France: Electricity Liberalisation in France: Slow Start, High Pace

France has been late in implementing the EU Electricity Directive of 19 December 1996 (the "EU Directive"). The French Electricity Act of 10 February 2000 (the "Electricity Act") was published nearly one year behind schedule and it took a number of additional months until the key implementing decrees were published. Even today, certain pieces of the new French electricity jigsaw are still missing, although it is fair to say that most of the regulatory framework is now in place. In parallel, Electricité de France (EDF) has launched an unprecedented wave of acquisitions and joint ventures in neighbouring countries over the last years, that is gradually turning a ‘one-country/one-product’ company into a multinational global energy player. To mention but a few of these: the acquisition of London Electricity, South Western Electricity and Cottam Power Station in England and Wales, the setting up of a trading subsidiary with Louis Dreyfus (EDF Trading), the acquisition of a controlling interest in Germany’s EnBW, the continuing developments in Brazil and Argentina and recently, the highly scrutinised acquisition, together with FIAT, of a non controlling stake in Italy’s Montedison.

In this context, many have accused EDF of taking unfair advantage of an incomplete and late liberalisation at home to expand outside its domestic boundaries. Although still widely accepted by some, this litany is more and more contradicted by facts. It is worth highlighting that all the acquisitions/joint ventures mentioned above, when referred to the EU antitrust watchdogs, have been cleared, sometimes in consideration of significant undertakings.

Slow in the early stages, the pace towards liberalisation of the French electricity market is now accelerating and, although still far from being fully opened, the French electricity market is no longer EDF’s private domain.

After more than half a century of monopoly, the Electricity Act is reshaping the French electricity market. The very title of the Electricity Act ("An Act relating to the modernisation and development of the public service of electricity") reflects its twofold objective: the modernisation of the public service on the one hand and the gradual opening up to competition on the other hand. Some, but not all, of the main provisions of the Act are described below.

Section 1 of the Act defines the public service of electricity as aiming to "guarantee the supply of electricity throughout the territory, in accordance with the general interest". In this view, the public service of electricity "contributes to the independence and security of supply, quality of air, deterrence of global warming, optimum management and development of the nation’s resources, monitoring of energy consumption, competitiveness of economic activity, management of future technological choices and rational use of energy". It further "contributes to social cohesion by satisfying everyone’s right to electricity" and is managed in accordance with the principles of "equality, continuity and adaptability, and the highest standards of safety, quality, costs, price and economic, social and energy efficiency". These general principles are substantiated in various provisions dealing respectively with the steady supply of electricity to the country, rational service of the territory by the public transmission and distribution networks, non-discriminatory access rights to these networks, supply to non- eligible consumers at equal tariffs whatever the geographic zone, back-up supply, etc.

EDF and, to a lesser extent, local distributors, are entrusted with the above public service obligations and as such, are entitled to compensation for costs associated therewith (the "public service obligations charges"). The Electricity Act enumerates the limited number of public service obligations charges that can be offset, i.e. only (1) the extra costs of certain generation contracts under which EDF has an obligation to purchase electricity at non-market price (mainly CHP generation plants, renewables, etc.) and (2) the extra generation costs in remote and non-interconnected areas. The above extra costs are offset by a public service electricity generation fund, managed by the Caisse des Dépôts et Consignations (Section 5 of the Electricity Act). As of September 2001, neither the decree implementing this fund nor the one setting up the transmission tariffs are yet published and, as a result, the compensation for public service obligations charges are ‘included’ in the transitional tariff applied by the grid operator, RTE.¹

Energy planning, aiming at guaranteeing the safe and steady supply to the territory, remains one of the main prerogatives of the government in the field of electricity. Sections 6 to 11 of the Electricity Act provide for a multi-year generation investment programme to be drawn up before the end of 2002 and organises an authorisation regime for new generation capacities, on which the minister has the last word. In certain circumstances, the minister of energy may call for tenders to install new generating capacities.

