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Is the liberalisation of the French energy sector gathering momentum?

Deregulation is making the energy sector more attractive to investors all over the EU. In France, however, there are unique factors that have made liberalisation more difficult to implement. Dominique Brault of Coudert Brothers explains the issues and provides an overview of the situation in France, as well as the possibilities for the future.

In France, as in all the EU member countries, the energy sector is in the midst of important changes, primarily due to deregulation. This article considers certain features of the French energy sector which have hindered liberalisation.

The principles set forth by the EU energy directives (below) are well-known including, for example, facilitation of access to transmission and direct sales by generators to certain eligible customers. These directives have unique implications for liberalisation in the context of the French energy markets.

Nationalization occurred in France more than fifty years ago, as part of the reconstruction of France following World War II. Since then, the French Government has maintained a tight hold on energy policy, particularly with a view to ensuring continuity of supply. Deregulation and privatization in the electric sector are recent phenomena - the Government relaxed its control over oil companies in the early 1990s, and continues to maintain control of the country's electricity and gas "champions": Electricité de France ("EDF") and Gaz de France ("GDF"). These companies were entrusted with monopoly powers with respect to transmission, the import and export of electricity (in the case of EDF) and the import and export of gas (in the case of GDF).

The nationalised structure of utilities has proven very difficult to change in France, largely due to the strong political influence of trade unions. Labor troubles arise whenever legislators suggest any reform, however tentative, that threatens the privileged status of the personnel or the concept of public service endorsed by organized labor.

Slow Implementation

These historical characteristics help to explain why France has historically taken a low-profile stance on energy market liberalisation, and why France has been slow to implement the EU energy directives. The French law for the deregulation of electricity was adopted on February 10, 2000 - one year after the date when it should have been implemented according to the terms of the 1996 EU directive. In addition, a number of decrees necessary for implementation of the electricity law still have not been issued. As for gas, the deregulation bill currently under consideration is not likely to be adopted by Parliament until the end of 2002, even though the 1998 EU directive called for adoption of such legislation by August 10, 2000.

Also, unlike some other EU member countries, France adopted only the bare minimum of the obligations defined by the EU electricity and gas directives. The French law deregulating electricity limits the "opening threshold" (in a gradual deregulation process, the first portion of the market to be deregulated) to 800 industrial sites, which represents less than 30% of the national consumption of electricity. Similarly, the current draft law on gas deregulation would limit the opening threshold to the minimum 20% prescribed by the directive. As a result, no more than about 150 industrial customers will be free to choose their supplier.

The following additional characteristics have also contributed to the slow pace and minimal standards of liberalisation in the French energy sector:

1.   EDF is required to buy electricity supplied from small independent producers and producers of renewable energy. The costs it incurs as a result of such purchases are compensated from a special fund to which all operators must contribute.


2.  One provision of the law governing the energy sector requires that energy supply contracts be for a minimum of three years - a restriction which makes it difficult to switch to a different supplier (and which raises questions as to the compatibility of that provision with the competition principles of the EU directives).


3.  Physical trading of gas and electricity is not free, but is subject to a ministerial authorization which may be granted only to producers or their subsidiaries.


4.  One of the requirements for obtaining authorization to operate new electricity-generating installations is compliance with applicable labor legislation. Currently, this implies that new entrants must raise their labor standards to the privileged level enjoyed by EDF employees, which limits the ability of new generators to compete on the basis of lower labor costs.


5.  Free access to gas storage is not guaranteed at this stage by the EU directive, which serves GDF's interests, as it maintains effective control of such facilities for its own use.

Some Progress

Nevertheless, liberalisation is well on its way, supporting the view that competition is too strong an incentive to be curbed indefinitely. A growing number of eligible customers have changed to private suppliers of electricity, and EDF has lost several important contracts. In addition, a specialized regulator, the Commission de Régulation de l'Electricité ("CRE"), was created in March 2000 to ensure free access to the grid in conjunction with the transmission system operator. GDF has opened access to its network to eligible customers, has internally separated its trading and transmission activities and has posted network access tariffs. Its domestic market competitors, Gaz du Sud-Ouest ("GSO") and Compagnie Française du Méthane ("CFM") have also taken the steps required to comply with the directive even though the implementation law has not yet been passed.

In addition, the reforms appear to be gaining some momentum. For example, after initially resisting implementation of the EU measures, EDF is now requesting that the government accelerate the opening of thresholds and speed up the liberalisation process. According to the CRE, the French energy market is now more effectively open to competition than the German market, which is officially 100% liberalised but is open only to German companies.

Prospects for Privatisation

In the prevailing atmosphere of slow reform in the French energy sector EDF, a highly competitive regional operator, has financed an enviable expansion in other countries.

This is likely to continue, given the new liberal government's recent announcement of its intention to privatise a portion of EDF and GDF. However, in the long run, the power of competition may prove too strong, even for EDF's powerful supporters.

Dominique Brault is a consultant in the Paris office of Coudert Brothers (Coudert Frères). Dominique is the author of several works on antitrust law and politics, and President of AFEC, the French Antitrust Studies Association. His experience encompasses antitrust law and public economic law. He has participated in the establishment and drafting of antitrust legislation in a number of countries, including Russia, Slovakia, Hungary and Morocco.

The EU Energy Directives

The legislative keystones of energy market liberalisation in Europe are the Electricity Directive (96/92/EC), which came into effect in 1997, and the Gas Directive (98/30/EC), which came into effect in 1998. Rather than create a uniform European system of energy regulation, these framework directives state general principles for the liberalisation of electricity and gas markets in EU countries. According to the principle of "subsidiarity" each country must implement these general principles through national energy legislation.

The major principles of the EU directives are:

1. Establishing "objective transparent and non-discriminatory" criteria for granting authorizations and/or conducting tenders for participation in particular undertakings, such as the construction of new networks, facilities and generation capacity.

2. Unbundling accounts as between different energy undertakings (e.g. for electricity, generation, transmission and distribution), and ensuring transparency in the pricing of each separate undertaking, whether through actual separation of enterprises or separate accounting.

3. Ensuring the right of third party operators to access to the system, particularly transmission networks; and

4. Ensuring the right of eligible customers to enter into supply agreements directly with the undertakings of their choice.

European countries are now at various stages of compliance with the directives. The Italian "Bersani Decree" (see Kuehne/Odescalchi article) and various French laws and decrees (see Brault article) are examples of the legislative efforts undertaken by EU states to comply with the EU directives.

This article was taken from Currents, Europe, a newsletter published by Coudert Brothers LLP which deals with legal issues and developments in energy, infrastructure and global project finance in Europe. For further information please visit www.coudert.com.