent in 2008,with market shares of 20 percent for big industrialcustomers and64 percent forgassuppliedviathe distribution network.77 Inthe Netherlands,GDF Suezhad amarket

72 .GDFSuezpress releaseof31July2009and Trends-Tendances,5March2009,p . 38-39 . 73 .See forexample GDFSuezpress releasesof 22 October2009and 31December2009 . 74 . Enerpresse,5March2010 . 75 . CREGRapport Annuel 2008,p . 51 . 76 .CREGetal . (2009),p . 9 . 77 .CREGetal . (2009),p . 10and GDFSuezDocumentde référence2008,p . 92 . 2010 fri, ©I 56 The EU’s Major ElectricityandGasUtilities sinceMarket Liberalization

share of 7percent in gassales to big industrialcustomers. 78 Before the merger,Suezwaseven the dominant gasplayer in Belgiumthanks to its subsidiaryDistrigas. Butthe European Commission imposedthe divestment of this companyasone of the conditions in its approvalofthe GDF-Suezmerger.Finally, the Netherlandsisone of the most important countries forGDF Suez’s exploration andproduction activities,as36percent of the company’s gasproduction wasrealizedthere in 2008.

Germany InGermany,GDF Suezis activeinelectricityandgas. Electrabel enteredthe Germanmarket in 1998,selling electricityto industrialcustomers andtaking participation in three Stadtwerke. Its production capacityin Germanygot animportant boost thanks to the recent swapagreement with E.ON; GDF Sueznowhasamarket share of around2percent. GDF madeits first acquisition in Germanyin 1994. In1998,it acquiredaparticipation of 32percent in Gasag,Berlin’shistoric gassupplier whichhasrecentlystartedto supplygasto customers outsideBerlin. Recent mediareports indicate that GDF Suezis abouttoincrease its share in Gasagandhence reinforceits position in the Germangasmarket. GDF also plannedto acquire 49.9 percent in the Stadtwerke of Leipzig for € 520m,butalocalreferendumin2008rejectedthe privatization of the municipalsupplier,against the wish of the city’s mayor. 79 Inthe sector of big industrialcustomers,GDF Suez had amarket share of 2percent in 2008.80 Italso hassome upstreamactivities in Germany,aswell asparticipation in transmission pipelines andstorage sites.Numerouspress reports havebeen indicating formore thantwoyears nowthat GDF Suezis in negotiations with the NordStreamconsortium, whichistobuildthe BalticSeagaspipeline.Nodecision has been madeatthe time of writing. 81

78 . GDFSuezDocumentde référence2008,p . 92 . 79 . “Leshabitants de Leipzig barrentlarouteàGDF,” L’Echo online ,28January 2008 . 80 .GDFSuezDocumentde référence2008,p . 92 . 81 .GDFSuez’sinterest in NordStreamissometimesseenasareactiontothe factthatTurkey blockedGDFSuezfrom becomingashareholderin the Nabuccoprojectforpoliticalreasons- Turkeyisopposed toFrance’srecognitionofthe Armeniangenocideand enraged byFrench oppositiontothe TurkishEU bid . 2010 fri, ©I Case Studies of Major EuropeanUtilities 57

Italy GDF Suezis,according to its ownassessment,the fourth- largest energyutilityin Italy,activeinelectricityandgas. It also offers energyservices there.GDF enteredthe Italian market in 1997 byacquiring positions in the energyservices sector.Electrabel enteredItalyin 2000,and, since2002,it owns production capacities in cooperation with Acea, Rome’smunic- ipalutility.Since2009,GDF Suezalso receives 1.1 GW of virtualpower plant capacities from Eni,whichgives it a combinedmarket share in production of 6-8 percent. GDF Suezis activeinelectricityandgassales anddistribution thanks to variousshareholdings,butithasdecidedin mid-2009 to retreatfrom adealwith Eni concerning the takeover of RomanaGas,the gassupplier of Rome. 82 Inthe sector of gas sales to big industrialcustomers,GDF Suezhad amarket share of 10percent in 2008.83

United Kingdom GDF enteredthe British gasmarket in 1999 byacquiring Volunteer Energy,agastrading company.The Frenchgas companyhasfurther developedits presencesincethen and had a15 percent market share forcommercialandindustrial gascustomers in 2007.84 This makesitthe third-largest supplier of gastobusiness customers in the UK.GDF Suezis also active in gasandoil exploration andproduction in the UK. Electrabel didnot enter the British market before the merger, andGDF Suezonlybecame animportant electricityplayer in the UK in 2008,when it acquiredTeesside,Europe’slargest CCGT plant. This gives it amarket share of around2-3 percent in the British generation market. The companysells electricityat the wholesale market andto industrialcustomers.InApril 2009, GDF Suez,in aconsortiumwith Iberdrola/Scottish Power and Scottish andSouthern Energy,participatedin the first round of auctions of landto buildnewnuclearpower stations.The consortiumdroppedoutafter prices had gone upsignificantly,

82 .Enerpresse,23 July2009 . 83 .GDFSuezDocumentde référence2008,p . 92 . 84 .Vignonand Grandclement(2008),p . 23 . 2010 fri, ©I 58 The EU’s Major ElectricityandGasUtilities sinceMarket Liberalization

butitacquiredanoption forthe acquisition of landatSellafield in October 2009,with the objectivetobuildanuclearplant there. 85

Iberia GDF Suezhasrather limitedactivities in Spain andPortugal, mainlyconsisting in electricityproduction (participations in CCGT plants andwindparks). Electricityfrom these plants is soldto the wholesale market. The assets andshareholdings stem from severalacquisitions byElectrabel,the first ones dating backtothe late 1990s. The market share in production amounts to around2-3 percent. Ingas,GDF enteredthe Portuguesemarket in the 1990sbyacquiring ashare in the second-largest Portuguese distributor Portgas(nowEDP Gas). GDF also entered, backin2001,the Medgazconsortium (12percent share),whichbuilt the pipeline of the same name, linking Algeriato Spain. SuezEnvironnement also holdsan 8.8 percent shareholding in the Spanish gascompanyGas Natural,butithasrecentlyannouncedits attention to sell its shares.Inthe run-uptothe GDF-Suezmerger,atakeover of GasNaturalbySuezwaswidelyseen asSuez’s “planB”ifthe tie-upwith GDF unraveled.Moreover,the Spanish government wasreportedto fearanaggressiveexpansion of GDF Suezinto the Spanish market.86

Centraland EasternEurope GDF andSuezacquiredseveralparticipations in the former communist countries of CentralandEastern Europe when those privatizedtheir energycompanies.GDF wasamong the first Western Europeancompanies to enter the newmarkets in the East,asitacquiredshares in the Hungariangasdistributors EgazandDegazin 1995. Itthen increasedits shareholdings andfinallymergedthe twocompanies.GDF Sueztodayhasa market share of around13 percent in gassales in Hungary. Suezalso enteredHungaryquite earlyon,in 1998,byacquiring

85 .“Franco-Spanishgroupquits racefornuclearsite,” FinancialTimes ,29April 2009 . GDF Suezpress releaseof28October2009 . 86 .“GDFSuezreadytojoinGasNaturalbid,” FinancialTimes ,19 June 2008 . “Spain plans defencesagainst Suez-GdF, ” FinancialTimes ,10September2007 . 2010 fri, ©I Case Studies of Major EuropeanUtilities 59 the largest conventionalHungarianpower plant,Dunamenti. After being solelyanelectricityproducer,it also startedsales andtrading activities in 2003. TodayGDF Suezproduces around 8percent of Hungarianelectricity. Suez’s Tractebel enteredthe Polish market in 2000 by acquiring shares in alarge power plant (Polaniecplant).87 The share wastakenover byElectrabel in 2001andincreasedto 60percent in 2003. GDF Suezis todaythe sixth-largest electricityproducer in Poland, with amarket share of 4-5 percent, andit also sells electricityto large customers there.The Polish press recentlyrevealedthatGDF Suezhasplans to significantly increase its production capacityin Poland. 88 GDF,together with Ruhrgas,acquiredcontrol of the SlovakiangascompanySlovensky´ Plynárensky´ Priemysel (SPP) in 2002 (for € 2.8bn; 51 percent of the shares remain with the Slovakgovernment,butthe twocompanies haveoperating control). SPP is activeininternationaltransit,controlling the Slovakpart of the main pipeline bringing Russiangasto Western Europe,domesticgastransmission,storage,distribution andsales in Slovakia. InRomaniain 2004,GDF acquiredthe gasdistribution companyDistrigasSud, whichhas1.2mcustomers in Southern Romania.GDF Suezhasa40.8 percent share in DistrigasSud, one of the first privatizedenergycompanies in Romania. 89 DistrigasSudrealizedaround25percent of Romaniangas sales in 2008. Moreover,GDF Suezis activeingasstorage in Romaniaviatwoshareholdings.The companyalso participates in the projectconcerning the construction of anewnuclear reactorinCernavoda;ithasa9.15 percent participation in this project.90 The projectseems relativelywell on trackfor a

87 .Thiswasnotthe firsttimeSuezinvested in Poland:the companyhadalreadyinvested thereinthe 1920s . 88 .“Ktoigdzie chcewybudowa ´celektrownie˛ ”[Who and wheretheywanttobuildpower plants], GazetaWyborcza ,24June 2009 . 89 .InternationalFinanceCorporation,the privatesectorarmofthe World Bank Group,and the EuropeanBank forReconstructionand Development,arethe twootherinternationalshare- holders,eachhaving5 .1 percent .The Romanianstatehas37percentand the Stateproperty fund 12percent . 90 .The remainingshareholders areRomania’sstate-ownedNuclearelectrica with51percent, CEZ,Eneland RWE with9 .15percenteach,and Iberdrolaand ArcelorMittalwith6 .2percent each . 2010 fri, ©I 60 The EU’s Major ElectricityandGasUtilities sinceMarket Liberalization

commissioning in 2015/2016,even if the Romaniangovern- ment couldstill decidetoreduceits stake andtherebymodify the project.

Outsidethe EU GDF Suez,whichdescribes itself as“aworldleader in energy,”hasimportant activities outsidethe EU.These include gasexploration andproduction (Norway,NorthAfrica),LNG (GDF Suezis the largest LNG gasimporter in the US),butalso “classic”utilityactivities likeelectricityproduction anddistribution. For example,GDF Suezis one of the first European companies present in this sector in Turkey,asitowns aCCGT power plant andacquiredthe gasdistributor Izgazin 2009. Its most significant extra-Europeanactivities are locatedin the Americas,where Suezhad startedimportant acquisition activities in the 1990s. Asiaandthe Middle East are the twoother important regions forGDF Suez.Itowns power plants andsells elec- tricityandgasinseveralcountries (among others:US, Brazil, Chile,Peru,Panama, Thailand, Singapore,Arab states of the PersianGulf). Inthe Gulf region,GDF Suezis activeinseveral desalination projects.In2009,GDF Suezalso participatedin a joint bidwith other Frenchcompanies forthe construction of nuclearplants in the UnitedArab Emirates,whichwasnot successfulinthe end.Overall,35 percent of GDF Suez’s electricityproduction is realizedoutsidethe EU. 91

EDF Electricité deFranceisthe historicFrenchelectricityoper- ator.Foundedin 1946 when Francenationalizedmajor compo- nents of its energysector,it replacedthe roughly1,500 private companies thathad previouslyassuredFrenchelectricity production,transmission anddistribution.The company became amonopolyin charge of transmission anddistribution, andaquasi-monopolyforgeneration andcommercialization with aclearpurpose:improving efficiencyin generation through standardization andimplementing full reliable access to electricitywith the same pricefor the same supplyanywhere

91 .GDFSuezDocumentde référence2008,p . 42 . 2010 fri, ©I Case Studies of Major EuropeanUtilities 61 in France. EDF remainedin the same situation until the French Parliament transposedthe first electricityliberalization direc- tiveof1996 into Frenchlawin 2000.Still today,EDF remains the dominant player in the Frenchelectricitymarket. EDF startedto internationalizeinthe 1990sandtodayreal- izes roughlyhalf of its revenues abroad.Asmost of its early acquisitions abroad (notablyin Latin America)provedunsuccessful,EDF then refocusedon Europe.Besides France,the UK, GermanyandItalyare the most important countries forEDF today.EDF was100 percent state-owneduntil 2005,when it waspartlyintroducedto the stockmarket,after the change of its legalstatustoalisted-company( société anonyme;SA). The Frenchstate currentlyhas84.4 percent of the shares,andit is obligedbyaspeciallawto keep atleast 70percent. The strong position of the Frenchgovernment in EDF andthe French reluctancetoopen its energymarket to competition havebeen the objectofrecurring protests byother Europeanutilities and governments.EDF is indeedin aquite unique–andadvanta- geous–situation,asmajor acquisitions byforeign companies in the Frenchelectricitysector are not feasible duetothe fact that,forpoliticalreasons,all nuclearpower plants in France will remain operatedbyEDF.Moreover,EDF owns all currently operating nuclearpower plants in Franceat100 percent. This will change in the nearfuture,butfor the time being EDF will remain the majorityshareholder in anynuclearfacilityin France.92 Onthe other hand, EDF is able to acquire important assets in other Europeancountries where no similarrestrictions apply. Whereashydropower dominatedEDF electricitymixin the earlyyears,oil became the dominant energysourceinthe 1960s:in 1973,43 percent of EDF’s totaloutputwasprovided byoil-firedpower stations.The 1973 oil crisis ledthe French government to the decision to start avast nuclearprogramin order to ensure Frenchenergyindependence. Nuclearpower in 1973 provided8percent of EDF’s output,andthis share increasedatafast pacethankstothe so-called“Messmer

92 .Othercompanieshaveminority shareholdingsin nuclearplants currentlyunder constructionordevelopment .Moreover,the acquisitionofminority shareholdingsin existing nuclearplants hasbeendiscussed lately . 2010 fri, ©I 62 The EU’s Major ElectricityandGasUtilities sinceMarket Liberalization

Plan”93:it reached49 percent in 1983,and75 percent in 1990.In 2008,86 percent of EDF’s production in Francewasnuclear- based.Henceitisfair to saythatnuclearenergyis anintegral part of EDF’s (if not French) identity. 94 Forty-seven percent of the EU’s nuclearpower production comes from the 58 Frenchreac- tors.However,the veryambitiousandimpressiveFrenchnuclear program(46 reactors putinoperation between 1977 and1987, andtwelvemore between 1988 and1999) wasbasedon overes- timates of future electricityconsumption:this resultedin EDF having immense overcapacity. 95 Inorder to use its capacities, EDF wastrying to stimulate demandforelectricityin France, inter aliabyattracting energy-intensiveindustries to Francewith lowelectricityprices.EDF also startedto export large amounts of electricityto neighboring countries,with Italy,Switzerland, Germany,andthe UnitedKingdom becoming the biggest buyers. EDF is still largelyfocusedon electricity,butithasdecided to diversifyinto gasbyproposing multi-energyoffers andenergy services especiallyto big customers.The advantages of electricity-gassynergyare currentlyless important forEDF,asgas onlyplaysaminor role in EDF’s power production portfolio (it is even marginalinEDF’s production insideFrance,albeit there are severalCCGT plants under construction). Most of EDF’s gas activities are locatedoutsideFrance:its subsidiaries EDF Energy, EnBW (Energie Baden-Württemberg AG)andEdison all sell more gasthanEDF in France. Edison hasthe most significant gas activities of them all with asignificant gasportfolio andapres- enceingasexploration andproduction. Inaperfectillustration of EDF’s quest to develop its gasactivities,the companysigned amemorandumofunderstanding with Gazprom in late 2009 concerning “the possibilityof EDF participating” in South Stream, anoffshore pipeline projectinthe BlackSeadevelopedby Gazprom andEni. Atthe same occasion,EDF confirmedits intention to sign along-term gassales contractwith Gazprom.96

93 .From the name of PierreMessmer,FrenchPrimeMinisterfrom 1972 to1974 . 94 .G .Hecht, The RadianceofFrance:NuclearPowerand NationalIdentity afterWorld WarII (2 nd edition),Cambridge,MA, MITPress,2009 . 95 .In1988,forinstance,the average loadfactorof EDF’snuclearplants wasonly61percent, whereasin West Germanyitwasat74percent,in Switzerland at84 percentand in Finland at 92percent . 96 .EDFpress releaseof27 November2009 . 2010 fri, ©I Case Studies of Major EuropeanUtilities 63

Table 9. EDF’sTotalSalesand EBITDA byCountry 2008

Totalsales Totalsales EBITDA EBITDA ( € bn) (%) ( € bn) (%) France34.3 53 9.063 UK 8.3 13 0.9 6 Germany7.5 121.1 8 Italy * 6.090.9 6 Other Europe 7.6 122.1 15 OutsideEurope 0.6 10.21 Total64.3 100 14.2100 TotaloutsideFrance30.047 5.237

* EDF EBITDAin Italy: € 0.8bnfrom Edison, € 0.1bnfrom other shareholdings. Source: EDF Rapport Annuel 2008,p. 8.

Inthe 1980s,EDF developedits first internationalprojects, with ChinaandFrench-speaking Africa being the first desti- nations forconsultancyandplant-construction jobs. Inthe early1990s,EDF startedto expandin Europe.Negotiations concerning aparticipation in the modernization of the East Germanelectricitysector in 1991 were not successful,butthe same year,EDF enteredaconsortiumthatbuilt agas-fired power station in Britain. Investments abroad reached 3bnFrenchfrancs(€ 0.46bn) in 1994,with the nextsteps being acquisitions in Sweden (Sydkraft in 1994,Graninge in 1996 –EDF later soldthese shareholdings to E.ON)andItaly(IlvaSE). WedescribebelowhowEDF hasstronglydevelopedits position in the Europeanelectricitymarkets:it is,byfar,the biggest electricityproducer in Europe today,producing roughly 20 percent of the EU’s electricity(595 TWhin2008). Seventy- nine percent of EDF’s electricityproduction is realizedin France,and72percent of its totalproduction comes from nuclearpower.Thanks to the high share of nucleargeneration andhydroelectricity,EDF hasthe lowest CO2 emissions per kWh among the seven largest Europeanutilities.This constitutes animportant competitiveadvantage aselectricityproducers in the EU will needto payforall of their CO2 emissions from 2013 onwards. 2010 fri, ©I 64 The EU’s Major ElectricityandGasUtilities sinceMarket Liberalization

After variousacquisitions in the 1990sand2000s,EDF announced, in July2009,the divestment of assets worth € 5bn. Its strategyforthe 2008-2012periodis basedon three priorities: the globalnuclearrevival,renewable energies andenergyeffi- ciency,andthe strengthening of its leadership position in Europe. Unlikeother companies,EDF regrettablydoes not publish updatedinformation concerning its internalstructure or an organizationalchart detailing its branches.Therefore,it is only possible to underline thatsubsidiaries in whichEDF hasless than50percent of voting rights (EnBW,Edison) playanimpor- tant role.EDF hasset upbranches forspecialbusiness areas: EDF Trading (100 percent EDF)wasset upin2000.Itbuysand sells electricity,emission permits,naturalgas,coal,freight, biomass andoil on aglobalscale.Itrealizedaprofit of € 1bn before taxin 2008. EDF Energies Nouvelles –formerlySIIF Energies,of whichEDF bought 35 percent in 2000 –manages the group’s“new”renewable energyassets (all renewable energies other thanhydropower; mainlywind). Itwasintroducedsepa- ratelyto the stockmarket in 2006; 50percent of shares remain with EDF,25.1 percent remain with GroupMouratoglouand 24.9 percent are free floating.EDF Energies Nouvelles realized sales of € 1bnin2008,equallydistributedbetween Europe and the Americas.

France Franceis,of course,the most important countryforEDF. Its traditionalposition asmarket leader hasnot yet been seri- ouslyquestioned, even if itsmarket shareshaveslightly decreased.Thanks to support from politicalleaders,EDF will probablyremain the dominant player in Frenchelectricityfor years to come,ensuring thatthe French servicepublic model will remain in place. EDF hasindeedstrong links with the Frenchgovernment,not onlyduetothe factthatthe government is the major shareholder.The government also fixes the regulatedelectricitytariff forhouseholdandbusiness customers.The heateddebate on the regulatedFrenchelec- tricitytariff in the summer of 2009hasshownthatthe French government is not alwaysinclinedto fulfill EDF’s economically 2010 fri, ©I Case Studies of Major EuropeanUtilities 65 argueddemands:Frenchelectricitycustomers paysignificantly lower prices thantheir Western Europeanpeers. 97 In2008,EDF served26.5m customers in France(electricity andgas,withoutCorsica andoverseasterritories) –this meant thatEDF had lost 0.7m customers sincefull market opening in 2007,asitstill had 27.2mcustomers in 2007.98 Nevertheless, the companyhasamarket share of around85-90percent in electricitysales.EDF hasasimilarlydominant position in electricitygeneration:it producedaround88 percent of French electricityin 2008,after 89 percentin2007and88 percent in 2006. Noother big Europeanutilityenjoysasimilarlystrong position in its home market,andonlyin fourEU Member States is the electricitygeneration market more concentrated thaninFrance.99 One shouldnote,however,thatEDF agreed in 2001torelease 5,400 MW of its production capacityin auctions,so-called“virtualpower plants.” Thereby,around40TWh is offeredeveryyeartocompetitors whichequals around 8percent of EDF’s electricityproduction in France. Nevertheless this measure hasnot been enough to create realcompetition. Moreover,the pricepaidbycompetitors is quite high (it approximates prices atthe electricityexchange).100 Anextension of the measure is currentlyunder debate,asawayto avoid legalprocedures bythe EuropeanCommission,whichcriti- cizes Francefor being slowto implement Europeanlegislation requiring market liberalization.101 Finally,the overall situation of the Frenchelectricitymarket might change oncethe NOME law–under discussion atthe time of writing –isinforce.

97 .InJune 2009,EDF’sCEOPierreGadonneixaskedforelectricity pricestobeincreased by 20 percentoverthe next three years .InAugust2009,the Frenchgovernmentdecided to increasetariffsby1 .9percentforhouseholds,4percentforsmall and medium-sized enterprises,and by5percentforbig enterprises .Thismakespriceincreasesof around 20 percent by2011 quiteunlikely .AccordingtoEurope’senergyportal,Frenchhouseholdcustomers pay € 0 .157perkWh,whereasSpanishcustomers pay € 0 .159,British € 0 .166,Belgian € 0 .205, German € 0 .253,Dutch € 0 .283and Italian € 0 .304(based on ayearlyconsumptionof3,500 kWh, asof February 2009–http://www .energy .eu) . 98 .The FrenchregulatorCRE reported that1 .0mFrenchhouseholds(ofatotalof29 .6m) were supplied byanalternativeelectricity supplieratthe endofJune 2009,whichmeansthatEDFhasa lost roughly1 .0mcustomers sincemarketopeningin2007 .CRE press releaseof1September2009 . 99 . Thesewerein2007 Greece,Estonia, Latviaand the CzechRepublicaccordingtoCapgemini (2008),p . 18 . 100 .See SiaConseil(2006),SiaConseil(2008),CRE (2009) and Edf websiteformoredetails on VPP(http://capacityauctions .edf .com) . 101 . AccordParis-Bruxellessur le marché de l’électricité,Enerpresse,17September2009 . 2010 fri, ©I 66 The EU’s Major ElectricityandGasUtilities sinceMarket Liberalization

Inorder to respectunbundling requirements of the EU,EDF set uptwosubsidiaries in Francewhichitowns at100 percent: RéseaudeTransport d’Electricité (RTE)for high-voltage electricitytransmission andElectricité RéseauDistribution France (ERDF)for electricitydistribution. Both cover the whole French territory,with RTEbeing the single operator of the French transmission network andERDF serving 34,000 Frenchtowns, representing 95 percent of electricitydistributedin France(see box1). The remaining 5percent are servedbymunicipal enterprises. Moreover,since2000 EDF hasa34 percent share in Dalkia, Europe’sleadingenergyservices provider with activities in severalEuropeancountries.Dalkiahad € 8.6bnofrevenuein2008; its majorityshareholder is VeoliaEnvironnement,whichhas 66 percent.

United Kingdom The UnitedKingdom is EDF’s secondmost important market. Between 1998 and2002,EDF acquiredseveralenergy companies in Britain foratotalofaround£6.2bn. The first andlargest acquisition in this periodwasLondon Electricityin 1998,forroughly£2bn. EDF bought the former publicsector electricityutilityfrom US utilityEntergy,whichwasone of the manyUS investors thatleft the British energysector after a short period. 102 After the completion of severalother acquisitions, EDF brought together its British assets in one structure,EDF Energy.Ittherebybecame one of the largest energycompanies in Britain,benefitting from the opportunities of liberalization andprivatization there. In2008,EDF concludedits most important dealinBritain to date.For £12.4bn,it acquiredBritish Energy,the largest British electricitygenerator thatruns the country’s nuclear power stations.InMay2009,EDF andBritish utilityCentrica agreedon adealgiving Centrica 20 percent of British Energy for£2.3bn. Aspart of the deal,Centrica transferredits 51 percent share in the BelgianSPE to EDF,andit received additionaldrawing rights from the British nuclearplants.

102 .Entergyhadacquired London Electricity in 1996 .See Haarand Jones(2008) . 2010 fri, ©I Case Studies of Major EuropeanUtilities 67

Thanks to the acquisition of British Energy,EDF tripledits production capacityandnowis the biggest electricityproducer in Britain,with amarket share of around18 percent.103 Moreover,this acquisition puts EDF in averyadvantageous position forthe nuclearnewbuildin Britain. EDF andCentrica haveannouncedthattheywill buildfournuclearreactors of the newEPR technologyin Britain,also under an80-20 joint- venture. 104 However,severalanalysts expresseddoubts about EDF’s capacityto financethe construction of nuclearreactors in Britain asscheduled. 105 Between 1998 and2002,EDF Energyalso acquiredthree of the fourteen British electricitydistribution areas:London, East EnglandandSouth East England.Theyform aconnected entityandmake EDF the largest distribution network operator in Britain,serving 7.8m customers.After the acquisition of British Energy,however,EDF Energyhasannouncedits intention to sell its British distribution assets (worth around £4bn). Negotiations on the issueare ongoing atthe time of writing.

Germany InGermany,EDF is mainlyactivethrough its shareholding in EnBW,the third-largest energyutilityin Germany.EDF acquired34.5 percent of EnBW in 2001,andlater increasedits share to 45.01percent. OEW,aconsortiumoftowns andlocal authorities in the Germanstate of Baden-Württemberg,owns anequalshare.Operationalcontrol is with EDF,butimportant decisions needto betakenincommon. When EDF entered into EnBW’s capital,the EuropeanCommission imposed severalconditions on EDF,including the obligation to make available to competitors portions of generation capacityin Francevia“virtualpower plants,”andthe endof its control over ahydropower producer in France(Compagnie Nationale duRhône,soldto Suezin 2003).106

103 .EDFhasagreed toselltwolarge thermalpowerstationsin ordertorespondtocompetition concernsof the EuropeanCommission . 104 . EDFpress releaseof11May2009 . 105 . “EDFpowerpricecurbcould hitUK nuclearreactorplans,” The Times ,10August2009 . 106 .See aboveand EuropeanCommissionpress releaseof7February 2001(IP/01/175) . 2010 fri, ©I 68 The EU’s Major ElectricityandGasUtilities sinceMarket Liberalization

EnBW’s activities are concentratedin its historicregion, Germany’s South-Western state of Baden-Württemberg.Butas aconsequenceofmarket liberalization,it is nowactiveinthe whole of Germany,viaparticipation in other energycompanies andlocalsuppliers ( Stadtwerke) . Moreover,EnBW hassome shareholdings outsideGermany,often in cooperation with EDF.EnBW,whichhasabalancedpower plant portfolio including nuclearenergy,producedaround11 percent of Germanelectricityin 2008. Its market share in electricity distribution andsales is larger,amounting to around15 percent andmaking it the third-largest companyin this area.EnBW is also one of the fourelectricityTSOsinGermany,owning the transmission network of Baden-Württemberg whichrepre- sents around11 percent of the whole Germannetwork. Unlike its peers E.ON andVattenfall,EnBW (just likeRWE)wants to keep this asset. Electricityrepresents 78 percent of EnBW’s revenues,asits gasactivities are rather limited: EnBW sells gas to end-users andhasashare of around7percent in this market. EnBW announcedits intention to extendits gasactivities by acquiring upto48percent of the third-largest Germangas importer VNG in 2009. Numerouspress reports in 2007indicatedthatEDF was interestedin atake-over of Germany’s second-largest energy utilityRWE.The newsgavebirth to manyspeculations,but EDF officiallydeniedanycontacts with RWE.RWEsuspected speculation bysome actors on the financialmarket behindthe leakandaskedGermanauthorities to inquire.Ahypothetical takeover of RWE, whichiswithoutdoubtpoliticallyverysensi- tiveifnot impossible,wouldhaveimpliedadivestment of EDF’s shareholding in EnBW. 107

Italy Italyis the thirdmost important countryforEDF’s internationalactivities.EDF hasbeen cooperating with severalpart- ners in Italy,butits Italianactivities havenever been easy,as politicshaveregularlycomplicatedEDF’s Italianbusiness.EDF

107 .“EDFwill RWE übernehmen und sichaus EnBW zurückziehen,” Energie-Chronik,May2007 . “RWE sharesjump on report thatEDFplanstakeover,”Bloomberg,11 May2007 .“RWE befürchtetgezielteKursmanipulation,” RP online ,12May2007 . 2010 fri, ©I Case Studies of Major EuropeanUtilities 69 hasbeen cooperating with the former monopolyEnel for severaldecades,andhasbeen,inter alia, delivering electricity to Enel under long-term contracts since1988. Both companies are also cooperating in the nuclearfield: EDF will beEnel’s industrialpartner forthe nuclearnewbuildin Italy,andEnel hasa12.5 percent participation in the Flamanville EPR project (see Enel section formore details). In2000,EDF establishedanItalianbranch(EDF Italia), whose main activitywaselectricitysales to big customers.EDF Italiawasintegratedinto Edison in 2006,asEDF is amajor shareholder in Edison since2001.108 EDF’s presenceinEdison hasbeen the objectofseveraldisputes,politicaldiscussions andongoing negotiations.In2001EDF acquiredits first shares in Edison,whichwasownedbyFiatandItalianbanks atthat time.Neither the other shareholders nor the Italiangovern- ment welcomedthe deal. The ItalianParliament even passeda lawin 2004thatrestrictedEDF’s voting rights to 2percent, although the companyhad amuchhigher shareholding.This lawwaslater invalidatedandanewownership model for Edison wasset up:the company’s main shareholders todayare EDF (whichhas50percent of voting rights109 ),the Italian utilityA2A(whichhas25.5 percent of voting rights; it is ownedbythe cities of Milano andBrescia)andCarlo TassaraSpa of Frenchinvestor Romain Zaleski (10percent,see graph 13 in annex).110 Edison’scomplicatedstructure also poses operationalprob- lems:there are ongoing discussions aboutwho hasthe right to use whatelectricityproducedfrom Edison’spower plants.The factthatanimportant part of Edison’sproductioncomes from Edipower,acompanyin whichEdison is a50percent

108 . Edison isthe second-largest electricity producerand the third-largest gascompanyin Italy,withtotalsalesof € 11 .1bnin2008 . 109 . EDFhasadirectshareholdingof19 4p. ercentand holds30 .6percentviaTransalpinadi Energia, acommonholdingcompanywithDelmi,of whichA2Aisthe majorshareholder(see graph in annexfordetails) . 110 .Recentpress reportsindicatethatCarlo Tassarawants tosellits stake,and thereare alsoplanstorestructurethe complicated ownership structureofEdison –theseplansareall but new .A2A, whichbythe waystated tobe“upset”about EDF’sreinforced cooperationwith Enelinthe nuclearfield,wants togetmorecontrol overEdison .Sources:A2A“upset”by partner’snucleardealwithEnel,Reuters,6August2009 . Edison investors hireMediobanca for restructuring-source,Reuters,2April 2009 . 2010 fri, ©I 70 The EU’s Major ElectricityandGasUtilities sinceMarket Liberalization

shareholder andin whichA2Aandthe Swiss Alpiq eachhavea 20 percent stake,makesthings even more complicated.The difficult ownership structure putaside,Edison hasbecome the most important challenger to the incumbent Italianelectricitycompany Enel. Itproduces around16 percent of Italianelectricity,which it mainlysells to the wholesale market,big industrialcustomers andthe Italianpower exchange.Itwasonlyin 2008thatEdison enteredthe residentialmarket. Besides electricity(whichaccounts foraround63 percent of Edison’srevenue),Edison also has important gasactivities.These are of particularinterest forEDF, whichhasonlyverylimitedexperienceinnaturalgas,butwants to develop its gasactivities.Edison hasamarket share of around 16 percent of Italiangassupply.Likeseveralother gassuppliers, Edison hasrecentlysteppedupits activities in the gasupstream sector in order to bepresent in the whole valuechain of natural gas. Around10percent of its gassales are currentlycoveredby gasproducedbyEdison itself.The companyalso is ashareholder in twopipeline projects thatcouldbring additionalgastoItaly (Galsi andItaly-Greece-Interconnector) aswell asinthe world’s first offshore LNG receiving terminal(AdriaticLNG located offshore of Porto Levante). Besides Edison,EDF is also activeinItalyviaits subsidiary Fenice(100 percent EDF). This companywasfoundedbyFiat andtakenover byEDF in 2001. Feniceprovides energy(mainly from cogeneration) andenvironmentalservices to companies andthe publicsector; it realized € 0.6bnofsales in 2008.

Belgiumand the Netherlands Despite geographicandculturalproximity,EDF had onlya limitedpresenceinBelgiumbefore 2009. Itowned50percent of aBelgiannuclearplant andsoldrather small amounts of electricityandgastobusiness customers in Belgium. In2009, however,EDF’s position in Belgiumreceivedaconsiderable boost through the acquisition of 51 percent of the shares of SPE from Centrica.SPE is Belgium’ssecond-largest energycompany, whichproduces around12percent of Belgianelectricityandhas 1.6m electricityandgascustomers.EDF andCentrica had agreed to the dealinMay2009inthe contextofCentrica’s acquisition of 20 percent of British Energy.The EuropeanCommission approvedthe deal,despite some opposition in Belgium,asit 2010 fri, ©I Case Studies of Major EuropeanUtilities 71 madethe Frenchgovernment the major shareholder of the twolargest power producers in Belgium(with Electrabel being controlledbyGDF Suezsince2008). The Belgianenterprise minister,forinstance,voicedconcerns thatthis couldlead to pricecollusion between Electrabel andSPE. 111 Inaway,the Belgianelectricitymarket is nowamirror of the Frenchelec- tricitymarket:GDF Suezis the dominant incumbent andEDF its largest competitor,whereasinFranceEDF is the dominant incumbent andGDF Suezits largest competitor. Inthe Netherlands,EDF is just abouttostart operations thanks to the construction of aCCGT plant in cooperation with DutchutilityDelta.