However, it is public knowledge that the existing generating capacities in France exceed by far the domestic demand, and France has been a net exporter of electricity for more than a decade (respectively 63.1 and 69.5 TWh in 1999 and 2000).² Therefore, it is not anticipated that any significant development of large new generating capacities will be undertaken before approximately 2010, the year in which certain existing nuclear plants are expected to be de-commissioned. Currently asleep, the crucial debate on the renewal of existing plants (will France renew, partly or fully, its nuclear installations, the world’s largest) is likely to start afresh in the next few years.

Pursuant to Chapter III of the Act, the high voltage grid (the transmission network) is operated by an independently managed entity within EDF. Although the grid operator has not been legally dissociated from EDF, a number of provisions are in place to ensure that it is, both in fact and in law, operating the network on a non discriminatory basis. Réseau de Transport d’Electricité ("RTE") has its own budget, which is controlled by the regulator, and neither its management nor its staff report to EDF. RTE is bound by strict confidentiality rules, detailed in particular in a recent decree published in July 2001.³

RTE recently took some steps that show that its independence amounts to more than words: first, in co-operation with National Grid Corporation, it granted to EDF’s competitors access capacities to the France – England interconnector known as "IFA 2000", previously allocated in full to EDF (on 5 September 2001, NGC and RTE published version 2 of the Interconnection Access Rules, as well as the quarterly auction sale specifications for October, November and December 2001); secondly, it acquired through two tender procedures the electricity necessary to compensate for transmission losses, amounting to some 12 TWh, i.e. approximately 10 % of the total ‘eligible market’. As a result, RTE has, in addition to EDF, some twenty other suppliers, both French and foreign, to provide this energy.

Ensuring a fair, transparent and non-discriminatory access to the transmission network is one of RTE’s primary responsibilities. In the case of an access dispute (no case reported yet), the regulator (CRE, see below) has extensive powers for resolving the dispute and imposing contractual arrangements on the parties. RTE is also responsible for the real-time balance of the network, its safety and efficiency. It manages the nomination programmes received, on a day-ahead basis, from all producers, importers, and traders.

RTE has published a number of standard contracts dealing with (1) connection to the network, (2) injection and withdrawal rights of distributors, consumers and producers (these delivery contracts are known as MADE, i.e. contrats de mise à disposition de l’énergie), (3) imports/exports and transfer contracts and, finally (4), in order to "facilitate the system access conditions, offer greater flexibility and improve the fluidity of the electricity market", RTE has set up Balance Responsible Entity contracts, allowing the system users to share their individual injection and withdrawal imbalances and minimise their costs. These contracts concern all the eligible customers of the system regardless of whether they are connected to the public transmission system or to public distribution systems.⁴

Access tariffs are regulated, i.e. they are set by the minister of energy upon proposals of the regulator. The decree laying down the basic rules applying to tariffs for the use of the public transmission and distribution grid was published in April 2001⁵ and the regulator submitted its proposal to the minister a few days after the publication of the above decree. However, the actual tariffs are still, as of mid-September 2001, to be approved and published. Applicable tariffs are, therefore, the transitional tariffs set up by RTE (see footnote 1).

As of today, the eligibility threshold has been set by the Eligibility Decree⁶ at 16 GWh, corresponding to the minimum degree of opening imposed by the EU Directive. In what can be seen as a U-turn decision, the government attempted to lower the eligibility threshold to 9 GWh in early 2001, i.e. well in advance to the date imposed by the EU Directive (February 2003). However, having regard to the strict wording of the Act, the attempt was rejected by the French State Council and the government agreed to comply with the State Council’s advice.

The present degree of opening corresponds to some 30 % of the market, i.e. around 1,300 eligible consumers whose aggregate annual consumption amounts to approximately 125 TWh. Further lowering of the threshold, in February 2003 at the latest, should correspond to some 34 % of the market.

Set up by Chapter VI of the Act and effectively created on 24 March 2000, the Commission de Régulation de l’Electricité ("CRE") is an independent administrative authority whose powers and scope of jurisdiction make it very much similar to other French regulators, such as the telecom’s ART. Its regulatory role comprises mainly (1) advising the government and legislator in nearly all matters relating to electricity, (2) the close monitoring of the rules governing the access to the networks and compliance therewith, (3) the auditing of EDF’s unbundled accounts and (4) sanctions against infringements in certain cases, mainly in relation to network access.

