UK: Iniquities of the French Connection.

UK: Iniquities of the French Connection. - Electrite de France supplies more than five per cent of total electricity in Britain. It achieves this by offering British industries unusually low prices, a fact that has prompted the CBI to complain to the EC

by Stephanie Cooke.
Last Updated: 31 Aug 2010

Electrite de France supplies more than five per cent of total electricity in Britain. It achieves this by offering British industries unusually low prices, a fact that has prompted the CBI to complain to the EC Commission, as it believes this is the result of illegal state aid. Stephanie Cooke adds more fuel to the case against French monopoly.

If the managers of ICI's Runcorn chlorine plant had their way, they would almost certainly opt to move to France. Since the UK electricity industry was privatised, ICI's electricity costs have soared by 60%. This has forced the company to delay major investment and is partly behind the company's decision to sacrifice two smaller chlorine plants at Hillhouse in Lancashire earlier this year. ICI, feeling that Runcorn itself - Britain's largest single electricity consumer - is threatened, is pressing the Government for a special deal there. Other large electricity users are watching its progress on the logical basis that what would be right for ICI would be so for them. But even if ICI wins its case, its costs would be likely to remain above those of its continental competitors, particularly the French.

While Runcorn marks time, its chief French rival, Atochem, is expanding: it is building a new chlorine plant. John Stoney, ICI's energy policy and purchasing manager, is pretty sure that they will have been helped by good prices. To compete, he says, "we need to halve the price (of British electricity) and that is quite ambitious". He believes, along with many other British businessmen, that the good deals that French companies get may amount to state aids but they are difficult to prove.

The CBI, however, thinks it has the proof. It has filed a complaint to the European Commission. The CBI claims that by charging domestically-based industry unusually low prices and by "dumping" electricity across its borders at less than the actual generation cost, Electricite de France (EdF) is using cheap power as an instrument of industrial and regional policy, thereby distorting intra-community trade. The complaint also accused the French government of failing to operate at arm's length from EdF as required under Article 90 of the Treaty of Rome.

A Department of Trade and Industry report on British energy policy issued this January also found the relationship between the French government and the EdF too intimate. It accused the French government of effectively preventing the sale of UK generation in France. From the French side of the Channel the view is, of course, much brighter. EdF supplies more than 5% of total electricity in Britain through the Channel link.

British industry meanwhile struggles to cope with the uncertainties of a private electricity market, one in which prices are set, or "pooled" on a half-hourly basis according to demand and supply. The generators compete for profit. Few could be found to say that the system is perfect but still fewer would quarrel with the view that reform would include more, not less competition.

The French system represents a different view: a state-owned utility nursing French industry. That utility makes a loss mainly due to the vast capital investment in nuclear power over the last 20 years.The CBI has estimated these losses. It reckoned that by the end of 1990, they totalled FF30.2 billion (£3.12 million) compared with profits of only FF2.7 billion (£279 million) and this despite some FF30 billion (£3.05 million), at 1987 prices, injected by the government between 1979 and 1985. The balance sheet has marginally improved but, according to CBI - with debts totalling FF232.5 billion (£22.25 million) in 1989 - it has a long, long way to go.

Not everyone in France is happy about the situation. The policy of keeping industry tariffs low was criticised by the French Court of Audit. Its figures were used by CBI in its complaint. The body's findings were, says the CBI, "highly critical of the French government".

One of EdF's strategies is to invest in new plant for dubious returns while charging low prices for supplying its customers with electricity.Pechiney, a state-owned aluminium company, is the most notorious example. It negotiated a bargain-basement price of six centimes per kilowatt-hour (approximately 0.75 pence) through to 1997. Pechiney's persuader was a threat to set up a new plant in Venezuela, a move which would have caused a political turmoil in an unemployment sensitive France. "The Pechiney deal was out of this world," says ICI's Stoney. "If we could get just 2 pence per kWh, we would be fine."

EdF took 49% of the equity in the new FF5 billion (£437 million) plant at Dunkirk, entitling it to 10% of profit after other investors are paid. British Steel complained about the deal but it was in vain. EdF pleaded that its low price for electricity was justified because it was equivalent to what Pechiney would have been paid had the plant been built in Venezuela. It further argued that as it had surplus capacity, it was reasonable to sell electricity for what it could get rather than not sell at all.

