Outlook: French electricity

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THE FRENCH have succeeded in stitching up both British Energy and the European Commission to win the auction for London Electricity. But whether the Trade and Industry Secretary Peter Mandelson will be so easily outflanked remains to be seen.

First British Energy. Electricite de France agreed to remain in the auction for London on condition that its owners, Entergy of the US, paid it a "break fee" if the business was sold to the only other bidder left in the race, British Energy. This break fee was equivalent to 2-4 per cent of the eventual bid price, meaning that in order to match the French offer, British Energy would have had no option but to overpay.

Knowing that Entergy was desperate to have the money its hands as soon as possible, EdF twisted the knife a bit further by making its bid unconditional on regulatory clearance. This is where the Commission comes in. Under EC rules, a bidder can be fined heavily for making an offer unconditional before Brussels has had an opportunity to vet the deal. However, EdF secured a dispensation from the EC - the first such occasion this has occurred - allowing it to bid unconditionally without fear of punishment.

This does not automatically mean the deal will be cleared by Brussels. But having given EdF a dispensation, it would be odd if the EC decided then to block the takeover.

Will Mr Mandelson be so well disposed towards the French? Unlike previous foreign takeovers in the electricity sector, this bid raises concerns for two reasons. First, EdF itself cannot be taken over because it is state-owned. Second, this deal amounts to vertical integration because EdF already supplies 7 per cent of the UK market through the interconnector from France.

Mr Mandelson is not too impressed by the fact that the interconnector only runs one way. As for back-door renationalisation of London, that would never have been allowed under the Lilley doctrine. But remember this is new Labour and Mr Mandelson is its most ardent advocate of privatisation. Brussels may keep the right to vet the merger, but EdF has to rely on the British authorities to transfer London's licence. EdF could be unstitched yet.