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CORRECTION to 5/25/01 IssueAlert: The U.S. Senate has been evenly divided  
between Democrats and Republicans since the November 2000 elections, not  for 
seven years as was incorrectly stated in the column. We apologize for  any 
misunderstanding that this error might have caused. 



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May 29, 2001

EDF Pursues Italy's Montedison; 
Lack of Reciprocity Still a Factor  

By Will McNamara
Director, Electric Industry Analysis 

[IMAGE]Power giant Electricit,de France (EDF) has sent shock waves through 
Italian financial markets and government ministries by attempting to raise 
its stake in electric firm Montedison to 20 percent from about 6 percent. 
However, Romano Prodi, the European Union commissioner for competition, is 
considering an intervention in the battle between EDF, the French electricity 
monopoly, and the Italian government. The latter has passed an ad hoc law 
restricting EDF to 2 percent of the voting rights for Montedison, the Italian 
electricity supplier spun off by Enel.  

Analysis: Once again, the issue of reciprocity has taken center stage in the 
European power market, with EDF playing the staring role. For the last year 
or so, as the European Union (EU) has enacted electric competition across the 
Continent, France's EDF has taken advantage of competitive opportunities in 
other European countries while resisting any penetration of its own market by 
foreign suppliers. Although EDF has a presence in the United Kingdom through 
its ownership of London Electricity, the French power firm has wanted for 
some time to increase its position in Spain and Italy. However, the 
neighboring governments continue to fight any expansion by EDF until France 
reciprocates and allows further liberalization of its own market. 

As I have mentioned before in this column, France has been criticized by 
other European nations for delaying energy liberalization in its own country. 
As a result, EDF (which controls approximately 90 percent of the French 
electric industry) may not be allowed to make additional acquisitions abroad 
until it further opens its own market to competition. To date, France has 
only opened its power and gas markets by the minimum amount imposed by the 
EU, and EDF has played a large role in this resistance. While other European 
countries such as Germany have opened 100 percent of their markets to 
competition, France has opted for a phased-in approach, opening a third each 
of its power and gas markets by February 2003 and August 2008, respectively. 
Thus, although other companies such as Spain's Endesa have attempted to push 
through barriers to obtain entry into France, it is questionable when true 
competition will emerge in the country.  

Nevertheless, EDF has now set its sights on Italy through an expansion of its 
holdings in Montedison, one of Italy's main electricity companies. Reports 
are mixed about how much EDF currently owns of Montedison. EDF recently said 
that its stake increased from 3.971 percent to 5.971 percent. However, other 
reports have indicated that EDF already controls about 20 percent of the 
capital assets of Montedison. Both increases in Montedison were made 
recently, which EDF was forced to confirm to the Italian stock market 
regulatory Consob. EDF has claimed that its holdings in Montedison were made 
strictly as a minority financial holding to diversify the company's financial 
assets across Europe. However, at the same time, EDF has also indicated that 
any increase it makes in its holdings on Montedison would be for trading 
purposes. In other words, EDF wants to control the generating assets of 
Montedison for resale across Europe's wholesale market. Further, with a 
20-percent stake, EDF would become Montedison's largest shareholder and a 
major presence in Italy's power market even as France remains mostly closed.  

EDF's argument that it has secured a stake in Montedison solely for financial 
diversification purposes is not flying with the European Union or the Italian 
government. The consensus across the Continent is that EDF is making a 
strategic increase of its electric holdings and plans to make as many 
additional acquisitions as will be allowed by EU regulators. In fact, EDF has 
admitted that its strategy is to "make 50 percent of its turnover from 
activities abroad by the end of 2005, compared with 25 percent currently." 
Consequently, it is clear that the French power firm is looking beyond its 
home country for expansion opportunities, and these opportunities typically 
have been in distribution and generation assets. Moving forward, the company 
has expressed an interest in expanding its trading operation 

