VZCZCXRO3907
RR RUEHAG RUEHDF RUEHIK RUEHLZ
DE RUEHFR #6678/01 2830917
ZNR UUUUU ZZH
R 100917Z OCT 06
FM AMEMBASSY PARIS
TO RUEHC/SECSTATE WASHDC 2047
INFO RUCPDOC/USDOC WASHDC
RHEBAAA/USDOE WASHDC
RUCNMEM/EU MEMBER STATES
RUEANFA/NRC WASHDC

UNCLAS SECTION 01 OF 02 PARIS 006678 
 
SIPDIS 
 
SENSITIVE 
SIPDIS 
 
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: NATIONAL ASSEMBLY APPROVES NEW ENERGY BILL 
 
REF: PARIS 1697 
 
NOT FOR INTERNET DISTRIBUTION 
 
Summary 
------- 
 
¶1. (SBU) On October 3, the National Assembly approved an energy bill 
to:  1)  open up the French gas and electricity markets to full 
competition by the EU deadline of July 1 2007, and 2) authorize the 
further privatization of the national gas utility, GDF.  If 
supported by the Senate as expected, further privatization will pave 
the way for GDF's expected 70.8-billion-euro tie-up with the 
French/Belgian energy conglomerate, Suez.  Most of the ruling UMP 
party voted for the bill, while the Communists and Socialists 
overwhelmingly opposed.  While the bill's intention was to transpose 
EU energy directives into local law, National Assembly members added 
provisions that would regulate the prices consumers pay beyond the 
2007 liberalization date.  The EU Commission may object to these 
controlled tariffs, and will have to decide on the implications the 
GDF-Suez merger will have on competition in various national energy 
markets.  Failure to obtain either EU or Suez shareholder approval 
for the merger would be a political blow for Prime Minister 
Villepin's government.  End Summary. 
 
Implementing EU Energy Directives: Potential Trouble Ahead 
--------------------------------------------- --- 
 
¶2. (SBU) On October 3, the National Assembly approved the GOF energy 
deregulation bill by 327 votes in favor versus 212 against.  The 
bill's intent was foremost to transpose into local legislation the 
2003 EU electricity and gas directives designed to open up member 
state markets to full competition by July 1, 2007.   However, the 
National Assembly introduced new provisions to the GOF energy draft 
bill that stray from EU energy directives and institute a 
"transitory market adjustment regulated tariff," beyond the July 1, 
2007 EU deadline for full energy market opening.  The Industry 
Junior Minister in charge of energy will issue a government order 
every two years establishing the tariff for the following two years. 
 The bill requires nuclear and hydro electricity producers with 
installations of over 2,000 megawatts to pay into a fund (at a rate 
based on the volume of their production the previous year) that will 
be used to subsidize gas suppliers. 
 
¶3.  A legal adviser for the Secretary General for European Affairs, 
tasked with French implementation of EU directives, told us that the 
EU Commission would undoubtedly issue a warning to the GOF regarding 
these new tariffs.  Last April, the Commission launched proceedings 
against France (and 15 other member states) for inadequate 
implementation of EU energy directives.  Furthermore, to ensure that 
the French Energy Regulatory Authority CRE ("Commission de 
Regulation de l'Energie") applies these regulated tariffs, National 
Assembly members transformed the role and make-up of the CRE, which 
they regarded as too independent and market-oriented, by adding four 
parliamentarians, two representatives chosen by parliamentary 
leaders, and one consumer representative to the regulatory 
authority's board. 
 
¶4.  Against a backdrop of higher gas and oil prices, observers say 
the moves are aimed at voters in the run up to the National Assembly 
and presidential elections, now seven months away.  Cambridge Energy 
Research Associates Electricity and Gas Director Jean-Marie 
Chevalier told us this "price freeze" would lull the French people 
into believing that "they are protected" from market realities.  He 
claimed that French Parliamentarians from all political parties, 
whether in the National Assembly or the Senate, wanted to restrict 
the scope of many EU directives related to market liberalization. 
The Senate begins consideration of the GOF energy draft bill during 
the week of October 9. 
 