Iberia EDF hasonlyverylimitedactivities in Spain andPortugal today.However,the companyhad showninterest in becoming animportant actor in the Spanish electricitymarket on several occasions in the recent past. In2008,forinstance,EDF declared its interest in acquiring shares in Iberdrola.Butthe Spanish company,backedbythe Spanish government,refusedthis planandEDF had to standdown.112 Seven years earlier,EnBW, apparentlyacting on behalf of EDF,acquiredshares in the then fourth-largest Spanish energyutilityHidrocantábrico. EDF’s 2002 annualreport qualifiedthis acquisition as“afirst step” in the Spanish market andaccordinglyrankedSpain as one of EDF’s fiveprioritycountries.ButasEnBW/EDF were not successfulintheir plantobecome the majorityshareholder of Hidrocantábrico(also because of opposition from the Spanish government),EnBW soldits shares again in 2004.113 EDF hasalso been activeinthe Spanish wholesale market since2000,selling electricityto industrialcustomers viaits branchHispaelec.However,EDF soldHispaelecto Alpiq in November 2009; the industrynewsserviceEnerpresse called this transaction the endof EDF’s Spanish adventure. 114

111 .EuropeanCommissionpress releaseof12November2009(IP/09/1704);“EDFest-il en train de taillerdescroupièresàGDF?” La LibreBelgiqueonline ,12May2009 . 112 .La batailleentreEDFetIberdrolatourne auvinaigre,AFP,4April 2008 . 113 .“EnBW ziehtsichaus demspanischenStrommarktzurück,” Energie-Chronik,July2004 . 114 . Enerpresse,5November2009 . 2010 fri, ©I 72 The EU’s Major ElectricityandGasUtilities sinceMarket Liberalization

Austria EDF hasbeen activeinAustriasince1998,when it acquired, together with GDF,25percent of the energysupplier ESTAG. After afailedattempt to increase their share to 49 percent in 2007,EDF acquiredGDF Suez’s share in June 2009. This movewasseen bysome analysts aspreparatoryforthe sale of the whole shareholding,butsources insideEDF denythis, pointing to the factthatrumours of this kindhaveexistedfor eight years now. 115

Centraland EasternEurope Likemost major West Europeanutilities,EDF hasactively participatedin the privatization auctions in CentralandEastern Europe.Its presenceisconcentratedin three countries: Hungary,PolandandSlovakia.Its entryin the region relied on adiversification strategy,concentrating on electricitygeneration,distribution andcombinedheatandpower operations. Ithasdirectandindirectparticipation,alone or in partnership with other energycompanies from Western Europe,especially EnBW.Comparedto the Germancompanies E.ON or RWE, but also comparedto GDF Suez,EDF’s presenceinthe region is smaller. 116 EDF enteredHungaryin 1996,when it acquired61 percent of the electricitydistributer Demasz.EDF todayhas100 percent in Demasz,whichserves nearly800,000 customers andhasa market share of around11 percent. In2000,EDF also acquired shares in BE ZRt,apower andheatgenerator.TodayEDF has a96 percent shareholding in this companywhichsupplies 60percent of Budapest’surbanheating needs. Sincethe mid-1990s,EDF hasacquired, in severalsteps, shares in fivePolish power production companies,some of whichalso produceheat. Through directandindirectshare- holdings (notablyviaEnBW),EDF is amajor electricity producer in Polandtoday;its shareholdings takentogether account foraround10percent of Polish production capacity. Production is mainlycoal-based, butEDF is also developing

115 . “EDFupsstake in Austria’sEstagto25pct,”Reuters,26 June 2009 . 116 .LaBelle (2009),p . 4-5 . 2010 fri, ©I Case Studies of Major EuropeanUtilities 73 biomass andcoalco-combustion. EDF is not activeindistri- bution,butits subsidiaryEveren hasamarket share of roughly 15 percent in electricitysales to industrialcustomers. EDF enteredSlovakiain 2002,when it acquired49 percent of the power distributor StredoslovenskaEnergetika(SSE); the remaining 51 percent are heldbythe SlovakNationalProperty Fund.EDF hasoperationalcontrol over SSE, whichhasaround 700,000 clients andcovers athirdof Slovakianterritory(market share of roughly30percent). EDF plans to acquire or build generation capacityin Slovakiain order to matchdistribution needs. Also in 2002,EDF wasinnegotiations with the Czech government concerning the plannedprivatization of the Czech electricitycompanyCEZ.Inthe end, both parties didnot reach anagreement,andCEZ hasonlybeen partlyprivatizedso far.

Outsidethe EU Switzerland, albeit not amember of the EU,playsacrucial role forEuropeanelectricity.Its geographicposition makesit animportant countryforEuropeanelectricityexchanges,and it also hassignificant peakhydro generation capacity.EDF has along historyof cooperation with Swiss companies,thanks to, inter alia, EDF’s electricityexports to Switzerland.Since2005, EDF hasbeen amajor shareholder in the Swiss electricity companyAtel. Inthe contextofthe Atel-EOS merger,EDF increasedits share andnowhas25percent in the merged companyAlpiq,whichproduces one- thirdof Swiss electricity andhasseveralshareholdings abroad. 117 EDF’s activities outsideEurope are limitedtoday,contrib- uting only1percent of the company’s revenues.Investments in Latin America (Brazil,Argentina, Mexico) in the 1990s provedunsuccessfulandwere soldby2005. Today,EDF hasa 30percent shareholding in twonuclearEPR power plants in China, whose commissioning is expectedfor2013 and2015. The companyalso haslimitedshareholdings in Laos and Vietnam. Moreover,EDF hasbecome amajor player in the US nuclearsector viaits acquisition of 49.99 percent of

117 .EDFpress releaseof16January 2009 . 2010 fri, ©I 74 The EU’s Major ElectricityandGasUtilities sinceMarket Liberalization

Constellation EnergyNuclearGroup. This deal(worth $4.5bn) had encounteredvariousdifficulties before being finalizedin November 2009. EDF therebyacquiredastake in fiveexisting nuclearreactors in the US andaims to buildfournewEPR reactors there,also in ajoint-venture with Constellation Energy.

Enel Enel (Ente Nazionale per l’EnergiaElettrica –National AuthorityforElectricity)isthe former Italianelectricity monopolyandItaly’s largest electricitycompanytoday.Even if it startedits internationalization later thanmost of its peers, todayit is one of Europe’slargest electricitycompanies with a broad internationalpresence. Inparticular,the acquisition of the Spanish utilityEndesa, completedin 2009,hassignificantly changedthe nature of Enel:backin2005,Enel generatedonly 11 percent of its electricityandrealizedonly5percent of its electricitysales outsideItaly.Three years later,the degree of internationalization wassignificantlyhigher:in 2008,Enel produced62percent of its electricityandrealized49 percent of its electricitysales abroad. 118 Enel wasfoundedin 1962,when Italydecidedto nation- alizeits electricitysector following long discussions.The complicatednationalization process lastedforseveralyears,as nearly1,200 companies were mergedinto Enel,resulting in a companythatwasdifficult to manage.Politicalinterference wassignificant,andEnel sufferedmajor economiclosses. Enel’sproduction portfolio in the early1960swasdominated byhydroelectricity,butthe companythen rapidlydeveloped thermal,andespeciallyoil,generation. Also,fournuclearplants were built,butin1987 andhencejust after Chernobyl,the Italianpopulation votedin areferendumtostop the use of nuclearenergyin Italy.Sincethen,Italyhasbecome amajor importer of electricity,mainlyfrom FranceandSwitzerland. Another problem forEnel hasbeen recurrent localopposition to newcoalpower plants andvirtuallyanyother newelec- tricityinfrastructure.

118 .In2009,the firstyearof full consolidationofEndesa, the shareofgenerationand sales abroadwascertainlystill higher,but no informationwasavailable atthe timeofwriting . 2010 fri, ©I Case Studies of Major EuropeanUtilities 75

After legislativechanges in the early1990s,Enel wastransformedfrom apublicauthorityto ajoint-stockcompany,and later to anindustrialholding company.In1999,Enel was privatized, when shares equalling roughly32percent of the companywere placedon the stockmarket. Today,the Italian state hasaminorityshareholding in Enel (viathe Ministryfor the EconomyandFinance,whichhas21.1 percent,andthe state- ownedbank CassaDepositi ePrestiti, whichhas10.1 percent). 33.7 percent of the shares are heldbyinstitutionalinvestors, and35.1 percent byprivate investors (asof31December 2008). Also beginning in the 1990s,the Italianelectricitysector was liberalized.The “Bersani Decree,”whichcame into effectin1999, openedupseveralparts of the electricitymarket suchasgener- ation,import,export,purchasing andsales.The high-voltage transmission network,formerlyownedbyEnel,wasfirst spun off to anEnel subsidiary,andbecame anindependent company (Terna)inthe end.Moreover,the Italiangovernment required Enel to sell atleast 15 GW of production capacityby2002, whichresultedin asignificant lowering of Enel’smarket share in power production in Italy.HenceEnel had to accept this quite radicalstep to diminish its position in its home market –fewof its Europeancompetitors were requiredto doso. Confrontedbythese changes,Enel first chose adiversification strategyandbecame activeinwater,telecommunications (mobile phone operator Wind, internet companyInfostrada) andrealestate.However,this strategydidnot provesuccessful andmost of the non-energyassets had been soldagain bythe mid-2000s. The last shares in the telecommunications company Windwere soldin 2008. The sale of non-energyassets providedEnel with the neces- saryfundstoimplement anewstrategybasedon refocusing on energyandinternationalization. Enel’sfirst significant step towardsinternationalization wasthe acquisition of Spanish utilityViesgo in 2001. Further acquisitions were realizedin the following years in Bulgaria, RomaniaandSpain. Byacquiring SlovenskéElektrárne in 2005,Enel became the largest power producer in Slovakia.After twomajor acquisitions in 2007-2008, of the Spanish utilityEndesaandthe Russianpower generator OGK-5,Enel statedthatits internationalexpansion wascomplete. Asthe acquisition of Endesahasleft Enel with asignificant 2010 fri, ©I 76 The EU’s Major ElectricityandGasUtilities sinceMarket Liberalization

amount of debt,the companyhasannouncedthatitwill concentrate on consolidation,integration and“portfolio optimization” in the nextyears.Ithasalreadydivestedsome assets and announcedthe sale of more assets in early2009. Enel’sobjective is to divest assets worth € 10bnby2010. 119 Enel,just asits largest subsidiaryEndesa, hasstartedto diversifyinto gasbyselling gastoend-use customers in Italy. Butfor the time being,Enel’sgasactivities remain rather limited, even if there is animportant potentialfor electricity- gassynergy:Enel produces asignificant share of its electricity from naturalgas. In2008,88 percent of Enel’srevenues came from electricity,andonly5percent from gas.

The Acquisition of Endesa The acquisition of Endesa 120 hassignificantlychangedthe nature of Enel,asithasmadeEnel amuchmore international company.Spain hasbecome Enel’ssecondhome market,and it hasacquiredsignificant shareholdings in Latin America.The takeover wasthe biggest dealinthe Europeanutilitysector andthe sizeofthe acquisition is remarkable:Enel,with revenues of € 43.7bnin2007,acquiredEndesa, whichhad revenues of € 18.1bnthe same year,for € 43.4bn. The dealwasalong andcomplicatedprocess,which reachedveryhigh politicalprominenceandwaswidelydebated in Europe.Itstartedin September 2005,when Spain’slargest gasutility,GasNatural,submitteda€ 22bntakeover bidfor Endesa, whichEndesaregardedashostile.E.ON respondedby announcing its interest in acquiring Endesaandoffered € 29bn in February2006. The EuropeanCommission clearedthe deal proposedbyE.ON later in 2006,butthe Spanish government

119 . EnelAnnualReport 2008,p . 13and 19 . 120 .Endesawasfounded in 1944 asagovernment-ownedelectricity company .Itbecame the leadingelectricity producerin Spain,interalia, byacquiringseveralsmallerutilitiesin the early1990s .The companywasprivatized between1988and 1998 .Itstarted tointernation- alizeits activitiesin the 1990s,firstin Latin America,theninsomeEuropeancountries (Portugal,France,Italy) . Endesaalsodiversified intowater,telecommunicationsand real estateinthe 1990s,but soldmost of theseassets in the 2000s .Moreover,ithasbecomean importantplayerin the Spanishgasmarket,too . Endesahadrevenuesof € 18 .1bnin2007 and € 22 .8bnin2008 . 59 percentof its 2008revenueswererealized in Spain and Portugal, 37 percentin Latin America,4percentelsewhere . 2010 fri, ©I Case Studies of Major EuropeanUtilities 77 andthe Spanish energyregulator expressedtheir opposition to aforeign takeover of Endesa.Theyindeedimposedheavy conditions on E.ON if it wantedto acquire Endesa;this behavior waslater declaredabreachofcommunitylawbythe European Court of Justice.121 GasNaturalgaveupits acquisition plans in February2007,whereasE.ON increasedits offer to € 41bn. One month later,Enel andAcciona, aSpanish construction company thathad alreadybought 30percent of Endesain 2006, announcedtheir intention to jointlytake over Endesa.Enel, alreadyactiveinSpain thanks to its earlier acquisition of Viesgo,wasaskedto step in asa“white knight:”politically,it seemedamore welcome partner to the Spanish government thanthe Germangiant E.ON.Furthermore,Enel didnot intend to havesole control of Endesa–Accionawouldensure that Spanish business still had animportant sayover Endesa. The dealprovokedmanyreactions andlong negotiations took placebetween the companies,the Spanish government, the Spanish competition authorities,the Spanish energyregulator andthe EuropeanCommission. AsE.ON realizedthatthe politicalopposition to its offer wastoo significant andthata successfulacquisition of Endesawasimpossible after Enel’s andAcciona’s declaration of interest,it gaveupits intention to become the majorityowner of Endesa.InApril 2007E.ON instead agreedwith Endesa, Enel andAccionaon the acquisition of assets from EndesaandEnel in Italy,Spain,France,Poland andTurkey.Enel andAccionathen announcedtheir joint offer forEndesasome dayslater,worth € 43.4bn. Enel wastoacquire 67 percent of Endesa, whereasAccionawouldhave25percent. InOctober 2007,the Spanish authorities allowedEnel and Accionato acquire Endesaunder some conditions.Inter alia, “AccionaandEnel shall keep Endesaasanautonomousenter- prise with full operationalresponsibilityin complying with its business plan,andasthe parent companyof its group,keeping its ownbrand, registeredoffice,directors andeffectivemanage- ment anddecision-making center in Spain.” 122 Asagreed, Endesasoldits Europeanactivities to E.ON in 2008(see E.ON section fordetails). Endesawasthen jointlymanagedbyEnel

121 . EuropeanCourtof Justicepress releaseof6March2008 . 122 .Enelpress releaseof23 October2007 . 2010 fri, ©I 78 The EU’s Major ElectricityandGasUtilities sinceMarket Liberalization

andAcciona, withAccionahaving adisproportionatelyhigh share of power when comparedto its shareholding.Cooperation between the twomain shareholders proveduneasy,asEnel and Accionahad different management styles andcontrasting ideas aboutEndesa’s future.Itwastherefore no surprise thatAcciona usedits option to sell its share earlier thanscheduled.The transfer of Acciona’s 25percent share to Enel wasconcludedin June 2009:Enel paid € 11.2bnfor the remaining shares,butat the same time soldsomeofEndesa’s renewable generation assets to Accionafor € 2.8bn. Inresult,Enel nowhas92percent of Endesaandfull management andoperationalcontrol.123

Enel’sOrganization and Presenceinthe DifferentMarkets Enel,asmost of its peers,hasaseparate division forrenewable energies whichoperates ataninternationallevel. Another particularityis the factthatEndesacontinues to constitute an independent entity,assuring most (butnot all) of Enel’sactivities in IberiaandLatin America.The Enel groupisdividedin eight divisions,the sixmost important being (in terms of revenues): 124 –“Sales” operates in the end-user market forelectricityand gasinItaly; –“Generation andEnergyManagement” is responsible for electricitygeneration in Italy; –“Infrastructure andNetworks” manages electricityandgas distribution in Italy; –“IberiaandLatin America”coordinates Endesa’s operations in the electricityandgasmarkets of Spain,Portugal,Latin America andelsewhere; –“International” manages Enel’sforeign operations other than EndesaandRenewables; –“Renewable Energy”develops andmanages generation of electricityfrom renewable resources in Europe andthe Americas under the name “Enel Green Power.” Enel recentlyannounced its intention to sell aminoritystake of “Enel Green Power.”

123 .Enelpress releasesof 20 February 2009and 25June 2009 . “Accionaand Enelnegotiate afriendlySpanishdivorce,” FinancialTimes ,13January 2009 . 124 . The twootherdivisionsare“Engineeringand Innovation” and “Servicesand other activities .” 2010 fri, ©I Case Studies of Major EuropeanUtilities 79

Table 10.Enel 2008Revenuesand EBITDA Revenues EBITDA € bn% € bn% Italy51.267 7.4 52 Iberia&Latin America 15.8 214.6 32 International4.7 61.07 Enel Green Power 1.8 21.28 Other 2.9 40.1 1 Totalbefore eliminations 76.4 100 14.3 100 andadjustments Eliminations andadjustments –15.4 –0.0– Total61.2–14.3 –

N.B.:Endesais consolidatedat67.05percent. Source: Enel AnnualReport 2008,p. 25,andowncalculations.

Italy Enel asthe former state-ownedmonopolyis the incumbent player of the Italianelectricitymarket. However,Enel was forcedto sell animportant part of its generation assets in the early2000stocompetitors (Edison,Eni,municipalorregional utilities andforeign companies). In2008,Enel wasthe single largest power generator in Italy,asitaccountedfor32percent of Italianelectricityproduction. Ithad amarket share of 41 percent in overall electricitysales to end-customers,with its market share in regulateddistribution being muchhigher (85 percent) thanits share in sales on the free market (27percent of total volumes,still making Enel the largest seller in this market). Moreover,Enel is Italy’s number twoingaswith amarket share of 7percent in sales to end-consumers in 2008.125 AsItalyoptedforownership unbundling,Enel wasrequired to giveupcontrol of the high-voltage transmission network it had formerlyowned.In1999,the transmission network was first given to anewly-createdEnel subsidiary,Terna.In2004, Ternawasintroducedto the stockmarket,andEnel subse- quentlyreducedits share in Ternato around5percent. Enel divestedsome remaining high-voltage network assets (mainly

125 . EnelAnnualReport 2008,p . 14 . 2010 fri, ©I 80 The EU’s Major ElectricityandGasUtilities sinceMarket Liberalization

Table 11.Enel 2008ItalianBusiness Revenues EBITDA € bn%€ bn% Sales 22.6 44 0.6 8 Generation &Energy22.1 43 3.1 42 Infrastructure &Network 6.5 13 3.7 50 Totalbefore eliminations 51.2100 7.4 100 andadjustments

Source: Enel AnnualReport 2008,p. 25,andowncalculations.

132and150kV)toTernain 2008. Moreover,Enel also soldits gasdistribution network “Enel Rete Gas” in 2009. Enel has, however,kept its important electricitydistribution network, through which76percent of electricityconsumedin Italywere transportedin 2008. Enel is also knownfor being the first companythatdeployedsmart meters on alarge scale to all its electricitycustomers in Italy.Inthe generation sector,Enel is one of the first companies in the worldto develop the use of hydrogen forpower production. After the politicaldecision in 2009bythe Italiangovernment to buildnuclearpower plants,Enel is set to become the main actor in nuclearpower in Italy.Enel had runthe Italiannuclearpower plants in the 1970sand1980s,andtodayhasaccess to nucleartechnology in Spain (viaits subsidiaryEndesa),Slovakia(viaits subsidiary SlovenskéElektrárne) andFrance(thanks to its participation in the FrenchEPR program). In2009Enel signedagreements with EDF forajoint venture thatwill studythe feasibilityof constructing nuclearpower plants in Italy. 126

Iberia Enel’sactivities on the IberianPeninsulaare mainly conductedthrough its subsidiaryEndesa, whichisone of two dominating electricitycompanies in Spain. Moreover,Enel has some assets in renewable energyviaits 50percent shareholding in Union FenosaRenovables.Until 2008,Enel also was activeinSpain viaits subsidiaryViesgo (acquiredin 2001,sold to E.ON in the contextofthe acquisition of Endesa). Through

126 .Enelpress releaseof24February 2009 . 2010 fri, ©I Case Studies of Major EuropeanUtilities 81 the acquisition of Endesa, Spain hasbecome the secondmost important countryforEnel in terms of revenues andoperations. Endesawasthe largest electricityproducer in Spain in 2008 with amarket share of around28percent.127 Itproduced 37 percent of its electricityfrom nuclearpower,34 percent from coal,14 percent from CCGT,10percent from hydroelec- tricityand5percent from other renewables.Inelectricitysales, Endesahad amarket share of 35 percent in the regulated market and49 percent in the liberalizedmarket. Ingas,Endesa had amarket share of 15 percent (including gasconsumed in Endesa’s power plants),or 8percent in supplies to end- customers (according to the Spanish regulator).128 Inneighboring Portugal,whose electricitymarket is coupled to the Spanish one under the IberianElectricityMarket ( MercadoIbéricodelaElectricidad,MIBEL),Endesahassome smaller participation in electricitygeneration. Endesawasselling electricityin Portugaluntil 2007(market share of 8percent), butleft the market duetothe slowpaceofderegulation and pricecaps.Ithowever announcedin early2009its return to the Portuguese market with the ambition to reachamarket share of 10percent in 2010. 129

France Enel haslong had the objectiveofdeveloping asignificant presenceinthe Frenchelectricitymarket. Ithasbeen active there foralong time,with cooperation in the nuclearfield dating backtothe 1970swhen Enel participatedin the Superphenixproject. However,Enel’sentryinto the French market hasbeen slow.LikeEDF’s activities in Italywith Edison, Enel’spresenceinFrancehasregularlybeen the subject of Italian-Frenchpoliticalnegotiations:the activities of both companies in their respectivecountries haveoften been linked anddescribedasresults of politicaldeals.Itwasalso forpolitical reasons thatEnel didnot pursueits plantoacquire Suez’s energy assets in 2006–aplanthatwasimpossible to realizegiven the Frenchgovernment’spreferencefor the GDF-Suezmerger.

127 .Comisión delMercado de ValoresMobiliariosetal . (2009),p . 24-25 . 128 . Comisión NacionaldeEnergía(2008b),p . 10 . 129 . Endesaenters Portugalseeking10pctmarketshare,Reuters,4March2009 . 2010 fri, ©I 82 The EU’s Major ElectricityandGasUtilities sinceMarket Liberalization

Since2005,Enel hasa12.5 percent participation in the EPR nuclearplant thatEDF is building atFlamanville.Enel will also participate in future EPR projects in Francelikethe one atPenly. This allowsEnel to train technicians andengineers in the latest nucleartechnology,butthe cooperation also includes access to nuclearcapacityin France(800 MW in 2009,1,200 MW in 2011). Moreover,Enel hasacquiredsome windassets in France,but also plans to buildgasorcoalplants there.Ithasalso announced its intention to bidforconcessions forhydroelectricplants.Enel is selling electricityto industrialcustomers in France,butits client portfolio is rather small (ameager 1TWhofsales in 2008). Finally,Enel hasa4.9 percent participation in the Frenchenergy exchange Powernext.130

Belgiumand the Netherlands Enel enteredthe Belgianmarket in 2008byacquiring 80percent of the companythatisbuilding a420 MW CCGT plant in Marcinelle.Its construction is expectedto becompleted in 2011,andEnel hasconfirmedthatitmight giveparts of its stake to EDF in anasset swapthatwouldgiveitfurther production capacityin France.

United Kingdom and Ireland Following apublictender in 2008,Enel’ssubsidiaryEndesa acquiredgeneration assets from ElectricitySupplyBoard(ESB, the incumbent electricitycompanyof Ireland)for € 450m. The Irish government had decidedto decrease the market share of ESB,andEndesanowowns around16 percent of installedgeneration capacityin Ireland, making it the second-largest electricity utilitythere.Endesaannounced“ambitiousgrowth targets for Ireland, Northern IrelandandGreatBritain” after the conclusion of the deal 131 –itisindeedinteresting to note thatneither Enel nor Endesahaveanysignificant position in the British market. The fiveother utilities analyzedin this book haveimportant assets andrespectivemarket shares there –Enel andVattenfall are the onlygroups withoutanysignificant presencethere.

130 .“EDFetEnelnégocientunéchanged’actifs,” La Tribune,13July2009 . “Eneloulastra- tégiedespetits pas,” La Tribune online ,13July2009 . 131 . Endesapress releasesof 31July2008and 8January 2009 . 2010 fri, ©I Case Studies of Major EuropeanUtilities 83

Centraland EasternEurope Enel is activeinthree CentralandEastern Europeancoun- tries:Slovakia, BulgariaandRomania.Its most notable presence is in Slovakia, where Enel,in 2006,acquired66 percent of SlovenskéElektrárne,the largest power producer in Slovakiaand the second-largest in CentralEastern Europe.SlovenskéElektrárne runs the fourSlovaknuclearreactors,andalso hascoal,gasand hydroelectricplants.The formerlystate-ownedcompany,in whichthe SlovakNationalPropertyFundstill has34percent, produces around75-80percent of Slovakelectricity.In2008, SlovenskéElektrárne hasstartedconstruction of twonewnuclear reactors atMochovce(western Slovakia),basedon Russiantech- nology.The start of operation is scheduledfor2012-2013. They will replacetwoolder reactors shutdownin2006and2008 following anagreement with the EuropeanUnion,whichrequired this shutdownfor securityreasons.The Slovaknuclearprogram hasrepeatedlybeen criticizedforits insufficient safetylevel, especiallyfrom internationalnon-governmentalorganizations (NGOs) andAustrianpoliticians andsociety,butEnel and SlovenskéElektrárne haveassuredthe publicthatthe reactors havebeen updatedto the highest securitystandards. Slovenské Elektrárne sells all its electricityon the Slovakwholesale market, asithasnodistribution activities anddoes not sell electricityto industrialcustomers (butitplans to develop the latter activity). SlovenskéElektrárne also hasregionalexpansion plans which mainlytarget the CzechRepublic, HungaryandPoland. InRomania, Enel participatedin the privatization of the electricitysector andacquiredshares in three electricitydistribution companies between 2005and2008. Enel hasthereby become the most important foreign operator in the Romanian electricitydistribution sector,with amarket share of approxi- mately30percent. Enel also plans to build, in ajoint-venture with E.ON,acoalpower plant in Romaniaforthe state-controlled energyproducer Termoelectrica.Moreover,the companypartici- pates in the Cernavoda nuclearnewbuildproject. InBulgaria, Enel acquiredshares in the MaritzaEast 3lignite plant in 2003,andincreasedits shareholding to 73 percent in 2006. Ittherebycontrols around8percent of the country’s electricityproduction,buthasnosales or distribution activities there. 2010 fri, ©I 84 The EU’s Major ElectricityandGasUtilities sinceMarket Liberalization

Outsidethe EU Enel’sactivities outsidethe EU are concentratedin Russia andthe Americas. Enel realizedthree major acquisitions in Russiain 2006-2007andthanks to its variousshareholdings Enel is nowactivethroughoutthe whole energyvaluechain in Russia: it acquired49.5 percent of the Russianelectricitytrader RusEnergoSbytin2006,andthen 59.1 percent of the electricity producer OGK-5 in 2007,whichhasfourlarge thermalpower plants. 132 Also in 2007,Enel acquiredsome former Yukos assets (mainlylicenses covering oil andnaturalgasfields),in ajoint-venture with Eni. This dealhasbeen criticizedasan action in favor of Gazprom,who didnot want to acquire these assets outright,fearing legalproblems.InMay2009,Enel,Eni andGazprom indeedannouncedthatGazprom woulduse its put-option andacquire 51 percent of the Eni-Enel joint-venture SeverEnergia. 133 Inthe Americas,Enel andEndesaeachhavesignificant assets in power production,sales anddistribution. Enel special- izes in renewable energyassets,whereasEndesahasaparticu- larlystrong portfolio in some Latin Americancountries (Chile, Argentina, Colombiainter alia)andproducedover 60TWh of electricityin Latin America in 2008. After the acquisition of Endesa, Enel is the leading private-sector electricitygroupin Latin America.

RWE RWE(Rheinisch-Westfälisches Elektrizitätswerk,Rhenish- WestphalianElectricPower Company)isone of the largest electricityproducers andmarketers in the EU.The company hasalong historyasitwasformedin 1898 asalocalelectricity enterprise in Essen (Ruhr area). Itthen grewinto neighboring Germanregions,andlater on became one of the largest German utilities.Still todayRWEhasstrong ties to its home region,as severalcities andmunicipalitiesofNorth Rhine-Westphalia haveanimportant shareholding in the company.RWEhas

132 .Enelcurrentlyowns55 .9 percentof OGK-5 afterasale of sharestothe EBRD . 133 .ENIand Enelbuy Yukosassets,Reuters,4April 2007 .Enelpress releaseof15May2009 . 2010 fri, ©I Case Studies of Major EuropeanUtilities 85 indeedfollowedthe mixedeconomymodel sinceits beginnings, asseveralmunicipalities acquiredshares in RWEearlyon, usuallyin exchange foraconcession given to RWEthatit wouldbecome the monopolysupplier of the municipality. Municipalshareholders came to possess the majorityof RWE’s voting rights,butthe company’s dailyaffairs havealwaysbeen managedbyprivate entrepreneurs. Historically,RWE hasbeen acompanyverymuchfocused on electricity,andmuchless on naturalgas. RWEhasbeen developing its gasactivities sincethe 1990s,butelectricitystill dominates:RWE realized66 percent of its 2008revenues in electricity,versus30percent in gas. This puts it in between E.ON andGDF Suez(for whichelectricityandgasare more or less equallyimportant),andEDF,Enel,IberdrolaandVattenfall (whichonlyhavelimitedgasactivities). RWE’s headquarters are locatedin Essen andhenceatthe center of the Ruhr –the heartlandof Germanheavy industry. Itistherefore no surprise thatRWE’s development was stronglylinkedto Germanindustrialization. One of the most important entrepreneurs in Germanhistory,Hugo Stinnes, wasthe driving forcebehindthe creation of RWE.From the beginning,RWE believedin the development of the electricity industryandbuilt manylarge power plants,most of them basedon coal,aresourcethathasalwaysplayedanimportant role forRWE.This is underlinedbythe factthatRWEhasalso been mining coal,especiallylignite,fordecades.Still today, RWE’s electricityproduction relies heavilyon lignite andhard coal:61 percent of RWE’s electricityproduction in 2008was basedon these sources.However,the companyhasalso participatedin the Germannuclearprogramsinceits beginnings in the early1960s. Besides production,RWE hasplayedadomi- nant role in the development of the Germanelectricitygrid;it hasalso become the largest TSO in Germany. Ingas,RWE wasone of the first companies to supply coke-oven gastoindustrialcustomers before WorldWarI.But it wasonlyaminor player when the Germannaturalgas business developedin the 1970s. In1988,the acquisition of Deutsche TexacogaveRWEaccess to oil andgasupstream assets.Eight years later,the acquisition of 50percent of 2010 fri, ©I 86 The EU’s Major ElectricityandGasUtilities sinceMarket Liberalization

Table 12.MajorRWEAcquisitions2000-2009

CompanySector Year € bn Essent Electricity,gas20097.3 Thames Water Water 2000 7.1 VEW Electricity,gas2000 5.9 Innogy(UK)Electricity,gas2002 5.1 AmericanWater Water 20034.5 TransgasandCzech Gas2002-20034.1 regionalgassuppliers

N.B.:Onlyincludes deals forwhichthe transaction valuehasbeen publishedbyRWE. Source: RWE, Facts &Figures,May2009.

Table 13.MajorRWEDivestments 2000-2009

CompanySector Year € bn Thames Water Water 20067.2 E-PlusMobilfunk Mobile telecommunication 2000 3.6 Hochtief Druckmaschinen Precision mechanical 2001-20071.8 engineering DEA Downstreamoil 2002 1.5 CondeaChemicals 2000 1.3 LAUBAGandVEAGElectricity, 2000 1.3 lignite mining Hochtief Construction 2004-20061.0 AmericanWater Water 2008-2009n.a.

N.B.:Onlyincludes deals forwhichthe transaction valuehasbeen publishedbyRWE. DEA: RWEsoldthe downstreamoil assets,butkept upstreamactivities. Source: RWE, Facts &Figures,May2009.

Thyssengas 134 brought RWEbacktothe larger gasbusiness,as it then became agasimporter andTSO.Moreover,the merger with VEW in 2000 addedsome Germanregionalgascompanies to RWE’s portfolio.RWEhasalso become activeinLNG with the acquisition of 50percent of the US LNG companyExcelerate in 2008. Thanks to acquisitions in other Europeancountries (inter alia, Essent in the Netherlands,Innogyin the UK and Transgasinthe CzechRepublic),RWE is currentlythe sixth- largest gascompanyin the EU in gassales to end-use customers.

134 . RWE acquired the remaining50percentin 2000 and 2002 . 2010 fri, ©I Case Studies of Major EuropeanUtilities 87

Inthe wake of the liberalization of the energysector,RWE diversifiedits activities beyondelectricityandgas. Itbecame activeinoil andchemicals with the acquisition of Deutsche Texaco,andhad variousshareholdings in the telecommunications sector in the 1990s. However,its experiences in telecommunications havebeen describedasa“roller coaster ride,”andmost of these activities were divestedwhen the telecommunications market wasliberalizedin the late 1990s.135 Inthe early2000s, RWEalso divestedits downstreamoil activities (DEA petrol stations) andfinancialparticipations in other industrialsectors (Hochtief,Heidelberger Druckmaschinen,Harpen). Acase in point is RWE’s water activities (see box2). Inshort,RWE abandonedthe “multi-utilities” concept onlyafter afewyears, andin severalsteps reducedits activities in sectors other than electricityandgas. However,the companydecidedto strongly develop its electricityandgasactivities atthe Europeanlevel. After some first steps towardsinternationalization in the 1990s, severalacquisitions in the 2000ssignificantlychangedthe company’s scope of activity,whichisnowmuchmore interna- tionalthanbefore.

Box2.RWE’sWaterActivities

Inthe late 1990s,RWE decidedto diversifyits businesses and optedfora“multi-utility”strategy.Electricity,gas,waste andrecy- cling,water andwaste water constitutedthe newcore business areas, whichRWEwantedto develop ataninternationalscale.RWEalready had some limitedparticipations in water atthattime (inter aliain Berlin),butenteredthe water business atalarge scale viatwomajor acquisitions in the early2000s. In2000,RWE bought the largest water utilityin Britain,Thames Water,whichalso had variousinter- nationalactivities.Three years later,RWE acquiredthe largest water companyin the US,AmericanWater.The combinedvalueofthe twoacquisitions wasmore than € 18bn,andRWE became the third- largest water companyworldwide,serving 56m customers.Inthe following years,water contributedaround10percent to RWE’s overall revenues.

135 . The last shareholdingintelecommunicationswasdivested in 2005 . International Directory of CompanyHistories ,vol .50,London:St .JamesPress,2003 . 2010 fri, ©I 88 The EU’s Major ElectricityandGasUtilities sinceMarket Liberalization

RWEenvisagedimportant synergies between water andenergy,as the utilityhopedto offer eachclient water,electricityandgasservices. ButRWEsoon realizedthatthe British andNorth Americanwater activities had onlyverylimitedsynergies with continentalEuropean electricityandgasactivities.Onlyfiveyears after the acquisition of Thames Water (andonlytwoyears after the acquisition of American Water),RWE announcedin late 2005thatitplannedto divest its water business by2007. The companyhad realizedthateconomies of scale in water canbeachievedon aregionalscale,andnot on aglobal one.Moreover,Thames Water’simportant activities in London turned outtobemuchless profitable thanestimated, asthe British water regulator requiredRWE to invest massivelyin the network. Inthe end, RWEonlykept its limitedwater activities in continentalEurope, asitwasstillconvincedaboutsynergyeffects there.The company then decidedto concentrate on its “traditionalcore competences” elec- tricityandgasinEurope,where it sawmanyopportunities thanks to the ongoing liberalization of the energysector. 1 InOctober 2006Thames Water wassoldto aconsortiumledbyan infrastructure fundfor € 7.2bn,whichallowedRWE to exit its adventure in the British (andglobal) water market withoutabig loss,even if market observers estimatedthatthe investment might not have earnedthe capitalcosts. 2 The divestment of AmericanWater has provedto bemore complicated, andledto substantialfinancial losses forRWE.After lengthydeliberations,RWE decidedto use an initialpublicoffer(IPO)inorder to divestAmericanWater. The placement wasfirst heldupbyalong regulatoryapprovalprocess, andthen RWEpostponedit duetothe unfavorable situation on financialmarkets in 2007and2008. The first placement took place in April 2008,when RWEsold39.5 percent. RWEfurther reducedits shareholding in 2009,anddivestedits last share in AmericanWater in November 2009.3

1 . RWE press releaseof4November2005 . 2 . Energie-Chronik,September2000,September2001,October2005,August2006,and October 2006 . 3 .RWE AnnualReport 2008,p . 53and RWE Report on the firsthalf of 2009,p . 10 .AmericanWater debut disappoints,FTonline,23 April 2008 . RWE press releasesof 18 and 25November2009 .

