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Lucia A Keegan  11/28/2006 09:57:12 AM  From  DB/Inbox:  Lucia A Keegan

Cable 
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UNCLAS    SENSITIVE     PARIS 07422

SIPDIS
cxparis:
    ACTION: ECON
    INFO:   ENGO SCIO TRDO ESCI FCS POL ORA AMB AGR LABO
            DCM ECNO UNESCO ECSO SCI

DISSEMINATION: ECONOUT /1
CHARGE: PROG

APPROVED: ECON:TWHITE
DRAFTED: ECON:FRADOVIC
CLEARED: ECON:SDWYER/HSULLIVAN; POL:WHOWEN

VZCZCFRI596
RR RUEHC RUCPDOC RHEBAAA RUCNMEM RUEANFA
DE RUEHFR #7422/01 3211153
ZNR UUUUU ZZH
R 171153Z NOV 06
FM AMEMBASSY PARIS
TO RUEHC/SECSTATE WASHDC 3167
INFO RUCPDOC/USDOC WASHDC
RHEBAAA/USDOE WASHDC
RUCNMEM/EU MEMBER STATES
RUEANFA/NRC WASHDC

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