Balance Of Power

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Some European goals sound so simple, so virtuous. Take, for a huge example, creating a single European market for energy, a prize that has been on the agenda for years. Once dominated by national gas and electricity monopolies, the E.U. is pushing to open energy markets. By next year, almost all households and businesses will have the freedom to shop around for a power supplier. "An open and competitive single E.U. market is crucial" if businesses are to compete and consumers thrive, Brussels' Competition Commissioner Neelie Kroes declared last month.

Now if only everyone could agree on how to get there. There is no shortage of European energy firms who want to become big enough to offer services across the Continent. Indeed, Europe's utilities are on a shopping spree. According to Dealogic, which tracks transactions, utility mergers and acquisitions announced so far this year have topped $117 billion — just shy of the $130 billion in deals clocked for the whole of 2005. In February, E.ON, Germany's largest power company, made a bold, €29.1 billion bid for Spain's electricity company Endesa that, if successful, would make it the largest power and gas company in the world. Late last month, just days after Italy's mighty utility Enel hinted at a takeover of French power and water group Suez — a deal that would have likely been worth about €35 billion — the French government hastily pulled together a tie-up between Suez and state-controlled Gaz de France worth more than €30 billion.

And there's the problem. While everyone pays lip service to the idea of a common energy market, few individual countries are eager to see their national players swallowed up by outside predators. "The government's wish is clear: to defend our national interests," said French Prime Minister Dominique de Villepin last week. Madrid is no different; late last month, Spain's Council of Ministers boosted its energy watchdog's veto powers over foreign takeovers. The regulator — stuffed full of government allies — might well scupper the German bid.

Of course, some European governments dislike the idea of any familiar brand — from yogurt to automobiles — being swallowed up by foreigners, even if it's unusual for them to try to block such deals in the name of the national interest.

With energy, though, the case for intervention is more compelling than usual. Energy affects almost every citizen and business, and when things go wrong the costs are felt more acutely than they are, say, in the insurance sector. Antonio López, Madrid-based director of analysis at Fortis Bank, argues that opposition to E.ON's cross-border dash for Endesa signals the Spanish government "is worried about supply." "If the company is German, it will experience any shortage or blackout from a distance," he says. "But [the blackouts] will happen in Spain. And blackouts are political issues. They cost votes."

But even a safe supply needs to feel like good value to the end user. In truth, it is far from clear that energy consolidation benefits the European economy or the consumer. Yes, theoretically it's an improvement if energy suppliers can easily shift their gas or electricity around the region. But the market needs enough competitive players to make it work. So while Brussels might cheer consolidation in some sectors — cross-border banking, for example — in others, like utilities, it's more of a headache. Remember the deregulated U.S. market of the late '90s, when a handful of big utilities, Enron among them, were able to dominate, sending prices skyward?

Kroes admitted last month that high industry concentration and feeble cross-border competition added up to "a rather gloomy picture." Consumer groups put that view more sharply. The specter of further consolidation among Europe's utilities "can only reinforce our worries regarding the actual level of competition in the market," says Dominique Forest, economic adviser to beuc, the Brussels-based European consumers' organization. Forest thinks the Commission should be "more proactive" in preventing market dominance. Unveiling an evaluation report on the sector last month, Kroes conceded that Europe's gas and electricity markets were still dogged by "real market distortions" that stiff the consumer. "Take this as a gentle word of warning," she cautioned. "We are at the beginning of a period of more intensive antitrust enforcement."

Kroes can scrap deals that put competition at risk by creating or reinforcing a dominant position, but it's a tough case to make when the combining companies are anchored in different regions or product sectors. Moreover, injecting competition into the energy sector is made difficult by the legacy of the past. European nations once had integrated energy suppliers with a local monopoly. Even if those firms are now limited in the amount of a market they can control, huge national power companies — think E.ON, France's electricity behemoth EDF and Enel — continue to have a hand in the generation, supply and distribution of energy. It's tough for potential new entrants to break into those businesses. "The main way in which these markets become 'contestable' is thus via takeovers of less efficient players," says Daniel Gros, director of the Centre for European Policy Studies in Brussels. The result: Europe's biggest utilities spent the last decade or so snapping up subsidiaries in member states, rather than in truly opening up their home markets to genuine competition from their counterparts.