CONSIDERATIONS ON THE AGREEMENT BETWEEN ENEL AND ENI ON THE CREATION OF A JOINT-VENTURE IN THE ELECTRICITY SECTOR
PRESS RELEASE
Last May the Italian Authority of Gas and Electricity Regulation submitted to the Italian Competition Authority the final considerations contained in its investigation into the agreement between ENEL and ENI on the creation of a joint-venture in the electricity sector. The Competition Authority agreed such thoughts and pointed out that the new company will be in line with the liberalization of the electricity industry only on condition that ENEL would sell its own shares, according to defined ways and in a reasonably short time.
The Competition Authority wrote to the Italian Authority of Gas and Electricity Regulation, after having met representatives from ENEL and ENI to gather information about the agreement. A broad summary of the document submitted to the Authority of Gas and Electricity Regulation is provided as follows.
The liberalization of the electricity industry
The Competition Authority said that the possibility to promote effective competition, which was not limited to exports, in the market concerned, involved the need to start a process of assigning control of a certain number of plants owned by ENEL at present. In fact, it is unrealistic to expect competition in the generation phase to be fostered in the short-term simply because of the installation of new plants. In this framework, in line with the liberalization of the electricity industry, which was promoted by Directive 96/92/EEC, ENEL privatization had to exclude the risk of leaving unchanged the current monopoly in the electricity industry. Such a risk should not be reduced by enabling a particular segment of domestic demand to address directly the marketplace, if ENEL could maintain, at a national level and for an undefined length of time, a dominant position even in the supply of electricity to this particular segment.
The agreement between ENEL and ENI
The recent actions taken by ENEL were to be placed in this context. In particular, it was to be noted the memorandum of agreement signed last May between ENEL and ENI and aimed at promoting cooperation in the production of electricity. The creation of a joint-venture with ENI should permit ENEL to avail of a company to supply future the free market with electricity, so as to prevent that such a market would be served by only imports of electricity from abroad. After having modernized the plants of the joint-venture, the new company should gain 33 per cent of the free market.
In the above mentioned memorandum of agreement, the parties agreed to find new shareholders, who would provide not only ordinary cash flows, but also necessary resources to complete the investment plan needed to modernize plants. The entry of new shareholders into the joint-venture could cause the loss of ownership and control of the new company by one of the two parties. This would be possible only following the reception of Directive 96/92/EEC by Parliament and the review of the present concession to Enel, which was renewed recently.
The framework for the agreement
The Competition Autority found that Italy is a net electricity importer for more than 37 million kilowatts, equal to about 16 per cent of total energy needed to sustain the ENEL network. 90 per cent of such imports comes from France and Switzerland. The ENEL network's interconnection capacity to networks located abroad is lower, in a percentage up to a maximum level of 24%, than the capacity of the main European countries'networks, especially if compared to the two above mentioned states. Many potential customers likely to acquire electricity in the free market, both national and international, are based in the central and northern regions, where remarkable shortages of electricity net production exist. Infrastructure resources (interconnection capacity and interoperation of networks, transmission effective capacity) being equal at the start of the free market, the Authority said that the technical ties characterizing the interconnection capacity of the ENEL network could have anticompetitive effects, as preventing foreign generation companies, which could offer cost advantages, from entering into the free market. Furthermore, ENEL has to recover efficiency, compared to other companies working in competitive markets: for instance, according to information supplied by ENEL, there are on average 75 employees per gas/oil power plant in the United States, whereas there are 260 employees per gas/oil power plant in Italy. Considering such efficiency discrepancies (which make current imports profitable) and given that ENEL owns the interconnection networks and runs the transmission activity, the company does not seem to be incentivated to refrain from opportunistic behaviours within the interconnection activity, so as to limit or impede the entry of the most likely potential Italian customers into the international market.
Promotion of competition and ENEL privatization
In this context the Authority felt that the creation of a joint-venture, as the one described in the memorandum of agreement signed between ENEL and ENI, could impede effective competition in the free market of electricity.
This situation could be avoided only on condition that ENEL would sell shortly its shareholding in the new company, interconnection capacity and interoperation of networks being equal.
Furthermore, ENEL should be privatized in conjunction with the liberalization of the market. As the Competition Authority pointed out last April, such a privatization should lead to increase gradually the number of independent and private operators, who would be able to participate in the electricity generation phase. Indeed, the experience of other countries, which privatized and liberalized the electricity industry, showed that the presence of a company enjoying a dominant position made competition in the generation phase difficult to pursue, by only allowing new operators to enter into the market.
ENEL's managing director, Franco Tatò, declared to the 10th Commission of the Chamber of Deputies in the course of a hearing held May 27th, 1997, that the creation of a joint-venture with Eni was an occasion to increase the value of ENEL's plants, instead of selling them at a lower price than expected. The Competition Authority said that this approach was in line with the transfer of ENEL's shareholding in the joint-venture, according to defined ways and in a short time. In so doing the constitution of a dominant position in the domestic segment of the free market would be prevented and the liberalization of the market would not be delayed, so as to promote effective competition.