Electricite de France SA investors who bought into the prospect that easing the government’s grip on the French power market would be a boon to the former monopoly may end up disappointed.
Lawmakers start debating a bill today that will force EDF to sell a quarter of its power supply from its 58 reactors to GDF Suez SA and other competitors. The legislation is likely to hold down the price the state-controlled company can get for the electricity. EDF Chief Executive Officer Henri Proglio has said the legislation shouldn’t “pillage” the utility.
EDF shares plunged 60 percent since peaking in 2007 as the company lost its monopoly to supply French households. When the state sold shares in the utility in 2005, investors expected power rates to rise and that EDF would benefit from lower costs to operate nuclear generators. Instead, rates remain 36 percent below the European average.
“Investors may end up punishing EDF on disappointment,”Kilian de Kertanguy, a fund manager at Cholet-Dupont Gestion in Paris, said by e-mail. “As things stand now, the law will be negative for EDF.”
The stock price reached a record 87.75 euros on Nov. 26, 2007, more than double yesterday’s close of 34.77 euros, valuing the company at 64.3 billion euros ($77 billion).
President Nicolas Sarkozy ’s government is seeking to placate calls from European Union regulators to allow more competition while limiting power price increases. Lawmakers say France’s status is special, since it gets 78 percent of its output from nuclear plants, meaning costs are lower than in the U.K., for example, were natural-gas fired plants dominate.
EDF spokesman Bernard Sananes in Paris declined to comment on the new law.
Gradual Advance
While EDF fought the law, known as Nome, to keep its dominant share of the power market, analysts said it may benefit from higher wholesale and consumer power prices in coming years.
“The law won’t be a quick win for EDF but rather a significant, gradual advance,” said Per Lekander, a Paris-based analyst at UBS AG. “It’s essentially a 10- to 15-year deregulation of the French market.”
The law, which will run through 2025, will bring the French market closer to more deregulated regimes in Germany and the U.K., where consumers pay more for their power.
Rivals including GDF Suez, Poweo SA and Direct Energie have said competing with EDF is impossible with rates at these levels without access to its nuclear output. Under the proposed law, EDF will sell as much as 100 terawatt-hours a year to competitors who will be allowed to resell it only to French customers and forced to invest in future generation capacity.
Lost Monopoly
Almost three years after EDF lost its monopoly, the company has about 92 percent of domestic customers,Philippe de Ladoucette, head of regulator the Commission de Regulation de l’Energie, said last month. The new law is the only option to opening up the market, he said.
“I don’t see scope for an overly bullish outcome for EDF,”Ingo Becker, an analyst at Kepler Capital Markets, said by phone. “The law will be an empty shell, a track for the train. Where we are heading and at what pace will be decided later.”
Proglio said last month any power price less than 42 euros a megawatt-hour would amount to “pillage.” Prices will be determined by the government for three-year periods in consultation with the regulator.
The wholesale price has to recognize costs of maintaining, dismantling and extending the life of existing reactors, according to the draft. Proglio has estimated 600 million euros are needed to extend the life of each reactor, for a total of 35 billion euros.
Nuclear Power
As the law stands, it stipulates EDF can charge a wholesale price for nuclear power linked to the below-market rate for industry that’s known as Tartam, currently about 42 euros a megawatt-hour.
Government-set rates for households and small businesses would have to rise 11.4 percent if EDF sells wholesale power at 42 euros a megawatt-hour and then 3.5 percent annually through 2025, according to scenarios outlined by the regulator. Rates for larger businesses would have to rise by 14.8 percent and then 3.7 percent a year.
“It’s a first step for industrial clients and competitors to EDF,” said Chicuong Dang, an analyst at KBL Richelieu Gestion. Rates will rise “over time,” he said.
Some deputies in the French parliament oppose the prospect of higher power prices and sweeping changes for state-controlled EDF. They are expected to defend the nuclear “rente,” or the benefit to future generations of cheap power rates from past investments in nuclear reactors.
“The law is trying to patch up a completely dysfunctional system,” said Socialist deputy Francois Brottes. “Was it worth smashing down everything to end up with that? And on top of that consumers will have to pay higher rates.”