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Economy

ORIGINAL FRENCH ARTICLE: GDF-Suez, ce que le gouvernement vous cache

by Pierre-Henri Lab

GDF-Suez, What the Government is Hiding from you

Translated Thursday 14 September 2006, by Henry Crapo

Energy. The letter of grievances from Brussels suggests dismantling the French system of gas production and distribution. Dominique de Villepin and Nicolas Sarkozy want to try to camouflage this from public scrutiny.

L’Humanité has come to know about the letter of grievances that the European Commission has sent to the officers of the Gaz de France and of Suez (the two gas companies involved) in the perspective of the fusion of the two groups. A document of 200 pages in its unexpurgated and uncensored version, it is organized in four parts relative to the market for natural gas in Belgium, that for gas in France, the market for electricity in Belgium, and the system for heating in France. In each of these parts, the Commission analyzes the impact of the fusion on the market, and identifies barriers to the establishment of free and unfettered competition. It provides in this context some serious indications concerning the restructuring that Brussels could impose, in the event that the French government chooses to carry this project of fusion forward to its completion. The extracts that we choose to publish concern only the national system for gas, and the three pillars on which it is based: long term contracts, the integrated character of the GDF group, and regulated prices. The extracts we publish leave no ambiguity as to the desire of the European Commission to place the future of the French gas system in question. (The reporter’s comments are here placed in footnotes.)

Long term contracts

Paragraph 429: "Of course the GDF and Suez are not the only gas operators having signed long term contracts [1]. In particular, other traditional European operators have access to such contracts. On the other hand, other operators wishing to enter the gas market have only difficult access to such contracts. Thus, in such a context, these long term contracts offer a considerable advantage to the new entity (GDF/Suez) in comparison to those operators who have only recently entered the market (such as the EDF, Poweo, or Altegaz), or to those companies with the ambition to do so in the future."

The integrated structure of the GDF

Paragraph 483: "The GDF, in contrast with other historical European gas operators, is a vertically integrated group in which there coexist activities of supply of gas and activities involving exploitation of the gas production infrastructure. Thus, besides its activity as supplier of gas (GDF Negoce), GDF includes three management infrastructures: GRT Gaz (transport), DGI (storage et and terminals for methane) and the network of distribution for Gaz de France (GRD Distribution)."

Paragraph 484: "The existence of vertically integrated groups in itself poses a structural conflict of interest once the markets and the supply of gas is liberalized and the gas suppliers are obliged to use the gas infrastructures of the former." [2]

Regulated prices

paragraph 502: "(...), the Commission considers that the regulated prices presently practiced are characteristically beneath the open market, and prevent the entry of competitors into the market." [3]

Conclusion

The grievances formulated by the European Commission have much to say about the real objectives pursued by the proponents of a GDF/Suez fusion. If perchance this fusion goes ahead to completion, the European Commission will seize the occasion to force the dismantling of a system that, during its 60 years of existence, has proved its efficiency both with respect to the security of its distribution system, and its capacity to hold prices down. This is a system more efficient than the free market, but in the eyes of Brussels has the fault of violating the sacrosanct principle of "free and unfettered competition", which presides over the European construction.

When reading these grievances, one understands better why an information black-out surrounds the government and the companies, GDF, Suez. In fact, the extracts we publish show that the fusion will not give birth to the giant gas producer promised, and that it will not have the virtues that its partisans claim it will have. The cession of infrastructures that Brussels will impose may very well produce an entity that will be smaller than the present GDF group.

As for the future evolution in gas prices, the calling into question of long term contracts and of regulated prices proves that there will surely be a new inflation of prices. In addition to a giant gas producer, the fusion of GDF/Suez aims also to create a competitor for the EDF (the national electric power company). The president of the EDF, Pierre Gadonneix, is getting ready. He has recently announced his own interest in acquiring those parts of the GDF that the Commission will force them to cede.

[1The European Commission has long-term contracts in their gun-sights. The duration of such contracts generally varies between 20 and 30 years, and offers a considerable advantage to the company holding them. The price of gas negotiated in the framework of such contracts is at about half the going price in the market. In case of fusion, to put GDF/Suez on an equal footing with its competitors, the European Commission will demand that such contractual practices cease. All European gas operators will have to purchase their gas at the market price. And the consumer will pay the difference ...

[2The Commission observes that the competitors of the GDF, in order to import, to transport, and to deliver their gas in France, would be obliged to use the infrastructures of the national company. In other words, they will depend upon the GDF to market their gas. To put an end to this advantage, in case of fusion with Suez, Brussels will demand that the national gas company cede all or part of these infrastructures.

[3One could not be more clear. Why would the consumer choose to deal with competitors at market price when the prices offered by the GDF are lower? In order to permit the competition to gain a market share in the event of a fusion between GDF and Suez, the Commission will demand that the practice of regulated prices be terminated. And tough luck, once again, for the consumer, who will pay the difference.


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