Over a few months, the CRE, despite limited staff, has been extremely active and has acted in a pro-active and transparent way in numerous matters ranging from the interconnection with neighbouring countries, the necessary amendments to public procurement rules in relation to electricity matters, the promotion of electricity trading in France, the creation of a power exchange, the unbundling of EDF’s accounts, the setting of transmission tariffs, etc.

A genuine wholesale market does not yet exist in France but is likely to emerge rapidly with the creation, later this year, of a ‘balancing market’ on which, through a bidding system (offering either higher or lower prices), the market players will let RTE know the technical and financial conditions on the basis of which the latter will be able to modify the market players’ generation or consumption programmes. RTE will make up for any imbalances by selecting offers, after having ranked them according to a merit order criterion.

Similarly, trading is likely to develop very quickly, the CRE having voiced its strong support based on the very wording of the Act, in spite of the legislator’s unambiguous desire to confine trading to "physical trading" (see in particular the CRE statement dated 6 September 2001⁷).

Another accelerating factor will be Paris’ power exchange, Powernext, once it effectively becomes operational later this year. Powernext S.A. was created on 26 July 2001 with a capital of 10 million Euros, held by major players in electricity trading and financial markets.

Euronext and a holding company of European transmission system operators called HGRT (initially set up with RTE), hold 34% and 17%, respectively, of its shares. The remaining 49% of Powernext is equally distributed among BNP Paribas, Electrabel, Electricité de France, Société Générale, and TotalFinaElf. According to RTE’s press release of 26 July 2001, Powernext will be "the only power exchange to organise transactions recognised as deliverable to any point in the French electricity grid which is considered to be a hub with no pre-set points of injection or withdrawal. This way, the traded products will have a single price schedule. The members will manage their own access to the interconnections with the transmission system operators concerned, for their transactions on Powernext and for their off-exchange bilateral transactions".

Despite obvious trends towards faster liberalisation, the French electricity market remains characterised by the absence of significant generators able to compete with EDF on the basis of generation capacities installed in France. Two exceptions are worth mentioning: SNET, the energy subsidiary of the French coal utility Charbonnages de France and CNR, a generator operating 18 hydro-plants along the river Rhône, have recently been "emancipated" (to quote CRE) in relation to EDF as a result of a government-sponsored process. They were given the opportunity to join forces with two other major European producers – ENDESA of Spain which has taken up 30% of the capital of the SNET, and Belgium’s ELECTRABEL which has created, with CNR, a company for the commercialisation of hydraulic production, ENERGIE DU RHONE.

In addition, in accordance with the undertakings accepted by EDF in the context of the acquisition of a controlling stake in EnBW, Germany’s 4th largest producer, EDF recently sold 1200 MW of virtual power capacity to some 20 competitors (generators, traders, etc.), both French and foreign. In total, EDF will make available some 4000 MW of base-load capacity, 1000 MW of peak-load capacity and 1000 MW of co-generation contracts to competitors, in periodical auctions organised until 2003.

Although still significantly influenced by one major player, the French electricity market is evolving at a rapid pace that was hardly conceivable a few months ago. By contrast, no progress has been made towards liberalisation of the French gas market⁸. France has already missed the August 2000 deadline and the situation is not likely to evolve until next year’s presidential election.

1. Available at http://www.rte-france.com/htm/an/offre/offre_acces_tarif.htm
2. "L’énergie en France – 2001", published by the French ministry of energy, available at http://www.industrie.gouv.fr/cgi-bin/industrie/frame0.pl?url=/energie/sommaire.htm.
3. Decree 2001-630 of 16 July 2001, French Official Gazette N° 165, 19 July 2001, p. 11592.
4. See : http://www.rte-france.com/htm/an/offre/offre_acces_comment.htm
5. Decree 2001-365 of 26 April 2001, French Official Gazette N° 100 of 28 April 2001, p. 6729.
6. Decree 2000-456 of 2 May 2000, French Official Gazette of 4 May 2000.
7. http://www.cre.fr/communiq/cp1_06_09_01.htm
8. Although Gaz de France has adopted some transitional measures aiming at guaranteeing access to its network to "automatic" eligible consumers under the Gas Directive.

"© Herbert Smith 2002

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