FRANCE: ENERGY SECTOR UPDATE

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TAGS: ENRG EPET EIND EINV PREL PGOV FR
SUBJECT: FRANCE: ENERGY SECTOR UPDATE

Sensitive but unclassified - Contains company proprietary
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1. (U) This is the first in a series of occasional
updates on the French energy sector. Feedback is welcome
to help us make this product as useful as possible for
our Washington inter-agency audience.

Contents:
-- EDF brokers deal to control Italian power company
(para 2)
-- Industry Minister pushes EDF to sell electricity
transmission company (para 3)
-- SEC inquiry about Iran raised at Total shareholder
meeting (para 4)
-- U.S. Energy Secretary meets French counterpart (para
5)
-- Former GDF directors create Altergaz (para 6)
-- Total negotiates end to strikes at French oil
refineries (para 7)
-- Areva hopes to build nuclear reactors in the U.S.
(para 8)
-- U.S. Energy Secretary discusses nuclear energy issues
with Areva CEO (para 9)
-- Areva lobbies (again) for U.S. support in China (para
10)


2. (U) EDF brokers deal to control Italian power company:
The state-owned French power company Electricite de
France (EDF) will pay seven billion euros to resolve
investment disputes in Italy in a deal that would give
EDF a 50% stake in Edison, Italy's second-largest
electricity producer. Although the deal values Edison at
only 7.5 billion euros, EDF had faced debt and equity
obligations of up to 13 billion euros as a result of a
complex series of put and call options. Assuming the
deal is approved by European competition authorities, it
would help clarify EDF's murky balance sheet and thus
help pave the way for the planned privatization of up to
30% of EDF later this year by resolving a four-year
impasse over EDF's liabilities in Italy. Uncertainties
remain, including the abolition of certain Italian
limitations on foreign shareholder voting rights. If
these are not lifted by May 27, EDF may pull out of the
deal.


3. (U) Industry Minister pushes EDF to sell electricity
transmission company: According to French business daily
La Tribune, GOF Industry Minister Patrick Devedjian said
that he would like to see 50% of the shares in RTE
(Reseau de Transport d'Electricite) sold to the public
sector bank CDC (Caisse des Depots et Consignations). In
effect, this would not be a privatization, but rather a
transfer from one GOF institution to another. However,
it would satisfy an important requirement of the European
Commission and the new French energy sector reform law
(04 Paris 6157) that EDF fully separate electricity
transmission from production, so that independent power
producers have unfettered access to the national
transmission grid. Currently, EDF still owns 100% of
RTE, although French energy regulator CRE (Commission de
Regulation de l'Energie) requires a certain level of
bureaucratic separation between the two entities.
Estimates put the total value of RTE at approximately
four billion euros. The two billion euros that EDF would
get from the sale could help to finance EDF's takeover of
Edison, which otherwise might throw EDF deeper into debt.
However, Devedjian denied a link between EDF's RTE stock
sale and Edison purchase.


4. (U) SEC inquiry about Iran raised at Total shareholder
meeting: Total Chairman Thierry Desmarest said that the
French oil company will respond to an inquiry from the
U.S. Securities and Exchange Commission for details about
its operations in Iran "as long as this doesn't raise
problems with the limits of sovereignty." Desmarest's
remarks are likely a sign that Total may set limits to
what it will disclose about its business in Iran, because
Total deems that a U.S. embargo on Iran doesn't extend to
French corporations. "We aim to have a fruitful
cooperation with the SEC," Desmarest said at an annual
shareholders' meeting on May 17. Total first disclosed
it had received a request from the SEC for information on
its operations in Iran in a legal filing posted on the
regulator's Web site in mid-April. According to Dow
Jones Newswires, the SEC wants to know whether Total and
other oil companies doing business in Iran have paid
"commissions" to intermediaries to secure contracts in
the country.


5. (SBU) U.S. Energy Secretary meets French counterpart:
On May 3, Energy Secretary Bodman met with GOF Industry
Ministry Patrick Devedjian on the margins of the OECD/IEA
Ministerial in Paris. The brief encounter served as a
good introductory meeting between the two officials.
Devedjian said that the nuclear energy policies of our
two countries were "very much in harmony" and he was
pleased that the reprocessing of U.S. weapons-grade
plutonium in France (the "Eurofab" project) had gone
smoothly. It wasn't often, he noted, that France is in a
position to offer technological lessons to the United
States. Bodman thanked Devedjian for France's
hospitality as host of the OECD and IEA Ministerial
meetings. Noting the lack of focus or measurable goals,
Bodman expressed interest in goal-setting for future IEA
Ministerials.


