On the face of it, the European Commission had some shocking news for shareholders of Eon and RWE in Germany, OMV in Austria and similar listed energy groups across the region. The Brussels regulator on Wednesday vowed to break up all energy suppliers that are also active in managing networks such as grids and pipelines. It argued that the combination of the two businesses stifled competition.

Given the Commission’s sweeping powers to initiate legislation, scrutinise mergers and pursue antitrust infringements, such a step is certainly not beyond Brussels’ reach. That would mean forcing some of Europe’s biggest groups not only to sell off priceless assets but also to face much sharper competition from smaller rivals.

And yet, this shocking news somehow failed to strike fear in the hearts of investors. RWE’s shares actually gained slightly, while Eon and OMV posted only minuscule falls that mirrored the broader market. What’s up? Don’t traders read the newspaper?

That is certainly one possible explanation. In the four years I have spent writing about the Commission, I have come to believe that markets have something of a blind spot when it comes to interpreting regulators. Traders and stock market analysts have, for example, consistently misread developments in the Commission’s long-running antitrust case against Microsoft - not least because they have too often focused on the fines imposed on the software group, rather than on the investigation’s broader impact on Microsoft’s business model.

In the case of Europe’s energy behemoths, however, I think the market got it right after all. Despite all the huffing and puffing in Brussels, I think there is a zero chance that the Commission will end up blowing down the empires built by Eon, GdF and their peers across Europe.

There are two ways the Commission could go about forcing through a break-up. The first is regulation, meaning a revision of the energy liberalisation directives that would mandate full ownership unbundling of suppliers and network operators. As every single Commission officials I have spoken to in the past weeks confirms, this is a non-starter.

France and Germany would simply not allow it. And since a formal revision of an EU law demands the support of the EU member states, that really is all that needs to be said. There is an unwritten rule that, on truly important questions, none of the EU’s big three can be overruled - regardless of the precise majorities required. Even in a Union of 27, nothing is likely to happen against the will of Berlin and Paris.

Then there is the new, and intriguing, option floated by Neelie Kroes on Wednesday. She pointed out that her powers as competition commissioner included the right to break up integrated energy groups, for example as a punishment for violating antitrust laws. Ms Kroes has already launched probes against Eon and others. Moreover, she does not need the assent of member states for her decisions in competition cases.

So should the energy groups be worried on this front? Ms Kroes’ officials stress that she is serious, but somehow I cannot imagine she will follow through on her threat. For a start, using competition law to break up companies would mean targeting and punishing individual companies rather than the entire sector. This in turn would mean that some integrated groups - those that do not face an ongoing probe by Brussels - would necessarily escape a forced break-up.

It would be difficult, to say the least, for Ms Kroes to explain why some groups face the harshest penalty imaginable while others walk away unscathed.

Politically, it would also be bizarre to use the Commission’s vast powers as an antitrust regulator to achieve policy goals that it cannot attain through the normal legislative process. Did I say bizarre? I meant impossible.

In fact, the correct way to look at this week’s events is to see the Commission’s demands as a purely tactical move. Brussels is hoping that it can scare member states and energy groups into accepting at least a more clearer separation of supply and networks, even if the likes of Eon retain the ownership of pipelines and power links.

Who knows? The tactic might even work. But one thing seems certain: integrated energy groups will remain just that for quite some time to come.   

January 11th, 2007 in Energy | Permalink