International Business

Chapter 4: Importing, Exporting, and International Trade

BusinessWeek Online

Read this article. Then write a paragraph that discusses why EU regulators disapprove of "economic nationalism."

Europe's Utilities Stay Close to Home

A wave of consolidation has swept the sector, but to the chagrin of EU officials, players are mostly hunting targets within their national borders

Score two for economic nationalism, zero for European integration. That's the clear message from the latest round of activity in Europe's fast-consolidating energy sector.

On Feb. 27, France announced a $39 billion deal in which Gaz de France, the government-controlled gas company, will acquire Paris-based electricity-and-water utility Suez. The agreement creates a French national champion that will be one of the world's biggest energy groups—while freezing out Italian utility group Enel, which had been angling to buy Suez or some of its holdings.

In a similar move, the Spanish government is maneuvering to block German energy giant E.on from acquiring Endesa of Spain. In late February, the government pushed through a series of regulatory changes to make Endesa less attractive to E.on, while backing a plan for Spanish group Gas Natural to take over the Spanish power company (see BW Online, 2/21/06, "E. on Bids Big for Endesa").

BORDER CROSSINGS. European Union regulators are clearly unhappy with these government-arranged marriages, which undermine efforts by Brussels to knock down national barriers in the energy business. On Feb. 16, EU Competition Commissioner Neelie Kroes issued a scathing report, saying that Europe's gas and electricity markets were still hobbled by inefficient, anti-competitive practices dating from the days when most of the region's utilities were public monopolies. For example, some utilities were effectively controlling wholesale electricity prices, while some gas companies were hoarding capacity on natural-gas pipelines, the report found.

Greater cross-border trading could lower the prices paid by customers of Europe's utilities—which, though privatized, still trade mainly within national borders, the report said. That's a message sure to resonate with European consumers, who have endured steep increases in gas and electricity prices over the past few years.

Even so, EU regulators are likely to have a hard time slowing the push toward national energy champions. For one thing, the EU is generally not allowed to review mergers involving companies doing at least two-thirds of their combined businesses within a single country, says Jean-François Bellis, a partner in the Brussels law firm of Van Bael & Bellis who specializes in EU competition law.

Because Suez and Endesa both have major operations outside their home countries, it's possible that these deals would be subject to EU review. But even if they are, the planned linkups may not run afoul of antitrust rules, because the acquirers are gas companies and the targeted acquisitions are mainly in the electricity business.

SNAPPING UP ASSETS. Regulators might still find grounds to challenge some planned mergers. For example, linking a gas company with an electric company could raise questions of vertical monopoly, since gas is widely used as a fuel for electric generation, says Louise Mills, an antitrust lawyer in the Brussels office of the Norton Rose law firm. Why not require utility companies to separate their generating and distribution businesses—a practice known as unbundling? Kroes has said she favors that approach, but the EU's Council of Ministers has been unwilling to approve it.

For now, Europe's energy companies seem bent on acquiring as much as they can. E.on, for example, is buying up oil- and gas-production businesses such as Caledonia Oil & Gas of Britain, which it acquired last year, in a bid to lessen its dependence on outside suppliers.

Utility companies are flush with cash and eager to move into faster-growing markets. On Feb. 27, Britain's National Grid inked a $7.3 billion deal to buy KeySpan (KSE), a New York-based gas and electricity distributor. Enel, Suez's erstwhile suitor, and German utility RWE, are both scouting for acquisitions in Central Europe. Electricité de France wants to expand into Spain and the Benelux region. So whether Brussels has misgivings or not, this shopping spree looks set to continue.

By Carol Matlock
February 27, 2006

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