6. (U) Former GDF directors create Altergaz: Three
former directors of natural gas group Gaz de France (GDF)
have created Altergaz, the first independent natural gas
provider on the French market. The new company plans to
complete a private share placement for 15 million euros
at the end of May, and will then carry out a stock market
listing. Altergaz has already signed a contract with
Italian energy group Eni for supplies of natural gas from
the North Sea. The company is targeting the French
business market, which is worth 4.5 billion euros and
remains dominated by GDF. Altergaz will begin its first
deliveries of gas on October 1, 2005.


7. (U) Total negotiates end to strikes at French oil
refineries: Total, the French oil group, bowed to
political pressure and ended a week-long strike at its
domestic refineries, which led to some local gas
shortages. The company said staff in its six French
refineries returned to work on May 23 after it agreed to
give them an extra day off to make up for working on
Pentecost, or Whit Monday, which was scrapped as a
official public holiday by the GOF this year. Pressure
reportedly came from French Prime Minister Jean-Pierre
Raffarin, who was keen to avoid embarrassing gas
shortages only a few days before the May 29 referendum on
the European constitution.


8. (U) Areva hopes to build nuclear reactors in the U.S.:
On May 19, French daily La Croix reported that French
nuclear power company Areva (ref 04 Paris 8615),through
its potential U.S. customer Constellation Energy, had
submitted a license application for the European
Pressurized Reactor (EPR) to the U.S. Nuclear Regulatory
Commission. In an article entitled "Areva eyes the
American market," the paper noted that Areva hopes to win
contracts to build the EPR in the U.S. However, Areva
and the French press seem to be engaging in wishful
thinking. Westinghouse already has a license for its
AP1000 (the EPR's closest competitor) and the NRC review
for an EPR license is expected to take up to two years.
So, for the time being, Westinghouse has a distinct
advantage in the U.S. market. In the meantime, Areva
will continue to grow its already lucrative business in
the U.S., repairing and maintaining the aging fleet of
existing U.S. nuclear reactors, rather than selling new
nuclear reactors. In the near-term, the Chinese market
is where the Areva EPR versus Westinghouse AP1000
competition battle will be fought. The Chinese plan to
announce their choice this autumn for an eight billion
dollar contract to build four nuclear reactors -- a
contract that will likely lead to more orders in China's
rapidly growing energy market.


9. (SBU) U.S. Energy Secretary discusses nuclear energy
issues with Areva CEO: Secretary Bodman also met with
Areva CEO Anne Lauvergeon during his May 3 visit to Paris
for the IEA Ministerial. It was the first time the two
had met and served as an opportunity for the Secretary to
hear European industry views on U.S. energy policy.
(Details about Areva, a very large and vertically-
integrated nuclear energy services company, can be found
in 04 Paris 8615 and 05 Paris 2764.) Lauvergeon
emphasized the importance of U.S. policy and its impact
on nuclear power in Europe. She expressed her pleasure
with President Bush's latest speech on energy policy
because it emphasized the importance of nuclear energy as
part of the energy mix. Secretary Bodman said that the
President feels very strongly about it because it's the
right thing for the country. Lauvergeon said that the
2010 program is significant because it helps with siting
and licensing a new plant. However, industry is still
looking for insurance on the back-end of the fuel cycle
to ensure the production of nuclear energy is
economically desirable. Secretary Bodman explained that
Yucca Mountain is a problem because the State of Nevada
is doing everything possible to prohibit its construction
and a recent court case has caused delays in the
schedule. He added that by the time the Yucca Mountain
site is ready to take in nuclear waste, it would almost
immediately be filled to capacity due to the backlog.
Lauvergeon offered her company's assistance to DOE in the
treatment of spent fuel. Secretary Bodman advised her to
work with Deputy Secretary of Energy Clay Sell who is in
charge of developing a more thorough strategy of dealing
with the nuclear waste issue.


10. (SBU) Areva lobbies (again) for U.S. support in
China: Echoing our earlier meetings with Areva officials
(ref Paris 2764),Areva CEO Lauvergeon recently told U.S.
Energy Secretary Bodman that Areva now has 7,000
employees in the U.S. and that if they are successful in
their bid to build reactors in China, there will be
direct benefits to the United States in the form of jobs
and income. Secretary Bodman pressed her on this and she
said that if Areva were successful the U.S. would receive
about 200 to 300 million dollars out of a two billion
dollar contract to AREVA. Lauvergeon also said that the
reactor design is a good one for the U.S. She asserted
that, in terms of employment, Areva employs more people
in the U.S. than Westinghouse.

Wolff