For instance, last month I discussed a report that EDF is preparing a bid for 
the regional U.K. electricity company Seeboard, which is owned by American 
Electric Power (NYSE: AEP). Serving about two million connected customers in 
England, Seeboard owns, operates and maintains an electricity network of over 
45,000 km (28,000 miles) of overhead lines and underground cables. An 
acquisition of Seeboard would factor into EDF's overall expansion efforts in 
Europe and be a nice complement to London Electricity, one of 12 regional 
electricity companies in England and Wales, which EDF bought from Entergy in 
1998. In addition, EDF has also made acquisitions in Sweden (Graninge) and 
Germany (EnBW) and reportedly is Poland's largest electricity distributor. 
These acquisitions were made by EDF International, which is wholly owned by 
the French government, and thus subject to EU oversight. Perhaps due to EDF's 
size and presence in Europe, these previous acquisitions were allowed without 
a great deal of EU intervention. However, now that other countries have 
voiced criticism of EDF and put pressure on the EU to intercede, it is 
unlikely that further acquisitions will proceed without intense scrutiny.  

As noted, trading appears to be the next wave of EDF's expansion efforts. 
Toward this end, EDF partnered with Louis Dreyfus in 1999 to create an energy 
trading company called EDF Trading. The various companies that EDF has 
invested in across Europe support the company's efforts to both learn about 
new competitive techniques and financially benefit when competition opens 
fully across the Continent.  

For its part, the Italian government has responded that it will block any 
increase of EDF's ownership of Montedison, based primarily on the argument 
that EDF is not offering the same opportunity for expansion in France. 
Specifically, Italy is working on a decree that would freeze the voting 
rights attached to the shares that EDF holds in Montedison. Further outlining 
its position, the Italian government has said that Italy must protect the 
imminent privatization of the power stations in the country that will soon be 
sold by Enel, one of the country's main power firms. As Montedison will be 
one of the main contenders of the assets owned by Enel, the Italian 
government wants to block EDF from increasing its share in the company and 
thus having access to additional power assets in Italy. For instance, Enel is 
planning to sell Elettrogen, a generation company that produces about 15 
percent of the production capacity in Italy. If EDF were to increase its 
stake in Montedison before or after Montedison makes a play for Elettrogen, 
then EDF, as a foreign entity, would gain a lock over the Italian power 
supply market.  

Italy's anti-EDF law is an interesting development, but it does not mark the 
first such legislation that has been initiated across the Continent. Spain 
also has created a similar law that is specifically targeted against EDF with 
regard to the French company's pursuit of Hidrocantabrico, Spain's fourth 
largest supplier. However, despite the efforts by Spain and Italy to restrict 
any expansion of EDF, the laws, although they are already in place, may 
ultimately be deemed anti-competitive and a breach of the Treaty of Rome, 
which calls for unlimited freedom on the movement of capital within the EU. 
Similar to how the Federal Trade Commission investigates anti-trust 
allegations in the United States, any attempt to overturn the laws in Spain 
and Italy would result in lengthy legal battles. 

EDF also remains interested in the Spanish's largest power utility Endesa, 
which is about the only foreign company that has been able to penetrate the 
French electricity market (through a 30-percent acquisition of French 
electricity generator Soci&eacutet,Nationale d&#39Electricit,et de 
Thermique). Endesa, which recently terminated an attempted merger with 
Iberdrola, Spain's second largest power firm, has been viewed as a takeover 
target for larger companies such as EDF. 

At last report, the EU Commission said that it would base any decision to 
intervene in the battle between EDF and the Italian government on "how far 
control was being exercised." In other words, EU intervention will be based 
on how much foreign control EDF might wield in the Italian market with an 
increased stake in Montedison. The fact that France remains resistant to 
electric competition in its own country remains a key factor in this debate, 
and it certainly adds heat to the criticisms leveled against EDF by the 
governments of Italy and Spain.  

An archive list of previous IssueAlerts is available at
www.scientech.com


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