The EC accepted this argument, ruling in 1989 that EdF could supply "at cost" (words obviously open to intrepretation) until 1997 on condition that the price should then rise by 10% annually for three years. The 1997 date is believed to be the point at which (it is hoped) French consumption will have risen sufficiently to absorb the present surplus, a forecast which, like most these days, could be more optimistic than realistic.

The Commission's decision was based on the judgment that because of the surplus capacity, a private investor would have priced in much the same way as EdF. The decision was a compromise between the competition directorate (DG4), which argued strongly against the deal, and the energy and industry directorates who supported it.

Commission sources say the pressure to approve the deal was "intense". They also say that the deal was not supposed to set a precedent. It did. A number of similar deals were subsequently cleared or went unchallenged, including ones for an Exxon Chemical subsidiary, Eka Nobel, the Swedish chemical company, and Allied Signal, the US engineering and motor components group. All were modelled on terms similar to the Pechiney deal.

EdF has used quotes from satisfied executives in its promotional literature. The CBI, straining for a sight of that level playing field, is less than satisfied. "Given EdF's precarious financial position," says its complaint, "the Commission's ruling has not entirely dispelled the suspicion that the low tariffs are the result of covert subsidy."

EdF is not coy about its policy of maintaining low prices in France to encourage foreign investment. And besides promoting internal growth, the utility, which generates approximately 90% of French electricity, also wishes to maintain its role as the leading electricity exporter in Europe. It obviously cannot boast about its profits but it does emphasise its position as the second lowest-cost source of power in Europe. Denmark is the first.

It also looks as if, despite criticism from outside, the utility aims to maintain its position. A brochure distributed to potential UK clients states: "Electricity prices are about 30% below UK rates for energy-intensive users." Nicole Bomo, EdF's marketing and business development division's project manager, based in Bristol, says: "EdF has recently set up a team whose sole aim is to provide assistance to industrial firms in order to facilitate the successful development of their activities in France.

EdF has been decommissioning power stations and has targets to compensate for the job losses. Nowadays, we also want to contribute to the development of the French economy and have no geographical limitations on this service." The utility "will assist the companies in all administrative questions or problems and will provide a financial package. Often these financial incentives supplement those of the local community concerned," says Bomo. All this is free of charge.

In Britain, EdF supplies the equivalent of a large power station's output throught the 2,000 MW cross-Channel link - 5.4% of total UK supply in 1992-93, according to the Department of Trade and Industry's British energy policy report. An executive of PowerGen ruefully admits that EdF has been so competitive that French imports through the link are now considered part of Britain's permanent, continuous - or baseload - supply. Oddly, as the committee notes, though the EdF bids low, it actually receives prices in line with coal-fired capacity because of the complicated procedures that determine final prices under contract.

Though EdF's supplies may decrease over the next few years (the utility's contracts with six British regional electricity companies expire at the end this month), the committee described EdF's role in the market as "that of a large power station with a privileged market position".

As Europe's biggest electricity exporter, EdF - according to a report by the Paris-based International Energy Agency - supplied 13% of its total production to its neighbours in 1990, including Switzerland, Italy (which shut down all its nuclear plants after Chernobyl), the UK, Germany, the Netherlands, Belgium and Spain.

"The French government sees attractions in EdF's export earnings which it hopes could double to FF15 billion (£1.6 million) annually over the next few years," says the CBI complaint. "The benefit to EdF, however, is more questionable. A report by the incoming chairman of the CEA (Commissariat a l'energie atomique) revealed that in 1987, EdF was earning 22.4 centimes per kWh on exports to the UK, Switzerland and Italy, compared with a production cost of 22.5 centimes per kWh. This smacks of dumping."

The French market itself is effectively closed to outside competition, something the UK's private generators would like to rectify now they are themselves suffering from over-capacity. The Trade and Industry report notes that National Power, for instance, says it "would welcome the opportunity to export electricity to other western European countries by means of the cross-Channel link", and that lack of openness in charges for transmission, particularly in France, "constitutes one of the principal obstacles to cross-border trade in energy".