RWErelies heavilyon lignite (33 percent of ownedgener- ation in 2008) andhardcoal(28percent) forpower production –noother major Europeanutilityuses coaltosuchahigh extent. This makesRWEthe biggest CO2 -emitter of all European power producers,afactthatconstitutes acompetitivedisad- vantage duetothe increasing needto acquire CO2 permits. RWE, likeits competitors,currentlystill receives a(decreasing) 2010 fri, ©I Case Studies of Major EuropeanUtilities 89 number of permits forfree(seeconclusion formoredetails, also on the debate on relatedwindfall profits). In2008,RWE paidabout € 1bnfor permits,andthis amount couldrise to € 3bnby2013. According to RWE, currentlythe company alreadyneedstopurchase around40percent of its CO2 permits. 136 Asthe other producers in the EU,it will needto acquire 100 percent of permits from 2013 onwards. Itishence in RWE’s best financialinterest to reduceemissions:the companyplans to reduceemissions by20percent by2012, andbymore than30percent by2015. Itwants to develop renewable energies,increase power production from natural gas,reducethe share of lignite andhardcoal,butalso develop Carbon Capture andStorage (CCS). RWEalso plans to keep nuclearenergy,hoping forthe reversalofthe Germanphase- outdecision.137 RWEplans investments of € 26bnby2012,important parts of whichwill beinvestedin the modernization of its production capacities.50percent of this € 26bnwill beinvestedoutside Germany.RWE’s (until nowverylimited)activities in “new” renewable energies –mainlywind–havebeen managedby the InnogysubsidiarysinceFebruary2008. RWEInnogyis especiallyactiveinGermanyandthe UnitedKingdom,and also hasassets in Spain,France,Portugal,Switzerlandandthe CzechRepublic. Likemost of its peers,RWE is part-ownedbypublic authorities.Historically,cities andmunicipalities from North Rhine-Westphaliaparticipatedin RWE.This gavethe company alocalidentityandstrong ties with its home region. Until 1998, when the system of multiple voting rights wasabandoned, localauthorities even had the majorityof voting rights.Butan increasing number of cities havesoldtheir participation in RWEduring the last decade. In2004,the municipalities had around33 percent of voting rights.Their influencehas continuedto decrease since,butthere are contradictoryreports

136 .E-mail from RWE representativetothe author,14 December2009 . 137 .RWE planstosignificantlychangeits fuel mixby2020:itwants toincreasethe shareof renewable energies(from 3percentof installed capacity in 2007 to17percentin 2020), increasethe shareofnaturalgas(from 16percentto30 percent),reducethe shareoflignite and hardcoal(from 56percentto35percent)and nearlykeep the shareofnuclearenergy (14percentin 2007,11 percentin 2020) . Source:RWE, Facts &Figures ,October2008,p . 30 . 2010 fri, ©I 90 The EU’s Major ElectricityandGasUtilities sinceMarket Liberalization

abouttheir current shareholding:ajoint-venture of municipal shareholders(RW Energie-Beteiligungsgesellschaft)has 15 percent of shares and16.1 percent of voting rights (asof 31 December 2008), 138 whichmakesitthe biggest single shareholder in RWE.The overall voting rights of municipalities (RW Energie-Beteiligungsgesellschaft plusothers) seems to be higher thanthat,butprobablyless than25percent,whichis the thresholdforablocking minority. 139 The municipalshareholders havethe right to nominate fouroutofthe twenty members of RWE’s supervisoryboard(ten outofthe twenty members are workers’ representatives). Some press reports claim thatlocalmayors tendto puttheir localinterests above overall companygoals (for example,when it comes to defending jobsintheir owncities) –RWErepresentatives havecontra- dictedthis in discussions with the author.Moreover,analysts underline thatthe cities’ participation is aprotection against possible hostile takeovers. 140

RWE’sStructureand Position in the DifferentEuropeanMarkets RWE’s internalstructure hasrepeatedlybeen modifiedin recent years,with newCEOs 141 not onlychanging the business model (from “multi-utility”backtoenergyutility),butalso the group’sstructure.After the last modification in 2009,the RWE groupcurrentlycomprises ten main divisions,with fourof them being geographicunits andsixbeing functionalunits: –“Germany”(consisting of numerousbranchcompanies) generates electricity,distributes andsells electricityandgasand mines lignite in Germany; –“GreatBritain” (RWEnpower) generates electricityandsells electricityandgasinthe UK; –“Netherlands/Belgium” (Essent) generates electricityand sells electricityandgasinthe Netherlandsandin Belgium;

138 . RWE-Factbookfür Privataktionäre,May2009,p . 25 . 139 . Süddeutsche Zeitung online estimated in March2009thatlocalauthoritieshad18percent of votingrights . 140 .See forexample “RWE: StädtesichernEinfluss,”3January 2008,http://www .manager- magazin .de;Aktienkurs bringtKommunenbei RWE in Zugzwang,Wirtschaftswoche, 15 December2005 . 141 . RWE changed CEOin 2003 and again in 2007 . 2010 fri, ©I Case Studies of Major EuropeanUtilities 91

Graph 2.RWEStructure

RWEAG AMPRION THYSSENGAS INTERNAL SERVICES

NETHERLANDS/ GREAT CENTRAL-AND UPSTREAM TRADING/GAS GERMANY BELGIUM BRITAIN EAST-EUROPE RENEWABLES GASAND OIL MIDSTREAM Powergeneration Essent RWE npower RWE Hungária RWE Innogy RWE Dea RWE Supply &Trading Distribution RWE Polska networks VSE (Slowakia) Retail /Sales RWE Transgas Energy efficiency (Czech Republic) Operating Companies

Source: http://www.rwe.com.

Table 14.RWE’sDivisions:Revenuesand EBITDA in 2008

External Intra-group Total %oftotal Division revenues revenues revenues revenues ( € bn) ( € bn) ( € bn) RWEEnergy30.4 2.1 32.5 40 RWESupply&Trading 6.3 20.5 26.8 33 RWEPower 1.4 10.011.4 14 RWEnpower 8.6 0.08.6 11 RWEDea1.8 0.22.02 Other (including RWEInnogy)0.4 n.a.n.a.0 TotalRWEgroup49.032.8 81.8 100

EBITDA %of Division ( € bn) EBITDA RWEPower 3.5 42 RWEEnergy3.036 RWEDea0.7 8 RWEnpower 0.7 8 RWESupply&Trading 0.5 6 RWEInnogy0.1 1 Other –0.2(2) TotalRWEgroup8.3 100 N.B.:The table gives the companies’ divisions before the latest modification of RWE’s structure in 2009. Source: RWEAnnualReport 2008andowncalculations. 2010 fri, ©I 92 The EU’s Major ElectricityandGasUtilities sinceMarket Liberalization

–“Central- andEast-Europe” sells electricityandgasandmanages distribution andtransmission networks in the CzechRepublic, Hungary,PolandandSlovakia; –“Renewables” (RWEInnogy)wasfoundedin 2008andmanages RWE’s renewable energyactivities; –“UpstreamGasandOil” (RWEDea)isproducing gasandoil, mainlyin Europe andNorth Africa; –“Trading /GasMidstream” (RWESupply&Trading) runs energytrading operations andmanages non-regulatedgas midstreamactivities; –“Amprion” manages RWE’s high-voltage electricitytransmission network in Germany; –“Thyssengas” manages RWE’s high-pressure gastransmission network in Germany(RWEhascommitteditself to sell its gas transmission network); –“InternalServices” (consulting,information technology[IT], services,technology). RWE’s activities are concentratedto averyhigh degree in the EU.RWE’s core markets form acoherent geographicentity in CentralEurope,to whichone needstoadd RWE’s UK business.Germanyis byfarthe most important country:RWE realized63 percent of its revenues there in 2008. The UK comes secondwith 20 percent,other Europeancountries amount for17percent andextra-Europeanbusiness for 1percent. The acquisition of Essent in 2009,however,will change the distribution anddecrease the part of Germanactiv- ities in overall revenues.

Germany Germanyis RWE’s home market,andstill byfarits most important countryof operations.Its traditionallystrong position on the Germanelectricitymarket wasreinforcedin 2000,when it mergedwith its long-term rivalVEW,whichoperatedin neighboring areasinWestern Germany.When approving the merger,however,the GermanFederalCartel OfficerequiredRWE to divest its shareholding in the East GermanutilityVEAGand the lignite companyLAUBAG(Lausitzer Braunkohle AG [today Vattenfall Mining AG]),whichRWEhad acquiredafter German 2010 fri, ©I Case Studies of Major EuropeanUtilities 93

Map1.RWECoreMarkets

Source: RWE, Facts &Figures,May2009,p. 8(before the acquisition of Essent). reunification. RWEis the largest power producer in Germany today,with amarket share of around31 percent (including electricitypurchasedfrom other producers under long-term contracts). Its market share in sales to end-customers is lower, ataround16 percent. This madeitthe second-largest seller behindE.ON in 2008–butafter E.ON’s sale of Thügain 2009, RWEwill probablybecome the largest seller aswell. RWEsells considerable parts of its electricityvialocalcompanies in which it hasminorityshareholdings. 142 According to the German Monopolies Commission,RWE hasmajorityparticipations in 26regionalorsupraregionalelectricitycompanies,andminority shareholdings in 71 regionalsuppliers. 143 Hence,RWE’s influ- enceonthe Germanelectricitymarket is probablylarger than

142 .4 .5m of RWE’s11 .5m Germanelectricity customers and 2 .0mofits 3 .0mgascustomers are“indirectcustomers”,whichmeansthattheygettheirelectricity orgasfrom companiesin whichRWE hasaminority holdingofatleast 20 percent . 143 .Monopolkommission(2007),p . 54 . 2010 fri, ©I 94 The EU’s Major ElectricityandGasUtilities sinceMarket Liberalization

the market shares might suggest. Moreover,RWE owns 31 percent of the Germanelectricitytransport network (220 kVand380kV), andanequalshare of the high-voltage distribution network (110kV). The companyalso owns around20 percent of the mediumandlowvoltage distribution network. UnlikeE.ON andVattenfall,RWE hasnointention to sell its electricity transmission network. RWE’s position in the Germangasmarket is muchsmaller, even if RWEis the third-largest gasseller to end-use customers with amarket share of around6percent. RWEbecame along distancenaturalgascarrier andnaturalgasimporter after the acquisition of Thyssengasin1996. However,RWE agreedwith theEuropeanCommissioninearly2009tosellits gastransmission network,in order to avoidacompetition case:the Commission suspectedRWE of anti-competitivebehavior and the refusaloftransmission services to thirdparties.The divestment process forthe asset,whichcomprises around4,000 km of high-pressure gastransmission pipelines equaling 10percent of the entire Germantransmission network,is currentlyongoing. 144 However,RWE keeps its gasdistribution network.

United Kingdom RWEenteredthe British electricityandgasmarket in 2002 byacquiring the utilityInnogyplc, whichoperatedpower plants andsuppliedelectricityandgas(under the npower brand)inNorthern andCentralEngland. 145 RWElater renamed its whole UK subsidiaryRWEnpower,anddevelopedits production andsales portfolio.Todaythe UK is the second most important market forRWE, andit realizes one-fifth of its revenues there.RWEnpower is the fourth-largest energyutility in the UK, having market shares of 14 percent in electricity production (mainlybasedon coalandgas),17 percent in elec- tricitysupplyand9percent in gassupplyin 2008. The company serves around7m customers (4.2melectricity,2.6m gasin2008); 59 percent of its electricitysales in 2008went to industrialand corporate customers,41 percent to private andcommercial

144 . OfficialJournalofthe EuropeanUnion,12June 2009(Commissiondecisionof18March2009) . 145 . RWE hadalreadyentered the Britishwatermarkettwoyears before,through the acquisition of ThamesWater . 2010 fri, ©I Case Studies of Major EuropeanUtilities 95 customers.The situation in gassales is different,with 84 percent of sales going to private andcommercialcustomers,andonly 16 percent to industrialandcorporate customers.Unlikemost other major UK utilities,RWE npower is not activeinelectricity distribution. Ina50-50joint-venture with E.ON,RWE hasobtainedland fornuclearnewbuildatauctions in April 2009. Both companies plantobuild6GW of nuclearcapacitythere.RWEalso develops newnaturalgasandcoalplants,aswell asoffshore wind production in the UK.

Belgiumand the Netherlands The Benelux market,geographicallyclose to RWE’s home region in Western Germany,hasbecome the thirdhome market of RWE: after the acquisition of Essent,RWE is the largest utilityin the Netherlands. RWEhasbeen activeinthe Benelux sincethe early2000sthrough severalshareholdings andacquisitions of severalsmaller Dutchgassuppliers.Italso started selling electricityto industrialcustomers in Belgiumandin theNetherlands. However,RWE abandoneditsactivities in Belgiumonlyafewyears later“duetoalackofaccessto the gridandother market relatedobstacles.”146 Moreover,RWE didnot findwaystotransport electricityproducedin its German plants to Belgium,asthere is no directelectricityinterconnection between the twocountries. Inearly2009,RWE andEssent announcedthattheyhad come to anagreement foratakeover offer; the acquisition was finalizedin September 2009. Itwasthe largest acquisition in RWE’s history.Essent,the largest energycompanyof the Netherlands,had startedto searchfor alarge Europeanpartner in mid-2008,after previousplans of amerger with the second- largest DutchutilityNuon didnot materialize. The European Commission grantedits approvaltothe merger under the condition thatEssent divests its Germanactivities andshareholdings beforehand.Essent waspreviouslyownedbyDutch regions andmunicipalities,which,over time,had mergedtheir respectiveenergyutilities.

146 .E-mail from RWE representativetothe author,14 December2009 . 2010 fri, ©I 96 The EU’s Major ElectricityandGasUtilities sinceMarket Liberalization

Essent hasabout6GW of production capacityandsupplies electricity,gasandheatto2.6m private andbusiness customers, mainlyin the Netherlands,butalso in Belgium. Inthe Netherlands, it hasamarket share of around26percent in retail (electricity andgas),and23percent in electricityproduction. RWEis not acquiring the whole of Essent:duetolegalrequirements of ownership unbundling,it cannot acquire the distribution networks,whichare to remain with the former Essent shareholders.The same applies to Essent’swaste management activities. 147 Moreover,Dutchcourts havenot allowedRWE to takeover Essent’sstake in the Borssele nuclearpower plant, whichmust remain in publicDutchownership.This,andthe disposalofEssent’sparticipation in the Stadtwerke of Bremen, reducedthe overall acquisition pricefrom aninitial € 9.2bnto € 7.3bn. Essent will remain anindependent enterprise within the RWEGroupandkeep its name.Itwill manage RWE’s Dutch andBelgianactivities andtherefore receiveexisting RWE’s DutchandBelgianassets. Besides Essent,RWE also hasa19.8 percent shareholding in Enovos,whichisthe result of the 2009merger of two Luxembourg utilities (Cegedel andSoteg) andthe German SaarFerngas. This makesRWEthe third-largest shareholder in Luxembourg’sbiggest utility,after the Luxembourg government andArcelorMittal.

France RWEhas,sincethe early2000s,limitedrenewable production assets in France. Its former subsidiaryHarpenhad acquired some hydro assets anddevelopedwindpower parks,whichare nowrunbyRWE’s renewables branchInnogy.The contribution to overall Frenchpower production is marginal. RWEis not activeinsales in France.

Austria RWEenteredthe Austrianmarket in 2001byacquiring 49 percent of the regionalpower companyKELAG(Kärntner

147 .Likemanyof its competitors,Essentwasalsoactiveintelecommunicationsin the past . Itsoldits Kabelcom subsidiary in 2007 . 2010 fri, ©I Case Studies of Major EuropeanUtilities 97

Graph 3.RWE’sMarketSharesin Centraland EasternEurope in 2008

N.B.:RWE’s market shares in grey. Source: RWE, Facts &Figures,May2009,p. 10.

Elektrizitäts-Aktiengesellschaft). The companyhad amarket share of 4percent in power production and8percent in power supplyin 2008.

Centraland EasternEurope Among the seven major Europeanenergyutilities,RWE is the one with the second-largest activities in CentralEastern Europe (behindE.ON). According to the Polish newspaper Rzeczpospolita, RWEhad revenues of € 7.4bninthe region in 2008.148 Hungaryandthe CzechRepublicare RWE’s most important markets,butitalso hasactivities in Slovakiaand Poland(see graph 3).

148 . http://grafik .rp .pl/grafika2/368638 . 2010 fri, ©I 98 The EU’s Major ElectricityandGasUtilities sinceMarket Liberalization

RWEenteredHungaryin the 1990s,when the countrywas the first in the region to privatise its electricityandgassector. RWE, together with EnBW,acquiredthe electricitygenerator Matrain 1995,andshareholdings in severaldistribution companies.RWEin 2008had market shares of 15 percent in electricityproduction,37 percent in electricitysupplyand 39 percent in gassupply.Ithasover 2mcustomers in elec- tricityandgaseach,andis also activeinwater supply. Inthe CzechRepublic, RWErealizedone of its largest internationalacquisitions in 2002-2003,when it won the bid forthe privatization of the country’s gastransmission network, whichincludes one of the three main pipelines fortrans- port of RussiangastoEurope.RWEacquiredthe Czechgas TSO Transgas,aswell asshareholdings of between 46 and 58 percent in the eight Czechregionalgasdistributors fora totalof € 4.1bn. RWEhad alreadyenteredthe Czechmarket in 1997,when it acquiredshares in the distribution company of Prague. RWEhad amarket share of 69 percent in gassupply in 2008,andserved2.3m customers.InJanuary2007,the EuropeanCommission putRWE’s market share in gassales at 84 percent.149 Inneighboring Slovakia, RWEacquired49 percent of the distribution companyVychodoslovenskaEnergeticke (VSE) in 2002.The remaining 51 percent is ownedbythe Slovak government,butRWEhasoperationalcontrol. VSE hasa market share of around13 percent in electricitydistribution. RWEalso startedselling gastoindustrialcustomers under the brandRWE GasSlovenskoin2008. RWE’s position in Polandis smaller thaninthe Czech Republic, HungaryandSlovakia.In2002,RWE acquired majoritycontrol of the power supplier anddistributor Stoen, whichhasamarket share of 6percent in Polish electricity supply.RWEplans to increase its market share andget access to production assets in Poland.Butafter some initialinterest, RWEdecided, in late 2009,not to participate in the privatization of the electricitycompanyENEA.

149 . http://ec .europa .eu/energy/energy_policy/doc/factsheets/market/market_cz_en .pdf . 2010 fri, ©I Case Studies of Major EuropeanUtilities 99

RWEparticipates in the RomaniannuclearprojectCernavoda with a9.15 percent shareholding.RWEwasalso in negotiations with Bulgarianauthorities concerning the Belene nuclearpower plant project,butdeclaredin October 2009thatitwouldnot pursuethese plans.

Outsidethe EU RWEcurrentlyhasnotraditionalutilityactivities outside the EU.However,it is activeingasupstreaminNorth Africa, andhasrecentlysignedits first cooperation agreements with Turkmenistanfor gasexploration. Inearly2008,RWE announcedits intention to acquire 51 percent of the Russian electricitygenerator TGK-2from its partner Sintez,butthen later in 2008steppedback,citing uncertain market conditions in Russia.Sintezrespondedbytaking RWEto arbitration.150 Moreover,RWE hasdeclaredits interest in entering the Turkish electricityandgasmarket,andit is likelyto participate in the privatization of the Turkish energysector.

Iberdrola Comparedto the fiveutilities analyzedabove,Iberdrola andVattenfall,whichwill beourlast case studies,are much smaller in terms of revenues.Moreover,their activities are limitedto amore restrictednumber of Europeancountries. Theythusform anintermediate groupbetween the “Big-5” and other utilities with revenues below € 15bnin2008and/or activities mostlylimitedto their nationalhome market. Wewill brieflypresent some of these smaller utilities in section 1.8. Iberdrolaresults from the merger of twoSpanish electricitycompanies (HidrolaandIberduero,both ownedbyprivate investors) in 1992.These twocompanies,or their antecedents, date backtothe earlydaysofelectrification in Spain. Their beginnings are closelylinkedto the development of hydro- electricityin the North of Spain,buttheywere also activein MadridandValencia.The Spanish civil warsloweddownthe companies’ development,butasdemandforelectricitygrew

150 .SintezsuesRWE for$1 .4 billion overTGK-2,Reuters,10November2008 . 2010 fri, ©I 100 The EU’s Major ElectricityandGasUtilities sinceMarket Liberalization

substantiallyin the 1950s,theycompletedseverallarge hydro- electricandthermalpower plants in the late 1950sand1960s. Iberduero wasalso among the pioneers of nuclearenergyin Spain,asitparticipatedin the construction of the country’s secondnuclearplant atSantaMaríadeGaroña.Inthe context of the oil crisis of 1973,the Spanish government strongly promotednuclearenergy,andIberdrola’s predecessors participatedin plant construction. When the Spanish government decidedto freezeall nuclearconstruction duetoovercapacity andhigh costs in 1984,the companies were left with alarge debtburden. In1985,RedEléctrica deEspañawascreatedasthe world’s first companydedicatedexclusivelyto power transmission and the operation of electricalsystems.This earlyexample of unbundling markedaradicalchange in the operation of the Spanish power sector andmeant thatSpanish utilities,including Iberdrola’s predecessors,havehad to dispose of their transmission gridsandconcentrate on power generation,distribution andsales. The Spanish electricitymarket continuedto evolveinthe early1990s,when the state-ownedutilityEndesaacquireda series of smaller utilities.TocounterbalanceEndesa’s growing influence,HidrolaandIberduero decidedto merge in 1991. Sincethen,IberdrolaandEndesaare the twodominating players in the Spanish electricitymarket. Theyeachhad around 40percent of the market in the 1990s,buttheir respective market shares havedecreasedsincethen. Shortlyafter the 1992merger,Iberdrolastartedits internationalization programbyacquiring severalelectricitycompanies in Latin America.Unlikemost other Europeanutilities,Iberdrola’s first internationalactivities were locatedoutsideEurope,albeit in aregion whichisculturallyclose.The companyalso devel- opedsome smaller activities in neighboring Portugal,butit wasonlyin 2007thatIberdrolabecame amajor European utilitywith the acquisition of Scottish Power.Through the latter acquisition,Iberdrolaalso took over important assets in the US.According to the company,Iberdrola’s internationalization strategywasbasedon penetrating in low-risk,liberalized markets bydeveloping averticallyintegratedcompanyand 2010 fri, ©I Case Studies of Major EuropeanUtilities 101

Table 15.IberdrolaRevenuesbyCountry/Division (2008)

€ bn% Spain 10.9 43 UnitedKingdom 8.032 Latin America 3.5 14 UnitedStates 1.04 IberdrolaRenovables* 1.9 8 Total25.2100

* IberdrolaRenovables,the company’s renewables branch,is mainlyactiveinEurope andthe US;around68 percent of its installedcapacityis insidethe EU. Source: IberdrolaSustainabilityReport 2008,p. 19. building arelevant presenceinthose markets,while avoiding hostileapproaches when acquiring other companies. 151 Resulting from its internationalization,Iberdrolanowhasfour core markets aroundthe AtlanticBasin:the IberianPeninsula, the UnitedKingdom,the UnitedStates andLatin America. Iberdrolahasundergone asignificant andveryrapidtrans- formation thanks to its acquisitions since2006. Between 2006 and2008,overall sales were multipliedby2.3,electricity production andsales by1.5,andgassales even by5.6. Atthe same time,the degree of internationalization hasstrongly increased: Iberdrolarealized25percent of its sales outside Spain in 2006; this share increasedto 57 percent in 2008. Around80percent of the company’s sales in 2008were real- izedinsidethe EU. The acquisition of Scottish Power in 2007for € 17.1bnwas the biggest dealinIberdrola’s history.Earlier,E.ON had made alower offer forScottish Power,whichthe Scottish company refused.The acquisition gaveIberdrolaaccess to important windassets in the US,asScottish power ownedPPM Energy, whichwasthe second-largest US windproducer atthattime. Iberdrolacontinuedto develop its position in the US through varioussmaller acquisitions,the most important of them being the acquisition of EnergyEast in 2008for € 3.4bn.

151 . E-mail from Iberdrolarepresentativetothe author,14 December2009 . 2010 fri, ©I 102 The EU’s Major ElectricityandGasUtilities sinceMarket Liberalization

The acquisition of Scottish Power had the additionaleffect of reducing the risk of ahostile takeover of Iberdrola, whichthe companyhad fearedforsome time.Rumours andnegotiations about(friendlyor hostile) takeovers or mergers involving IberdrolaandEndesa, Repsol,Union Fenosaor EDF have repeatedlybeen reportedsince2000.In2008,Iberdrolaeven filedaformalcomplaint against EDF with the European Commission,asitwasupset byEDF’s uncleartakeover intentions thatresultedfrom variousspeculativesignals. 152 Iberdrolaenteredthe naturalgasbusiness in 2001,buthas onlybecome animportant gasplayer with adiversifiedsupply portfolio aswell assome LNG andstorage assets thanks to acquisitions in 2007and2008. Onlyabout30percent of the company’s gassales are realizedin Spain; it soldmore gasin the UK andthe US thaninits home market in 2008.153 Iberdrolahasnosignificant upstreamactivities.Overall,its gas activities remain relativelylimitedcomparedwith its electricityactivities. Likemanyother utilities,Iberdroladiversifiedits business in the 1990s,entering the water,telecommunications and multimediamarkets.These acquisitions havebeen soldagain, butIberdrolacontinues to beactiveinconstruction andenergy engineering through its “IberdrolaIngenieríayConstrucción” subsidiary,andin realestate through “IberdrolaImmobiliaria.” These business sectors contribute onlymodestlyto the company’s revenues. Iberdrola, whichiswhollyownedbyprivate investors, 154 is the world’s largest owner of windparks.Earlier thanits competitors,Iberdrolaaggressivelydevelopedits renewables assets in Spain andabroad.Itclearlyconsiders its renewable arm asaglobalbusiness.Iberdrola’s business model makes renewable energies –mostlywind–the main driver of the company’s growth strategy.Inits strategicplanfor 2008-2010, Iberdrolaunderlines its intention to remain the number one globaloperator in the renewables sector andthe largest producer

152 .“Iberdrolalodgescomplaintagainst EDF, ” FinancialTimes ,28February 2008 . 153 .Iberdrolagassalesin 2008:66 .7TWhinthe UK, 58 .9 TWhinthe US,55 .7TWhinSpain . 154 . Shareholders:45 .1 percentdomestic(Spanish) entities,28 4p. ercentforeignentities, 26 .5 percentindividualinvestors .Source:IberdrolaSustainability Report 2008,p . 18 . 2010 fri, ©I Case Studies of Major EuropeanUtilities 103 of electricityfrom wind.Accordingly,Iberdrolaplans to spend 48 percent of investments in renewable energysources.Its renewables branch,IberdrolaRenovables,hasbeen listedsepa- ratelyon the stockmarket since2007(Iberdrolacurrently owns 80percent). The main countries forrenewable activities are Spain,the UK, the US,andon asmaller scale other Europeancountries likeGreece,FranceorPoland.Moreover, Iberdrolahas14percent in Gamesa, aSpanish windgenerator manufacturer,with whichIberdrolahasastrategiccollaboration agreement. Both companies plantomerge their windparks by2011. Iberdrola’s large renewable energyassets will givethe companyacompetitiveadvantage especiallyin the long term: when carbon prices rise asexpected, forexample,in the EU after the beginning of full auctioning of EU ETS (European Union Emission Trading System) permits starting from 2013, Iberdrolawill payless forCO2 permits thanproducers that relymore heavilyon fossil fuels.Butatthe same time,Iberdrola is also more dependent on the level of subsidies forrenewable energies likefeed-in tariffs.Governments usuallyguarantee a stable level of feed-in tariffs foralong time (for example,the first twentyyears of operations in the case of windpower in Spain), butifthe tariff level is modified, plannedinvestments canlose their attractiveness.Companies then needto cope with the newsituation andchange their plans:forexample,the recent reduction of feed-in tariffs forphotovoltaicsinSpain hasled to adramaticfall in newinvestments in 2009. Iberdrolawas, however,barelyaffected, asthe vast majorityof its “new” renewable assets are windparks.Moreover,acompanycan hedge the risk of changing regulatoryconditions bydeveloping renewable energysources in different countries:49 percent of Iberdrola’s renewable capacityis alreadylocatedoutsideSpain, andthis share is expectedto reach61percent in 2012.

Iberdrola’sInternalStructureand PresenceinEuropeanMarkets Iberdrola’s internalorganization consists of centralized corporate divisions thatcontrol overall governanceanddecen- tralizedbusiness units responsible forgeographiczones.There are sixcorporate divisions:Operations,Officeofthe General 2010 fri, ©I 104 The EU’s Major ElectricityandGasUtilities sinceMarket Liberalization

Secretary,EconomicandFinancial,Corporate Resources,Strategy andStudies,Development. Business divisions are dividedinto twosubdivisions:“SpainandLatinAmerica”and“International.” 155 This is interesting,asitmakesacleardistinction between operations in IberiaandLatin America on the one hand, and internationalactivities in the UK, US andelsewhere on the other:Latin Americanoperations,whichstartedearlier in this culturallyclose region,seem to beregardedasmore similarto domesticbusiness thanactivities in the UK, even though the UK andSpain are both members of the EU. Iberdrolaoperates its energybusiness under different brands: “Iberdrola”inSpain,Europe (with exception of UK),the US and Mexico,“Scottish Power” in the UK. 156 Renewable energyproduction is branded“IberdrolaRenovables,”“IberdrolaRenewables,” “Scottish Power Renewables” and“RokasRenewables.”

Iberia Iberdrolais one of the twoleading electricitycompanies in Spain,nearlyex-aequowith Endesa, butwith smaller market shares in production,distribution andsales in 2008. Iberdrola producedaround24percent of Spanish electricityin 2008 (Endesa28percent).157 Nuclearenergyaccountedfor37percent of its net production in Spain in 2008,gascombinedcycles for 29percent,hydroelectricityfor13percent,other renewables for13percent andcoalfor only3percent. Iberdrolais active in electricitydistribution in Spain with amarket share of around38 percent,serving 10mcustomers.Concerning electricitysales,it is interesting to add thatIberdrolahad asignificantlyhigher market share in the regulatedmarket (42percent) thaninthe liberalizedmarket (34 percent).158 Iberdrolastartedgasactivities in 2001andwasthe second- largest gasmarketer in Spain in 2007,with amarket share of 12percent according to the Spanish regulator. 159 Seventy-three

155 . “Spain and Latin America”includes“NetworkBusiness Spain”,“Deregulated Business Spain &Portugal”,“Latin America”and “Non-EnergyBusinesses .” “International” bringstogether “US”,“UK”and “IngenieríayConstrucción .” 156 .EnergyEast istobeincorporarted intothisarchitecture . 157 .Comisión delMercado de ValoresMobiliariosetal . (2009),p . 24-25 . 158 . Comisión NacionaldeEnergía(2008a),p . 5 . 159 . Comisión NacionaldeEnergía(2008b),p . 10 . 2010 fri, ©I Case Studies of Major EuropeanUtilities 105 percent of Iberdrola’s gassupplies were usedin its gascombined cycle power plants in 2008,andsupplyto end-customers is only on the liberalizedmarket (mainlybig customers,0.2mcustomers in 2008). InPortugal,Iberdrolahassome renewable generation assets andmarkets electricity.In2008,it also obtainedalicense to market gas. Moreover,it hasa9.5 percent participation in the country’s largest utilityEDP.Until 2008,the companyhad aminor shareholding in the Portuguese gascompanyGalp. Iberdroladoes not publish separate figures forits activities in Portugal,so it is difficult to estimate its current market share there.Itseems,however,to beverylimited.

United Kingdom Sincethe acquisition of Scottish Power in 2007,Iberdrola hasbeen activeinthe UnitedKingdom’selectricityandgas market. Scottish Power wasformedin 1990,when the British electricitysector wasprivatized.Itwasthe successor of the South of ScotlandElectricityBoard, whereasthe North of ScotlandHydro Boardbecame Scottish andSouthern Energy. UnlikeinEnglandandWales,the Scottish electricitysector continuedto beorganizedon anintegratedbasis:Scottish Power kept the high-voltage transmission network in the south of Scotland, whichitstill owns today.Asmanyother European energyutilities,Scottish Power diversifiedinto water andtelecommunications in the 1990s,butsoldthese activities again in the early2000s. Scottish Power is the UK’s fifth-largest electricitygenerator with amarket share of around8percent. Eighty-nine percent of its production in 2008wasthermal(gasandcoal),but Scottish Power hasbeen developing renewable energies (mainlywind). ScottishPower Renewables is currentlyworking on severaloffshore windpower projects in the UK, with atotal capacityof 1.7 GW.IberdrolaRenovables is also activeinthe British windsector,asithasobtainedthe rights to develop up to 7.2GW of offshore capacityin the North Sea(in a50-50joint- venture with Vattenfall).160

160 .Iberdrolapress releaseof8January 2010 . 2010 fri, ©I 106 The EU’s Major ElectricityandGasUtilities sinceMarket Liberalization

Iberdrolaparticipatedin the auctions forlandfornuclear newbuildin early2009inaconsortiumwith GDF Suezand Scottish andSouthern Energy,buttheir bidwasnot successful, astheywithdrewin reaction to high prices.Later in 2009,the same consortiumhowever acquiredasite atSellafieldfor the possible construction of anewnuclearplant. Itisunlikely thataninvestment decision will betakenbefore 2015.161 Scottish Power is the sixth-largest marketer of electricityin the UK with amarket share of around7percent. Itisthe operator of twodistribution areaswith around3.4m electricityusers, “CentralandSouthern Scotland,”its historicregion,and “MerseysideandNorth Wales” (sincethe acquisition of the MerseysideandNorth Wales ElectricityBoard[MANWEB] in 1995). Scottish Power hasatotalof5.2melectricityandgascustomers, with amarket share of around6percent in quantities of suppliedgas.

OtherEU countries Iberdroladoes not havesignificant activities in EU countries other thanSpain andthe UK.Its Renovables/Renewables branchhaswindgeneration assets in variousEuropeancoun- tries.Moreover,Iberdrolais activeinsales to big industrial customers in some countries (for example,France). Italso participates in the RomaniannuclearprojectCernavoda (6.2percent participation).

