Spanish energy tussle hots up

By Theo Leggett
Europe business reporter, BBC News, Brussels

Endesa is Spain's largest electricity group

A conflict is brewing between Brussels and Madrid over the Spanish government's decision to impose harsh conditions on the planned sale of the electricity group Endesa to the German firm E.ON.

Spain is facing widespread accusations of protectionism over its attitude towards the merger.

The European Commission has written to Madrid asking it to justify its position. It has demanded a response within days.

Endesa is Spain's largest electricity group. Earlier this year, it was the target of a $27bn hostile takeover bid by another Spanish utility, Gas Natural.

Such a deal would have created an all-Spanish giant, the third largest energy firm in the world.

Although the plan was opposed by Endesa itself, it was warmly welcomed by the Spanish government, which welcomed the opportunity to create a new national champion.

But then E.ON appeared on the scene - and trumped Gas Natural's bid with its own $35bn offer.

Alarm bells

While Madrid did not publicly oppose the E.ON bid, officials rapidly made it clear that they would prefer Endesa to remain firmly in Spanish hands.

E.ON's takeover offer for Endesa surprised Madrid

Within days, the government of Jose Luis Zapatero adopted a decree giving the national energy regulator new powers to veto deals which could affect strategic public interests.

In Brussels, alarm bells were already ringing.

The European Commission is becoming increasingly concerned that the effects of decades of liberalisation are being lost - as member states struggle to prevent flagship companies from falling into foreign hands.

It is worried that new market barriers are springing up to replace the ones which have already been torn down. Commissioners have repeatedly warned that protectionist measures simply will not be tolerated.

So when the Spanish decree was adopted, the Commission rapidly opened disciplinary proceedings - and called on Madrid to explain itself.

Sell-off demand

Now, the row has gone a stage further.

Earlier this month, Spain's energy regulator approved E.ON's bid for Endesa - but the approval was far from being a wholehearted endorsement.

The deal could only go ahead, the regulator said, if the merged company agreed to sell a large portion of its generating capacity and gave up control of several nuclear power stations.

It would also have to sell its assets on Spain's island territories and in the North African enclaves of Ceuta and Melilla.

Both E.ON and Endesa say they will appeal against the ruling.

Direct challenge

Spain argues that the conditions were justified under EU rules which allow cross border mergers to be blocked or amended in the interests of public security.

EU Competition Commissioner Neelie Kroes wants some answers

But to many observers, it was a direct challenge to the authority of the European Commission, which had already approved the deal unconditionally.

Last week, the Competition Commissioner Neelie Kroes wrote to Spain demanding an official explanation. Although the letter was meant to be confidential, much of its contents have been leaked to the press.

It is believed to have accused Spain of "arbitrary discrimination" against E.ON, of breaching the EU's principles of equal treatment and non-discrimination, and "interfering with the free movement of capital".

Officially, the Commission is making no comment on the affair. But sources within the EU executive believe that it will be very difficult for Spain to justify its actions.

If Mrs Kroes does conclude that Spain has indeed been acting illegally, she has the power to overturn the regulator's decision - and could do so very rapidly.