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Energy control in France becomes patriotic

The battlefield is almost ready for the French President's first collision with Brussels, and Nicolas Sarkozy has prepared his artillery to deliver the first barrage.

The weaponry is impressive: a €90-billion ($129-billion) cannon made of the merger of two massive utilities, Gaz de France and Suez. Alongside it, an older but even more impressive gun, Électricité de France, and still in the development stage is Areva, the nuclear power engineering firm. This conflict is about energy and markets, about competition, state intervention and industrial policy.

The European Commission wants to rip apart the continent's giant utilities, force them to divest the networks of pipelines and power grids that allow incumbent firms to maintain their grip on customers and markets. Neelie Kroes, the Competition Commissioner, wants to declare open season, hoping it will drop prices, but France is moving in the other direction. Within two days of the Gaz de France-Suez pact, Jean-Pierre Jouyet, France's Minister of State for European Affairs, told the European Parliament that his country was resolutely opposed to „unbundling” - the cession of transport networks from gas and power utilities.

Such a policy would weaken Europe's defence of its interests in energy terms, he argued. „I'm thinking of the Russian operators,” he said. Gaz de France-Suez promises to be more than just a headache for Kroes, whose team approved the merger (subject to some disposals in Belgium) in its first incarnation last year. The partners were able to argue that a merged GDF-Suez would be the only entity strong enough to compete in the French electricity market, now a virtual monopoly for state-owned Électricité de France.

Market power is the issue: French gas markets were formally opened to free competition at the beginning of July, allowing consumers to freely choose a supplier. There is, however, precious little evidence of new suppliers making inroads. At the end of July, Kroes decided to pile on the pressure, launching a probe into alleged collusion between Gaz de France and E.ON, the German utility that owns Ruhrgas. The commission believes the firms agreed to keep out of each other's territories when the market was opened up. Neither Germany nor France want full unbundling.

It's not just nationalism and fear of labor unions. Both countries lack domestic energy resources and Germany is utterly dependent on Russian gas. Separation of the pipeline networks would weaken the incumbent national utility, leaving it exposed to foreign competition. Precisely, Kroes says, but, in the political mindset in Paris and Berlin, a powerful national energy player is the only real security against bullying from dominant foreign suppliers.

Without Gaz de France, Sarkozy thinks, who would stand up to Gazprom? It's a dubious argument, because Ruhrgas and Gaz de France have long-term contracts with foreign producers, such as Gazprom and Algeria's Sonatrach, and in a long-term commercial relationship - such as the alliance between Ruhrgas and its Russian supplier - neither has any interest in lower gas prices. Regulators can talk competition theory until they are blue in the face, but it makes little difference when confronted with naked displays of nationalism, such as Monday's hysterical launch of the GDF-Suez merger. (Read more)