Outsidethe EU Iberdrolarealizes around20 percent of its revenues outside the EU,whichisahigh share if comparedto other European utilities.Iberdrola’s most important market outsidethe EU is Latin America, where the companyrealized14 percent of its revenues in 2008. Iberdrolais activeinelectricitygeneration, distribution andsales in fiveLatin Americancountries:Mexico, Brazil,Guatemala, BoliviaandChile.The US,where Iberdrola is activeinelectricityandgas,contributed4percent to total revenues in 2008. The companywillstronglydevelopits renewable –mainlywind–assets there.In2009,it wasawarded more publicmoneyfrom the federalrecoverypackage for

161 . IberdrolaChairman:NoDecisionOnSellafield PlantBefore2015,DowJones,9December2009 . 2010 fri, ©I Case Studies of Major EuropeanUtilities 107 renewables thananyother company.Iberdrolafinallyannounced in early2009its interest in entering the RussianandCIS elec- tricitymarketswhen signing anagreement with Russian electricitycompanyInter RAO.According to companysources, it is,however,unlikelythatIberdrolawill directlyownoroperate assets there. 162

Vattenfall Vattenfall is Sweden’shistoricelectricitycompanyandthe onlyutilityamong the seven largest in Europe thatisstill 100 percent state-owned.The companywasfoundedin 1909 asanagencyof the Swedish government with the task of exploiting large-scale hydropower.Private companies had startedto producehydropower earlier,butthe Swedish government wantedto guarantee aquickdevelopment of electricity production,fearing thatprivate companies wouldlackthe necessaryfunds. Vattenfall became the major electricity producer in Sweden,with amarket share of around30percent in the 1930sandaround50percent in the 1980s. Incontrast to other countries likeFrance,GreatBritain or Italy,Sweden never nationalizedits electricitysector:private andmunicipal electricityproducers anddistributors alwaysco-existedwith Vattenfall. Electricitytransmission,however,wasnationalized andcontrolledbyVattenfall from 1949 to 1992,when another state-ownedutility,SvenskaKraftnät,took over ownership and control of the transmission system.163 Asits Europeanpeers,Vattenfall remainedacompany mainlyactiveinits home countryuntil the 1990s. Asthe growth of Swedish electricityconsumption slowedsignifi- cantlyin the 1980s,Vattenfall neededto decideifitwantedto consolidate its existing assets or to look fornewgrowth opportunities.LikemanyEuropeanelectricitycompanies atthat time Vattenfall had to make achoice:keep its current business model,enter newbusiness sectors or expandto newgeographic

162 .Iberdrolapress releaseof3March2009 . Iberdrolalooksfornew-buildopportunities, World NuclearNews,6August2009 . E-mail from Iberdrolarepresentativetothe author, 14 December2009 . 163 .The main sourceforthisparagraph and the followingisHögselius (2009),whichprovides adetailed and very good analysisof Vattenfall’sinternationalizationprocess . 2010 fri, ©I 108 The EU’s Major ElectricityandGasUtilities sinceMarket Liberalization

markets.Asmanyothers,Vattenfall first chose to diversifyits business areas,offering energy-andenvironment-relatedserv- ices.Unlikemost of its peers,Vattenfall didnot diversifyinto naturalgasinSweden. One shouldnote in this contextthat the Swedish gasmarket remains comparativelysmall,given thatSweden hasnoeasyaccess to gas. The beginning of liberalization in the Europeanenergysector andthe promising investment perspectives in CentralandEastern Europe after 1990 changedthe situation. Atthis time Vattenfall increasingly exploredits options forentering newgeographicmarkets. Moreover,the example of other Europeanutilities expanding abroad inspiredVattenfall,andit even felt thatitmight lose its respectedposition among Europeanelectricitycompanies if it didnot internationalize. Inpreparation forits internationalization,Vattenfall changed its legalstatusin1991. After long years of lobbying byVattenfall, it wastransformedfrom agovernment agencyto ajoint stock company.This gavethe companymore independencevis-à-vis government andParliament,andwasseen asaprecondition forinternationalization. The first internationalization strategy wasset upin1993 andfocusedon markets in geographical proximityto Sweden (“countries atacable length’sdistance,” i.e.the BalticSearegion). Germanywasidentifiedasthe first target country,asVattenfall had alreadystartedcooperation with North Germanelectricitycompanies (inter alia, by exchanging electricitywith them). First efforts to properly enter theGermanmarket,however,provedunsuccessful. At the same time,foreign companies startedto enter the Swedish market,whichincreasedthe pressure on Vattenfall to go international. First,rather small steps towardsinternationalexpansion were madeinPolandin 1992andin neighboring Finlandfrom 1994 onwards. Vattenfall enteredthe Germanmarket in 1996 through ajoint-venture called“VesaEnergy.” In1999,Vattenfall madeits first big acquisition abroad when buying 25percent of HEW,the municipalelectricitycompanyof Hamburg.At thattime,the Germanelectricitymarket wasinaveryactive phase of consolidation,in whichHEW had become involved, notablythrough negotiations to acquire BEWAG,the municipal 2010 fri, ©I Case Studies of Major EuropeanUtilities 109 electricitycompanyof Berlin,andVEAG, the largest electricity generator in East Germany.By2002,andafter some difficult negotiations,Vattenfall acquiredcontrol over all three companies,aswell asLAUBAG, acompanythatoperatedlignite mines.Thanks to these acquisitions,Vattenfall hasbecome one of the largest Germanutilities. In2000,Vattenfall also enteredthe Polish electricityand heatmarket andhasbeen taking advantage of privatization opportunities sincethen. Vattenfall acquiredthe heatproduction companyEW andthe distribution companyGZE, andincreased its share in these companies to 75 percent by2006. The same year,Vattenfall’sGermanandPolish localbrandswere replaced bythe Vattenfall brand.Eventually,the companymergedits GermanandPolish business units. Acquisitions in GermanyandPolandhavebeen met with criticism in Sweden,asVattenfall hasacquiredseveraloldcoal plants there,whichare big CO2 emitters.This hasbeen perceived asnot being in line with Vattenfall’sefforts to present itself as one of the leaders in cleanenergyandCO 2 reduction. Thanks to the high share of hydropower andnuclearproduction in Sweden,Vattenfall indeedproduces electricitywith compara- tivelylowCO2 emissions there.Onthe contrary,in Germany, PolandandDenmark,Vattenfall relies mainlyon fossil resources forelectricitygeneration. Itisnoteworthyin this contextthatthe companyhastakenaleading role in developing CCS technologies,notablyatits SchwarzePumpe lignite plant in Germany. In2001,Vattenfall enteredthe Estonianheatmarket on a small scale bythe acquisition of the heatcompanyof the city of Pärnu.Vattenfall also consideredentering the electricityand heatmarkets of the Balticstates atalarger scale,buthasnot yet realizedthese plans.Quite to the contrary,it soldits Estonian andsmall Latvianheatassets to Fortuminearly2007.164 Recently,Vattenfall enteredtwonewmarkets.Amajor investment is the acquisition of the DutchutilityNuon,of whichVattenfall acquired49 percent in 2009,andhasagreed to acquire the remaining 51 percent in the nextsixyears (the

164 . Vattenfall press releaseof21December2006 . 2010 fri, ©I 110 The EU’s Major ElectricityandGasUtilities sinceMarket Liberalization

totalacquisition priceis € 8.5bn). Vattenfall hastherebybecome amajor player in the Dutchelectricityandgasmarket,andalso obtained, forthe first time,access to upstreamgasassets. Moreover,the acquisition of Nuon gives Vattenfall access to the Belgianmarket. However,it does not reinforceVattenfall’s position in the Germanmarket,asthe EuropeanCommission imposedthe divestment of Nuon’sGermanactivities.Vattenfall also recentlyenteredthe UK market byacquiring anddevel- oping offshore windfarms there. Vattenfall’stransformation from anationalinto aninter- nationalactor hasbeen describedas“aprocess thatproved long anddifficult.” 165 Butitalso wasa“highlysuccessful internationalization” thatcreated“one of themost radically internationalizedelectricitycompanies in Europe.”166 Through internationalization,the companyhasalso grownbigger:overall sales haveexperiencedstrong growth since2000.Lars Josefsson, Vattenfall’sCEOsince2000 andanoutspokenadvocate of internationalization,statedin 2000 thathewantedthe company to triple in sizeby2005. Inthe end, Vattenfall even surpassed this goal,asrevenues in 2005were nearlyfourtimes ashigh asrevenues in 2000.In2008,theywere more thanfivetimes ashigh asin2000. In2008,Vattenfall realizedonlyone-thirdof its revenues in the Nordiccountries.Vattenfall does not publish separate numbers forSweden,therefore wecanonlyassume that Sweden accounts for25-30percent of Vattenfall’srevenues.As severalacquisitions abroad were realizedin the early2000s, the share of sales abroad in overall sales increasedsignificantly atthattime (see graph 4). Operations in the Nordiccountries provetobemore profitable,astheygenerate asignificantlyhigher share of operating profits.Moreover,it is interesting to note thatVattenfall producedmore electricityin Sweden thaninGermanyand Polandin 2008,butsoldsignificantlymore electricityto end- consumers in GermanyandPolandthaninSweden (see tables 16 and17).

165 . Högselius (2009),p . 258 . 166 .Högselius (2009),p . 258 . 2010 fri, ©I Case Studies of Major EuropeanUtilities 111

Graph 4. Vattenfall Salesand Profit1984-2007 (SEK bn)

140 Sales (total) Sales (Nordic) Profit before taxe 120

100

0 1984 1987 19901993 1996 1999 2002 2005

Source: Högselius(2009),p. 259 (basedon Vattenfall annualreports,1984-2007).

Table 16.Vattenfall ExternalNetSalesand OperatingProfit(2008)

External Operating %external %operating Region net sales profit sales profit (SEK bn) (SEK bn)

Nordiccountries 54.7 33.3 16.8 56.1 (including UK) GermanyandPoland99.260.3 15.1 50.6 Other 10.6 6.4 –2.0–6.7 Total164.5 100 29.9 100

Source: Vattenfall AnnualReport 2008,p. 60and63,andowncalculation. 2010 fri, ©I 112 The EU’s Major ElectricityandGasUtilities sinceMarket Liberalization

Table 17.Vattenfall Electricity Generation and Sales(2008)

Generation Region %generation Sales (TWh) %sales (TWh) Nordiccountries 90.7 56 55.7 29 GermanyandPoland72.4 44 98.252 Other countries –– 4.1 2 Spot market ––31.4 17 Total163.1 100 189.3 100

Source: Vattenfall AnnualReport 2008,p. 124.

Vattenfall’sInternalStructure and PresenceinEuropeanMarkets Vattenfall’sinternalorganization consists of fivebusiness units:three of them followageographiclogic(Nordic, Central Europe,Benelux)andare responsible for,inter alia, electricity andheatgeneration,distributionandsalesinthe respective countries.Anewlycreatedbusiness group“Pan-European” deals with windpower,nuclearpower,business development andengineering in all countries where Vattenfall is active. Another independent business unit is responsible forenergy trading. Itisnoteworthythatthe CentralEurope business group(whichcomprises the GermanandPolish businesses) accountedfor68percent of employees atyear-end2008,and the Nordicbusiness groupfor only29percent. The acquisition of Nuon andreorganization of some business sectors have, however,changedthis ratio in the course of 2009. With its historicroots in the Swedish market,Vattenfall hasbecome the leading energygroupinthe Nordicregion. OutsideSweden,Vattenfall hasassets in twoother countries in the region,FinlandandDenmark.167 Besides electricity, Vattenfall is also activeinheat:it is the fourth-largest supplier of heatinthe Nordicregion. GermanyandPolandbecame important markets forVattenfall in the early2000s. The NetherlandsandBelgiumare other keymarkets forVattenfall

167 .The Nordicregion(Denmark,Finland,Norway,Sweden)iswellinterconnected,and the electricity marketcanberegardedastrulyregional . The regionalsohasacommonpower exchange,NordPool . 2010 fri, ©I Case Studies of Major EuropeanUtilities 113

Table 18.Vattenfall’sMarketPositions

Sweden FinlandDenmark GermanyPoland Electricity 1(in the Nordiccountries, 37 generation including Norway) Electricitytrading Top 3Top 3Top 3Top 3Top 3 Distribution 22n.a.4 5 Sales 13n.a.4 5 Districtheat4421 1

Source: Vattenfall website,basedon 2008data(prior to the acquisition of Nuon). sincethe acquisition of Nuon in 2009. Limitedactivities exist in the UnitedKingdom. Norway,France,Switzerland, Austria andthe CzechRepublicare seen as“prioritygrowth markets.” Unlikemost of its peers,Vattenfall hasnoactivities outside the EU. 168 According to the company,it is Europe’sfifth-largest generator of electricityandEurope’slargest generator of heat. Ithasanoverall market share of around5percent in the Europeanelectricity,gasandheatmarket,andhasannounced along-term target of achieving amarket share of 10percent by2030.

Nordiccountries Vattenfall is activeinall Nordiccountries,with the Swedish market being the most important. InDenmark andFinland, the companygenerates andsells electricity.Ithasnoproduction assets in Norway,butsells electricityto major industrialcompa- nies there.Inthe whole region,Vattenfall hasamarket share of approximately20-23percent in electricitygeneration,and around14 percent in electricitysales to end-customers. Vattenfall’sSwedish activities comprise generation,distribution andsales of electricityandheat. Its market share in electricitygeneration is around50percent,whichmakesitthe biggest electricitygenerator byfar. Vattenfall’spower production in Sweden is mainlybasedon nuclearandhydropower.The

168 . Vattenfall hadacquired someparticipationsin Asianand Latin Americanpowerplant projects in the 1990s,but soldtheseparticipationsagain soonafter . 2010 fri, ©I 114 The EU’s Major ElectricityandGasUtilities sinceMarket Liberalization

companyis the second-largest electricityretailer with amarket share of around15 percent. Moreover,it is the main regional andlocalnetwork operator in Sweden with 0.9m customers. InFinland, Vattenfall hasbeen activeinelectricityand heatgeneration,distribution andsales since1995. Through severalacquisitions,it hasbecome one of the largest energy companies there.Vattenfall is the second-largest electricity retailer in Finlandwith amarket share of around10percent. Vattenfall hasbeen present on the Danish energymarket since1996 andtodaygenerates andsells electricityto energy companies there.Ithasnoretail activities in Denmark. In2006, Vattenfall acquiredgeneration assets from ElsamandE2under anagreement with DONG,giving it asignificant presencein generation (mainlyfossil-based, butalso increasinglybiomass andwind). Vattenfall controls approximately24percent of the Danish power generation capacity. InNorway,Vattenfall sells electricityto big industrial customers.Itwasthe third-largest retailer in 2007with amarket share of around8percent. Inthe past,Vattenfall wasalso active in electricitydistribution in Norway:it ownedOslo Energi, Norway’s largest power supplier,butsoldthis subsidiaryin 2001.

Germany Thanks to its acquisitions between 1999 and2002,Vattenfall hasbecome one of the fourlarge utilities in Germany.Its size is comparable to EnBW’s,with Vattenfall having aslightlyhigher share in electricityproduction (third-largest generator with a market share of around12-14 percent),butasmaller share in retail (fourth-largest retailer with amarket share of around 10percent). The companyis also activeinheatgeneration and sales,butonlyrecentlystartedto sell gastoend-customers. This is,inter alia, duetothe factthatVattenfall hasashare- holding in Gasag,the historicgassupplier of Berlin,sincethe acquisition of BEWAG.Moreover,Vattenfall hasbeen the elec- tricityTSO in the Eastern part of Germany(former GDR), Berlin andHamburg sinceits acquisitions in the early2000s. However,Vattenfall announcedthe sale of its high-voltage transmission gridto aconsortiumofElia, the Belgianelectricity 2010 fri, ©I Case Studies of Major EuropeanUtilities 115

TSO,andIndustryFundsManagement,aninvestment fund, in March2010.Permissions are pending atthe time of writing, buttheyare not expectedto pose anyproblem.169 Inrecent years,Vattenfall hassufferedsetbacks in Germany, especiallyin terms of image.Incidents atVattenfall’snuclear power plants in Germanyandpoor communication of those incidents were met with criticism bythe publicandmedia. 170 The construction of anewcoalpower plant in Hamburg has been delayedbydifficult negotiations with localauthorities andhasalso causedpublicopposition. Severalpoliticians and NGOsaskedVattenfall customers to change supplier.Even the cityof Hamburg,whichhad soldits municipalelectricity companyto Vattenfall between 1999 and2002,hasnowestab- lishedanewmunicipalelectricitycompany,asitisseemingly unhappywith Vattenfall’spolicy. Besides “traditional” utilitybusiness,Vattenfall also mines lignite in Eastern Germany.Moreover,it is activeintelecom- munications andrealestate.

Benelux Thanks to the acquisitionofNuon in 2009, 171 Vattenfall hasbecome amajor player in the Benelux energymarket. Most of Nuon’sassets are locatedin the Netherlands,butthe company is also developing its position in Belgium. Inthe Netherlands, Nuon is the third-largest electricitygenerator with amarket share of around18-20 percent. Itisthe second-largest electricityretailer with amarket share of 30percent. The company, formerlyownedbyagroupoflocalauthorities,hasstrongly developedrenewable energyproduction andprovides 28percent of Dutchwindenergy.Vattenfall andNuon together aspiretobecoming thelargestoffshorewindgeneratorin Europe.This shouldnot hidethe factthatthe bulk of Nuon’s electricitygeneration comes from gasandcoalpower plants.

169 . Vattenfall,Eliaand IFMjointpress releaseof12March2010 . 170 .Inahighlyunusualstep,all the otheroperators of nuclearpowerplants in Germany publiclycriticized Vattenfall’smanagementof incidents atits Germannuclearplants in 2009 . See “Konkurrenten greifen Vattenfall an,” Handelsblatt,26 August2009 . 171 . Vattenfall acquired 49 percentof Nuon in 2009,and will acquirethe remaining51percent in the next sixyears .Overthe next four years,the brand name Nuon will bekept . 2010 fri, ©I 116 The EU’s Major ElectricityandGasUtilities sinceMarket Liberalization

Nuon is also activeinnaturalgas:it is the second-largest gasretailer in the Netherlandswith amarket share of 28percent of gassupply.Itenteredthe Dutchgasupstreammarket in 2008with the objectivetobuildaportfolio of gasassets that provides 10to 20 percent of the company’s gasdemandforthe nextten years.Byacquiring Nuon,Vattenfall henceentered the gasdownstreambusiness atamuchlarger scale than before andeven gainedaccess to naturalgasupstreamassets. Itwill beinteresting to see if Vattenfall will followits peers andsuccessfullydiversifyfurther into gas. Nuon had separated its electricityandgasnetwork activities in 2008inacompany calledAlliander,whichremains whollyownedwith the orig- inalshareholders. This means thatVattenfall does not own distribution networks in the Netherlands. Before the acquisition byVattenfall,Nuon had enteredthe BelgianandGermanenergymarket. The EuropeanCommission, in its approvalofthe acquisition,imposedon Vattenfall the sale of most of Nuon’sGermanactivities,asNuon Deutschland had become the strongest newentrant in Hamburg andBerlin –cities in whichVattenfall had takenover the historicsuppliers andnowis the incumbent.172 Nuon,however,keeps its Belgian activities,where it is one of the most successfulnewentrants with amarket share of around5percent in both electricityand gassupply.Itowns one windfarm andhasplans to develop its production capacitythere.

Poland Vattenfall enteredthe Polish market in 1992andhas acquiredseveralcompanies andshareholdings sincethen in privatization rounds. Today,it is the fourth-largest private energycompanyin Poland, andthe largest foreign energy company.Vattenfall is the seventh-largest electricitygenerator (market share of 2-3 percent) andthe sixth-largest retailer (market share of around10percent) in the veryfragmented Polish market. Itisthe largest heatproducer in Polandwith a market share of 24percent.173

172 .EuropeanCommissionpress releaseof22 June 2009(IP/09/978) . 173 .Accordingtohttp://www .vattenfall .pl . 2010 fri, ©I Case Studies of Major EuropeanUtilities 117

InNovember 2008,Vattenfall acquired18.7 percent of ENEA, the third-largest electricitycompanyin Polandwith amarket share of around8percent in electricitygeneration and15 percent in electricitysales to end-customers.The Polish government decidedto privatise additionalshares of ENEA in 2009. Vattenfall wasexpectedto bethe front-runner,but RWEemergedasmost probable bidder.After exclusivenego- tiations,RWE however steppedbackandthe future of ENEA hasagain become unclear.174

United Kingdom Vattenfall owns severalwindfarms in the UnitedKingdom, andhasplans to develop its windportfolio there (especially offshore). Ithad declaredits interest in the privatization of British Energyin order to enter the British nuclearmarket,but ultimatelyretreated.After some initialinterest in the land auctions fornuclearnewbuildin 2009,the companydidnot participate in the end.Butithasagain been mentionedasa potentialinvestor forashare in nuclearpower plants to be developedbyEDF in the UnitedKingdom.175

OtherEuropeanUtilities Besides the seven utilities presentedin detail,there are of course manyother utilitycompanies in the EU.All these are smaller thanthe companies analyzedaboveand/or are very muchfocusedon one nationalmarket. Eni,abig oil andgas upstreamcompany,is anexception,asitalso is alarge gas trader anddistributor.Webrieflypresent some of these companies in the following paragraphs,in alphabeticalorder and withoutanyintention to giveanexhaustiveoverview. Centrica Centrica wascreatedin 1997,when British Gassplit into twocompanies:Centrica, whichtook over gassupply,services, retail business andsome limitedgasproduction assets,andBG

174 . “RWE schrecktin Polenzurück,” Handelsblatt,14 October2009 . 175 . “Sweden stopsVattenfall/BritishEnergybid-paper,”Reuters,30 April 2008;“Vattenfall pullsout of UK newnuclearmarket,”5June 2009,http://www .contractjournal .com;“Swedes preparetosnapupstake in Britain’snewnuclearreactors,” The Times ,15 October2009 . 2010 fri, ©I 118 The EU’s Major ElectricityandGasUtilities sinceMarket Liberalization

Group,whichtook over gasandoil exploration andextraction. Centrica is the largest supplier of gastodomesticcustomers in the UK with amarket share of 44 percent in this segment (9.5m customers). Itisalso one of the largest electricityretailers with amarket share of around22 percent and6.1m electricity customers.Itoperates its retail business under the brand “British Gas” (“Scottish Gas” in Scotland). Duetopricevola- tilityandalso duetothe factthatitdoes not ownelectricity generation assets,the companyhassufferedlosses in recent years.Ithas,however,acquireda20 percent participation in British Energyfrom EDF,andwill obtain electricityfrom British nuclearplants (see EDF section fordetails). The companyhassome assets abroad, mainlyin North America.Inthe contextthe acquisition of a20 percent participation in British Energy,Centrica soldits 51 percent participation in SPE, the second-largest Belgianelectricityproducer, to EDF.Centrica also hassome activities in the wholesale markets of Spain,the NetherlandsandGermany.

CEZ CEZ is the largest electricitycompanyin the CzechRepublic andalso hasoperations in other countries in Centraland Southeast Europe.CEZ, in its current form,wasfoundedin 1992. Eight regionaldistribution companies were separatedfrom CEZ in 1994,before CEZ took control of fiveofthem again in 2003. This moveresultedfrom the abandonment of earlier privatization plans thataimedatselling 67.7 percent of CEZ andsixregionaldistribution companies to aforeign utility (EDF andEnel had filedunsuccessfuloffers in 2002).176 CEZ hasbeen partlyprivatizedwith the state holding 70percent as of May2009,and30percent being heldbyother shareholders. UniCredit andCitibank were the largest other shareholders with 8and7percent of shares respectively. 177 CEZ’s principal businesses encompass electricitygeneration,distribution and sales,heatsales andcoalmining.The companysees its strength in realizing the successfultransformation from acentrally- plannedcommunist-style market to aliberalizedmarket. It

176 .“Tschechische StromwirtschaftfindetvorerstkeinenKäufer,” Energie-Chronik,February 2002 . 177 .Asof December2008,source:CEZ AnnualReport 2008,p . 94 . 2010 fri, ©I Case Studies of Major EuropeanUtilities 119 nowwants to use these experiences in othercountries in CentralandSoutheastern Europe.CEZ presents itself asthe “most profitable andleast indebted”power companyin Europe, andhasthe objectiveofbecoming the leader on the Central andSoutheastern Europeanelectricitymarket.178 Inthe CzechRepublic, it hasamarket share of around 73 percent in electricitygeneration,andaround45 percent in electricitysupply(in terms of volumes sold). Moreover,CEZ controls 5outofthe 8Czechelectricitydistribution companies accounting for62percent of customers. 179 Its power production is mainlycoal-based(using lignite minedin its ownmines), butitalso hastwonuclearplants and34 hydropower plants. Abroad, the companyhasacquiredthree distribution companies andapower plant in Bulgaria, giving it ashare of 12percent of installedgeneration capacitythere.InRomania, CEZ owns the country’s largest distributor Electrica Olteniaandtwoother distribution companies.Itplans to develop large windfarms andaCCGT unit there andalso hasashare in the Cernavoda nuclearpower plant project. Moreover,CEZ acquiredtwocoal power plants in the South of Poland.CEZ enteredin astrategic alliancewith MOL of Hungaryin 2007,with,inter alia, the plantojointlydevelop CCGT plants.In2009,CEZ enteredthe market of an“old”EU Member State forthe first time when it acquiredthe Germanlignite mining companyMIBRAG (Mitteldeutsche Braunkohlengesellschaft mbH (CentralGerman BrownCoalCompany)inajoint-venture with the J&T Group. Itnowplans to buildacoalpower plant in Germany,located nexttoits mines.Also in 2009,CEZ enteredtwomarkets outside the EU,asitacquiredthe onlyAlbanianelectricitydistribution companyanda50percent stake in aTurkish distribution company.

DONG DONG is anintegratedenergycompany,mainlyactivein Denmark,andon asmaller scale in neighboring North European countries.The companywasfoundedasDansk Naturgasin1972,

178 . http://www .cez .cz/en/cez-group/cez-group .html . 179 . CEZInvestorpresentationNovember2009,http://www .cez .cz/edee/content/file/investori/ equity_investors_november_2009 .pdf . 2010 fri, ©I 120 The EU’s Major ElectricityandGasUtilities sinceMarket Liberalization

andwasactiveingasandoil exploration andproduction, butalso gasdistribution,in the first years of its existence. The nature of the companychangedin the early2000s,when it acquiredstakesinseveralDanish electricitycompanies. In2005,it mergedwith fiveDanish electricitycompanies andhencebecame the Danish “nationalchampion” in the energysector.The fiveintegratedcompanies includedtwo major electricityproducers in Denmark,ElsamandEnergi E2, andthreedistribution companies.Sincethe merger,the Danish government hasa73 percent majorityin DONG, with former ElsamandEnergi E2owners having 18 percent. The companynowrealizes most of its revenues in energy sales anddistribution,andelectricitygeneration. Exploration andproduction onlyaccountedfor9percent of revenues in 2008. The companyproduces around50percentofDanish electricity,with 86 percent of electricitygeneration based on thermalsources,and14 percent from renewable sources (mainlywind)in2008. DONG’s market share in electricity retail is lower,ataround35 percent. OutsideDenmark,the companyis marketing electricityandgasinSweden,where it hasamarket share of around5percent in electricity. DONG is also present in the NetherlandsandGermanyand plans to strengthen itsposition there.Italso haslimited power production assets (mainlywind)abroad. 180 In Germany,the companyhasa25.1 percent participation in Lübeck’smunicipalenergyandwater supplier,andrecently acquiredEssent’sformer GermansubsidiaryKom-Strom. In October 2009,DONG announcedthatitwouldfreezeall plans to buildnewcoalplants until 2020,asitdoes not think thatCCS technologies will beavailable andaccepted bythe publicbefore thatdate.Asaconsequence,newcoal plants are not compatible with the company’s aim to generate half of its energyin 2020 from CO2 -neutralenergy sources. 181

180 .In2007,DONG divested the renewablesportfoliowhichEnergi E2haddevelopedinSpain for € 0 .7bntoE .ON . 181 . “DONG Energydropsinvestments in newcoalpowerplants,” Vattenfall EnergyNews Europe,Week42,2009 . 2010 fri, ©I Case Studies of Major EuropeanUtilities 121

EDP EDP (EnergiasdePortugal,formerlyElectricidadedePortugal) is the third-largest electricitycompanyin the IberianPeninsula, andthe largest Portuguese industrialgroup. EDP is the only companythathassignificant electricityandgasgeneration, distribution andsupplyactivities in both parts of the Iberian market,PortugalandSpain. Itwasfoundedin 1976 asthe state- ownedelectricitymonopolyin Portugal. Butsincethe beginning of privatization in 1997,the share of the state hasdecreased andcurrentlystandsat20 percent. EDP is still mainlyanelec- tricitycompany,butithasdiversifiedinto gas,mainlythanks to acquisitions in Spain:in 2008,the companyrealized89 percent of its revenues in electricity,and9percent in gas. With market liberalization,EDP’s market share in electricity generation in Portugalhasdecreasedto around65 percent,but it still hasaround95 percent in Portuguese electricitysupply. Power generationismainlybasedon hydroelectricityand thermalpower,butthe companyhasalso stronglydeveloped windpower.EDP plannedto acquire,together with Eni,Portugal’s main gascompany,GasdePortugal(GDP). However,the EuropeanCommission prohibitedthe acquisition in 2004,asit wouldhavehad, in its view,negativeconsequences forcompetition.182 HenceEDP’s Portuguese gasactivities remain limited to its control of one of the sixdistribution companies (Portgas). EDP’s gasactivities in Spain are muchmore significant (Spain accounts for88percent of EDP’s overall gassales),but EDP also hasimportant electricityactivities there.EDP is present on the Spanish electricitymarket mainlyviaits subsid- iaryHC Energía, the fourth-largest electricityoperator in Spain. Its gasactivities are mainlyrealizedbyNaturgas,in whichit hasa66 percent stake. Outsidethe IberianPeninsula, EDP is activemainlyviaits renewable energies branchEDP Renováveis,whichwasintro- ducedseparatelyto the stockmarket. The EDP groupholds 62percent of EDP Renováveis (asofJune 2009). EDP Renováveis is the fourth-largest windenergycompanyin the world, buthas

182 .EuropeanCommissionpress releaseof9December2004(IP/04/1455) . 2010 fri, ©I 122 The EU’s Major ElectricityandGasUtilities sinceMarket Liberalization

onlycontributed4percent to EDP’s overall revenues in 2008. Thanks to important investments,this share should, however, increase.EDP Renováveis’ main countries of operation are theUS (45 percentofinstalledcapacity),Spain (38 percent), Portugal(12percent),andFrance(4percent). Outsidethe EU, EDP is present in the Brazilianelectricitysector,where it produces,distributes andsupplies electricityviaits subsidiary EnergiasdoBrasil.

Eni The Italianoil andgascompanyEni,mainlyknownfor its upstreamactivities,is animportant player on the European gasmarket andone of Europe’slargest gasmarketers (with E.ON andGDF Suez). Itisactiveinthe supply,transport,distribution andsale of naturalgas. Moreover,Eni also hasseveral power plants in Italy.Gasmid-anddownstreamandelectricity accountedforaroundone-thirdof the company’s revenues and one-quarter of its EBIT in 2008. Around50percent of Eni’sgassales are realizedin Italyand the remaining 50percent abroad, mainlyin other European countries.In2002,Eni acquiredfull control of Italgas,the leading gasdistributor in Italy.Today,Eni has53percent in SnamRete Gas,the leading player in the regulatedgasbusiness (transport,distribution,storage,LNG regasification) in Italy. Moreover,Eni acquiredDistrigasin2008,the leading gassupplier in Belgium,whichwasformerlypart of Suez.Eni is also present in manyother Europeangasmarkets,notablyin Spain,where it hashad a50percent stake in Union FenosaGassince2002.Eni, of whichthe Italiangovernment owns 30percent,plans to develop its internationalpresence. Its objectiveistorealize 61 percent of its gassales abroad in 2012.Eni,whichhasa market share of around45 percent in gassales in Italy,expects its sales in Italyto decrease asaconsequenceofmarket opening. Its gasactivities in Italyare subjecttocompetition investigations bythe EuropeanCommission,whichaccuses Eni of “capacityhoarding,”“capacitydegradation” and“strategicunder- investment” in its internationalgastransmission pipelines. 183

183 .EuropeanCommissionpress releaseof19March2009(MEMO/09/120) . 2010 fri, ©I Case Studies of Major EuropeanUtilities 123

Inthe earlydaysofEni,EnricoMattei had the ambition of making Eni the sole energycompanyof Italy,whichwould also beresponsible forelectricityproduction andnuclear energy.Eni had first developedactivities in electricityatthat time,butMattei’svision wasnot realized, asEnel came to be the leading Italianelectricitycompany.Sincethe creation of Enipower in 1999,Eni is (again) activeinelectricity:it owns severalthermalpower plants in Italyandproduces around 10percent of the country’s electricity.Its share in electricity sales also standsataround10percent.

Fortum Fortumisthe largest Finnish utility,activeinthe generation, distribution andsale of electricityandheat. The companywas foundedin 1998 through the merger of the electricitycompany ImatranVoima(state-owned)andthe oil companyNeste Oyj (listed). The oil andgasbusiness wasagain separatedfrom the companyin 2005into Neste Oil. The Finnish state currently holds50.8 percent of Fortum’sshares. The companyis the second-largest electricitygenerator in the Nordiccountries with amarket share of 13 percent in 2008; its electricityproduction insidethe EU is mainlybasedon hydro and nuclear(45 percent each). Moreover,it is the largest electricity distributor andretailer in the Nordicregion. Its presenceinthe Nordicmarket is mainlyconcentratedin FinlandandSweden (the countryhasmore customers in Sweden thaninFinland),but it also hassubsidiaries in Norway.Fortumhasnodownstreamgas activities,butitisactiveinheat:it is the largest heatgenerator in the Nordicregion. Its market shares in Finlandare around 30percent in electricitygeneration and12percent in electricity retail. InSweden,the companyhasmarket shares of 17 percent in electricitygeneration and14 percent in electricityretail. Outsidethe Nordicregion,Fortumisactiveinthe Balticstates (some limitedheatsales) andPoland(electricityandheatsales). Moreover,Fortumhasbecome animportant player on the Russian electricitymarket. Itenteredthis market in 2003byacquiring shares in the distribution companyLenenergo (whichitdivested again in 2007). Fortumhasshares in twoRussianelectricity generators:TGK-1 (since2006) andTGK-10(since2008). 2010 fri, ©I 124 The EU’s Major ElectricityandGasUtilities sinceMarket Liberalization

GasNatural With the acquisition of the electricitycompanyUnion Fenosa, whichwascompletedin September 2009,GasNaturalhasbecome one of the three leading energyutilities in Spain. The incumbent gascompanyin Spain,it hasnowfortifiedits position asmarket leader in gaswith amarket share of around60-65 percent. Large parts of its gasportfolio are basedon LNG,andGasNaturalisthe world’s second-largest LNG company.Through the acquisition of Union Fenosa, GasNaturalhasalso become the third-largest electricitycompanyin Spain,though well behindEndesaand Iberdrola.After the acquisition of Union Fenosa, GasNaturalhas amarket share of around20 percent in electricitygeneration and 13 percent in electricityretail. Ifone takeselectricityandgas together,GasNaturalisthe largest marketer of energyin Spain. GasNaturalstartedto enter foreign markets in 1992and is activein23countries worldwidesincethe acquisition of Union Fenosa.Most of its internationalactivities are located outsideEurope (for the most part in Latin America). The companyis activeingasdistribution in Italyon asmall scale andsells gasonthe FrenchandPortuguese wholesale markets. Moreover it is activeinelectricitydistribution in Moldova, where it is responsible forpower supplyto 70percent of the population. The company’s main shareholders are Cajade Ahorros ypensiones deBacelonaandCriteriaCaixacorp which have37.5 percent each. The Spanish oil companyRepsol is the third-largest shareholder having 30.8 percent. Gasunieand GasTerra Gasunie andGasTerraare the main players in the Dutch naturalgasmarket. After being the trading andsupplybranchof Gasunie,GasTerrabecame anindependent gastrading company in 2006. Sincethen,Gasunie’sactivities havebeen limitedto gas infrastructure.The company’s main task is to operate the Dutch high-pressure gaspipelines; this task is done byGasunie’ssubsid- iaryGasTransport Services B.V.(GTS). Gasunie,whichis 100 percent ownedbythe Dutchstate,hasalso been running the North Germangastransmission system sincethe acquisition of BEB in 2008. Moreover,it offers gasstorage andLNG services. GasTerra(50percent ownedbythe Dutchstate,the remaining shareholders being Shell andExxonMobil) is aninternational 2010 fri, ©I Case Studies of Major EuropeanUtilities 125 gastrading company.Itbuysgasfrom Dutchgasproducers (89 percent of purchases) andfrom abroad (11 percent),whichit then sells to Dutchandforeign customers (energycompanies, power stations,industry). Its sales of 84 bcmin2008madeitthe EU’s fourth-largest gasseller.GasTerrarealized39 percent of its 2008sales in the Netherlands,23percent in Germany,10percent eachinItalyandthe UK, andthe remainder in France,Belgium andSwitzerland.

PublicPowerCorporation(PPC) The PublicPower Corporation (PPC, DEI in Greek) is the largest power generator in Greecewith amarket share nearto 100 percent andanear-monopolyposition in power supply.The companywasset upin1950bythe Greek government andit waspartlyprivatizedin 2001. The Greek state todayholds 51 percent of PPC’s shares.The companyowns twolarge lignite mines andlignite is the largest sourceofpower forPPC, accounting for55percent of power production. Duetothis,PPC emits more CO2 per kWhofelectricitygeneratedthananyother major Europeanelectricitygenerator.PPC wasthe sole owner of the Greek transmission system,butafter the beginning of unbundling,it reducedits share in the Greek TSO to 49 percent.

Scottishand SouthernEnergy Scottish andSouthern Energywasformedin 1998 following the merger of Scottish Hydro-ElectricandSouthern Electric.The listedcompany,in whichnosingle entityhasmore than5percent of shares,is the third-largest electricitygenerator andthe second- largest energysupplier in the UnitedKingdom,with amarket share of around12percent in electricitygeneration and17 percent in electricityretail. Its power production is mainlythermal (around80percent),with the remainder coming from renewable energysources (hydropower andwind). The companyis one of the leaders in renewable energies in the UK, andserves atotalof around9m customers.Operating under severalbrands,Scottish andSouthern Energyalso runs the electricitytransmission network in the North of Scotland, andthe electricitydistribution networks in Northern ScotlandandCentralSouthern England.It owns 50percent of ScotiaGasNetworks,the UK’s second-largest gasdistribution companywhichprovides naturalgascustomers 2010 fri, ©I 126 The EU’s Major ElectricityandGasUtilities sinceMarket Liberalization

in Scotlandandthe South andSouth East of England.Scottish andSouthern Energyis verymuchfocusedon the British market, butithasalso some operations abroad, especiallyin windenergy. Notably,it hasacquiredAirtricity,the largest generator and supplier of renewable energyin Ireland, in 2008.

