The European Commission has made clear it will clamp down on anti-competitive practices in energy markets and has pushed for the break up of big utilities, but for their share prices this could eventually be good news.
The European Union in September is expected to announce a series of legislative proposals and to tackle the contentious issue of unbundling - or forcing big utilities that generate power to sell or spin-off distribution assets to try to stimulate competition.
Analysts say the commission has signalled its determination to be tough and its belief more action is required by announcing a series of anti-trust proceedings, but that does not mean investors should abandon utility stocks.
"The anti-trust proceedings add an element of uncertainty to the companies, which is rarely appreciated, and if there is any hint that there could be fines, clearly this is unwelcome," said Geraint Anderson of Dresdner Kleinwort.
But he said any break up of giant companies could boost share prices, not least because it would make them "more vulnerable to potential take-over." "It also adds focus to the groups, which is generally appreciated by investors," he added.
British companies have already been through the process. Share prices of the incumbents fell following the full opening to competition in 1996 and then in 1997 when the full unbundling of the former monopolies was completed.
They later rebounded and that could happen elsewhere. "If they were to demerge their network businesses in the way that has happened in the UK and maybe also separate off their supply businesses too, you would have to assume that returns could be very high in future, based on what's happened here," one industry source said.
Although unbundling would pave the way for more competition, it would also force incumbents to become more efficient and cut costs, "which must be in shareholders' interest," the source added. The former gas monopoly British Gas, for instance, was split into BG Group and Centrica.
Investors in British Gas were given one share in BG Group and one in Centrica in exchange for their old shares. Centrica shares have risen from 64.82 pence when they were first traded on February 17, 1997, to around 340 pence on Monday. Shares in the old British Gas fell to lows below 100 pence in 1996, according to Reuters data, and closed at 247.5 pence on February 14, 1997. BG Group is now trading at around 770 pence.
Comparisons are inexact because there are so many factors at play, but gains in Centrica and BG look favourable compared with the performance of huge European incumbents. The world's largest utility, Germany's E.ON fell to around 40 euros in late 1996, recovering to close to 50 euros in February 1997 and to around 116 euros now.
Since its listing at the end of 2005, shares in Electricite de France have risen from just over 30 euros to around 70 euros. Both firms are among those subject to EU anti-trust proceedings. The European Commission said in July it had opened proceedings against E.ON and Gaz de France over an alleged deal to stay out of each other's home markets.
Days earlier it had announced the opening of anti-trust cases against Electricite de France and Suez, saying the dominant electricity suppliers to France and Belgium had tried to close their markets to competitors. Analysts said it was too early to see negative effects on share prices as that would probably depend on whether proceedings resulted in fines.
Fines could be huge, but the onus is on the commission to prove its case and companies are expected to defend themselves. "These fines can be swingeing - up to 10 percent of world-wide turnover," said Stephen Rose of international law firm Eversheds. "It's a powerful weapon."
Almost as significant as any fines is the message being sent out by the commission, which has backed full, rather than partial unbundling. "Why is the commission announcing these cases now, particularly because they are announcing them at a very early stage?" asked Rose.
"Clearly the commission wants to keep the sector in the spotlight. It's looking for ammunition to say competition is not working. We need to take some steps." Countries like France and Germany are strongly opposed to unbundling and the result in September could be a compromise, such as allowing firms to keep ownership but making them hand over operation of their grids to an independent system operator.
That outcome might generate far less upside for share prices. "It would probably be just a bit of disruption and a few associated costs and should therefore have little positive impact," said Anderson.
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