Merger between GDF and Suez 
--------------------------- 
 
¶5. (SBU) The energy bill paves the way for the privatization of 
state-owned gas group GDF and its merger with Franco-Belgian energy 
company Suez.  More specifically, it allows the state to lower its 
equity stake in GDF from 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 around a third (a specific percentage of state 
ownership has purposely been avoided to keep GDF's options as open 
as possible). 
 
¶6. (SBU) The European Commission has allowed the French Government 
 
PARIS 00006678  002 OF 002 
 
 
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. 
 
¶7.  (SBU)  First proposed by Prime Minister de Villepin last 
February, the merger between GDF and Suez has been generally viewed 
as an attempt to block a proposed takeover bid for Suez by the 
Italian group Enel.  President Jacques Chirac stated emphatically 
then that the tie-up was essential to mobilize the large financial 
resources needed for investment:  "We have in France a major 
electricity company, EDF; a major nuclear company, Areva; a major 
oil company, Total; and a minor gas company - GDF." 
 
¶8. (U) If approved by the EU Commission and Suez shareholders, the 
merger will create the biggest gas group in Europe, and Europe's 
fifth-largest producer of electricity.  GDF controls the gas sector 
in France and is also active in other European countries, most 
notably Belgium.  It recently began operating in the electricity 
sector in France, Belgium and Britain.  Suez, for its part, operates 
in the gas and electricity sectors and also provides energy, water 
and environmental services.  Its energy sector operations are 
concentrated in Belgium, via its subsidiaries Distrigaz and 
Electrabel, but it recently entered the French gas and electricity 
markets as well. 
 
Opposition and filibustering 
---------------------------- 
 
¶9. (SBU) Communist and Socialist parliamentary members filed a 
record 137,449 proposed amendments (many of which were almost 
identical) to the bill.  However, the opposition's tactics failed to 
force the government to resort to an emergency procedure known as 
Article 49.3 to push through the measure without a vote.  The 
opposition is now getting ready to appeal to the Constitutional 
Council  once the bill has been approved by the Senate. 
 
¶10. (SBU) The ruling center-right Union for a Popular Movement (UMP) 
party also faced a revolt in its own ranks.  Many UMP 
parliamentarians were unenthusiastic about the bill.  But in the end 
only 10 UMP representatives joined the Socialist, Communist, and 
most of the Union for French Democracy (UDF) representatives in 
voting against the bill. 
 
¶11. (SBU) A number of trade union federations called for a day of 
strikes and demonstrations across France on September 12, and again 
on October 3 to signal their unhappiness with the privatization of 
GDF.  These failed to gain traction, with many citing demonstration 
fatigue in the wake of protests against the government's youth 
employment scheme earlier in the year.  Perhaps the most 
politically-charged action was the replaying of a 2004 video in 
which then-Economy and Finance Minister Nicolas Sarkozy declared 
that the State share of GDF would not fall below 70 percent.  These 
tactics have received press coverage but have failed to become a 
catalyst for social protest. 
 
Merger Still Faces Obstacles 
---------------------------- 
 
¶12. (SBU) Although the GOF overcame its largest hurdle to the 
GDF/Suez merger with National Assembly passage of the energy bill, 
other obstacles remain.  The European Commission has already sent 
the French Government and GDF a letter outlining possible 
impediments to the merger, including concerns that a merged EDF-Suez 
would nearly monopolize the French and Belgian gas markets.  The 
Commission prolonged its review of the merger proposals from the 
original October 25 deadline to November 17 after initial 
concessions the two companies provided in September failed to 
assuage concerns.  GDF and the European Commission have expressed 
concern about Government of Belgium talks (to which GDF has not been 
party) with Suez aimed at divesting a portion of its nuclear power 
generating capacity.  Finally, shareholder approval of the merger 
cannot be taken for granted.  Some prominent shareholders have 
presented alternative proposals to the GOF and lobbied against the 
merger in its current form to the press.  Shareholder rejection of 
the proposed merger would be a severe embarrassment to Prime 
Minister Villepin's government, which lobbied vigorously for the 
energy bill's passage. 
 
HOFMANN