Deregulating Electricity Markets - A "Natural Monopoly" is Forced to Adapt to a New Market Environment

EDF, by far France's largest energy supplier, has been the subject of some controversy in recent years. Critics have derided both the company and the French government for dragging their feet on implementing deregulation, in compliance with EU directives. Professors Vanessa Strauss-Kahn and Daniel Traca and writer Joao Pinto investigate the history of one of the world's biggest utilities, addressing many of the issues currently at the heart of arguments for and against the deregulation of a sector that had traditionally enjoyed monopolistic positions throughout Europe.

by Vanessa Strauss-Kahn, Joao Pinto,Daniel Traça
Last Updated: 23 Jul 2013

Some Europeans need more convincing about the overall benefits of economic liberalisation than others. Neither the French government, nor a majority of French citizens, nor many among the sizable workforce of Eléctricité de France (EDF) have embraced recent EU directives on the deregulation of the European energy market wholeheartedly. But many, particularly elsewhere in Europe, have long been eager to see EDF lose what they see as its privileged and unfair position within the country - a status that they feel has greatly helped it to expand aggressively abroad, especially in many neighbouring countries that had already opened their markets to foreign competitors.

Vanessa Strauss-Kahn and Daniel Traça, both assistant professors of economics at INSEAD, investigate the history of EDF, one of the world's biggest utilities. In doing so, they address many of the issues currently at the heart of arguments for and against the deregulation of a sector that had traditionally enjoyed monopolistic positions throughout Europe.

The most powerful proponent of energy liberalisation, the European Commission, has long seen a continental common market as one of the best means for increasing efficiency and securing supply. By 2002, more than 80% of the EU market was open to competition. France, however, was only one of several Member States to stall in implementing EC directives, or otherwise to erect certain barriers against opening up their home markets fully.

The authors analyse how EDF's excess production capacity and other strategic advantages have benefited certain French industrial groups, providing "spillovers" to several areas of the national economy and helping to foster a general air of reluctance in France to alter the status quo too radically.

Attention is also paid to EDF's multi-pronged strategy of both domestic market protection and dynamic foreign expansion - a policy that, perhaps inevitably, put it at odds with the European Commission. (In 2001, the EC minced few words in stating that EDF had unfairly used its ultra-dominant position in its home market to outbid any newcomers.)

Strauss-Kahn and Traça also take into account some of the anti-deregulation arguments that have emerged over issues like the liberalisation of such essential services. They note that while privatisation in other European markets has usually been a success, it has not always resulted in either lower prices, or better supply guarantees. EDF has long been able to deliver energy at far below the average EU rate, due mainly to its excessive generating capacity through its chain of nuclear reactors. Many liberalisation opponents have argued that electricity is a "strategic sector" in which government intervention is socially beneficial overall.

The authors also examine the political aspects of EDF's prominence within France, including the distinctively Gallic notion of "Service Public", i.e., the rightfulness of direct governmental intervention whenever and wherever private initiatives may have socially unfavourable consequences. They conclude by posing several questions about major issues that the managerial board at EDF will have to deal with in the near future, including how risky the French government's ongoing strategy of resisting full liberalisation might prove to be, and whether EDF's general M&A strategy is sustainable over the long term.

INSEAD 2004

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