Statkraft Statkraft is Norway’s leading electricitycompany.We mention it here because Norway,whichofcourse is not amember of the EU,is verymuchintegratedinto the EU electricitymarket. After being astate companyformost of its history,Statkraft has been transformedinto alimitedcompanyin 2004,butthe Norwegianstate remains the owner of 100 percent of its shares. Statkraft is mainlyactiveinpower generation andsupply,district heating andenergytrading.Itisthe largest power producer in Norwaywith amarket share of around35 percent,andthe third- largest in the Nordicmarket with amarket share of around 14 percent. The companyis also activeinelectricityretail with a market share of 24percent in Norway.After animportant asset swapwith E.ON in 2008,Statkraft is currentlythe largest renewable energyproducer in Europe. 184 This is mainlyduetoits very important hydro production in Norway,whichalso constitutes apivotalreservoir forpeakproduction in Europe:Statkraft is a major importer of electricitytowardsthe EU,andveryactivein energytrading.The big exposure to hydroelectricity,however, constitutes arisk in dryperiods,whichStatkraft hasreducedby developing windandgaspower (in Norway,Germany,the UK andSweden). Recent acquisitions andorganicgrowth have changedthe geographicfocusofthe company:in 2007,only 3percent of its production capacitywaslocatedoutsideNorway. This share hasgrownto28percent in January2009. Moreover, the companyplans to further develop its internationalactivities, notablyin South East Europe (first hydro projects in Albaniaand Turkey). Outsidethe EU,Statkraft develops renewable energy projects in AsiaandLatin America, mainlyviaSNPower (in whichithasa60percent shareholding).

184 . Asaresultof the assetswapwithE .ON,Statkrafthassignificantlyreduced its activity in Sweden,whereithadsharesin E .ON Sweden (the formerSydkraft) . Atthe same timeithas becomethe singlelargest shareholderin E .ON,havinga4 1. 7percentstake . 2010 fri, ©I Overviewof MajorNational Markets and RegionalElectricity and GasMarkets in the EU

Inits inquiryinto the Europeangasandelectricity sectors, 1 the EuropeanCommission underlinedthatthere is no Europeanmarket forelectricityandgasyet,asmost nationalmarkets are not yet sufficientlyinterconnected. Moreover,manyother obstacles (structuraland/or regulatory forinstance) remain forthe creation of atrulysingle market. Most observers share the viewof the EuropeanCommission, asthe Nordicmarket is probablythe onlyregionallyinte- gratedelectricitymarket in the EU today.Predictably,Member States havetakendifferent approaches in implementing the liberalization directives.One shouldalso bearinmindthat Member States had verydifferent market structures in the early1990s. Even if the same Europeandirectives applyin all Member States,theyhavebeen implementedin different ways andwith significantlydifferent results byMember States. Moreover,most countries havenot yet totallyimplementedthe directives of the secondpackage,whichhasledthe European Commission to launchinfringement procedures forfailure to implement the secondpackage against 25ofthe EU’s 27Member States. 2

1 . EuropeanCommission(2007) . 2 O. nlyCyprusand Maltaavoidedaction–duetotheirsmall sizeand isolated energysystems, theybenefitfrom exemptions .EuropeanCommissionpress releaseof25June 2009 (IP/09/1035) . 2010 fri, ©I 128 The EU’s Major ElectricityandGasUtilities sinceMarket Liberalization

Inthis context,nationaltraditions andlegacies from the past needto betakeninto account,astheyoften havealong life andpresent important politicalobstacles forliberalization. Italso needstobeunderlinedthatmanygovernments have been favoring,in one wayor another,the creation of “national champions,”betheyownedbythe government or private business.This,of course,impedes liberalization in manycases.In short,there is adiverse set of market structures in the EU today.There is,however,acommon trendtowardsdemo- nopolization in most countries,even if concentration processes haverecentlytakenplaceinalimitednumber of countries (for example,the UnitedKingdom). Inorder to present an overviewof these highlydivergent nationalmarkets,weoffer ashort overviewof major nationalandregionalmarkets in the EU in the following sections.This shouldallowforabetter understanding of the Europeanelectricityandgasmarkets, andamore precise evaluation of the relativeposition of each large utility(also see statisticaldataon nationalelectricityand gasmarkets andmarket concentration in electricitygeneration in annex). Even if wehavemostlynationalmarkets today–with the exception of the Nordicandincreasinglythe Central-Western Europeanelectricitymarkets –,there are some trendstowards greater integration between groups of Member States.One example is the launchofthe trilateralmarket coupling between French,BelgianandDutchelectricitymarkets in 2007,acoop- eration between the three power exchanges (APX, Powernext, Belpex)andthe three TSOs(Elia, RTE, TenneT). Germanyis to join the market coupling in 2010.Moreover,EliaandRTE createdacommon technicalcoordination center (calledCoreso) in 2009,whichsupplies nationalTSOswith forecasts aboutthe securityof the gridof the North West of Europe.NationalGridof the UK joinedCoreso three months after the start of operations. Similarprocesses are taking placeelsewhere.Agoodexample is the common Iberianmarket (MIBEL),which,however,has turnedouttobedifficult to establish. Itisnoteworthythat these developments are mainlylimitedto electricity.For now, gasmarkets remain muchmore national,or even sub-national where different market zones exist. This is due,to alarge extent, to the fundamentaldifferences between the twoproducts. 2010 fri, ©I Overviewof Major NationalMarkets 129

These differences canalso explain,atleast partly,whyin most Member States –butnot in all –there is less competition in gasthaninelectricity. Itisnot in the scope of this paper to analyzeindetail how farthe expansion strategies of large utilities contribute to the trendtowardsgreater integration of the different national markets.Inourview,it is withoutdoubtthatthe emergence of trulyEuropeanutilities with activities in manyEU countries contributes positivelyto market integration,asthese companies haveanaturalinterest in the interconnection andintegration of nationalmarkets.Unsurprisingly,theyask formarket conditions thatare asuniform aspossible in all Member States.Most of them also arguefor further liberalization andmarket opening –even if in manycases this means thattheywill facemore competition in their home market. Most big utilities seem to haveacceptedthis andcompensate fordecreasedmarket shares athome byexpanding activities abroad.

Germany Germany,the largest countryin the EU in terms of population andgross domesticproduct(GDP),also hasthe highest electricityconsumption in absolute numbers.Moreover,it has the second-largest gasmarket of the EU.Concerning market structure andcompetition,the countryis within the EU average. Its electricityandgasmarkets are neither verycompetitive andfragmented, nor are theyamong the least competitiveand most monopolisticones.

The GermanElectricity Market Market liberalization hassignificantlychangedthe structure of the Germanelectricitymarket. Inthe mid-1990s,there were aroundten major electricityproducers in Germany,with the retail market fragmentedamong ahuge number of supply companiesenjoying regionalorlocalmonopolies. The beginnings of market liberalization ledto severalfar-reaching merger andacquisition activities.The most important ones were the merger of Bayernwerk andPreussenElektrawhichformedE.ON, andthe acquisition of VEW byRWE.Twomajor foreign utilities 2010 fri, ©I 130 The EU’s Major ElectricityandGasUtilities sinceMarket Liberalization

enteredthe Germanelectricitymarket atthattime:EDF bought shares in EnBW,whichitself wasthe result of the merger of severalregionalelectricitycompanies.Vattenfall acquiredand subsequentlymergedVEAG, BEWAG,HEW andLAUBAG. Asaresult,RWE, E.ON,Vattenfall andEnBW haveachieved amarket share of 80-95 percent in electricitygeneration in recent years (depending on years andcalculation methodology). The Germanregulator,forinstance,estimatedthatin2007, these fourcompanies produced87.9 percent of net electricity forgeneralconsumption (451.4 TWhoutof513.5 TWh).3 The production capacities of all fourcompanies are more or less regionallyconcentrated, aseverycompanyhasits historic home region(s). Until 2009,eachofthe fourlarge integrated utilities also ownedthe transmission network in its region. A major change took placein2009,when E.ON soldits network. Moreover,Vattenfall divestedits transmission network in March2010(see belowfordetails). Ofthe fourlarge Germanutilities,RWE andE.ON are by farthe most dominant players,astheytogether producedaround 55-60percent of Germanelectricityin recent years (RWE around30percent,E.ON around25percent). The smaller companies of the “Big-4,”Vattenfall andEnBW,produced around12-15 percent of electricityeach. Asaconsequence, the Germanregulator,the FederalCartel Officeandthe Bundesgerichtshof are of the opinion thatRWEandE.ON form aduopolyanddominate the Germangeneration market.4 It will beinteresting to see if the authorities change their view after the divestment of 5GW of production capacitybyE.ON following its agreement with the EuropeanCommission. This step hasreducedE.ON’s share of electricityproduction to around 15 percent. Moreover,E.ON andRWE are regularlyaccusedof using their market power to manipulate the Germanelectricity exchange EEX (EuropeanEnergyExchange). The companies, of course,denythese accusations; court proceedings are

3 .Bundesnetzagentur(2008b),p . 13 . 4 . Bundesnetzagentur(2008b),p . 13 . 2010 fri, ©I Overviewof Major NationalMarkets 131 ongoing. 5 Interestingly,in its proceedings against E.ON the EuropeanCommission initiallyassumedthatRWE, E.ON and Vattenfall formedanoligopolyon the Germanelectricity wholesale market. Butinits finaldecision,the Commission didnot specifywhether the three companies form anoligopoly, or whether just RWEandE.ON form aduopoly. 6 The Germanelectricitydistribution market is veryfragmentedwith 855 distribution system operators (DSOs) in June 2008,779 of whichhad less than100,000 customers. 7 Manyof them are activeonlyin one regionorcityandare often ownedbymunicipalities.Moreover,the factthatmost of them haveno,or onlyverylimited, production capacities makesthem dependent on the fourbig producers.This in turn impedes competition. Inaddition,the big producers have shareholdings in severallocalandregionaldistributors,even if the sale of ThügabyE.ON in 2009haschangedthis situation to acertain extent. The fourlarge utilities takentogether real- izedaround52percent of electricitysales to end-customers in 2007,with E.ON,RWE andEnBW having market shares of around16 percent each,andVattenfall having only4percent.8 These figures includesales viaconsolidatedparticipations –theywouldbesignificantlyhigher if sales viacompanies in whichthe big generators haveminorityparticipations were countedaswell. Until the endof 2009,the Germanhigh-voltage transmission network wasoperatedbyfourTSOs,whichwere all subsidiaries of the fourbig generators.Ofatotalof35,250km of 220 and380kVlines,RWE owned11,500 km,E.ON 10,600 km, Vattenfall 9,500 km andEnBW 3,600 km (asof2008).9 Buta major change to this traditionalstructure happenedin November 2009,when E.ON soldits gridto the Dutch state-ownedTSO TenneT.Vattenfall soldits gridin March

5 . See,forexample,“EnergieverbraucherverklagenE .onund RWE,” Spiegelonline ,8May2009; “ManipulationanderStrombörse,” Wirtschaftswoche online ,12March2007;“Manipulationan derStrombörse?” http://www .energienetz .de/de/Energiebezug/Strom/Stromboersen/site__516 . 6 .Bundesnetzagentur(2009),p . 14 . 7 B. undesnetzagentur(2008a),p . 6 . 8 . Owncalculationbased on RWE Fact&Figures,May2009,p . 127,whichquotesdata provided bythe Bundesverband derEnergie- und Wasserwirtschaft(BDEW) . 9 . http://www .udo-leuschner .de/energie-chronik/080702 .htm 2010 fri, ©I 132 The EU’s Major ElectricityandGasUtilities sinceMarket Liberalization

Map2.TSOAreasin Germanyin 2010

Source: Author.

2010to aconsortiumofthe BelgianTSO EliaandanAustralian investment fund(IndustryFundManagement). Onthe other hand, RWEandEnBW want to keep their high-voltage networks –atleast forthe time being.The coalition government of CDU/ CSU andFDP declared, in late 2009,its intention to set upa single GermanTSO in the coalition agreement,butthis plan hasbecome highlyunrealisticafter the acquisitions byTenneT andElia. Asoftoday,most observers regardthe extent of competition in the Germanelectricitymarket asunsatisfactory,andthe result of liberalization asrather disappointing.Inthe first years of 2010 fri, ©I Overviewof Major NationalMarkets 133

Graph 5. Structureofthe GermanElectricity Market(2008)

4 Major

≈ 60 Regional

>800 Local Local Electricitysupply Netelectricity consumptionof521 TWh to endcustomers 236TWh =45% 139.5 TWh=27% 120.5 TWh=23% 25 TWh =5% Industry Private Trade, Others households commerce, public institutions Source: RWE, Facts &Figures,May2009,p. 119. liberalization after 1998,there wasasurprisinglyhigh level of competition thatledto important reductions of the electricity pricebetween 1998 and2000.Householdsobtainedreductions of upto30percent andsome industrialcustomers of even 70percent.10 Utilityrepresentatives underline thatthese reductions ledto losses forthe electricitygenerators,astheydidnot control the situation duetotheir lackofpreparation for,and understanding of,aliberalizedmarket.11 Sincethe mid-2000s, there havebeen manydebates aboutthe lackofcompetition in Germany.The issueofincreasing electricityprices predict- ablydominatedpublicdebates,butcompetition authorities andthe regulator havealso criticizedthe lackofcompetition basedon investigations into the functioning of the electricity market (see above). Not surprisingly,most energycompanies andtheir associations rejectthis view,citing the increasing level of competition andmarket entrants.

The GermanGasMarket Inits 2008report to the EuropeanCommission,the German regulator writes that“the Germangasmarkets are still charac- terizedbyahigh level of concentration.”There is “no effective

10 .“Ganzschön bedient,” neueenergie ,July2005 . 11 .MatthiasDürr (RWE)atIFRI EnergyBreakfast Roundtable in Brussels,17December2009 . 2010 fri, ©I 134 The EU’s Major ElectricityandGasUtilities sinceMarket Liberalization

Graph 6.Structureofthe GermanGasMarket(2008)

German ProducersForeignProducers

Supra-regional longdistancegas companies Level1 (with direct access to import/production) E.ON Ruhrgas, VNG, Wingas, RWE Supply &Trading

Regional longdistancegas companies Level2 (withoutdirect access to import/production) Erdgas Münster,GVS,Bayerngas,SaarFerngas,E.ONAvacon, Gas-Union, FGN, EVG, EWE, RWE WWE

Over 700regionaland localdistributors

EndCustomers (Private households andcommercial customers, industry,powerplants)

Totalsupply 930* TWh

126* TWh367*TWh 437* TWh Powergeneration Industrial Residential andsmall (publicsupply) customers commercial customers *Preliminaryfigures.

Source: RWE, Facts &Figures,May2009,p. 142.

competition,”butitalso notes thatthere hasbeen “some movement” in the market recently. 12 Itisverycomplicated, if not impossible,to estimate the market shares of the different companies in the Germangasmarket. This is duetoalackof transparency,andalso to the factthatthere are manyintra- companysales.Moreover,the Germangasmarket hasacompli- catedmarket structure consisting of four“supra-regional long-distancegascompanies,”ten “regionallong-distancegas companies” andover 700 regionalandlocaldistributors (according to ananalysis byRWE, see graph). The Bundesnetzagentur dividedGermangascompanies into 20 TSOsand697 DSOsin June 2008.13

12 .Bundesnetzagentur(2008a),p . 19 . 13 .Bundesnetzagentur(2008a),p . 15 . 2010 fri, ©I Overviewof Major NationalMarkets 135

Arecent andverydetailedstudyof the Germangasmarket does not giveanyfigures formarket shares,underlining the lackoftransparency. 14 According to the regulator,the three largest wholesalers (whichare not named)had amarket share of 26.3 percent in the overall market in 2007and45 percent in the market forbig customers (>100 GWhper year).15 In2007 the EuropeanCommission estimatedthatthe largest wholesale company(obviouslyE.ON Ruhrgas) accountedfor60percent of the wholesale market.16 Inanycase,the market share of “new”entrants sincemarket liberalization is still low,with the incumbents largelydominating (the largest ones being E.ON Ruhrgas,VNG,WingasandRWE). The most successful newentrant in the Germangasmarket is GDF Suezwith sales of around30TWhin2008-2009.17 Inhis encyclopedicstudyof the Germangasmarket,Heiko Lohmann underlines thatimportant changes havetakenplace in the Germangasmarket in recent years.Thanks to the work of the regulatoryauthorityandchangedmarket behavior of large incumbents (in particularE.ON Ruhrgas),competition is nowmore andmore becoming arealityaccording to Lohmann.18 Hetherebygives amore nuancedviewthanthe Germanregulator (see above) or the GermanMonopolies Commission,whichconcludedin 2007that“it is not possible to speakoffunctioning competition in the Germangas market.” 19

France Franceisthe Western Europeancountrywhere the electricityandgasmarkets havechangedthe least. The French government hasnever been verykeen on introducing competition,andhasoften been slowto implement European

14 .Lohmann (2009),p . 49 . 15 .Accordingtothe same source,theystill had30 .9 percentof the overall marketand 50percentof the big customers in 2006 .Bundesnetzagentur(2008a),p . 21 . 16 .http://ec .europa .eu/energy/energy_policy/doc/factsheets/market/market_de_en .pdf . 17 .Lohmann (2009),p . 50 . 18 .Lohmann (2009),p . 3 .Heiko Lohmann publishedanotherstudyabout the earlystepsof Germangasmarketliberalizationin2006 (see Lohmann 2006) . 19 .Monopolkommission(2007),p . 149 . 2010 fri, ©I 136 The EU’s Major ElectricityandGasUtilities sinceMarket Liberalization

directives.Duetothis,the historicincumbent electricityand gascompanies (EDF andGDF Suez–whichwere until recently state-ownedmonopolies) still verymuchcontrol the market. Newentrants andthe Frenchregulator CRE (Commission de Régulation del’Energie) havecontinuouslycomplainedabout difficulties of entering the market. The predominanceofregu- latedtariffs forelectricityandgas–especiallyin the residen- tialsector,butnot onlythere –isaparticularityof the French market andcertainlydoes not help to foster competition,as regulatedprices often donot reflectproduction costs.EDF, GDF Suezandtheir competitors regularlycomplain aboutthis, astheymake verylowprofits or even losses in their sales to residentialcustomers.

The FrenchElectricity Market According to the CRE, 66 percent of overall electricity consumption wasunder regulatedelectricitytariffs in June 2009 (the realshare is higher,ascustomers under TARTAM tariff are countedascustomers under market price).20 Ninety-five percent of electricityconsumedbyhouseholdsisunder the regulatedtariff. 21 Asfor electricitygeneration,the Frenchsitu- ation is uniqueinsofarasthe countryhasaveryhigh share of nuclearproduction. In2008,76 percent of Frenchelectricity wasgeneratedbynuclearplants,14 percent byrenewable energysources (mainlyhydropower) and10percent bythermal plants. 22 The high share of nuclearbase-load makescompe- tition in generation more difficult thaninother countries that haveamore diversifiedandflexible production mix–espe- ciallyasall nuclearplants (andmanyhydro plants) are owned bythe historicoperator EDF.Thanks to this,EDF hasamarket

20 .TARTAM standsfor“Tarif RéglementéTransitoired’AjustementduMarché”,aspecialtransi- tory tariffthatallows companiesthatleftthe regulated tariffforthe free markettocomeback toregulated tariffs .Manycompaniesused thisopportunity asmarketpriceswentup and remained higherthanthe regulated tariff . Customers underTARTAM payapremiumof 10-23 percentoverthe originalregulated tariff,but thispriceinmost casesremainsbelowthe marketprice . Thiscontroversialmeasurebythe Frenchgovernmenthasbeenwidelycriticized, and should beabandoned in 2010 .The EuropeanCommissionbegananinvestigationinto regulated electricity tariffsin Francein2007,whichhasbeenextendedin2009 . See European Commissionpress releaseof10March2009(IP/09/376) . 21 . CRE (2009) . 22 .Percentagescalculated withdatafrom http://www .ufe-electricite .fr . 2010 fri, ©I Overviewof Major NationalMarkets 137 share of around88 percent in electricitygeneration. The second-largest producer,GDF Suez,hasamarket share of around5percent (mainlyhydro),andthe third-largest,E.ON, 2-3 percent (mainlycoal). The Frenchwholesale market hasbeen coupledwiththe Belgianandthe Dutchones since2006. Thanks to this,electricityprices atthe power exchanges (PowernextinFrance, Belpexin BelgiumandAPX in the Netherlands) havebeen increasinglyconverging sincethen:in 2008,base-load prices were the same for70percent of the cases andpeak-load prices for72percent of the time. 23 Duetothe high degree of nuclearproduction byone single company,the sale of electricityproducedin EDF’s nuclear plants through auctions (“VirtualPower Plants”) hasbeen introducedfollowing arequest of the EuropeanCommission (in the contextofEDF’s acquisition of shares in EnBW). These auctions are of crucialimportancefor alternativesuppliers,as theygivethem achancetoacquire electricityandthen sell it to end-use customers.However,the prices realizedatthese auctions havebeen considerablyhigher thanthe production costs of EDF.Therefore,the priceatwhichalternativesuppliers canacquire electricityproducedin EDF’s nuclearpower plants is one of the most important points in the ongoing debates concerning the reform of the Frenchelectricitymarket. This reform shouldbeintroducedin 2010:after the publication of the Champsaurreport in April 2009,the Frenchgovernment andParliament are expectedto decideonanewelectricity market lawin 2010(NOME). Consultations with the European Commission andthe industryon this issueare ongoing.Itis however politicallyimpossible to transfer some of the existing nuclearpower plants to another operator in ameasure to stimulate competition:publicopinion considers it safer to have onlyone nationaloperator (i.e.EDF). Moreover,the French population is stronglyattachedto the servicepublic model,for whichEDF,asanation-wideandpublicoperator,is astrong symbol.

23 .Thesevalueswere64percentand 61percentrespectivelyin 2007 .RTE, Rapport d’activité 2008,p . 10 . 2010 fri, ©I 138 The EU’s Major ElectricityandGasUtilities sinceMarket Liberalization

The concessions of asubstantialpart of Frenchhydropower plants are upfor renewalinthe nextyears.ManyEuropean companies havedeclaredtheir interest in the upcoming auctions, andone might expectthatEDF’s share in overall hydropower production will decrease in the future. Inelectricitysales,EDF also enjoysaverystrong position. The exactmarket share is difficult to estimate,butshouldbe around85-90percent. Competition is most advancedamongst the largest customers.Alternativesuppliers haveamarket share of around18 percent in this segment. Inthe overall market, alternativesuppliers haveamarket share of 10percent.24 GDF Suez,the incumbent gascompany,is the largest alternative supplier forelectricity,with amarket share of around5-7 percent. The high-voltage electricitytransmission network is oper- atedbyRTE, whichis100 percent ownedbyEDF.RTEis widelyregardedasanindependent TSO andasaninterna- tionalreferencefor network construction andoperation,especiallyconcerning interconnection issues.Onthe contrary,the incomplete unbundling of ERDF,another EDF subsidiarythat is responsible fordistribution to around95 percent of elec- tricitycustomer sites in France,hasbeen criticized. 25 The remaining 5percent of customer sites are suppliedbyaround 160localdistribution companies.

The FrenchGasMarket Unlikeinmost other countries,the Frenchgasmarket is somewhatmore competitivethanthe Frenchelectricitymarket –atleast if one takesthe market share of alternativesuppliers asthe criterion:alternativegassuppliers (all suppliers other thanGDF Suez,Totaland22 small localsuppliers) havea market share of 14 percent in gassales.Alternativeelectricity suppliers account foronly10percent of electricitysales.

24 . SharesaccordingtoCRE (2009) . Alternativesuppliers aredefined asall suppliers thatare nothistoricsuppliers .The historicsuppliers areEDFand around 20 small localsuppliers owned bymunicipalities(whichhadnotbeennationalized in 1945) . Fortheir(very limited)sales outsidetheirtraditionalarea, theselocalsuppliers areconsidered asalternativesuppliers . 25 . Competitors havecriticized thatERDFdoesnotoperateseparatelyfrom otherbusiness sectors of EDF .Moreover,the similarity of namesand logosof ERDFand EDFhasbeen criticized . 2010 fri, ©I Overviewof Major NationalMarkets 139

However,GDF Suez,operating under the brandGazdeFrance in gasretail andwholesale in France,is still bylarge the dominant player of the Frenchgasmarket. All market segments takentogether,GDF Suezsoldaround61 percent of gasdeliv- eredto end-customers in Francein2008. Totalcomes second with around16 percent,EDF thirdwith around4percent. E.ON,whichis–according to its owninformation –the largest foreign companyin the Frenchgasmarket,had amarket share of around2percent. When evaluating market shares in the different market segments,one needstoconsider that55percent of Frenchgas consumption is under regulatedtariffs whereas88percent of deliverypoints are under regulatedtariffs.Ninety-one percent of consumption byresidentialcustomersisunder regulated tariffs,butonly18 percent of consumption bylarge clients directlyconnectedto the transmission network is under regulatedtariffs. 26 GDF Suezhasamarket share of 85 percent in the residen- tialsector,with other historicsuppliers (localdistribution companies) having around10percent andalternativesuppliers having around4percent. Inthe non-residentialmarket,alternativesuppliers haveamarket share of around18 percent,and in the subsector of big industrialclients (those whichare directly suppliedfrom the transport network),theyhave26percent.27 GDF Suezindicatedthatithad amarket share of 59 percent in the big customer sector in 2008(whichitcalls “grands comptes,”representing its 300 largest customers).28 The majorityof gasinfrastructure (transmission anddistribution networks,storage sites,LNG terminals) in Franceis ownedandoperatedbysubsidiaries of GDF Suez.The company owns andoperates 88 percent of the transmission network. The remaining 12percent is operatedbythe Frenchoil major Total,whichtook over,in 2004-2005,some of the historicgas companies in the South-West region of France. GrDF,GDF Suez’s distribution subsidiary,owns andoperates 96 percent

26 .CRE (2009) . 27 .SharesaccordingtoCRE (2009) .Clients directlysupplied from the transport network accountfor0 .01percentof delivery points,but 31percentof consumption . 28 . GDFSuezDocumentde référence2008,p . 92 . 2010 fri, ©I 140 The EU’s Major ElectricityandGasUtilities sinceMarket Liberalization

of the gasdistribution network. The remaining 4percentis operatedbysmall localdistribution companies. 29 GDF Suez’s subsidiaryStorengyoperates 13 of the 15 storage sites in France; another subsidiary,Elengy,operates the twoFrench LNG terminals.GDF Suezalso is byfarthe largest gasimporter in France. Innegotiations with the EuropeanCommission, however,GDF Suezacceptedto graduallydecrease its share of import capacityfrom 2010onwards,reducing it to less than 50percent by2014 (see GDF Suezsection fordetails).

United Kingdom30 According to most observers,the UnitedKingdom hasthe most competitiveelectricityandgasmarket in Europe.The privatization andliberalization undertakenthere in the late 1980s and1990shasindeedservedasanexample andmotivation for the EuropeanCommission to propose the EU-wideliberalization of the sector.The English andWelsh gasandelectricitymarkets were the first in Europe to beliberalizedin the early1990s. Monopolies in gas(anationalmonopoly:British Gas),electricitygeneration (anationalmonopoly:the CentralElectricity Generating Board, CEGB)andelectricitysupply(regional monopolies:the RegionalElectricityCompanies) were broken up–hencethe British government took boldsteps thatwere more radicalthanthose undertakeninmost other European countries.Aseries of mergers andacquisitions followed, with manyassets changing owner severaltimes. 31 Severalforeign investors from the US andEurope enteredthe market,Whereas most US investors left the market again fairlysoon, 32 five Europeanutilities (EDF,E.ON,GDF Suez,Iberdrola, RWE) came to bemajor players in the British electricityandgas market.

29 . Informationasof 2007,http://ec .europa .eu/energy/energy_policy/doc/factsheets/market/ market_fr_en .pdf . 30 .Forelectricity and gas,oneneedstodistinguishthe differentconstituentpartsof the United Kingdom:forobvious geographicalreasons,NorthernIreland formsaseparatemarket from the rest of the UK .But even insideGreatBritain,differencesexist betweenEngland and Waleson the onehand,and Scotland on the other:energyliberalizationwasdoneindifferent ways and withdifferentresults there . But since2005,GreatBritain hasasingleelectricity wholesale market,asmarketarrangements forEngland and WaleswereextendedtoScotland . 31 . Green(2006)providesagood overviewof thesedevelopments . 32 .See Haarand Jones(2008) on thisissue . 2010 fri, ©I Overviewof Major NationalMarkets 141

Table 19.Electricity Generation Capacity and NetGeneration in GreatBritain

Generation Net generation Net generation Company capacity (2007,TWh) (2007,%) (2009,%) EDF Energy * 18 27.27.6 Npower (RWE)1425.8 7.2 E.ON 11 41.211.5 SSE 1041.1 11.5 Scottish Power (Iberdrola)724.3 6.8 Centrica 615.4 4.3 GDF Suez611.1 3.1 InternationalPower 6n.a.n.a. Drax5n.a.n.a. British Energy–62.1 17.4 Others 23109.230.6 Total100 357.4 100

* Includes British Energyforgeneration capacity. Sources: Ofgem (2009),p. 22 forgeneration capacity;EDF presentation 24September 2008, E.ON AnnualReport 2008,p. 96,andowncalculations fornet generation.

The BritishElectricity Market The veryfragmentedBritish electricitygeneration market of the late 1990shasbecome more concentratedagain:in 2007, there were sixmajor producers thataccountedfor62percent of electricitygeneration (see table 19). Sincethen,the largest generator in Britain andoperator of the British nuclearpower plants,British Energy,hasbeen acquiredbyEDF.This hasled to further concentration,even if EDF divested20 percent of British Energyto Centrica in 2009andannouncedplans to divest further shares of British Energy.Itisnoteworthythat Scottish andSouthern Energy(SSE)andCentrica are the only major electricitygenerators in Britain thatare not ownedby foreign companies (asofearly2010). Onthe retail side,one must distinguish between the markets fordomestic(household)andnon-domesticcustomers.Six large companies –whichare all major electricitygenerators – supplied99 percent of domesticcustomers in 2008. The situation in the market forsmall,non-domesticcustomers is quite similar. 2010 fri, ©I 142 The EU’s Major ElectricityandGasUtilities sinceMarket Liberalization

Table 20.MarketSharesin the BritishElectricity Retail Market(in %)

Non-domestic Non-domestic consumers Domestic consumers Company (consumption customers (consumption between 100 kW below100 kW) and1MW) British Energy––15 British Gas/ 22 31 6 Centrica E.ON 18 15 11 EDF Energy13 16 18 GDF Suez–– 6 RWEnpower 15 11 18 Scottish Power 1265 (Iberdrola) SSE 19 18 16 Others 025

N.B.:Domesticcustomers:asofJune 2008andbynumber of customer accounts. Non-domesticcustomers:asofNovember 2008andbyvolume of suppliedelectricity. Source: Ofgem (2009),p. 28-29.

The market forlarge non-domesticcustomers hasaslightly different composition,butthe major electricitygenerators also haveimportant market shares.Thus,the retail market is modestlyconcentrated, butthis is not seen asaproblem for competition:the Officeofthe GasandElectricityMarkets (Ofgem) statedin 2009that“the sixlargest suppliers are acting competitivelyandwehavefoundno evidenceofacartel.” 33 It is however noteworthythatthe retail market is less fragmented thanthe generation market,andthatall major suppliers have important generation capacity.The sixlargest suppliers account for54percent of generation capacity.Conversely,not all generators are activeinsupply. Electricitytransmission anddistribution networks in the UK are unbundled, buttovarying degrees.The English and Welshhigh-voltage transmission networksare ownership unbundled, astheir owner andoperator,the NationalGrid, has no generation,wholesale or retail activities.NationalGridalso

33 .Ofgem (2009),p . 7 . 2010 fri, ©I Overviewof Major NationalMarkets 143

Graph 7.Structureofthe UK Electricity Market(2007)

Over 30 electricity generators

1transmission systemoperator

7distributionnetworkoperators, operating 14 distributionzones

7major suppliers

Netelectricity consumption342 TWh

226TWh 116TWh

Industrial &commercialcustomers (incl. transportand agriculture) Residential customers

Source: RWE, Facts &Figures,May2009,p. 120. operates the Scottish transmission network,even if it does not ownit(it is ownedbySSE andScottish Power). The situation forelectricitydistribution networks is different,asall large suppliers (with the exception of RWEnpower andCentrica) haveaffiliates thatownandoperate distribution networks. There are 14 distribution zones in the UK, operatedby7distri- bution network operators (DNOs). Only2DNOshaveno generation andretail activities.EDF Energy,whichowns and operates 3distribution areas,announcedits intention to divest its distribution networks in 2009.

The BritishGasMarket

The former fullyintegratedmonopolyin the British gas market,British Gas,wasprivatizedin 1986 –fouryears earlier thanthe monopolyelectricitygenerator.Starting in 1986,the British gasmarket hasbeen graduallyopenedto competition. The privatizedBritish Gaswasdemergedinto twoseparate companies,BGplcandCentrica, in 1997. Centrica took over 2010 fri, ©I 144 The EU’s Major ElectricityandGasUtilities sinceMarket Liberalization

Graph 8. Structureofthe UK GasMarket(2008)

Production /Import/Export

Producersand shippers

1gas transporter

4gas distributionoperators

9major suppliers

Totalsupply 1,091TWh

483TWh 241TWh 367TWh

Conversion to power& Industrial & otherenergyindustryuse commercial customers Residential customers

Source: RWE, Facts &Figures,May2009,p. 141.

gassupply,services,retail business andsome gasproduction assets,whereasBG plctook over the bulk of gasandoil exploration andextraction,andalso the high pressure gastransmission system. The transmission system wasdemergedfrom BG plc three years later.Itwasthen acquiredbyNationalGridin 2002, whichtodayowns andoperates the British high-pressure gas transmission system. The companyis also the largest of the fourgasdistribution network operators,owning andoperating distribution networks in fiveareas. The three other gasDNOs are Wales &West Utilities,Northern GasNetworks andScotia GasNetworks. Unlikeinmanyother Europeancountries,there are several companies thatbring naturalgastothe British market. For domesticgasproduction,there are,forinstance,fivecompanies with amarket share of more than5percent. Moreover,there are 16 shippers with primarycapacityon the Interconnector pipeline forimports from Belgium,and7main shippers on the Langeledpipeline from Norway.Moreover,there is anincreasing number of companies activeinLNG import. According to the 2010 fri, ©I Overviewof Major NationalMarkets 145

Table 21. MarketSharesin the BritishGasRetail Market(in %)

Non-domestic Non-domestic Domestic Company consumers consumers customers (non-dailymetered) (dailymetered * ) BP –– 3 British Gas/Centrica 44 217 Corona–121 E.ON 13 19 5 EDF Energy72– Eni –– 9 Gazprom –41 GDF Suez–713 RWEnpower 1252 Scottish Power 91– (Iberdrola) Shell –515 SSE 15 5– Statoil ––20 Total–17 17 Wingas––6 Others 020

* Annualconsumption greater than58,600,000 kWh. N.B.:Domesticcustomers:asofJune 2008andbynumber of customers. Non-domesticcustomers:asofNovember 2008andbyvolumes of gassupplied. Source: Ofgem (2009),p. 52-53.

British regulator,it is verydifficult to assess the market shares of gasproducers andimporters,butthis market seems highly competitive.34 Ingasretail,one needsagain to distinguish between the domesticandnon-domesticmarket. Inthe domesticmarket,the sixmajor electricitysuppliers are also the main gassuppliers,but with significantlydifferent market shares:Centrica, the owner of the former monopolyandincumbent supplier British Gas,hasa muchhigher share in gasthaninelectricity.The market structure in the non-domesticmarket is more fragmented, whichisa sign forahigh degree of competition (see table 21).

