Competition commissioner wants energy giants split up

Integrated French and German gas and electricity giants were warned by the European Commission yesterday that it was considering forcing them to break up.

In a politically charged move, Neelie Kroes, the European competition commissioner, said there were too many conflicts of interest at companies that own distribution networks and also supply customers. She promised a more wide-ranging regulatory swoop to inject competition into the European energy market.

"Europe needs open markets. I am ready to force them open," she said. "There can be no real step change on energy unless the markets function openly and freely. If we are not successful in our energy policy as a commission, then we are failing as a commission."

Although she named no specific European states or companies, analysts said her primary target would be the big incumbent operators in France and German. The UK separated the supply (split between many companies) and distribution - held within National Grid - in the 1990s, while a number of other European countries are also "unbundled", including Belgium, Italy and Spain.

In Germany the obvious integrated players are EON and RWE, while in France it is Electricité de France. Although there is legal separation of distribution and supply across Europe, Ms Kroes said these "Chinese walls" were not sufficient.

She told a conference in London: "I am convinced that further unbundling of network and supply activities is needed to effectively remove conflicts of interest and to create the right investment incentives.

"Investments should be made when it is good for the network business and not only when it is good for the integrated company itself. Furthermore, network companies should not favour their own distribution or generation companies, at the expense of independent companies."

Ms Kroes said the commission had seen "indications" that legal unbundling had not prevented information flows between the network and supply.

Ms Kroes said competitors of integrated companies had to work without the necessary knowledge of what was going on in the market. "The price spikes in the UK gas market last winter and the difficulties in determining why more gas was not flowing from the Continent to the UK are a clear indication of this," she said. "If the authorities have difficulties getting the information they need, competitors of the vertically integrated incumbents must be operating completely in the dark. So regulation here may well be needed."

Brussels is investigating the workings of the European energy market and will report its findings in January.

Ms Kroes produced a long list of features that illustrated the "malfunctioning in this sector". These included too much market concentration and a "huge" lack of transparency.