EdF, however, is a major opponent of the proposed EC directive for a single market in electricity which would allow large industries to choose their own suppliers. Britain heartily endorses this proposal.

The practice of using electricity tariffs as an instrument of industrial and social policy is widespread in Europe, but proving that it is done "in a manner liable to distort intra-Community trade and investment", as the CBI argues is the case in France, is difficult. What complicates the matter is that in many countries at least part of the cost of low rates to industry is picked up by the domestic consumers. Energy experts, however, are generally agreed that France would be the most obvious target for a case to be made on electricity subsidies.

"I think there is evidence that companies do get good deals in even high cost countries like Germany. The reason why we focused on France is because there have been these special deals," says CBI company affairs director Graham Mason."The problem that Britain has is that we are paying the market price for power and in many European countries they don't," says energy expert William Hieronymus, of consultants Putnam, Hayes and Bartlett. "There is no provision for subsidy in the wholesale (private) market, with the exception that under one MW, customers are still paying a coal subsidy. Other than that it is a wholly competitive market. It is a test to hold up to other countries."

EdF has a long way to go if a single market based on fair competition is ever to be achieved. While the utility is under pressure to reduce its debt, it has also been forced by the French government to reduce prices. The CBI report states: "On the one hand it (EdF) agreed in 1989 to reduce its net borrowing by FF 20 billion (£1.91 billion) by the end of 1992; on the other, the same administration has insisted on real price reductions of 1% per annum between 1984-88 and 1.5% per annum from 1989-92. In short, while the authorities now expect the consumer and the economy generally to reap the benefit of the huge investment programme of the last two decades, EdF clearly requires significant price increases to regain financial equilibrium and start repaying the debts contracted for the development of the nuclear programme. Thus the French government is not only failing to ensure the kind of return on its investment that a private investor would require, but is actually frustrating any chance of remedying the company's financial position by its own policy of curbing prices."

EdF claims that its tariff structure matches marginal generation and transmission costs but that does not include many other costs associated with building, owning and operating nuclear plant. And as the CBI points out, there are a number of factors that make even these claims dubious. To begin with, the costs are calculated using "reference" stations operating in an optimal system. Nuclear reactors are assumed to operate without interruption at almost full capacity. The reality is quite different. Since increases in domestic demand far outstripped those in industrial demand, nuclear stations designed for baseload operation (eg to support continuous factory operation) have been used in the "load-following" mode, to meet peak demand. That means they are not as economic. France's nuclear plants have also been running well below capacity, pushing up generating costs. Older plants, representing 35-40% of total nuclear capacity, are undergoing steam generator repairs, forcing them out of service from five months to more than a year at a time. The average cost of these repairs has been estimated at $100 million (£57 million) per unit, not counting replacement power. Experts say the new generation of reactors may experience the same difficulties.

The CBI report states: "Tariffs are now designed to even out EdF's load curve, maximising the use of baseload nuclear power and lopping off peak demand, but the fundamental problem of achieving high load factors for all nuclear transmission persists. Meanwhile, five new nuclear plants with a combined capacity of 6.9 GW are currently under construction, with another two planned, adding a further 2.9 GW to national generating capacity. The economic logic behind building further baseload plant to meet peak demand is not immediately apparent."

The theory that supports France's loss-making electricity operation is that centralised economic planning ultimately produces results. However, the theory behind the single market was meant to point Europe in the opposite direction.

The EC's competition directorate has read the CBI's report but has not acted on it. Sources within the EC say that it would take massive resources and French co-operation before an adequate study could be made.

If the parliamentary Trade and Industry Committee had its way, which is unlikely, EdF would be barred from further sales in Britain until France opened its market to outsiders. "One of the reasons we are in favour of greater liberalisation is that it would flush out real costs," says a British Electricity Association spokesman. "Once you have true competition, the cost will come down."

Sadly, industry experts reckon that the proposed directive on allowing large industries to choose their own electricity suppliers is a long way from fruition.

In the April issue Stephanie Cooke examines airline subsidies.

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