Energy deal threat to nascent market

Date: 05/06/1997

By Chris Johnstone

GERMANY's competition watchdog has signalled that it will demand that the European Commission send a multi-million-ecu energy deal back to it for scrutiny, in a move which could raise political hackles in Brussels and Berlin.

The German cartel office says that a three-way purchase of Berlin's main electricity company Berliner Kraft Und Licht AG - better known under the acronym BEWAG - looks likely to strangle power liberalisation at source.

Under the deal, Preussen Elecktra and Bayernwerk, owned respectively by energy giants Veba and Vega, and US multinational Southern Company are lined up to buy the 50.8&percent; stake in BEWAG owned by Berlin's local authorities.

But the cartel office suspects it has been structured to avoid a tough examination by German authorities and to come up first for Commission scrutiny.

It points out that a clause in the deal allows the Southern Company to sell off its stake in BEWAG after two years, with its German partners given first right of refusal of the shares.

The involvement of Atlanta-based Southern Company gives the deal an international dimension which automatically means it must first go to Karel van Miert's Directorate-General for competition (DGIV) for examination under the EU's merger rules.

The cartel office must wait for the BEWAG deal to be officially notified to the Commission and then win the support of

the German economics ministry before launching a bid for it to come home for a local inquiry. The notification was expected this week following a final decision by the upper house of Berlin's parliament to approve the deal.

That procedure does not appear without problems, however, since Economics Minister Gunter Rexrodt is reported to be in favour of the Berlin energy sale because it will bring a large international energy company on to the domestic market.

Southern already has a stake in the UK's South West Electricity, made an abortive attempt last year to take over National Power and has extensive interests throughout the world.

But the cartel office has history on its side. The only decision by Commission competition officials to refer a case back to Germany also involved an energy sector deal which touched on some similar issues to those raised by BEWAG.

Earlier this year, Van Miert's officials agreed to hand back a complex energy sector swap between four German companies to the cartel office. Large energy buyer and supplier RWE transferred its interest in Isarwerke to Bayernwerk in return for the latter's 50&percent; share in local gas supplier Thyssengas.

RWE's stake raised concerns that it would be able to force Thyssengas to take its gas supplies and refuse those from rivals. The cartel office scenario to clear the deal included a promise from Thyssengas not to be involved in exclusive supply contracts and RWE's commitment not to lean on its subsidiaries.

The second part of the deal, in which Bayernwerk took an 18&percent; stake in Isarwerke, posed fewer competition problems.

Nonetheless, the cartel office successfully pressed for 'demarcation' deals, which set out exclusive supply areas, to be dissolved. This allowed increased competition in Isarwerke's distribution zone.

The German watchdog is worried that the latest deal will help give Preussen Electra a dominant position as energy supplier in the Berlin region and will suffocate creeping competition in the electricity supply market. Preussen Electra already supplies much of outer Berlin through its Potsdam-based company MEVAG.

At the moment, who owns what in German electricity supply makes little difference to consumers. Most power firms have cosy long-time demarcation deals, which are currently legal under local law.

The cartel office is, however, looking ahead to the time when these exclusive deals, most of which run for between ten and 20 years, expire. It then hopes for more competition driven by the EU's cautious timetable for opening up the market in electricity supply and German moves to ban the demarcation deals.

A projected law progressing through the German federal parliament under Rexrodt's patronage would make the exclusive demarcation deals illegal.

The German situation recalls the near year-long conflict between Van Miert and Belgian electricity supplier Electrabel after it attempted to tie local authorities to long-term exclusive supply contracts.

That struggle ended last month when Electrabel backed down and agreed to allow local authorities to shop around for part of their energy supply from 2006 with full competition brought in five years later.