34 . Ofgem (2008),p . 76 . 2010 fri, ©I 146 The EU’s Major ElectricityandGasUtilities sinceMarket Liberalization

Italy Sincethe 1960s,the Italianelectricityandgasmarkets have been dominatedbytwostate-ownedcompanies:Enel forelec- tricityandEni fornaturalgas. Both companies havebeen partlyprivatized, butthe state remains animportant minority shareholder in both. Market liberalization haschangedthe picture,asEnel hasenteredthe gasmarket andEni hasentered the electricitymarket. Moreover,other companies haveincreasing shares in both markets.However,Enel is still byfarthe largest companyin the Italianelectricitymarket andEni dominates the Italiangasmarket. The largest competitor to the former monopolies is Edison,acompanyactiveinelectricityandgas. ItiscontrolledbyEDF andA2A. 35 Indistribution andsales to end-use customers,the Italianmarket is veryfragmentedwith ahigh number of localcompanies activeinboth sectors.

The ItalianElectricity Market Market liberalization hashad more tangible results in the Italianelectricitymarket thaninthe gasmarket so far. The “Bersani Decree” of 1999 openedupthe electricitymarket and brought important structuralchanges:Enel had to divest 15 GW of production capacitywhichequaledaround25percent of its capacityatthattime.The electricitytransmission network was also spunoff to anindependent TSO,Terna.Inresult,Enel is not the single dominating companyof the Italianelectricitymarket anymore.Its share of net electricitygeneration in 2008amounted to 31 percent,while Edison’smarket share was12percent. Eni wasthe thirdproducer with 9percent,followedbyEdipower (in whichEdison hasa50percent stake)with 8percent andE.ON with 7percent. Inline with this data, the share of the three largest generators hasdecreasedfrom 71 percent in 2001to52percent in 2008. When considering the Italianelectricitygeneration market,it is important to note thatelectricityimports represented 12percent of power requirements on the network in 2008.36

35 . A2AisanItalianutility bornout of the mergerof twomunicipalelectricity and gascompanies, AEM of Milanand ASMBresciaatthe endof2007 . 36 .Ifnoothersourceisindicated,all datain thischapteristaken from Autoritàperl’energia elettrica eilgas(2008,2009) . 2010 fri, ©I Overviewof Major NationalMarkets 147

Table 22.Structureofthe ItalianElectricity Retail Market(2008)

Volumes Volumes Withdrawal Withdrawal Type of market (TWh) (%) points (m) points (%) Protected-tariff service89.3 31.5 32.4 91.0 Safeguardservice12.8 4.5 0.20.9 Liberalizedmarket 181.4 64.02.9 8.1 Total283.5 100 35.6 100

Source: Autoritàper l’energiaelettrica eilgas(2009),p. 39 andowncalculations.

Inelectricitysales,there were three companies with amarket share higher than5percent in 2008:Enel with 47 percent, Edison with 6percent andAceaElectrabel with 6percent. These market shares applyto the whole retail market,i.e.the free market andthe regulatedmarket. Asinother countries, important differences in terms of market shares exist between the regulatedandthe free market. In2008,64 percent of elec- tricitywassuppliedon the liberalizedmarket andthe trend towardsalarger share of consumption servedbythe free market shouldcontinue. Interms of customer sites,however, the situation is different,asthe vast majorityof the numerous customers with small consumption (householdsandsmall business) is still under regulatedtariffs.The full liberalization of the market took placeon1July2007. Sincethen,all customers including householdscanchoose their supplier andswitchto the free market. Changes of pricetypes havebeen introduced the same day,with theintroduction of the “protected-tariff service” forhouseholdsandsmall companies andthe provisional“safeguardservice” forall customers thatcannot access the protection segment andthatare withoutacontractfor electricityon the free market. Enel is byfarthe dominant companyin the regulatedmarket forresidentialcustomers andsmall companies,with amarket share of around80percent in terms of volumes in 2008. Enel waseven more dominant in the provisional“safeguardservice” market segment with amarket share of 84 percent in 2008. The degree of concentration of the free market is much lower thanthatofthe regulatedand“safeguard”market. Enel wasalso the largest companyin this segment in 2008,butwith 2010 fri, ©I 148 The EU’s Major ElectricityandGasUtilities sinceMarket Liberalization

amuchsmaller market share of 27percent. Other companies with market shares above5percent in 2007(no information available for2008) were Edison (11.5 percent),Eni (6.6 percent), Axpo (5.9 percent) andAceaElectrabel (5.3 percent). The combinedmarket share of the three largest companies was 43.6 percent in 2008. Enel is also byfarthe most important electricitydistribution network operator:around87 percent of distributedelectricity went through its network in 2008. There were 130other distribution network operators,butnone of them had amarket share of more than5percent. Electricitytransmission networks are ownedandoperatedbyTerna, anindependent company thatwasspunoff from Enel in severalsteps in the early2000s. ItwasIPO-edin 2004; currentlythe state-ownedCassaDepositi ePrestiti (CDP SpA)isits main shareholder with 30percent of shares.Enel hasaround5percent.

The ItalianGasMarket Italy’s gasmarket is more concentratedthanthe country’s electricitymarket,mostlyduetothe factthatpublicauthorities havenot takenthe same boldstructuralmeasures asinelec- tricity.Asaresult,the incumbent Eni enjoysaverydominant position in the Italiangasmarket. The differences between gas andelectricityplayanimportant role in this context,aspoliti- cians seem to givesecurityof supplypriorityover competition. Indeed, Italydependsheavilyon gasimports from Russia, AlgeriaandLibya.The countryis the EU’s third-largest gas consumer,consuming onlyslightlyless gasthanGermany:this is mostlyduetothe factthatmore than60percent of Italy’s electricitygeneration is gas-based. The three leading companies Eni,Enel andEdison provided 85 percent of Italy’s gas(i.e.producedor importedgas) in 2008. Their share of totalgasdemand(i.e.gassoldon wholesale and retail markets,including resales) waslower,with Eni having amarket share of 36 percent,Enel 12percent andEdison 9percent. A2Ahad 7percent andE.ON had 5percent. The situation differs in eachmarket segment,forexample with a large number of small localsuppliers forhouseholdcustomers. 2010 fri, ©I Overviewof Major NationalMarkets 149

Table 23.LeadingGasSellers in ItalybyMarketSegment(2008,in %)

Accumulated Market Largest Market Second- Market Third-largest Market market share segment seller share largest seller share seller share of three largest sellers Electricity Eni 42.5 Enel 29.8 Edison 8.7 81.0 generators IndustryEni 46.5 Enel 11.8 Energie 8.1 66.4 Investimenti Tradeand Eni 20.8 Energie 10.4 Enel 10.1 41.3 services Investimenti HouseholdsEni 29.9 Enel 12.9 Hera6.1 48.9

Source: Autoritàper l’energiaelettrica eilgas(2009),p. 70.

These small operators seem,however,to beunable to compete with larger companies forlarger clients; electricitygenerators, forinstance,are suppliedmainlybythe three large operators (see table 23). The dominant position of Eni is closelylinkedto its control of the Italiangastransmission network. The TSO SnamRete Gas–inwhichEni hasacontrolling stake of 53 percent – owns andoperates around95 percent of the gastransmission network in Italy. 37 The Italianenergyregulator hasrepeatedly calledforownership unbundling of SnamRete Gas–butthe Italiangovernment opposes this measure. 38 The gasdistribution segment is highlyfragmented, with more than300 distribution network operators (there were more than800 ten years ago). Onlyseven companies havemore than500,000 customers,and 25havebetween 100,000 and500,000 customers in 2007. The 32largest distribution companies,however,distribute 75 percent of the totalgasvolume.Eni is also the largest companyin this market segment,with companies of the Eni groupcontrolling around27percent of the distribution network asmeasuredby volumes sold.

37 .The Italiantreasury has5percentof the sharesand the remaining42percentarefree floating . http://www .snamretegas .it/en/media/PDF/factsEng .PDF . 38 . “Eni still pullsall the stringsin Italiangasmarket,” Utility Weekonline ,7August2009 . 2010 fri, ©I 150 The EU’s Major ElectricityandGasUtilities sinceMarket Liberalization

Basedon Eni’scontrol of the transmission network and import capacities,severalinstitutions haveaccusedItaly’s incumbent gascompanyof impeding competition. For instance,aninvestigation conductedbythe ItalianNational Competition Authority(Autoritàgarante dellaconcorrenzae del mercato) foundthatEni had abusedits dominant position in the Italiangasmarket. The authorityimposedits highest fine ever ( € 290m) on Eni in 2006for blocking third-party access to apipeline thatcarries gasfrom Algeriato Sicily, saying thatthe companyinterruptedthe necessarycapacity increases on the line. 39 The EuropeanCommission hasalso been investigating Eni since2007,suspecting the company of “capacityhoarding,”“capacitydegradation” and“strategic underinvestment” in Eni’sinternationaltransmission pipeline system.40 The Italianregulator also notes in his report thatthe level of competition on the Italiangasmarket is not sufficient,underlining thatthe lackofinfrastructure is one of the keyproblems. 41 The ItalianParliament hastakensteps in order to improvecompetition,i.e.bylimiting Eni’sshare of gasimports:Eni had 75 percent in 2002 andwasobliged to decrease its share by2percent everyyearuntil 2010, finallyreaching 61 percent). Moreover,acapof50percent wasimposedon Eni’ssales to end-customers until 2010. 42 In order to respectthese restrictions,Eni hasstartedagasrelease program,which,however,hasseeminglynot been anoutright success.Anextension of the import andsales restrictions until 2015 wasunder discussion in the ItalianParliament in 2009.43 Eni points to these measures when replying to accusations –andunderlines thatitcontrols less thantwo- thirdsofthe Italianmarket,comparedto E.ON Ruhrgas controlling 84 percent andGDF Suezcontrolling 89 percent of their respectivehome markets (according to Eni CEO Paolo Scaroni).44

39 . “Eni settoappealantitrustfine,” FinancialTimes ,17February 2006 . 40 .EuropeanCommissionpress releaseof19March2009(MEMO/09/120) . 41 .Autoritàperl’energiaelettrica eilgas(2008),p . 50 . 42 .“Lesexpériencesde ‘gasrelease’ en Europe,”CRE,2004,http://www .cre .fr . 43 .“Antitrustsays gascapsneeded,withflexibility,”Reuters,7May2009 . 44 .“Eni still pullsall the stringsin Italiangasmarket,” Utility Weekonline ,7August2009 . 2010 fri, ©I Overviewof Major NationalMarkets 151

Spain Inline with Spain’seconomicdevelopment,the country’s energyuse hassharplyincreasedin recent years:gross electricitygeneration rose from 196 TWhin1998 to 310TWh in 2008andgasconsumption tripledin the same periodto 39 bcmin2008.45 The Spanish electricityandgasmarkets are nowthe fifth-largest in the EU.Thanks to its growth,the Spanish market hasattractedthe interest of manyforeign companies in recent years.German,FrenchandItaliancompanies havesought to enter the market –with mixedresults:Enel of ItalyacquiredEndesaafter E.ON failedto dosoin2007/2008. Following anagreement with Enel andEndesa, the largest Germanutility,however,acquiredsome Spanish assets from Enel andEndesa, giving E.ON asolidposition in the Spanish market. Other interestedcompanies likeEDF havenot (yet) succeededin entering the Spanish market (with the exception of Portugal’sEDP,whichnowcontrols HidroCantábrico). E.ON’s andEDF’s failure to make large-scale acquisitions in Spain wasclearlyduetoresistancebythe Spanish government. After EndesaandIberdrolagrewbigger in the 1990sthrough mergers andacquisitions,further merger plans between Spanish utilitieswere broughtforwardin the last decade. The only bigger dealthatfinallytook placewasthe acquisition of Unión FenosabyNaturalGasin2009. Asaconsequence,the Spanish electricityandgassector is dominatedbythree companies: EndesaandIberdrolaare the leading electricityutilities which also havesignificant gasactivities,andGasNaturalisthe leading gascompanywhichalso hassignificant electricityactivities.

The SpanishElectricity Market Inelectricity,EndesaandIberdroladominate all parts of the valuechain except high-voltage transmission. The twocompanies had amarket share of roughly52percent in Spanish electricity generation in 2008,with Endesaproducing 28percent and Iberdrolaproducing 24percent. This representedamarket share of around41 percent in the Iberianmarket (Spain and

45 .BP (2009) forgas,BPwebsiteforelectricity (http://www .bp .com) . 2010 fri, ©I 152 The EU’s Major ElectricityandGasUtilities sinceMarket Liberalization

Portugaltakentogether),with Endesaproducing 22 percent andIberdrolaproducing 19 percent.46 HenceEndesaproduced more electricitythanIberdrolain 2008(88 TWhfor Endesa, 68 TWhfor Iberdrola),butIberdrolahasmore installedcapacity in Spain (Iberdrola26GW,Endesa22 GW,of which17GW on the Spanish mainland). This is duetothe factthatthe energy mixof both companies is quite different. Endesaproduced 87 percent of its electricityfrom thermalandnuclearsources in 2008,whereasthese sources amountedto only69 percent of Iberdrola’s production:the companyhasacomparatively high share of renewable production (27percent). The third- largest producer wasUnión Fenosawith amarket share of around13 percent. GasNaturalproduced7percent of Spanish electricityin 2008,HidroCantábrico(controlledbyEDP of Portugal) produced5percent andViesgo (controlledbyE.ON) produced3percent. Other producers andelectricityimports amount to 21percent of Spanish electricity. 47 Electricitysupplyin Spain is markedbythe co-existence of regulatedandliberalizedprices.The gradualtransition towardsliberalizedprices took another step on 1July2009, when regulatedtariffs forconsumers with acontractedcapacity of more than10kWwere abolished.This means that1.3m of the 24m electricityconsumers in Spain are nowin the liberalizedmarket. The remaining consumers canchoose to switch to the liberalizedmarket. In2007,7percent of customers representing 27percent of consumption were in the liberalizedmarket. This share had been higher in the past,butsome customers returnedto regulatedprices between 2005and2007, forthe simple reason thatregulatedtariffs were lower than market prices.This reflects animportant problem:asregulated tariffs are belowproduction costs,there wasanaccumulated “tariff deficit” of € 14bnatthe endof 2008.48 IberdrolaandEndesasoldnearlythe same amount of electricityin Spain in 2007,with Iberdrolabeing the leader in the regulatedmarket andEndesain the liberalizedmarket (see

46 .Comisióndel Mercado de ValoresMobiliariosetal . (2009),p . 24-25and e-mail from Iberdrolarepresentativetothe author,14 December2009 . 47 .Comisión NacionaldeEnergía(2009),p . 32 . 48 .Comisión NacionaldeEnergía(2008c)and Enerpresse,6July2009 . 2010 fri, ©I Overviewof Major NationalMarkets 153

Table 24. MarketShareson the SpanishMainland Electricity SupplyMarket (byvolume,2007,in %)

CompanyRegulatedmarket Liberalizedmarket Totalmarket Iberdrola42.233.7 39.9 Endesa35.4 48.6 39.0 Unión Fenosa15.4 13.014.8 HidroCantábrico4.7 2.4 4.1 Viesgo 2.3 2.22.3 Others 0.00.00.0

Source: Comisión NacionaldeEnergía(2008a),p. 5andowncalculations. table 24).49 Unión Fenosawasthe thirdmost important seller with around15 percent. Itisnotable thatthe electricitysales market is largelydominatedbyonlythree companies –this is aremarkablysmall number of companies.This situation is probablyduetothe persistenceofregulatedtariffs for73percent of consumption (in 2007). Ownership of the Spanish high-voltage electricitytransmission network is unbundled: it is ownedandoperatedby RedEléctrica deEspana(REE),whichhasnogeneration or supplyactivities.When the TSO companywascreatedin 1985, it wasthe first companyin the worlddedicatedexclusivelyto power transmission. The acquisition of transmission networks byREE happenedin twosteps,the 400 kVnetwork being unbundledfirst,andthe 220 kVnetwork some years later.REE is alistedcompanywith 80percent of shares free-floating and20 percent heldbySociedad EstataldeParticipaciones Industriales (SEPI),alarge industrialholding companyowned bythe Spanish state. There are fivemain distribution companies in Spain,which also actasDSOs. Theyare part of the fivemain electricity groups Endesa, Iberdrola, Unión Fenosa, HidroCantábricoand Viesgo.EndesaandIberdrolaare the twolargest companies, with Endesaalso owning andoperating the networks of the Spanish islands.

49 .Dataaspresented in the 2008AnnualReportsof bothcompaniesisunfortunatelydifficult tocompareduetoinconsistencies . 2010 fri, ©I 154 The EU’s Major ElectricityandGasUtilities sinceMarket Liberalization

Map3.Electricity Distribution Areasin Spain

Source: Comisión NacionaldeEnergía(2008c),p. 54

The Spanish electricitymarket hasbeen integratedwith the Portuguese market sinceJuly2007inthe IberianElectricity Market (MIBEL). This is the secondregionalelectricitymarket integration in the EU after NordPool. In2007,there wasstill anotable pricedifferentialinthe integratedmarket,asthe weightedaverage base-load priceinthe spot market was € 64/MWhinSpain and € 70/MWhinPortugal. This difference wasduetorestrictions in interconnection capacity.Since2007, pricelevels havesharplydecreasedduetothe economicslow- downandfalling energyprices,andtheyhavealso come closer in both parts of the MIBEL market. Inthe longer run,the market integration will increase competition in both countries. This couldespeciallyapplyto Portugal,where EDP is still byfar the dominant player with market shares of around65 percent in generation and95 percent in supply. 2010 fri, ©I Overviewof Major NationalMarkets 155 4 – – – – a sifi ca tion 1 0 16 5 0 termin a ls sh a re reg tot a l S p nish LNG of LNG ac ti v ities %) gri d sh a re 64 38 –– –– –– –– tot a l 89 0 8 , in of S p a nish s y stem T r a nsmission nfr a str u c t re r ke t ( 20 Ga si s Ma gri d sh a re 5 2 4 –– –– –– –– –– tot a l 86 of D istri b u tion S p a nish s y stem S p a ni s h Ga t he of ts sh a re –– et 9. 2 49 4.33 3.19 2 .1 0 –– 2 .3 0 –– 0 . 2 8– 0 . 2 4– 45.53 R et a iling m a rk t S egmen e r en et D iff n S p a in. ac ti v ities t he g a si – 0 .86 – 0 . 2 7– S p a nish 3.4 3.8 9. 0 5.41 13.4 1 2 . .79 15. 0 1 2 .36 1 0 .8 1 2 .3 S h a re C m a rk tr ad e d g a s the r ad ing OT of import in 99. Ga st r ke t S h a e s in g a s a llo w e d to Ma .59 .34 1.86 1.8 2 4. 0 1. 9– 3.4 2 7.9 2 .65 1.39 0 . 2 5– 3. 2 6– 0 . 4– 2 5. S h a re onger (imports) a v il ab le ol b le Ta of sn c ion a l d e E nergí ( 200 9) , p. n a g á si Na 00 8 ,E h 0 .77 C omisión F enos a 11.95 t u r a l4 * a s4 J u l y2 S u e z2 t u rg A fter Ga s Na Ib er d rol a 1 2 .53 U nión E n d es a 8.35 BP S hell GDF BBE Na C eps a 4.79 E . ON GALP S o u r c e : S on a tr ac C omp a n y * O thers E n a g á s 2010 fri, ©I 156 The EU’s Major ElectricityandGasUtilities sinceMarket Liberalization

The SpanishGasMarket The sizeofthe Spanish gasmarket hasincreasedsharplyin recent years.Spain is in auniquesituation when comparedto other Europeancountries,asthe majorityof its gasimports come from LNG.In2008,forinstance,29bcm(or 73 percent of totalimports) arrivedbyLNG,and11 bcmarrivedbypipeline. 50 Noother EU Member State hassuchahigh share of LNG in its imports.In2008,the industrialsector represented44 percent of consumption,electricitygeneration represented42percent,and domesticandcommercialconsumers represented13 percent. GasNaturalisthe incumbent gascompanyin Spain,with amarket share of 42percent in gasimports in 2008. In2007, GasNatural’sshare wasstill at52percent. Iberdrola, Unión FenosaandEndesawere other important importers with market shares between 8and13 percent. GasNaturalacquiredUnión Fenosain 2009,butitwasforced to guarantee thatitwouldnot control Unión FenosaGas(UFG), the gasbranchofUnión Fenosa.GasNaturalnowhasa50percent stake in UFG;Eni holdsthe remaining 50percent (since2002). Itremains to beseen if this changeinownershipofUFGwill haveaninfluenceoncompetition in the Spanish gasmarket –the companyhad indeedbecome one of the most important competitors of GasNatural. Asthe following graph shows,the development of the Spanish gasmarket since2001hasbeen markedbyacleartrendtowardsmore competition:the market share of the incumbent (GasNatural) hasdecreasedfrom roughly 80percent to around50percent (in terms of volumes sold). Inthe viewof the EuropeanCommission,agasrelease program(startedin 2001) enabledcompetition in the Spanish gasmarket,where competition hasbeen intense in the indus- trialsegment of the market.51 Whereasthe regulatedtariff prevails in the electricitymarket,the vast majorityof Spanish gasconsumption is in the liberalizedmarket (96 percent of totalconsumption in 2008). Competition is quite naturally muchmore intense in this sector of the market:GasNatural

50 .AccordingtoBP (2009) . 51 .http://ec .europa .eu/energy/energy_policy/doc/factsheets/market/market_es_en .pdf . 2010 fri, ©I Overviewof Major NationalMarkets 157

Graph 9. MarketSharesin the SpanishGasRetail Market2000-2008 (volumessold) % 100 90 80 70 60 50 40 30 20 10 0 2000 20012002 200320042005200620072008

Grupo GasNaturalGrupo Unión FenosaIberdrolaGrupo EndesaNaturgas CepsaShell GDF SuezBBE BP Otros

Source: Comisión NacionaldeEnergía(2009),p. 97.

Table 26.SpanishGasRetail Market:MarketSharesin Termsof Volume (2007,in %) CompanyLiberalizedmarket Regulatedmarket GasNatural43.7 81.7 Unión FenosaGas12.9 0.1 Iberdrola13.4 – Endesa9.210.1 Naturgas5.3 7.9 Cepsa4.5 – Shell 3.3 – GDF Suez2.4 – BBE 2.2– Others 2.8 0.1

Source: Comisión NacionaldeEnergía(2009),p. 94. had amarket share of 46.5 percent in 2007andfiveother companies had market shares of atleast 4percent. The situation in the regulatedgasmarket is different:GasNaturalhad ashare of 82.4 percent there in 2007,with onlytwoother companies having anotable presencethere (see table 26). Interms of 2010 fri, ©I 158 The EU’s Major ElectricityandGasUtilities sinceMarket Liberalization

customers,60percent were in the regulatedmarket,butthey onlyrepresented11.5 percent of consumption. The largest part of the Spanish gastransmission system is ownership unbundled: the independent TSO Enagás 52 owned andoperated89 percent of the transmission network in 2007. Three suppliers controlledthe remaining parts.The situation fordistribution networks is different,where the incumbent supplier GasNaturalowns andoperates 86 percent of the network. However,in 2009GasNaturalagreedto sell parts of the distribution network asacondition foracquiring 50percent in Unión FenosaGas. Twoother suppliers,EndesaandNaturgas, control the remaining parts of the network. The control of LNGterminals is anothercrucialissue,given thehigh share of LNG in the Spanish market. The TSO Enagásowns and operates the three largest Spanish LNG terminals andcurrently controls aroundtwo-thirdsofSpanish LNG import capacity. 53 The remaining capacityis ownedbysuppliers.

Nordic The Nordicelectricitymarket –consisting of Denmark, Finland, NorwayandSweden –wasthe first in Europe to be integratedregionally.Ithasacommon power exchange (NordPool) andmost of the region works asone synchronized zone (ENSTO-E’s [EuropeanNetwork of Transmission System Operators forElectricity]regionalgroupNordic–former Nordel). The onlyexception is “Denmark West,”i.e.the Danish mainland, whichispart of ENSTO-E’s regionalgroupContinental Europe (former Union forthe Co-ordination of Transmission of Electricity[UCTE]). Icelandis also part of ENSTO-E’s regional groupNordic, butnot interconnected.The region is seen as one of the most competitiveelectricitymarkets in Europe, mainlythanks to its regionalintegration whichleadstoalower level of market concentration when comparedto the rest of

52 .Enagáswasset-upasastate-ownedcompanyin 1972 .ItwassoldtoGasNaturalin1994, but thenIPO-edin2002 .Today,itisalisted companywith70 percentof sharesfree floating . The Spanishhydrocarbon lawimposesa5percentmaximumlimiton shareholdingsand a 3percentlimiton the exerciseofvotingrights .Moreover,votingrights of entitiesinvolved in the gassectorarelimited to1percent .Currently,sixshareholders have5percenteach:Sagane Inversiones,CIC Cajastur,BancajaInversiones,Kartera1(BBK),SEPI, OmanOil HoldingsSpain . 53 .Based on datafrom GasInfrastructureEurope,November2009,http://www .gie .eu .com . 2010 fri, ©I Overviewof Major NationalMarkets 159

Table 27.Electricity Generation and Consumption in the NordicRegion (2008,in TWh)

Denmark FinlandIcelandNorwaySweden NORDEL Electricity 34.6 74.1 16.5 142.7 146.0414.0 generation Electricity 36.1 87.016.6 128.9 144.1 412.7 consumption

Source: Nordel (2009a).

Europe.Sweden andNorwayare the largest electricitymarkets in the region. The gasmarkets of the fourcountries are relativelysmall andunderdeveloped.This is surprising atleast at first view,given the important level of gasproduction in NorwayandDenmark. Onthe other hand, the sparse population densityof large areasofthe region is anobviousimpediment to the development of gasmarkets. 54

The NordicElectricity Market Taking into account their small populations,the Nordic countries havesurprisinglylarge electricitymarkets (see table 27). Their high electricityconsumption per capitacanbeexplained byclimaticreasons andindustrystructure.In2008,industry accountedfor47percent of electricityconsumption in the Nordicregion,housing accountedfor28percent housing,and tradeandservices accountedfor22 percent. Electricitygeneration is dominatedbyhydropower,which accounts for58percent (see table 28). The differences in energymixbetween the fourinterconnectedcountries have been agoodreason andmotivation to integrate the electricity markets.Complementarityis indeedamajor advantage of the region,asitallowsbalancing fluctuations in renewables production duetometeorologicalfactors (less hydropower production in adryyear,less windproduction when the wind is not blowing etc.).

54 .Ifnotindicated otherwise,informationinthischapteristaken from DanishEnergy Regulatory Authority (2008),EnergyMarketAuthority of Finland (2008),NorwegianWater Resourcesand EnergyDirectorate(2008),and SwedishEnergyMarkets Inspectorate(2008), aswellasNordel(2009a)and Nordel(2009b) . 2010 fri, ©I 160 The EU’s Major ElectricityandGasUtilities sinceMarket Liberalization

Table 28. EnergyMixin NordicElectricity Generation (2008,in %)

Denmark FinlandIcelandNorwaySweden NORDEL Hydropower 02375984758 Nuclearpower –30––4220 Coal/gas/ 8047 011019 biomass Windpower 20 0–113 Geothermal ––25– –– power

Source: Basedon Nordel (2009a),p. 7.

Table 29. NordicElectricity Market (percentage of hourswithidenticalpricesin 2007)

Areaswith acommon price%of hours Sweden,Finland95 Sweden,Finland, South Norway,CentralNorway,East Denmark 65 Sweden,Finland, South Norway,CentralNorway,North Norway, 38 East Denmark Sweden,Finland, South Norway,CentralNorway,North Norway, 28 East Denmark,West Denmark

Source: Swedish EnergyMarkets Inspectorate (2008),p. 18.

Determining the relevant market is crucialfor the evaluation of the market position of everyelectricitycompany.Hence the realityof market integration is important. Inthe case of the Nordicmarket,most observers tendto use the region asthe relevant market,butthis assumption canbequestionedwhen wetake into account the pricedifferentials thatexist in the Nordicregion. There are transmission limitations insideregion, andtherefore eight electricityspot areasexist insideNordPool. Incase of congestion,market splitting between the different areasisused: transmission limitations are solvedbyprice signals,wherebythe priceinashortfall areawill behigher than the priceinasurplusarea.In2008,the periodof identical prices in all eight areaswasexceptionallylow,atonly7percent (it wasat28percent in 2007,and33 percent in 2006). Inside the area, some parts are better integratedthanothers and hencehaveahigher proportion of hours with the same price (for example,Sweden andFinland, see table). Inthe case of 2010 fri, ©I Overviewof Major NationalMarkets 161

Graph 10.MarketSharesin the NordicElectricity Market

Source: Fortumpresentation September 2009.

Denmark,there is not even aninterconnection between West andEast –the first cable linking the twoparts of the Danish system is currentlyunder construction. Ataregionallevel,the Nordicelectricitymarket is fairly fragmented.Ingeneration,the fivelargest companies –Vattenfall, Fortum,Statkraft,E.ON andDONG –account foraround 60percent of the market. Around350companies account for the remaining generation. Inretail anddistribution,the market is even more fragmented, asthe fivelargest companies have only30percent in eachsegment (see graph 10). Itisinter- esting to note thatE.ON is the onlycompanyfrom outsidethe region thathasasignificant share of the market. The companies from the region often haveassets in neighboring countries (i.e.Vattenfall in Finlandor FortuminSweden). Quite logically,the respectivenationalmarkets are more concentratedthanthe regionalmarket –butstill rather less concentratedthanother nationalmarkets in the EU.Inall countries,the state-controlledincumbent55 is the largest producer.The retail markets are muchmore fragmentedwith manymunicipalcompanies serving localcustomers.InSweden, the three largest electricitygenerators –Vattenfall (45 percent), E.ON (20 percent) andFortum(19 percent) –accountedfor

55 .Statkraftand Vattenfall are100 percentstate-owned,DONG at73percent,Fortumat 51 percent . 2010 fri, ©I 162 The EU’s Major ElectricityandGasUtilities sinceMarket Liberalization

Table 30.NaturalGasConsumption in the NordicRegion (2008)

Country Consumption in bcm Denmark 4.6 Norway4.4 Finland4.0 Sweden 1.0

Source: BP (2009).

84 percent of generation in 2008. The retail market is more fragmented, with Vattenfall having around30percent,E.ON having 12percent andFortumhaving 8percent in 2007. In Norway,Statkraft produces 35 percent of electricityandhasa market share of 25percent in retail. InFinland, Fortum produces around30percent of electricityandhas12percent of retail. The second-largest producer PVOhasamarket share of 20 percent in electricitygeneration. The Danish electricity sector is highlyconcentrated, asDONG produces 50percent of electricityin Denmark andhasashare of 35 percent in distribution. The second-largest company,Vattenfall,produces 20 percent of Danish electricity. Inall Nordiccountries butFinland, the TSO is ownership unbundledandstate-owned.The Finnish TSO Fingridis not fullyownership unbundled, astwogenerating companies, FortumandPohjolanVoimaOy,eachown25percent of the shares. 56 Distribution networks in the Nordiccountries are mostlyownedandoperatedbysmall or medium-sizedlocal distributors,whichare municipalcompanies in manycases.

The NordicGasMarket Even if NorwayandDenmark are important gasproducers with aproduction of 99 bcmand10bcmrespectivelyin 2008, 57 the Nordicgasmarkets are relativelysmall when compared to population andGDP.Onlyin Denmark andFinlandis

56 .The otherowners of Fingrid arethe StateofFinland (12percent)and insurancecompanies (38percent) . 57 .BP (2009) . 2010 fri, ©I Overviewof Major NationalMarkets 163 naturalgasanimportant fuel forelectricitygeneration (around 21and15 percent of totalelectricityproduction respectively in 2006).58 The Danish gasmarket is highlyconcentratedwith three companies –DONG,HNG/MN,andStatoil Gazelle –controlling around95 percent of the totalamount of gasavailable in the wholesale market. DONG alone controls 85 percent of the gasfrom the Danish part of the North Sea.The retail market is also dominatedbyDONG,whichprovides 44 percent of gas soldto end-customers.There is one TSO in Denmark responsible forgasandelectricity(Energinet.dk) andthere are five distribution companies,with DONG being the largest of them. The other distribution companies are ownedbymunicipalities. The Norwegiandownstreamgasmarket is relativelysmall. There is onlyone gas-firedpower plant in Norway,andonlya fewindustrialcustomers use naturalgas. The main use is for petrochemicalfeedstocks. The naturalgasmarket in Finlandis isolatedandsmall, asall gasisimportedfrom Russia.One company,Gasum,acts as the sole importer andwholesale supplier in Finland. 59 Asone pipeline from Russiais the onlysupplyoption,Finlandis exemptedfrom the EU’s gasdirectives.Gasumalso owns and operates the transmission network. Energyandpower companies, whichuse naturalgastoco-generate heatandpower,account forover 50percent of Finnish gasconsumption. Pulp and paper companies account forover 30percent. Onlyasmall secondarygasmarket with some limitedtrading exists.Retail supplyof gasisundertakenbyaround30companies having designateddistribution areas; theyalso operate the distribution networks. The verysmall Swedish gasmarket is dominatedbythe onlytwoimporters,DONG andE.ON.E.ON is also the dominant player in retail,accounting foraroundhalf of gassold.Five other companies market gastoaround55,000 naturalgasusers (of whom around2,600 are business users).

58 .http://www .iea .org . 59 .GasumisownedbyFortum(31percent),Gazprom (25percent),the FinnishGovernment (24percent)and E .ON Ruhrgas(20 percent) . 2010 fri, ©I 164 The EU’s Major ElectricityandGasUtilities sinceMarket Liberalization

Belgiumand the Netherlands The NetherlandsandBelgiumare important energymarkets in Northwestern Europe,respectivelybeing the EU’s eight- and ninth-largest electricity,andsixth- andseventh-largest gas markets,in terms of consumption. The electricitymarkets of both countries are reasonablywell interconnectedin the trilateralmarket-coupling with France(see paragraph on French electricitymarket). Gasmarkets are also fairlyintegrated, with the Netherlandsbeing animportant gassourcefor Belgium.

