FRENCH ENERGY BILL PRIVATIZES GDF, FREEZES ELECTRICITY AND

UNCLAS SECTION 01 OF 02 PARIS 007422

SIPDIS

SENSITIVE

STATE FOR EUR/WE; DRL/IL; OES; NP; EB/ESC, AND EB/CBA
USDOC FOR 4212/MAC/EUR/OEURA
DOE FOR ROBERT PRICE PI-32 AND KP LAU NE-80

E.O. 12958: N/A
TAGS: ENRG EPET EIND EINV ELAB PREL PGOV FR
SUBJECT: FRENCH ENERGY BILL PRIVATIZES GDF, FREEZES ELECTRICITY AND
GAS PRICES, AND TAMES INDEPENDENT REGULATOR

REF: PARIS 06678

NOT FOR INTERNET DISTRIBUTION

Summary
--------------


1. (SBU) On November 14, the European Commission announced that the
French energy conglomerate Suez and the 70 percent GOF-owned Gaz de
France (GDF) had satisfied concerns about the proposed merger's
impact on competition after the two firms promised to sell off some
prime assets in Belgium. GDF will sell its 25.5 percent stake in
the Belgian electricity company SPE, the main competitor of Suez
subsidiary Electrabel. The Commission's decision paves the way for
the expected 70.8 billion-euro merger. The EU decision follows the
French Senate's November 9 final approval of the GOF energy bill,
which further privatized the national gas utility, GDF. The French
Senate also approved the opening of French gas and electricity
markets to full competition by the EU deadline of July 1, 2007, but
also included provisions for maintaining government-regulated
tariffs during a transition period beyond 2007. The composition and
role of France's independent energy regulator CRE have also been
revamped, in part by adding more parliamentarians. This could
compromise CRE's independence. End Summary.

Privatization of GDF
--------------


2. (U) The GOF Energy bill approved by the Senate on November 9
calls for the GOF to lower its equity stake in GDF below 70 percent.
(GDF's partial privatization in 2005 was accompanied by a
government commitment, stipulated by law, not to cut the state's
share below 70 percent.) The French state currently owns 80.2
percent of GDF, and would see its stake in the merged entity fall to
a third. The European Commission has allowed the French Government
to retain a "golden share" in the merged entity, protecting GDF's
gas distribution network, liquefied natural gas terminals and
storage depots from takeovers. The golden share would provide the
GOF with veto powers, for a restricted period, to ensure that
private owners do not take decisions counter to national strategic
interests.

GDF-Suez Merger
--------------


3. (U) While Parliament reviewed the energy bill, the heads of both
companies agreed on how to divvy up management responsibilities of
their combined group. Suez Chief Executive Gerard Mestrallet will
become Chairman and Chief Executive of the new entity, while GDF CEO
Jean-Francois Cirelli will become Vice-Chairman and President. The
merged group is expected to become operational from January 2007.
According to the presentation document on the Suez website, the
merged group will have six separate businesses. In terms of its gas
operations, GDF-Suez will be the number one buyer and supplier of
gas in Europe and manage the largest gas transportation and
distribution network in Europe. The new group also expects to be
the fifth largest producer and supplier of electricity in Europe and
a "world leader" in liquefied natural gas (LNG).

European Commission approves merger following concessions
-------------- --------------


4. (SBU) The European Commission lifted a key obstacle to the tie-up
by giving its green light to the proposed plan on November 14, which
should ensure the new group is operational as of 2007. To obtain EU
approval, the two groups made a number of proposals focused on
Belgium, where the companies would have had considerable market
power as a merged entity. Under the proposals, GDF will sell its
25.5 percent stake in the Belgian electricity company SPE, which is
the main competitor of Electrabel, the Suez subsidiary. Electrabel
accounts for 90 percent of Belgium's electricity production and
operates the seven nuclear reactors producing electricity in the
country. Suez, for its part, will sell its stake in another Belgian
subsidiary Distrigaz. However, the new group will retain 70
terawatts/per hour supplied under long-term contracts held by
Distrigaz. The new group will also have a presence in Germany,
Italy, Eastern Europe, Spain, Portugal, and, outside Europe, Brazil,
the United States, the Middle East and Thailand.

Additional steps for GDF-Suez merger
--------------


5. (SBU) There are a few more hurdles to clear before the firms can
complete their merger. The Constitutional Court will review the
merger at the request of the Socialist and Communist Parties by the
end of November. Following a green light from the companies'
respective employee representatives, the firms will submit the
merger agreement to the Suez and GDF boards. They will also call
for shareholders meetings on November 22, and announce the terms and
conditions of the merger to be submitted to approval vote at two
extraordinary general meetings, to be scheduled on November 29.
A limited electricity and gas market opening
--------------


6. (SBU) The Senate confirmed National Assembly amendments to the
GOF bill that stray from EU energy directives designed to open up
gas and electricity markets to full competition by July 1, 2007.
The new provisions institute a "transitory market adjustment
regulated tariff" for two years beyond the July 1, 2007 EU deadline
for full energy market opening. This new tariff will be established
by government order from the Junior Industry Minister, who is in
charge of energy. Energy suppliers using this new tariff will
receive compensation from the government. The compensation will be
proportional to the volume of nuclear or hydro-based production the
preceding year. Ministry of Economy, Finance and Industry Director
General Dominique Maillard (Under Secretary equivalent) said the
tariff would be in place for only two years and was necessary to
sell the bill politically. If the GOF asserted that the purpose of
deregulation was to increase competition and thus lower fares, "the
population would object" if prices contrarily rose, he said.


7. (SBU) Furthermore, the Senate approved the National Assembly's
transformation of the role and make-up of the CRE ("Commission de
Regulation de l'Energie"),which the legislature viewed as too
independent and market-oriented. Parliamentarians and one consumer
representative will now sit on the board of the CRE, which currently
includes only senior civil servants. A new four-member committee
within the CRE will be responsible for settling disputes and
applying sanctions. It is not yet clear how these members will be
nominated. However, the Chairman of this new committee will become
the National Mediator for Energy, a new position that the bill has
not defined clearly.


8. (SBU) In an electoral year, these moves have a clear political
content, according to Cambridge Energy Research Associates (CERA)
Electricity and Gas Director Jean-Marie Chevalier. The price freeze
introduced by Parliamentarians is designed to raise an imaginary
wall of protection against higher gas prices. In an attempt to
ensure that this wall would remain in place, Parliamentarians had
limited the CRE's independence in overseeing the French gas and
electricity markets, Chevalier told us on November 13. The new
regulated tariffs are bound to raise a few eyebrows within the
European Commission. Maillard told us that the GOF will address the
Commission's questions matter-of-factly and was confident the
Commission would be satisfied.

Comment
--------------


9. (SBU) Parliamentary approval of the French energy bill and the
European Commission's endorsement of the Suez-GDF merger are major
victories for the French Government and Economy and Finance Minister
Thierry Breton. Despite opposition from unions and a threatened,
unprecedented filibuster by Social Party (PS) and Communist Party
(PC) opposition lawmakers, the GOF succeeded in maintaining its
original early 2007 timetable for both the Suez-GDF merger and
implementation of the 2003 EU gas and electricity directives. The
bill's provisions that could ultimately compromise the market
regulator's independence, and that continue the GOF's role setting
energy tariffs, are causes of concern among supporters of further
liberalization of the gas and electricity markets in France.

Stapleton