WULF BERNOTAT, the chief executive of E.ON, Germany's biggest power company, used to be one of the staunchest critics of the “unbundling” of energy production and transmission assets advocated by the European Commission. But on February 28th he made a surprising U-turn. As EU energy ministers met in Brussels to discuss unbundling, E.ON said it would sell its German electricity-transmission grid, plus about 20% of its local generating capacity, in exchange for an end to the antitrust investigation of E.ON being carried out by Neelie Kroes, the EU's competition commissioner.
This does not mean that Mr Bernotat has become a sudden believer in a fully liberalised energy market, as proposed by the EU. His company was facing antitrust fines of several billion euros and lawsuits from disgruntled German consumers. So he decided it was better to irritate his government and upset his rivals than to continue fighting with the mighty Ms Kroes.
This is a big blow for the German government, which has been leading the campaign against EU plans to make the energy market more competitive by breaking up vertically integrated energy giants such as France's EDF and Gaz de France, and Germany's E.ON and RWE. Germany, together with France, Austria, Bulgaria, Greece, Luxembourg, Latvia and Slovakia, argues that Europe needs power giants that can stand up to Russia's Gazprom and other big producers.
The German-led campaign had been going rather well. But after E.ON's surprise move, its rivals are weighing their options. Vattenfall Europe, the German subsidiary of Sweden's Vattenfall, says it may consider selling its grid; RWE insists it will not. But both may decide to sell if they are threatened with huge antitrust fines.
E.ON's deal with the commission could prove a blessing for the company, which this week reported a 10% increase in operating profit in 2007 compared with the previous year. Analysts expect E.ON to sell the Thüga group and its stakes in 120 municipal-power companies, which could fetch €3 billion-5 billion ($4.6 billion-7.6 billion), in addition to the electricity grid, which could go for €2 billion. “This would mean a move out of low-growth, very regulated assets to focus on mid-stream and up-stream,” says Lueder Schumacher, an analyst at Dresdner Kleinwort, an investment bank. That could, he suggests, boost the value of E.ON's shares, which are trading at a discount to those of its peers. E.ON could use the resulting war-chest for something big, such as a takeover of Iberdrola, a Spanish electricity giant.
The EU is pushing ahead with its plans and wants an agreement by the summer. It has little time to lose. France, one of the staunchest opponents of unbundling, is taking over the EU presidency in July. Next year the commission itself is up for reappointment, which tends to mean that EU legislation makes little progress. And governments take years to implement new directives. Colette Lewiner of Capgemini, a consultancy, predicts a compromise, such as full unbundling of electricity grids and arm's-length ownership of gas networks.
But Ms Kroes is determined to push for a truly free market by using her department's antitrust powers. She can fine groups up to 10% of their total annual sales (some €7 billion in E.ON's case). EDF and Belgium's Electrabel are also under investigation. It is piecemeal progress, but the threat of a big fine seems to focus minds more clearly than any amount of talk about lofty legislation.