The Belgianand DutchElectricity Markets The Dutchenergymarket is of course markedbythe country’s significant gasproduction. Asaresult,naturalgasaccounts foralarge part of the country’s energymix.For instance,gas is usedforaround60percent of Dutchelectricityproduction. However,the Netherlandsisnot self-sufficient in electricity: the countryimported16 percent of the electricityit consumed in 2007. Ingeneralterms,the Dutchelectricitymarket is one of the fewcompetitivemarkets in the EU: the European Commission statedin 2007thatthe Dutchelectricitymarket “is functioning well.” 60 The Dutchregulator does not publish market shares forsingle companies,whichmakesstatements aboutmarket shares more difficult. There are seven large,andeighteen small,electricity producers in the Netherlands,with the fourlargest generators controlling three-quarters of the capacity. 61 The fourlargest producers are Essent (acquiredbyRWEin 2009) with 23percent of installedcapacity,Electrabel (GDF Suez)with 20 percent, Nuon (acquiredbyVattenfall in 2009) with 18-20 percent and E.ON with 10percent. Asfor net generation,Electrabel is the largest producer. 62 Essent andNuon are alsolarge electricity suppliers,whereasElectrabel andE.ON are mainlyactivein the wholesale market. According to press reports,Electrabel andE.ON are interestedin the acquisition of Oxxio,whichis

60 .http://ec .europa .eu/energy/energy_policy/doc/factsheets/market/market_nl_en .pdf . 61 . Energiekamer(2009),p . 12 . 62 .GDFSuezDocumentde référence2008,p . 62 . 2010 fri, ©I Overviewof Major NationalMarkets 165 the fourth-largest electricityandgassupplier in the Netherlands: this wouldallowElectrabel or E.ON to matchtheir generation assets with amuchlarger portfolio of clients. For electricityretail,the Dutchregulator onlypublishes dataforthe residentialmarket. Inthis market,the three largest companies had 80percent of the market atthe endof 2008, andonlyone other companyhasamarket share above5percent. According to information publishedbyRWE, Nuon hasamarket share of 30percent,Essent has26percent,Eneco(owned by61 Dutchmunicipalities) has24percent,Oxxio (ownedby Centrica)has5percent andother companies share the remaining 15 percent.63 There is one state-ownedunbundledelectricityTSO in the Netherlands,TenneT.Indistribution,there are eight regional DSOs. TenneTis currentlytaking over the 110kVand150kV networks from regionalDSOs. Arecent lawrequires DSOsto beownership unbundledbefore 2011. The Belgianenergymarket hastraditionallybeen concentrated, with the incumbent Electrabel andits main shareholder Suezbeing the dominant players in electricityandgas. Several developments in recent years havebrought some changes to the Belgianmarket,butrealcompetition is still onlyemerging:since the merger between GDF andSuez,Electrabel is nowpart of GDF Suez(in whichthe Frenchgovernment is the single largest shareholder). Electrabel wasobligedto cease its operationalactivities in the electricitytransmission network in 2005,buthaskept aminorityparticipation in Elia, the electricityTSO.GDF Suez, however,announcedin March2010to divest this participation. Inelectricitygeneration,Electrabel had amarket share of around86 percent in 2008. Butthis share is expectedto decrease to around65 percent in 2010,asElectrabel agreedon anasset swapwith E.ON,whichwill become the third-largest producer with amarket share of 10-15 percent. The second-largest Belgian producer,SPE, hasamarket share of around13 percent. The EuropeanCommission hasallowedEDF to acquire a51 percent majorityshareholding in SPE in November 2009. This dealhad

63 .RWE, Facts &Figures ,May2009,p . 18 . 2010 fri, ©I 166 The EU’s Major ElectricityandGasUtilities sinceMarket Liberalization

been opposed–invain –byBelgiancompetition authorities andthe Belgianregulator,astheywere worriedbythe factthat the Frenchgovernment,alreadythe single biggest shareholder in Electrabel,controls EDF.All other producers haveamarket share below5percent. Inelectricitysupply,Electrabel is also the largest company byfar,with amarket share of around73 percent in 2008. SPE is the second-largest supplier with around12percent of the market. The Dutchcompanies Nuon andEssent are the most successfulnewentrants with 3and2percent respectively. E.ON also had 2percent.64 Interestingly,Electrabel had ahigher market share –84percent –inthe big industrialcustomers segment (customers connectedto the network atmore than 70kV)thaninelectricitysupplyviathe distribution network, where it had 70percent in 2008.65

The Belgianand DutchGasMarkets The Dutchgasmarket is less competitivethanthe electricitymarket:the Dutchregulator saidthat“the variousparts of the Dutch[gas]wholesale market are withoutexception highlyconcentrated.”66 This is particularlytruefor the low- calorificpart of the gasmarket. The number of players in the wholesale market hasconsiderablyincreasedin recent years, butthe incumbent wholesaler GasTerrastill controls more than80percent of the available gas. Inthe small consumers market,there are,according to the regulator,three large suppliers with acombinedmarket share of 77 percent atthe endof 2008–the same companies thatalso dominate electricitysupply.Likeinelectricity,theyhavemore or less comparable market shares between 24and28percent. Likeinelectricity,there is one state-ownedgasTSO,Gas Transport Services (GTS),whichisasubsidiaryof the state- ownedGasunie.There are 11 gasDSOs,whichare all owned bymunicipalities andprovinces.Onlyfourofthem havemore than100,000 customers.

64 . CREGetal . (2009),p . 8 . 65 . CREGetal . (2009),p . 9and CREGRapport Annuel 2008,p . 51 . 66 .Energiekamer(2008),p . 34 . 2010 fri, ©I Overviewof Major NationalMarkets 167

InBelgium,there is not one clearlydominant companyin gassupply.Inoverall gassales,Distrigas(acquiredbyEni following the GDF-Suezmerger) hasaround39 percent, Electrabel has30percent,SPE has11percent,GDF Suezhas 7percent (whichcanbeaddedto Electrabel’sshare) and Wingashas7percent. There is amarkeddifferencebetween the wholesale market andgassupplies viathe distribution network. For the latter,whichaccount foraround46 percent of totalsales,Electrabel hasamarket share of 64 percent,SPE has15percent andDistrigashas7percent. Inthe wholesale market,Distrigasisthe largest player with amarket share of 72percent in 2008. GDF Suezis the second-largest company in this market with 13 percent.67

Centraland EasternEurope The energymarketsofCentralandEastern European countries constitute aspecialcase insidethe EU.The legacies of communist times canstill beseen there,asthese ten countries have–tovarying degrees –alower level of economic development thanthe EU average,andaccordinglyalower energyconsumption per capita(see table 31).68 Moreover,as theyjoinedthe EU in 2004and2007,some of the liberalization directives were introducedlater,assome of the newMember States were grantedexemptions.The energysituation of every CentralandEastern Europeancountryis different,in terms of nationalresources,market organization andcompanystructure. However,all of them undertook amajor restructuring of their energysectors after the endof communism,whichincluded privatization programs of varying degrees.Privatization started in the mid-1990s,with Hungarybeing the front-runner.In some countries,the energysector is nowcompletelypriva- tized;inothers,privatization hasbeen slowandpartial. In general,distribution companies havebeen privatizedfirst,and manynewentrants startedwith sales operations.Electricity generation andgasimport companies havebeen privatizedat aslower pace,astheyare generallyregardedasstrategically

67 .CREGetal . (2009) . 68 . CzechRepublic, Estonia, Hungary,Latvia, Lithuania, Poland,Slovakiaand Sloveniajoined the EU in 2004,Bulgariaand Romaniain 2007 . 2010 fri, ©I 168 The EU’s Major ElectricityandGasUtilities sinceMarket Liberalization

Table 31. SizeofElectricity and GasMarkets in Centraland EasternEurope (2007/2008,byelectricity consumption)

Electricity Electricity Gasconsumption Country production consumption (bcm) (TWh) (TWh) Poland139.7 138.4 13.9 CzechRepublic77.1 65.6 8.7 Hungary37.040.9 12.0 Romania56.1 40.214.5 Slovakia27.226.8 5.7 Bulgaria41.4 26.23.3 Slovenia14.1 13.2n.a. Lithuania12.5 8.1 3.2 Estonia10.9 6.6 n.a. Latvia4.6 6.4 n.a.

Sources: IEA (2009) forPoland, CzechRepublic, Hungary,Slovakia(2008data)andhttp:// www.enercee.net forother countries (2007data)for electricity;BP (2009) forgas(2008data).

more important. Inall cases,foreign companies,mainlyfrom the EU-15,havebeen major investors –especiallyGerman (E.ON,RWE),French(EDF,GDF Suez)andItalian(Enel) companies. 69 The case of the partlystate-ownedCzechelec- tricityincumbent,CEZ, is particularlyinteresting,asitisthe only of the region’scompanies thatalso hasimportant assets in other CentralandEastern Europeancountries (Poland, Romania andBulgaria). Thanks to its production assets in the Czech Republicandabroad, CEZ is the onlycompanycoming from the region thatranks among the 20 largest power producers in the EU. Even if energyconsumption per capitais lower thanthe EU average,energyintensityis higher:the CentralandEastern Europeancountries generallyneedmore energyto produce one unit of GDP.Hencethe potentialtoimproveenergyinten- sityis high atthe level of end-use consumers,butalso concerning transmission anddistribution losses.Insome of the region’s countries,energypovertyremains animportant socialproblem

–governments therefore tendto keep (regulated)energyprices low,asthe socialsystem is not yet developedenough to provide targetedhelp everywhere.Ofcourse,this does not make it easier fornewcompanies to enter the market,nor does it help to increase competition. Inmanycases,foreign investors have complainedaboutend-user prices thatdonot cover production costs. 70 Inthe longer term,this couldlead to important problems, ascompanies will not invest sufficientlyin newelectricityand gasinfrastructure. There are significant differences between the ten Central andEastern EuropeanMember States in terms of market structure.Inthe CzechRepublic, Estonia, LatviaandSlovakia, electricitygeneration is verymuchdominatedbythe incumbent company,whichhasbetween 80and100 percent of production capacity.The structure is more fragmentedin other countries, butthe state often remains the main shareholder in the different electricitygeneration companies.For example,this is the case of Romania, where different companies exist forthermal, hydro andnuclearproduction –all of them are controlledby the government.71 SlovakiaandHungaryare exceptions,as foreign companies –Enel in SlovakiaandGDF SuezandAlpiq of Switzerlandin Hungary–are major power producers there. The Polish generation market,byfarthe largest in the region, is particularlyfragmented.Around80percent of generation capacityis still controlledbythe state,asprivatization has been on the agenda formanyyears,butonlyafewgeneration companies havesofarbeen privatized. Throughoutthe region,Romania, PolandandHungary havethe largest gasmarkets (in terms of consumption). But the whole region consumes onlyaround65 bcmper year, whichissignificantlyless thanthe yearlygasconsumption of Italyalone.Most CentralandEastern Europeangasmarkets are veryconcentratedwith the incumbent companydominating the market with market shares of more than80or 90percent.

70 .Togivejusttwoexamples:foreigninvestors in the Polishelectricity sectorcomplained about the uneconomicallylowlevel of regulated electricity pricesin 2009(see forexample Enerpresse,20 November2009) .InHungary,E .ON received payments from the government tocompensateforthe lowlevel of retail pricesin naturalgas(see forexample E .ON Confirms CompensationDealWithHungary Government,DowJones,10June 2009) . 71 . Onelectricity reformand privatizationinRomania, see Diaconuetal . (2009) . 2010 fri, ©I 170 The EU’s Major ElectricityandGasUtilities sinceMarket Liberalization

Hungaryis the onlycountrywith fourlarge suppliers,butthere is no realcompetition because of the predominanceofregu- latedprices.Foreign investors –from Western Europe,butalso Gazprom –haveenteredthe gasmarkets in severalcountries. Romaniais in auniquesituation,asthe countryis amajor gasproducer,albeit production is declining.Romgaz(state- owned)andPetrom (controlledbyOMV)are the major gas producers.Theyare also activeinstorage andtrading.The two major distribution companies,DistrigasSudandDistrigas Nord, are ownedbyGDF SuezandE.ON Ruhrgasrespectively. Twotrading companies are in charge of gasimports,WIEE (ajoint-venture between Wintershall andGazprom) andWirom (ajoint-venture between WIEE andGDF Suez). Inthe CzechRepublic, RWEis byfarthe largest gas company.Ithasacquiredthe TSO Transgasandhasshares in sixof the eight distribution companies,giving it amarket share of around80percent in the retail market. RWEis also the sole gasimporter in thatcountry.InSlovakia, E.ON Ruhrgas andGDF Suezjointlyown49percent of the nationalgas companySPP,whichenjoysanear-monopolyposition. Inthe Balticstates,E.ON RuhrgasandGazprom are major shareholders in the respectivenationalgascompanies.Onlyin Poland, is the nationalincumbent,PGNiG, whichhasanear-monopolymarket position in all market segments,still state-ownedat100 percent. 2010 fri, ©I Conclusions

This studyfocusedon the evolution of major European utilities sincethe 1990s,when the liberalization of the European electricityandgasmarkets started.Ourcase studies of the seven largest utilitiesin2009–E.ON,GDF Suez,EDF,Enel,RWE, IberdrolaandVattenfall –haveanalyzedthe significant changes thatthese companies havegone through in the last fifteen years. Theyhaveadaptedtheir strategies to the newmarket environment in different ways,often consistent with their companies’ andcountries’ economictraditions andcultures.All of them enteredforeign markets in other Europeancountries,butonly afewof them haveimportant assets outsidethe EU.Theyhave become Europeanplayers with some of them having assets in nearlyall Member States of the EU: this veryfacthasahuge impactfor the EU’s energypolicy. 1 The EU’s electricityandgas companies,whichwere strictlynationalcompanies less than twentyyears ago,havebeen Europeanizedin ashort amount of time. The companies analyzedin this book all diversifiedtheir business activities,especiallybyusing the synergies between electricityandgas. Some utilities haveenteredother business sectors likewater,waste or telecommunications,butthis “multi- utility”strategyhasnot been successful:nearlyall these activities havebeen soldagain,sometimes after onlyaveryshort period. Itisalso notable thatseveralenergyutilities spunoff participations theyhad had formanyyears in non-energysectors.In particular,this wasthe case forthe twolargest Germanutilities

1 . See mapsin annexforanillustrationoftheirpresencethroughout the EU . 2010 fri, ©I 172 The EU’s Major ElectricityandGasUtilities sinceMarket Liberalization

E.ON andRWE.Inshort,the capacityof these companies to adapt to newmarket conditions andto benefit from new opportunities hasbeen trulyimpressive. The capacityto adapt is especiallytruewhen it comes to embracing competition. Less thantwentyyears ago,there was strictlyno competition between utilities in Europe,andall utilities enjoyedamonopolyposition in their nationalorsub- nationalmarket. Sincethen,it hasbecome possible to enter the others’ market andthe big groups havelargelyusedthis opportunity.Theyindeedstartedto compete against each other.The competition case involving GDF andRuhrgasisa goodillustration of this:in 1975 both companies agreednot to enter the market of the other when theybuilt the MEGAL pipeline.The EuropeanCommission finedboth companies in 2009,asthe Commission believedthattheyhad continued market-sharing after the beginning of market liberalization in 1999. Butthe twocompanies havechangedtheir business models sincethe mid-2000s,giving uptheir previousmarket- sharing agreement andliterallybecoming the most successful newforeign entrant into the other’smarket. Their case illustrates thatthe EU’s large utilities docompete against each other in some countries andmarket segments.

The emergenceof“seven brothers” The numerousmergers andacquisitions in the last fifteen years haveledto alimitednumber of big companies.Itisnot easyto classifythe largest companies,andourchoiceoftaking overall sales asthe criterion is certainlyjust one possibility.In anycase,asmall groupoffivetoten utilities currentlydomi- nates the electricityandgasmarkets in the EU.There are some goodreasons to concentrate on the seven biggest utilities; some havecalledthem the “seven brothers” of Europeanutilities, in areferencetothe “seven sisters” of oil majors. 2 Butinthe current situation,there is apronounceddifferencebetween the first fivecompanies (E.ON,GDF Suez,EDF,Enel,RWE) andthe twosmallest of the “Big-7,”Vattenfall andIberdrola. The twolatter utilities are between the fivelargest andthe

2 .Forexample,Thomas(2009) . 2010 fri, ©I Conclusions 173 numerousother smaller companies activeinthe sector.Itis noticeable that,of the fivelargest companies,twoare German andtwoare French. Not surprisingly,the fifth of the “Big-5” also comes from alarge EU country,Italy.

NoBritishamong the Seven,but twoGermanand twoFrench Butnone of the seven largest utilitygroups is headquarteredin the third-largest economyof the EU,the United Kingdom:the privatization of the British energysector hasled to asituation where most of the UK’s major utilities are owned byforeign companies.Inaway,the British energysector is therebymore Europeanizedthanthe Germanorthe French energysector:aninteresting conclusion,given the UK’s “half- in,half-out” position in the EU in general. The British case showsthatthe often heateddebates aboutforeign ownership of big utilities are outoftouchwith today’s market realities.It is indeedsurprising to see thatmanyactors still defendthe concept of “nationalchampions” andarguethattheyshouldbe protectedagainst foreign takeovers.The largest utilities are indeedless andless “German,”“French” or “Italian:”inthe case of E.ON,onlyone-thirdof the shareholders are German, 60percent of the workforceisemployedoutsideGermanyand the companysells more electricityoutsideGermanythan insidethe country.Onthe other hand–andthis is animportant caveat–ownership is less internationalfor most other companies,especiallythose in whichanationalgovernment hasanimportant stake (EDF,GDF Suez,Enel,Vattenfall). Some of the nationalgovernments are temptedto use “their” companies forpoliticalgoals,often to the frustration of company management,whichwouldpursueaEuropeanstrategybased on profit-maximization. Last,butnot least,it is interesting to note thatthe large majorityof management andsupervisoryboardmembers are still nationals of the utility’s home country.InDecember 2009, none of the seven largest utilities had a“foreign” CEO. 3 The nationalityof management boardmembers wasasfollows:EDF: 13 French,1Italian,1German; Enel:8Italians; E.ON: 5Germans;

3 .Vattenfall hasnamedaNorwegian(ØysteinLøseth) tobecomethe company’sfirstforeign CEOin 2010 .RWE hadaDutchCEO(HarryRoels)from 2003 to2007 . 2010 fri, ©I 174 The EU’s Major ElectricityandGasUtilities sinceMarket Liberalization

GDF Suez:4French,2Belgians; Iberdrola: 6Spanish; RWE: 6Germans; Vattenfall:5Swedish,2Norwegians,2Germans, 1Finnish,1Dutch. Thus,the degree of Europeanization is surprisinglylowif one looks atmajor utilities from the boardroom perspective. Butwealso needto note thatsenior management of utilities with assets in manyEU countries nowsees the market through multiple nationallenses.Thereby,senior managers broaden (i.e.Europeanize) their viewandit is only logicalthattheyhavebecome morefavorable to EU-wide market integration andharmonization. Recent statements by industryrepresentatives,forexample the demandto harmonize subsidies forrenewable energies atthe EU level, 4 illustrate this development.

Astrongtrendtowardselectricity-gassynergy Astrong generaltrendtowardsdiversification of activities within the energysector canbeobservedforall major utilities. All companies nowhaveelectricityandnaturalgasactivities, even if this is not truefor all their countries of operation. The synergies between electricityandgasare obvious,asmany customers needto besuppliedbyboth products andhenceask forcombinedoffers.Moreover,the share of naturalgasinelec- tricitygeneration hassignificantlyincreasedin the last twenty years.This,of course,also favors electricity-gassynergy.The relativeimportanceofelectricityandgasfor eachofthe major utilities is farfrom being homogenous:thanks to mergers between large electricityandgascompanies,electricityandgas are more or less equallyimportant forE.ON andGDF Suez. For these twocompanies,both products contribute in roughly equalterms to overall revenues.Inthe case of EDF,Enel, IberdrolaandVattenfall,electricityclearlydominates.RWEis somehowin between the twogroups of utilities. Itisimportant to note thatthese seven companies dominate the Europeanelectricitymarket,astheyaccount foraround 55 percent of the EU’s electricitygeneration. The picture is different in naturalgas,where major utilities likeE.ON,GDF SuezandRWE share the market with other important players

4 . Thisdemand wasmade,forexample,bythe CEOof E .ON .See interviewwithWulf Bernotat, “Europabrauchteine einheitliche Energiepolitik,” Handelsblatt,24June 2009 . 2010 fri, ©I Conclusions 175 likeEni,GasTerraor Wingas. Itisobvious(even if overlooked sometimes) thatthe important differences between natural gasandelectricityin terms of production,transport,storage possibilities andconsumption haveanimportant impacton market structures.Finally,it is interesting to observethatthe gasmarket is more competitivethanthe electricitymarket in some countries,likeFranceorSpain. This somehowcontra- dicts conventionalwisdom,whichclaims thatitiseasier to bring competition to the electricitysector thantothe gas sector.

Geographyand culturematter All major utilities haveusedthe opportunities of market liberalization forentering newmarkets in other European countries.Besides purelyeconomicfactors –whichare,of course,the most important –,geographicalproximityand culturalaffinityhavebeen essentialfactors forexpansion strategies.Itisdifficult to saywithoutinsider knowledge of companies’ decision-making howimportant these factors have been in reality,butasimple analysis of “who acquiredwhere” showstheir significance. Nearlyall major companies are present in the UK today, whicharguablyhasthe most open market. FrenchandGerman companies are particularlypresent there.Manycompanies havealso participatedin the privatization of utilities in Central andEastern Europe; Germanutilities are the largest investors there,whichisaconsequenceofgeographicalproximityand historicallinks.Enel hasamajor presenceinRomania, acultur- allyclose country.Moreover,Enel acquiredEndesa, after Spanish authorities dideverything to avoidatakeover of Endesaby E.ON.The factthatE.ON comes from aculturallymore distant countrywith adifferent economicculture thanEnel might haveplayedarole there.Before the acquisition of Endesa, Enel wasalreadypresent in Spain –andEndesain Italy.The Nordic market is another example of howculturalaffinityandsimilar economicthinking playarole:companies of the region are veryactiveinneighboring countries,butonlyone outsideplayer (E.ON)hasimportant assets there.The example of Belgiumis also striking,with FrenchorFrench-Belgiancompanies being 2010 fri, ©I 176 The EU’s Major ElectricityandGasUtilities sinceMarket Liberalization

the dominating energycompanies there.EDF,forinstance,has all its major foreign assets in neighboring countries:the UK, ItalyandGermany,where EnBW is even activeinaregion bordering France. Inall cases,the integration of newlyacquiredcompanies into the groupisamajor challenge.Severalsolutions canbe observed, with some acquiredcompanies keeping astrong identity,acertain degree of autonomyandaseparate brand (likeEndesa, Edison or Scottish Power) under the umbrellaof the group. Inmanycases,localmanagement is kept. Inother cases,subsidiaries are completelyincorporatedandthe head of the branchisamanager dispatchedfrom the company’s headquarters. Inmanycases,agradualprocesscanbeobserved: first the originalname andgreater autonomyare kept forsome years after the acquisition. Butthen,after some time,the group’sheadquarters effectivelytake control of the acquired company,streamlining operations andchanging the name of the localcompany.Itwill beanimportant factor to watchin the years to come if large utilitygroups likethe “seven brothers” will succeedin creating trulyintegratedEuropeancompanies. There are important differences throughoutEurope when it comes to business culture andforming acoherent groupout of companies with sometimes verydifferent traditions is no easytask.

Hostiletakeoverbidsrarelysucceed The case of E.ON’s failedbidforEndesaalso illustrates another fact:ahostile takeover bidforalarge utilitycreates strong politicalopposition in nearlyall cases,not least due to the importanceofthe energysector foraneconomy.This in turn makesasuccessfultakeover verydifficult. Several examples in the last decade,likeEnel’sfailedattempt to acquire Suez,EDF’s failedattempt to acquire Iberdrolaor the Italian lawdiminishing EDF’s voting rights in Edison,showthat nationalgovernments are readyto use their power to avoid takeovers thattheyconsider hostile.Agoodrelation with nationalauthorities andlocalpartners thusseems necessary if autilitywants to acquire companies in other European countries. 2010 fri, ©I Conclusions 177

Fewoutsiders in the EU market Companies from outsidethe EU playaverylimitedrole in the Europeanelectricityandgasmarket:trans-border mergers andacquisitions are mostlyintra-EU.NorwegianandSwiss utilities are anexception,butthe economies andcompanies of these countries are highlyintegratedwith the EU even without their countries being EU members.The case of US energy companies is interesting in this context,asmanyof them investedin the EU in the 1990s,butthen quicklydivested their assets again duetoeconomicfailure. 5 Aninteresting thing to watchisthe evolving position of Gazprom in European energymarkets –especiallyin the gasmarket. The Russian gascompanyhasopenedretail subsidiaries in some Member States andhasparticipations in severalother gassuppliers and gastransportcompanies,forexampleinthe Balticcountries, Finland, Germany,Austria, Romaniaandthe UK. 6

Markets outsidethe EU playaminorroleformost Europeanutilities ManyEuropeanutilities haveassets outsidethe EU,butin most cases,those assets onlyaccount forarelativelylimited part of overall revenues.For EDF,RWE andVattenfall,assets outsidethe EU are marginal; in the case of the E.ON,GDF Suez,Enel andIberdrola, theyaccount forless than20 percent. Ingeographicterms,investments in the Americasare the most important. Utilities haveinvestedin the US (mainlyin the renewable energysector) andSpanish,Portuguese andItalian utilities haveimportant assets in Latin America.Here too culturalcloseness is anobviousfactor.Another important market is Russia, where E.ON,Enel andFortum–companies from countries thathavetraditionallyclose links with Russia –havemadeimportant investments in electricitygeneration.

Enteringnewmarkets vs.defendingthe home market Entering newmarkets abroad presupposes astable and ideallystrong position in the home market. There havebeen polemicdebates aboutcompanies that,thanks to the “helping

5 . See on thisissueHaarand Jones(2008) . 6 .See on thisissueŁoskot-Strachota(2009) . 2010 fri, ©I 178 The EU’s Major ElectricityandGasUtilities sinceMarket Liberalization

hand”(or closedeyes) of nationalauthorities,canoperate in a more or less protectedhome market,butuse the openness of other nationalmarkets in order to invest there.This hasindeed been trueinsome cases,where nationalgovernments were keen to protect(or create) “nationalchampions.” Inthe earlyphase of market liberalization,wehaveseenthe creation of national champions in some countries:E.ON andRWE in Germany, EndesaandIberdrolain Spain,Electrabel in Belgium. This has ledto market concentration andalower level of competition. Butinthe last fiveyears or so,most incumbents haveseen their market share in their respectivehome market decreasing. This is especiallytruefor electricityandgassales,asmany companies lost customers after market opening to new(trading) companies or foreign competitors.Asfor electricitygeneration, the construction of newpower plants bynewentrants and asset swaps likethe one between Electrabel andE.ON are grad- uallydecreasing the markets shares of incumbents.Inany case,growth athome is rarelypossible formajor European utilities.Theyeither alreadyhaveaveryhigh to near-monopoly market share,or nationalcompetition authorities interdict them furthergrowth.Therefore,theyhavemainlyincreased their revenues thanks to activities abroad in the last decade. In ourview,this trendis likelyto last. Asalogicalconsequence, the importanceofthe home market andthe share of revenues coming from it havedecreasedforall utilities.Inoverall terms, wethink that,forthe large utilities studiedhere,gains in other countries more thancompensate losses in the home market. Making profits in aliberalizedandEuropean-widemarket is probablymore difficult thaninaregulatednationalmarket –butthe companies with the best business models haveclearly benefitedfrom the extension of their market madepossible by liberalization. Theyhaveincreasedtheir revenues andEBITDA in awaytheycouldnot havedone had theyremainedactive in their home countryalone.

Marketconcentrationand competition After the waveofmergers andacquisitions in recent years, one might wonder if the outcome of liberalization is anoligopo- listicelectricityandgasmarket with limitedcompetition. After 2010 fri, ©I Conclusions 179 all,EuropeanCommission officials concedeinprivate thatthe emergenceofasmall number of EU-wideplayers wasneither the intention of liberalization nor the expectedoutcome. Therefore,some market observers havemadethe criticism that the developments of the last decadehaveledto anoligopoly thatimpedes effectivecompetition.7 Inouropinion,it is still too earlyto clearlyanalyzethe consequences forcompetition of the EU-wideexpansion of major utilities.Onlythe future will show if aEuropeanoligopolywith limitedcompetition emerges,or if, on the contrary,the expansion strategies of Europe’slargest utilities bring along competition. After all,competition could develop with fivetoten big utilitygroups in the European market. Moreover,the effects of further market integration on companystructures andcompetition remain to beseen. Electricityandgasare indeedverydistinctsectors of the economywith high fixedcosts andsubstantialinvestment needs. This necessarilylimits competition. Inourview,it is doubtfulifsmall newmarket entrants cansuccessfullycompete withlargeincumbents,especiallyin theelectricitygeneration market. Large foreign players haveabetter chancethere,and some examples of nationalmarkets thatbecame more competi- tiveafter acquisitions of major foreign players are encouraging. Maybeasmall number of large groups is the onlywayto make competition work in the Europeanelectricityandgasmarket?

Apresenceindistributionorsalesalone isnotenough toestablishaviable business position Looking atthe experiences of newentrants (newlyestab- lishedcompanies or companies becoming activeabroad),it becomes clearthatapresenceonlyin distribution or sales is not aviable business model in the longer term. Inmanycases, entering the sales market or acquiring distribution assets is the preferredandeasiest wayto enter anewmarket,andmany companies start bydoing this.Butwithoutaccess to electricity

7 .See,forexample,“Powergames:The finalshape of the Europeanenergymarketisemerging: Anoligopoly,” The Economist,26 February 2009,orthe interviewwithFrançoisPossemiers, Presidentof the BelgianregulatorCREG, in La LibreBelgique ,23 January 2010,where Possemiers stated:“Weriskgoing towardsasituationofnaturalorfriendlyoligopolyin Europe . The companiesdo nothurtthemselves .[ . . ]The historicoperators havekepttremendous powerin theirhome territories .” 2010 fri, ©I 180 The EU’s Major ElectricityandGasUtilities sinceMarket Liberalization

production or gasimport capacity,newentrants haveadiffi- cult life,astheyneedto buy electricityor gasfrom the incumbents.This clearlylimits their profits,aselectricitygeneration andgasimport are normallythe most profitable parts of the valuechain. Being present in both production andsupplyalso allowscompanies to hedge these activities,in case the pricefor electricityor gasatthe wholesale market reaches particularly high levels.Stemming from this,wecanobservethatmanynew entrants havesought to buildelectricityproduction capacityor to get access to gasimport capacities.This creates newcapacities –newpower plants,newpipelines andnewLNG terminals – andtherebyhaspositiveeffects on competition andsecurity of supply.

Acleartrendtowardsownership unbundling This book hasnot discussedthe legalaspects of European market liberalization andsome of the hotlydebatedissues like ownership unbundling.Butwehaveobservedacleartrend towardsthe divestment of transmission anddistribution networks.Manycountries haveimposedunbundling of transmission networks bylaw.Buteven in those countries where ownership unbundling is not requiredbylaw,it hashappened or is likelyto happen soon. Examples of recentlyfinalizedor announceddivestments are:E.ON andVattenfall selling their high-voltage electricitynetworks in Germany,RWE selling its gastransmission network in Germany,EDF selling its electricity distribution network in the UnitedKingdom,Enel selling its gasdistribution network in Italy. Insome cases,these divestments might bethe result of tougher regulation andpricecaps imposedon transmission tariffs byregulators andthe EuropeanCommission. Moreover, manyexperts believethatitisnearlyimpossible to implement the Independent Transmission Operator ( ITO)model,ascontrol rights given to regulators pose manypracticalproblems. 8 Hencesome companies are keen to avoidnever-ending battles with regulators bypre-emptivelydivesting their network assets. Itisinteresting to observethatunbundledTSOsandDSOsare

8 . Klotz (2009) . 2010 fri, ©I Conclusions 181 organizedin different waysandhaveowners of adifferent nature. Insome cases,theyare independentlylistedcompanies (for example,NationalGridin the UK). Inother cases,theyare ownedbythe government (for example,TenneTin the Netherlands). Athirdmodel,whichcouldbecome more common in the future,are TSOsandDSOsownedbylarge investment or pension funds(forexample,Enel Rete Gas,a gasDSO,in whichafinancialconsortiumhasan80percent stake since2009). Mixedownership models also exist. In short,the ownership unbundling of network activities has the potentialtolead to entirelynewforms of asset ownership in the electricityandgassectors. Ofcourse,some utilities activeinretail still remain owners of transmission networks withoutanyintention to sell them forthe time being (for example,EDF viaRTE of the French electricitytransmission network,GDF Suezof the Frenchgas transmission network,E.ON Ruhrgasofamajor part of the Germangastransmission network,RWE of amajor part of the Germanelectricitytransmission network,RWE of the Czech gastransmission network). Butatthe same time,it seems that most major utilities nowincreasinglyfocusonelectricity generation,naturalgasimportandsupplyof electricityand naturalgas. One shouldnote the increasing interest in natural gasproduction aswell. For some of them atleast,transmission anddistribution network activities seem to become less part of the “core business.” One reason forthis tendencyis the fact thatelectricitygeneration andgasimport often constitute the market segments where the best margins canbeachieved–but network activities are also alow-risk business thatcanbea goodhedge against the riskier unregulatedbusinesses.

Privatizationasaconsequenceofliberalization? Europeanlegislation hasnever imposedthe privatization of utilities andit is unlikelythatanysuchproposalwill be made. Butinthe contextofmarket liberalization,privatization hasindeedtakenplaceinmanycases,often in severalsteps (see graph 11 foranoverviewof the situation in the electricity sector).9 Asaresult,fourofthe seven major utilities are 2010 9 . Onthe issueinamoregeneralcontext,see Heddenhausen (2007) . fri, ©I 182 The EU’s Major ElectricityandGasUtilities sinceMarket Liberalization

Graph 11.Electricity Privatization Timeline byCountry

PublicMostlyPublicMixedMostlyPrivate Private UK Sweden Spain SlovakRepublic Portugal Poland Luxembourg Italy Ireland Hungary Greece Germany France Finland Denmark CzechRepublic Belgium Austria 19801983 1986 1989 19921995 1998 200120042007

N.B.:Datausedforthe graph simplifies the situation bytaking into account onlythe largest companyof eachpart of the electricitysector.Inthe case of Sweden,forexample,aprivately- ownedcompany(E.ON)hashad animportant market share in electricitygeneration and supplysincethe early2000s,butthis is not acknowledgedin the graph. Source: Pollitt (2009) using the OECD internationalregulation database.

currentlypartlystate-owned.Onlyone of the “seven brothers” is still state-ownedat100 percent (Vattenfall),butatthe same time,onlytwoofthem are listedcompanies in whichthe state does not haveanyparticipation (E.ON andIberdrola).10 The picture is similarfor the middle-sizedutilities,i.e.the groupof companies thatfollowthe “seven brothers.” One canobserveanoverall trendtowardsalesser degree of state ownership.Inourview,continuation of privatization is likely. 11 However,this shouldnot hidethe factthatstate ownership is still wide-spread in manyMember States.Inthe

10 .The caseofRWEisuniqueinthiscontext,asseveralGermancitieshaveasubstantial participation,but notthe GermanFederalgovernment . 11 .The CEOof E .ON,Wulf Bernotatrecentlypresented adifferentviewon thisissue . Inhis opinion,the statehasgained moreinfluenceoverenergyutilitiesin severalEU countries .His statementsomehowcontradicts the factthatseveralcompanieshavebeenprivatized in recentyears,and no majorcompanyhasbeennationalized .Atthe same time,Bernotatindi- rectlyraisesaninterestingquestion:howcanone clearlyassess the degree of influencea governmentisexercisingoveranenergycompany?See interviewwithWulf Bernotatand GérardMestrallet, Handelsblatt,30 November2009 . 2010 fri, ©I Conclusions 183 contextofthe current economiccrisis,some governments might bekeen to sell their participations in utilities:this is a wayto make money,whichwouldrelievetight state budgets, strainedfrom large amounts of moneyspent forrecovery packages.Moreover,anewinvestment cycle is abouttostart in the electricitysector,with major investments ahead in the nexttwentyyears.Manygovernments will likelyencourage the private sector to invest asmuchaspossible in order to avoidspending publicfunds. The economicmodel andtradition of aMember State of course playsanimportant role in this context:all major utilities in the Nordiccountries are atleast partlystate-owned.InFrance, the partialprivatization of EDF (in whichthe state still owns 85 percent) andGDF (viathe merger with Suez)hasbeen stronglyopposed, duetofears aboutthe future of the service public model.12 Moreover,the Frenchgovernment seems to resist further privatization,asitwants to maintain its influence over the long term vision forindustrialpolicyandthe effec- tiveness of investment. Inthe UK andGermany,privatization took placeearly,in the 1980sandearly1990s. InCentraland Eastern Europe,manyprivatizations took placeinthe context of economictransition. Butthere are important differences between the countries,andmanycompanies are still state- owned, especiallyelectricityproducers andgascompanies. Insome cases foreign state-ownedcompanies participatedin privatization roundsandacquiredassets abroad.Itisindeed difficult to consider these cases asrealprivatizations (for example,EDF investing in Polandor Hungary,or Vattenfall in GermanyandPoland). Butthe most important question to ask in this context concerns the behavior of companies:does it make adiffer- encefor autilityif it is state-ownedor listedon the stockmarket? Noeasyanswer is possible:when it comes to obstructing competition andmarket foreclosure,ownership is probablynot so important. Itisquite obviousthatall companies,aslongastheycan,use their market power to maximise profits.Sofor the everydayfunctioning of the

12 .Interestingly,oncethe partialprivatizationshadtaken place,protestsended . 2010 fri, ©I 184 The EU’s Major ElectricityandGasUtilities sinceMarket Liberalization

electricityandgasmarkets,companyownership is maybenot thatimportant. Governments of course want state-runcompa- nies to make money–butsome of them dointerfere in their management forpoliticalreasons. One caneasilyobservethatsome governments in the EU prefer subsidizing state-ownedutilities from the state budget in order to ensure lowprices forconsumers (mainlythrough regulatedprices). Suchactions,whichare particularly common in CentralandEastern Europe,clearlydistort the market. Moreover,governments sometimes interfere in a company’s decisions-making forpoliticalreasons:decisions byVattenfall to acquire companies in Germany,Polandand the Netherlandsthatproduceelectricitymainlyfrom coal haveledto repeatedtensions with the Swedish government andParliament.

The dominationoffossil fuelsin the energymix of all utilitiesbut EDF There are major differences between the utilities analyzed in this studyin terms of energysources usedforelectricity production. Asthere is no common standardforthe publication of acompany’s energymix,it is not easyto compare the datapublishedbythe utilities (see box3). For all utilities butEDF,fossil fuelsclearlydominate theproduction mix, accounting for45to75percent of production. Insome cases, coalisthe dominating fossil fuel (RWE, E.ON,Vattenfall),in others naturalgas(GDF Suez,Iberdrola). All utilities have some nuclearproduction,whichaccounts for15to30percent of production forall utilities butEDF.EDF,byfarthe EU’s largest electricityproducer,produces around70to 75 percent of its electricityfrom nuclear. The share of renewable energies ranges from 2percent in the case of RWEto 26percent in the case of Vattenfall. The vast majorityof electricity production from renewable energies comes from hydroelectricity.The major utilities produceonlyasmall part of their electricityfrom wind, solarorgeothermicsources.Notable exceptions are Iberdrolaand, to alesser extent,Enel,which havestronglydevelopedthese “new”renewable energy sources. 2010 fri, ©I Conclusions 185

Box3.Utilities’Production Mix (netproduction,2008)

EDF (no overall dataavailable):France:Nuclear86%,Hydro 10%, Fossil fuels 4%; UK (installedcapacity,before acquisition of British Energy):Coal82%,Gas16%,RES 1%; EnBW (installedcapacity): Fossil fuels 44%,Nuclear32%,Hydro 23%,Other RES 1%; Edison: Fossil fuels 89%,Hydro 10%,Wind1%; no dataforother countries available. 1 Enel(in Europe):Coal30%,Hydro 20%,CCGT19%,Nuclear18%, Oil&GasST/OCGT 8%,Other RES 5%.2 E.ON (E.ON Group):Hardcoal31%,Naturalgas30%,Nuclear24%, Hydro 6%,Lignite 5%,Wind2%,Other 2%.3 GDF Suez(GDF SuezGroup):Naturalgas50%,Hydro 18%,Nuclear 17%,Coal12%,Other RES 2%,Other non-RES 1%.4 Iberdrola(Spain+UK):CCGT 34%,Nuclear26%,Coal14%,Hydro 11%,Other RES 11%,Cogeneration 4%.5 RWE(RWEGroup):Lignite 33%,Hardcoal28%,Nuclear22%,Gas 14%,RES 2%,Other 1%.6 Vattenfall (Vattenfall Group):Fossil fuels 46%,Nuclear28%,Hydro 24%,Other RES 2%.7

1 . AnnualReport 2008 . 2 .Presentationof2008results:annexes,p . 10,http://www .enel .it,and owncalculation . 3 .http//www .eon .com/de/businessareas/35251 .jsp(datafor2009) . 4 . Activitiesand Sustainable DevelopmentReport 2008,p . 47 . 5 . Results 2008,p . 5,http//www .iberdrola .esand owncalculation . 6 .AnnualReport 2008,p . 61,and owncalculation . 7 .AnnualReport 2008,frontcover(inside) .

All utilities nowpubliclyunderline their big interest in renewable energies anddefine ambitiousCO2 reduction goals –not least because the publicandpoliticians are demanding this.However,one shouldnot forget thatCO2 emissions of the EU’s power sector decreasedbyonly3percent between 1990 and2006.13 According to PwC(see table 32),the evolution of the “carbon factor” (kg CO2 per MWhofelectricityproduced) of the twentylargest electricityproducers of the EU has remainednearlystable since2001. Butreducing CO2 emissions

13 .AccordingtoPollitt (2009),p . 20-22,who usesdatafrom the EuropeanEnvironment Agencyforthe EU-15plus CzechRepublic, Hungary,Poland and Slovakia . 2010 fri, ©I 186 The EU’s Major ElectricityandGasUtilities sinceMarket Liberalization

Table 32.CO2 EmissionsbyCompany(2001-2008) Overall group KgCO / KgCO / KgCO / KgCO / 2 2 2 2 emissions Company MWh * MWh MWh MWh (million tonnes) in 2001 in 2004 in 2006 in 2008 in 2008 RWE700 761 771 742138 Vattenfall 394 40345045273 Enel 526514 495 422 83 E.ON 457 413 456 411 100 GDF Suez371 327314 32746 Iberdrola148 179 297 283 27 EDF 134 148 14214090 Average 371 368 368 350760 of 20 largest producers**

* KgCO2 /MWhmeans kg CO2 per MWhofelectricityproduced(“carbon factor”). ** Sumfor overall emissions. N.B.:Mergers andacquisitions havebeen takeninto account retrospectively,i.e.emissions havebeen recalculated.For example,CO 2 emittedbyEdison in 2001(when EDF wasnot yet ashareholder of Edison) is includedinto EDF’s carbon factor in 2001. Source: PwC/Enerpresse,Changement climatiqueetélectricité,November 2009,http://www.pwc.fr.

is also increasinglyin the financialinterest of utilities,asthe EU ETS is nowarealityforall electricityproducers.Inthis context,it is veryimportant to bearinmindthatthere are significant differences between Europe’slargest electricity producers in terms of carbon emissions per MWhofelectricity produced.EDF with only140kg CO2 /MWhwill bemuchless affectedbyfull auctioning of permits thanRWEwith 742kg CO2 /MWh(see table 32andgraph 12andannexfordetails). Will EU ETSleadtoachangeofthe energymix? According to manyobservers,the EU ETS hasbeen the sourceofwindfall profits forelectricityproducers more than causing anychanges in the energymix:Point Carbon estimates thatthe allocation of emissions permits forfree couldlead to upto € 71bnofwindfall profits forEuropeanelectricityproducers by2012. 14 Unsurprisingly,the issueofwindfall profits hasled

14 .http://www .businessgreen .com/business-green/news/2213702/ europe-cap-trade-scheme-hand . 2010 fri, ©I Conclusions 187

Graph 12.Carbon Factor (kgCO2 perMWhofelectricity produced)

1200 1000 1006 818 800 742

/ MW h 597 2 600 503 500 496 452 422 416 411 404 CO 400 327 283 kg 200 176 156 140 101 41 29 0 E & O DEI CEZ EDP EDF Drax RW Nuon Enel E.ON Dong Suez PV ttenfall Union British Fortum Va Fenosa GDFEuropeIberdrola Energy Verbund Statkraft ScottishSouthern

Source: PwC/Enerpresse,Changement climatiqueetélectricité,November 2009,http://www. pwc.fr. to manyheateddebates.Duetothe complexityof the matter, it is verydifficult,if not impossible,to assess the amount of windfall profits with certainty. 15 Accusations of windfall profits through the EU ETS are of course deniedbythe concernedcompanies.Inanycase,the situation will change in 2013,when all permits will beauctioned(with the notable exception of power plants in CentralandEastern European countries,whichobtain free allocations until 2019). Thanks to this,electricityproduction from sources with lowCO2 emissions –renewables andnuclear–shouldbecome considerablymore attractivefor economicreasons.Naturalgaswill also win,asit might increasinglybeusedforreplacing coal. Butthe impact of the EU ETS does not seem to beimportant enough to lead to arapidandradicalchange of the production park towards lowcarbon electricityproduction:75 percent of power plants currentlyunder construction in Europe will becoalorgas firedaccording to arecent surveybyCapgemini.16

Majorutilitiesarelatecomers forrenewable energies and hesitatewithCCS Asfor the large utilities analyzedin this book,aclose look attheir production portfolios showsthatmost of them have, forthe time being,onlyaverysmall part of “new”renewable production (wind, solar,biomass etc.). The impression one gets

15 .Forscientificcontributionson the issue,see,forexample,Ellermann and Joskow(2008), PointCarbon (2008),Sijm,Neuhoff and Chen(2006) . 16 .Capgemini (2009),p . 4 . 2010 fri, ©I 188 The EU’s Major ElectricityandGasUtilities sinceMarket Liberalization

when reading the companies’ publications or listening to their statements wouldappeartosuggest otherwise.All major utilities –with the exception of Iberdrola–are “latecomers” to renewable energysources,whichhavemainlybeen developedby smaller companies.The latter facthasalso ledto slightlymore competition,asthese small producers are newentrants in the production market. This effectwill probablyremain limited andtemporary,aslarge utilities are nowincreasinglyacquiring renewable energycompanies.Moreover,theyare strongly developing offshore windprojects,andcouldbecome major renewable electricityproducers in the future.Itisinteresting to note in this contextthatmost major utilities havecreated specialsubsidiaries to develop renewable energies on aEuropean andeven worldwidelevel. Some of these subsidiaries have been introducedseparatelyto the stockmarket. This shows thatrenewable energies indeedhavespecialfeatures andtheir development demandsadifferent approach. One shouldnot forget,however,thatasignificantlyhigher share of renewable energies in the future will onlybeachievedif CO2 emissions will haveahigher pricethaninthe first twophases of EU ETS. Moreover,governments will needto continuesubsidizing renewable energysources thatare not yet competitive. The perspectives forCarbon Capture andStorage,on the contrary,seem more uncertain when one assesses current investment projects.Most major Europeanutilities dohave CCS projects,butonlyVattenfall hasalreadyasmall pilot plant working.Major utilities currentlydonot seem willing to invest significant amounts of capitalinthis technology,butwill rely heavilyon publicmoneyto bespent on CCS.Atthe same time, severalCCS projects havealreadybeen postponedor cancelled because of localopposition.

The beginningofanewinvestmentcycle... According to the EuropeanCommission,investments of € 1,600bnwill beneededin the Europeanelectricityandgas sector until 2030. 17 Amajor newinvestment cycle likethe one between 1960and1980is nowstarting,asmanypower plants

17 E. uropeanCommission(2008),p . 24 . 2010 fri, ©I Conclusions 189 needto bereplacedandnewelectricityandgastransmission anddistribution infrastructure needto bebuilt. Moreover,the objectiveofincreasing the contribution of renewable energies creates significant investment needs,also forelectricitytrans- mission networks.Inthe contextofongoing liberalization, ambitiousclimate goals andrenewedfears concerning energy security,it hasbecome difficult forcompanies to determine the right investment policy.Anevolving politicalandregula- toryframework results in unclearinvestment signals.An increasing level of ideologicalorlocalopposition against new infrastructure –for example,acoalplant,ahigh-voltage line or aLNG terminal–makesnewinvestment even more difficult. Moreover,the responsibilityof the different market actors foruninterruptedsupplyatacceptable prices hasbecome less clearthaninregulatedmarkets.Togivejust oneexample: in the past,companies working in aregulatedmarket were responsible forassuring peak-load capacityatall times.Ina liberalizedmarket,no companywouldbereadyto invest in peak-load plants thatare not profitable.Inasituation likethis, shouldgovernment and/or the regulator beallowedto force companies to invest?

... in timesof economiccrisis The current economiccrisis hasnot changedthese mid- andlong-term needs,butitisresulting in some deferralof,or stoppage in,investments duetothe temporarydecline of elec- tricityandgasconsumption. UCTE forinstancerecently reduced–from 50GW to 20 GW –its forecast foradditional electricitygeneration capacityneededto maintain securityof supplyuntil 2020. 18 Inresponse to the crisis,severalutilities havesignificantly reducedtheir investment plans:E.ON scaledbackplanned investments from € 36bnto € 30bnfor 2009-2011,Enel from € 44bnto € 32bnfor 2009-2013,Iberdrolafrom € 13bnto € 4.5bn for2009andGasNatural/Union Fenosafrom € 21bnto € 11-13bnin2009.19 Itremains to beseen if utilities will step

18 .Capgemini (2009),p . 6 . 19 .Capgemini (2009),p . 5 . 2010 fri, ©I 190 The EU’s Major ElectricityandGasUtilities sinceMarket Liberalization

uptheir investments soon enough in order to guarantee a sufficient level of supplyin the future:stopping investments fortoo long after ademanddrop in the short term will result in insufficient capacitysome years later.Moreover,if the EU wants to achieveits ambitiousclimate goals,major investments needto take placeinthe years to come in order to decarbonizeelectricityproduction,forexample,bydecarbon- izing coalusing CCS andbringing on lowcarbon options like renewable energies andnuclearenergy. Atthe same time,some of the major utilities haveannounced substantialdivestment plans in 2009. E.ON andEnel announced divestments worth € 10bneachandEDF announceddivestments of € 5bn.20 These decisions havepartlybeen madeafter agreements with the EuropeanCommission andwith the aim of mitigating competition concerns.Theywill result in ownership unbundling of transmission or distribution networks in some cases.Butinother cases,divestments of strategicallyless important assets are neededto providecash andthustohelp avoiding “imperialoverstretch” after costlyacquisitions.

The utilities’EU-wideexpansionwasfaster thanthe integrationofthe nationalmarkets Overall,the EU-wideexpansion of major Europeanutilities hasbeen muchfaster thanthe integration of nationalelectricity andgasmarkets.Ourstudyclearlyshowsthatutilitycompanies haveenteredother Europeanelectricityandgasmarkets ata large scale.Thereby,theyare nowactiveinvariousnationalelec- tricityandgasmarkets thatshare some common features,but not (yet) in asingle Europeanenergymarket:forthe time being the relevant markets forelectricityandgasare nationalinmost cases. 21 The Nordicelectricitymarket is anotable exception. The presenceofone companyin severalEU countries certainly contributes to the gradualintegration of the markets,even if this will bearather indirectside-effectofthe companies’ behavior.More researchisneededto analyzethis link.

20 .Capgemini (2009),p . 6 . 21 . The relevantmarketcaneven besub-national(i .e . regionalorlocal) forsomepartsof the valuechain:supplyin the residentialmarket,forinstance,isstill very muchdominated by localcompaniesin severalEuropeancountries . 2010 fri, ©I Conclusions 191

Substantialpricedifferences forelectricityandgas–at power exchanges aswell asfor end-consumers –illustrate the factthatthe electricityandgasmarkets of the EU are insuffi- cientlyintegrated(see annexforexamples).22 Inrecent years however,there hasbeen astronger tendency towardsahigher level of market integration on the European level. This canbeseen,forinstance,atthe institutionallevel, where mergers of power exchanges havetakenplaceand enhancedcooperation between regulators emerges.The crucial role of physicalinterconnection (electricitylines andcables, gaspipelines) must beunderlinedin this context:in many places,this basiccondition formarket integration is still lacking or underdeveloped.This problem is widelyrecognized, but onlyveryfewof the necessaryinvestments havebeen made.23 Moreover,the governanceof,andaccess to,interconnections, aswell asthe harmonization of overall market rules,must beimprovedin order to achievea“level-playing field”inthe Europeanelectricityandgasmarkets. Given these problems,the EuropeanCommission and Europeanregulators proposed, andnowgraduallyimplement, aregionalapproachtomarket integration. Itconsists of one initiativefor electricitywith seven regions andone forgas with three regions. 24 This measure seems to bethe right path, even if it onlyconstitutes anappropriate intermediate step towardsanEU-widemarket. The support of Member States’ governments will becrucial,assignificant advances dependon their commitment to create realcompetition in energymarkets. Asfor companies,it remains to beseen if increasing market integration will haveimplications forthe companystructure andmarket concentration.

22 .Pricedifferentialsareofcoursenotonlyduetoinsufficientmarketintegration,but also tootherfactors .However,the insufficientlevel of marketintegrationcertainlyplays acrucial role in thiscontext . 23 .Onthe issueofelectricity interconnectionsin Europe,see Nies(2009) . 24 . See http://www .energy-regulators .eu/portal/page/portal/EER_HOME/EER_INITIATIVES for details . 2010 fri, ©I ©Ifri, 2010 Annex 2010 fri, ©I 194 The EU’s Major ElectricityandGasUtilities sinceMarket Liberalization

Map4.The EU’sMajorUtilities: PresenceinEuropeanElectricity Markets

■ ■ EDF Enel ▲ ▲ E.ON GDF Suez ● ● Iberdrola RWE ★ ★ Vattenfall

Map5.The EU’sMajorUtilities: PresenceinEuropeanGasMarkets

■ ■ EDF Enel ▲ ▲ E.ON GDF Suez ● ● Iberdrola RWE ★ ★ Vattenfall

! Significant presence ! Limitedpresence Source: Author. 2010 fri, ©I 196 The EU’s Major ElectricityandGasUtilities sinceMarket Liberalization

Annex1. AdditionalDataatEU Level

Table 33.SizeofMajorNationalElectricity and GasMarkets in the EU (2008,byelectricity consumption)

Electricity Electricity Gas Country production consumption consumption (TWh) (TWh) (bcm) Germany608.0587.082.0 France549.0501.044.2 UnitedKingdom 372.9 383.9 93.9 Italy304.4 343.9 77.7 Spain 287.4 276.4 39.0 Sweden 146.0144.4 1.0 Poland139.7 138.4 13.9 Netherlands102.7 118.4 38.6 Belgium * 81.091.6 17.0 Finland74.4 87.1 4.0 Austria61.7 66.6 9.5 CzechRepublic77.1 65.6 8.7 Greece57.4 64.5 4.2 Portugal45.254.6 4.6 Romania ** 56.1 48.1 14.5 Hungary37.040.9 12.0 Denmark 36.1 34.6 4.6 EuropeanUnion /EU27 *** 3,361.7 n.a.490.1 Turkey190.1 189.8 36.0 Norway143.0129.04.4 Switzerland66.9 65.5 3.1

* Includes Luxembourg forgas. ** ElectricitydataforRomaniais for2007andaccording to http://www.enercee.net. *** ElectricitydataforEU27isfor 2007andaccording to http://epp.eurostat.ec.europa.eu . Sources: IEA (2009) forelectricity,BP(2009) forgas. 2010 fri, ©I Annex 197

Table 34. MarketShareofthe Largest Electricity Generator (% of totalgeneration,2007)

CountryMarket share Cyprus100.0 Malta100.0 Estonia94.0 Greece91.6 France88.0 Latvia86.0 Belgium83.9 Slovenia82.0 Luxembourg** 80.9 CzechRepublic74.2 Slovakia72.4 Lithuania70.5 Portugal55.6 Ireland48.0 Denmark 47.0 Sweden 45.0 Hungary40.9 Austria * 34.4 Italy31.3 Spain 31.0 Germany ** 28.4 Romania27.5 Finland26.0 UnitedKingdom 18.5 Poland16.5 Croatia84.0 Turkey *** 38.0 Norway **** 32.5

N.B.:Nodataavailable forthe Netherlands. * 2001(Austria). ** 2004(Luxembourg,Germany). *** 2005(Turkey). **** 2006(Norway). Source: http://epp.eurostat.ec.europa.eu. 2010 fri, ©I 198 The EU’s Major ElectricityandGasUtilities sinceMarket Liberalization

Map6.MarketConcentration of Electricity Wholesale Markets (byHHI)

Source: EuropeanCommission (2009),p. 6(using regulator’sdata).

Table 35. MarketConcentration: HHIValuesforAvailable Installed Electricity Generation Capacity (2003-2005) CountryHHI CR(1/2,in %)* France8,59292.6 Belgium8,30790.7 Italy4,150n.a. Spain 2,79071.4 Netherlands2,33257.7 Germany1,914 54.1 UnitedKingdom 1,068 32.6

* CR(1) forFranceandBelgium,CR(2)for the others,CR(1/2)being the market share of the (two) largest generator(s). Source: http://ec.europa.eu/competition/sectors/energy/inquiry/electricity_final_execsum.pdf (p.15) forall countries butItaly;Percebois (2008),p. 10,forItaly. 2010 fri, ©I Annex 199

Electricity and GasPrices:Differencesbetween MemberStates Atend-consumerlevel Inthe first semester 2009,electricityprices (withouttaxes) rangedbetween € 0.0587 (Estonia)and € 0.1416 per kWh (Slovakia)for industrialcustomers andbetween € 0.0685 (Bulgaria)and € 0.1789 per kWh(Ireland)for household customers.Gasprices (withouttaxes) rangedbetween € 5.10 (Romania)and € 11.08per GJ (Germany)for industrialcustomers andbetween € 5.28(Romania)and € 15.76 per GJ (Ireland). Source:Eurostat–for medium-sizedindustries andmedium- sizedhouseholds(500-2000 MWhofannualelectricityconsump- tion and10,000-100,000 GJ of annualgasconsumption).

Atwholesale level Table 36.Average Electricity Base-loadPriceatPowerExchange(2007)

Country/region andpower exchange Average price(€ /MWh) Scandinavia(NordPool) 27.9 Germany(EEX)38.0 Spain (OMEL)39.3 France(Powernext) 40.9 Italy(MGP/IPEX)71.0

Source: Autoritàper l’energiaelettrica eilgas(2008),p. 38. 2010 fri, ©I 200 The EU’s Major ElectricityandGasUtilities sinceMarket Liberalization

Table 37.PowerGenerators withthe Highest CO2Emissionsin the EU (2007)

Electricity Overall group Cost of Cost of emission Company production emissions emission permits as% (TWh) (million tonnes) permits ( € bn) of grouprevenue PPC (Greece) 54 53.00.7 14.2 Polish Energyn.a.55.00.8 13.3 CEZ 74 38.3 0.5 8.4 Vattenfall 168 86.01.27.9 Endesa12166.8 0.9 5.2 RWE173 142.9 2.04.8 Electrabel 141 32.6 0.5 3.3 Enel 94 54.9 0.8 1.8 E.ON 217 81.21.1 1.6 EDF 647 56.00.8 1.3

N.B.:The table showsthatthe cost of emission permits under EU ETS affects electricity producers unevenly.For those with alow“carbon factor” (lowCO2 emissions per MWhof electricityproduced)likeEDF,the cost of emission permits is relativelymuchlower thanfor those with ahigh carbon factorlikePPC or the Polish electricityproducers (bothhavea production portfolio mostlybasedon hardcoalandlignite,andhenceahigh level of CO2 emissions per MWhofelectricityproduced). Sources: PwC/Enerpresse,Climate Change andElectricity,November 2008,http://www.pwc.fr, forelectricityproduction volumes; FinancialTimes,8December 2008for other data. 2010 fri, ©I Annex 201

Table 38. MajorEuropeanElectricity and GasCompanies: PresenceinSelected Markets

United GermanyFrance ItalyIberiaBenelux Kingdom EDF ESignificant Leader Leader Significant Present Significant GPresent Present Present Significant –Present Enel E–Present –Leader Leader – G–––Significant Present – E.ON ESignificant Present Significant Present Present Significant GLeader Present Significant Present Present Present GDF SuezEPresent Present Present Present Present Leader GPresent Leader Present Significant Present Significant IberdrolaE ––Significant –Leader – G––Significant –Present – RWEELeader –Significant ––Significant GPresent –Significant ––Present Vattenfall ESignificant ––––Significant G–––––Present Czech Republic NordicPoland (CZ)and HungaryRomaniaBulgaria Slovakia (SK) EDF E–Present Present Present –– (SK) G––Present ––– Enel E––Leader (SK)–Significant Present G–––––– E.ON ESignificant Present Significant Significant Significant Significant GSignificant –Significant Leader Present Present GDF SuezE–Present –Significant –– G––Significant Significant Significant – (SK) IberdrolaE –––––– G–––––– RWEE–Present Significant Significant –– (SK) G–-Leader (CZ)Leader –– Vattenfall ELeader Present –––– G––––––

E: electricity(generation and/or supply),G:gas. Leader:largest companyor more than30percent market share. Significant:between 10and30percent market share. Present:less than10percent market share. 2010 fri, ©I 202 The EU’s Major ElectricityandGasUtilities sinceMarket Liberalization

Table 39. Summary of PrecedingOverview

Overall CompanyE/GPresence(number of countries /regions) TotalE+G countries / region E.ON E 2312 12:8 × Significant,4 × Present G 11:2 × Leader,3 × Significant,6 × Present GDF SuezE 17 10 8:1 × Leader,1 × Significant,6 × Present G 9:1 × Leader,5 × Significant,3 × Present EDF E 15 9 9:2 × Leader,2 × Significant,5 × Present G 6:1 × Significant,5 × Present RWEE 106 5:1 × Leader,4 × Significant, G 5:2 × Leader,1 × Significant,2 × Present Enel E 86 6:3 × Leader,1 × Significant,2 × Present G 2:1 × Significant,1 × Present Vattenfall E 54 4:1 × Leader,2 × Significant,1 × Present G 1:1 × Present IberdrolaE 42 2:1 × Leader,1 × Significant G 2:1 × Significant,1 × Present

Presenceofseven majorutilitiesin selected markets (presenceingasand electricity iscounted onlyonce): –Benelux:5–EDF,E.ON,GDF Suez,RWE, Vattenfall. –CzechRepublicandSlovakia: 5–EDF,E.ON,Enel,GDF Suez, RWE. –Germany:5–EDF,E.ON,GDF Suez,RWE, Vattenfall. –Iberia: 5–EDF,Enel,E.ON,GDF Suez,Iberdrola. –Poland: 5–EDF,E.ON,GDF Suez,RWE, Vattenfall. –UnitedKingdom:5–EDF,E.ON,GDF Suez,Iberdrola, RWE. –France:4–EDF,Enel,E.ON,GDF Suez. –Hungary:4–EDF,E.ON,GDF Suez,RWE. –Italy:4–EDF,Enel,E.ON,GDF Suez. –Romania: 3–Enel,E.ON,GDF Suez. –Bulgaria: 2–Enel,E.ON. –Nordic: 2–E.ON,Vattenfall. 2010 fri, ©I Annex 203 th a t orm a – 3 2 . 0 83.1 13.5 22 .8 2 5. 61. 2 2 6.8 49. 0 64.3 86.8 17.1 (36.9) 1 0 8. 2 pro-f to c o u ntries cc o u nt 22 .4 2 7.4 15. 2 1 0 .1 18.1 47.5 43.7 2 3.8 15.5 4 2 .5 87.3 59.6 68.7 (35.5) ( 2 7.6) w o u l da 0 .6 he ad q u a rtere d in 14.8 2 7.6 1 0 .3 44.3 11. 0 17.5 38.5 2 4.1 14.7 44.3 86.1 58.9 67.8 (3 2 .9) ( 2 8.4) 200 8 , this 8.5 F or 1 0 .8 22 .4 1 2 . 0 13.5 18. 22 41.5 11.7 33.8 39.5 73.7 51.1 56.1 r c omp a nies ( 2 3. 0 ) fo n 200 7. r a tes 0 8 6.3 7.5 17.5 17.6 38.1 1 0 .3 36.5 2 7. 0 19.6 1 2 . 13.3 4 2 .1 59.7 46.9 46.5 - 20 6. 0 b ni € 98 e x c h a nge 5.9 5.6 9.5 16.6 11. 0 1 2 .5 39.6 2 5.9 43.9 44.9 43.8 200 3 4 5 6 7 8 200 8 a n d flo a ting in e v en u s 19 6.4 5.3 9.6 14.5 15.1 17. 2 16.6 46.1 3 0 . 31.3 22 .8 11. 0 1 2 .3 46.6 49. 0 5 2 .4 41.8 35.1 s :R reporting; e v en u es in t ie 200 8– Ma r c h 9= 8). 7. 2 b nr € 5.5 7.5 14.4 1 2 .7 16.1 4 2 .4 2 8.8 20 .3 6 2 .9 49.8 4 0 .7 200 1 2002 jo r U t ili A pril o c h a nges Ma 4 0 . F enos a h ad 8.5 7. 0 8.1 6.8 15.7 34.6 47.9 34.4 93. 2 79.7 2000 b le o cc u r d et ese a r c h. Ta U nion a ttenf ll). might 6.4 3. 2 4.9 1.5 6.3 200 9. 1 00 %). 13.5 2 1. 02 11. 0 16.3 38.4 3 2 . 0 48.8 3 2 .1 1999 a n dV 1 00 %). a n d o w nr SSE, / 200 5( 200 8) / 200 9( in acc u r ac ies F enos a in –– 2 .7 6.8 3. 2 3.8 20 .5 11.1 2 9.5 1998 E nerg y : fin a n c i l e r A pril- Ma h( 6 2 %) 5 0 .1%) nion some . C entri ca, ont u r s( (i.e 20 .7 b n. o u thern € b n a d, e u ro € of sin c e 200 8( he *** a n dS o w er) * t u r a l ac q ire dU E nel S u e z sin c 200 3( L é v êq u e a n dM da t a in S u e z sin c 200 8. ** t u r a l h a v et of ll of re v en u es **** ( Ga s &P ot rt ***** E 37.5 Sc ottish rt GDF Ga s Na ttenf a ll Pa Pa d on S o u r c es : * ** *** **** ***** N . B :A joint S u e z (energ y )3 Ib er d rol a 5.9 E n d es a GDF E nel C entri ca Va RW E ni EDF SSE E . ON E le c tr ab el Ga s Na 2010 fri, ©I 204 The EU’s Major ElectricityandGasUtilities sinceMarket Liberalization ts ke b r ac 63 35 4.8 6.9 n. a . 2 8.1 in 3 2 , 8 00 a ttenf ll esellers or rt 2 41 5. 2 17.1 43 6.4 18 2 189 181 2 5.4 2 8.4 33 , 000 b er d rol aV intr a -gro u po EI 45 8.3 22 41 2 18 16.9 (3 2 8) RW 65 , 9 00 in c l u d ing s a les * 4 o v er a ll 53 86 2 7 0 317 61. 2 49. 02 2 3.4 5 0 . 18.7 E nel 76 , 000 a s; 0 8 rg 20 s in t ie 19 61 02 674 1 2 79 espe c i a ll y fo 64.3 14. 2 14.3 22 .1 2 4.5 EDF 16 0 , 9 00 jo r U t ili d o u b ts . Ma 41 some S u e z b le 68 2 76 197 5 00 83.1 13.9 16.7 2 8.9 (7 0 .7) (11.8) (16.7) Ta 198 , 200 (energ y ) (134 , 6 00 ) GDF v a il ab le; da t aa E . if 74 318 615 2 94 86.8 13.4 15.4 44.9 E . ON (1 22 4) 93 , 5 00 b y RW . t ab le %) en d - c u stomers , in llo w ing fo 200 8. a les : to ca p ac it y ( TW h) per c ent. w ith n d - 200 8) e x tr a - E u rope n v l es 00 ( TW h) A /re v en u es t1 b n) b n a te € b n) € ( ( TW h) . C omp a re € ( EBITD A nn u a l R eports A ( E n d es aa y ees le c tri it y a n d g ss da t a in c l u d es a les D e b t( a v il ab le W ith R e v en u es EBITD S o u r c es : S ome if N . B :E * E le c tri it y gener a tion Ma rgin E le c tri it y s a les N et Ga ss E mplo ( GW ) E le c tri it y pro d u tion 2010 fri, ©I Annex 205

Table 42.The Largest Electricity Companiesin Europe: Consolidated Electricity Sales(TWh)

Company200620072008 EDF 610656 674 E.ON 362435 615* RWE312306317 Enel (including Endesain 2008) 159 166 270 Vattenfall 195 194 189 Iberdrola96 130182 GDF Suez145 168 197 Endesa148 153 n.a.

* This represents asurprisinglyhigh increase when comparedto 2007and2006,whichcannot bejustifiedbynewacquisitions alone.Itmight beduetochanges in reporting /consolidation. Source: RWE, Facts &Figures,2009andownresearch.

Table 43.The Largest Electricity Producers in Europe: Installed Generation Capacity and NetGeneration (2008)

CompanyInstalledcapacity(GW)Net generation (TWh) EDF (including EnBW)127641 Enel* 94 197 E.ON 74 243 GDF Suez68 145 RWE45 187 Iberdrola43 95 Vattenfall 35 161

* With Endesaat100 percent. Sources: Companies’ Annualreports 2008for capacity,PwC/Enerpresse,Climate Change and Electricity,November 2009,http://www.pwc.fr,fornet generation. 2010 fri, ©I 206 The EU’s Major ElectricityandGasUtilities sinceMarket Liberalization

Annex2.AdditionalDataatCountryLevel

Table 44.Installed Generation Capacity in GreatBritain byCompany(2008,in %)

CompanyShare of totalcapacity British Energy15 RWE12 E.ON 12 SSE 12 Scottish Power 7 EDF 6 InternationalPower 6 Centrica 6 Drax5 Others 19

Source: Ofgem (2008),p. 37.

Table 45.MarketConcentration in the ItalianElectricity Generation Market (2001-2007)

Number %share of of companies net generation Net installed Peakdemand Demand with of the three capacity (GW) (TWh)* >5% share of main (GW) net generation companies 20014 70.7 76.252.0304.8 2002 366.7 76.6 52.6 310.7 20034 65.9 78.253.4 320.7 20045 64.4 81.5 53.6 325.4 20055 59.4 85.5 55.0330.4 20065 57.1 89.8 55.6 337.5 20075 54.7 93.6 56.8 339.9

* Net of energyforpumping andbefore gridleakage. Source: Autoritàper l’energiaelettrica eilgas(2008),p. 33. 2010 fri, ©I Annex 207

Annex3.AdditionalDataatCompanyLevel

Graph 13.Edison ShareholderStructure

A2A Enia SEL Dolomiti Financial EDFGroup Spa Spa Spa EnergiaSpa Investors

51%15% 10%10% 14%

DELMI

50.0% Transalpina 50.0% di Energia

61.3%

10.0% 19.4% Tassara EDISON Group

9.3%

Market

Sourcesand Statistics

Companies’ AnnualReports Companies’ websites Internationalpress articles Autoritàper l’energiaelettrica eilgas(2009),“AnnualReport to the EuropeanCommission on RegulatoryActivities andthe State of Services in the ElectricityandGasSectors” (covering 2008),http:// www.energy-regulators.eu. –(2008),“AnnualReport to the EuropeanCommission on RegulatoryActivities andthe State of Services in the Electricityand GasSectors” (covering 2007),http://www.energy-regulators.eu. BP (2009), BP StatisticalReviewof WorldEnergy. Bundesnetzagentur(2009),“2009Monitoring Report” (English Summary,covering 2008),http://www.energy-regulators.eu. –(2008a),“Report to the EuropeanCommission on the GermanElectricityandGasMarket” (covering 2007),http://www. bundesnetzagentur.de/cae/servlet/contentblob/97434/publicationFile/277/ MonitoringReport2008Id14819.pdf. –(2008b),“Monitoringbericht 2008,”http://www.bundesnetzagentur. de/cae/servlet/contentblob/97436/publicationFile/1106/ Monitoringbericht08EnergieId14513.pdf. Comisión del MercadodeValores Mobiliarios et al. (2009), “Descripción del Funcionamiento del Mibel,”http://www.cne.es/cne/ doc/mercados/Estudio_MIBEL_ES.pdf. 2010 fri, ©I 210 The EU’s Major ElectricityandGasUtilities sinceMarket Liberalization

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Amajor change hastakenplaceinthe companystructure of the Europeanelectricityandgasmarkets.Twentyyears ago,nationalor regionalmonopolies dominatedthe markets andthere wasstrictly no competition between utilities.Butsincethe liberalization of EU energymarkets beganinthe 1990s,companies likeE.ON,GDF Suez, EDF,Enel,andRWE havebecome Europeangiants with activities in a large number of Member States.The advocates of market liberalization didnot expect,or even intend, the emergenceofasmall number of large utilities thatcontrol anincreasing part of the EU market. Some observers alreadyclaim thatliberalization hasledto anoligopoly with detrimentalconsequences forcompetition. Basedon extensivebackgroundresearch,this book presents afact- basedanalysis of the changes in the Europeanutilitysector since the 1990s. Case studies of the seven largest utilities illustrate how companies adaptedtheir strategies to the changing market environment. The author underlines diverging choices andcommon trendslike geographicexpansion into newmarkets viamergers andacquisitions or diversification of business activities with the aim of using synergies between electricityandgas.

ChristianSchülke is aResearchFellowwith the IFRI EnergyProgram. HeisbasedatIFRI Brussels office. His researchfocuses on European electricityandgasmarkets,EUenergypolicy,andenergytransport infrastructures in the EU andthe Former Soviet Union.

Prix: 17,50 d Distribution: ISBN 978-2-86592-696-1 Editions Technip 25,rueGinoux 75015 Paris –France Tél. :0145783380 -:HSMIQF=^W[^[V: Fax:0145753711 www.editionstechnip.com 2010 fri, ©I