French authorities have decided that regulated electricity tariffs are anti-comp ...

French authorities have decided that regulated electricity tariffs are anti-competitive. However, while EdF will be concerned by the proposed abolition of the tariffs in the next wave of deregulation, analyst Datamonitor believes the company still retains sufficient market power to protect its dominant position. ‘Around 2.5mn French customers will be free to choose their electricity supplier come July of this year in the third tranche of French deregulation. However, where other market openings have led to competition among suppliers, the choice for French SME (small- and medium-sized) customers will be very limited, and currently rather unappealing,’ comments the analyst. ‘The major switching driver in the market - namely, price - has been undermined by regulated tariffs that are low enough to minimise margins for potential entrants to an unacceptable extent.’ Philippe Lermusieau, Director of Suez subsidiary Energie du Rhone and a Divisional Director General of Suez-owned Electrabel, said: ‘We must somehow access valuable clients, but how many will actually use their freedom of choice because the tariff is so low?’ The regulator is now considering removing these tariffs, through their definitive abolition or the alternative of a spot linked regulated tariff. However, Datamonitor believes EdF should not be unduly troubled by competition even if tariffs are removed. EdF still controls 96% of retail supply and 94% of generation. Its prices will be difficult to undercut through imports because of France’s reliance on nuclear power leading to low base prices and because the political decision to keep France independent in energy terms has led to overcapacity. ‘The overcapacity of integrated utilities in neighboring markets (RWE, E.On, EnBW and HEW in Germany, Endesa in Spain, and Electrabel in Belgium) could lead to players seeking new markets in France, although the price differential is likely to be minimal,’ says the analyst. ‘However, market concentration in generation only reflects the supply-side barriers. On the demand side, French law prohibits customers changing their minds once they enter the open market, raising concerns over switching. When combined with the apathy surrounding the energy market, prospects for successful new entrants look slim.’ The tools used to overcome this apathy - namely, sales and marketing - are also firmly in EdF’s control, says Datamonitor. ‘Just as British Gas in the UK has been able to muscle its way into leadership of the residential electricity market through a sales and marketing budget far in excess of its competitors, so EdF will have a substantial head start. If we then combine this advantage with their commercial network and client file with detailed knowledge of SME customers’ needs, brand opinions and service experience, the balance tips even further in its favour.’ ‘The new entrants’ hope for success may lie in EdF making service errors and finding those customers for whom price is no longer the key factor. Nevertheless, experiences in other liberalised markets suggest that a strong brand - and EdF's brand is one of the strongest - can often counteract the effects of individual mistakes. Whilst the regulator’s move on tariffs may therefore knock down one of the pillars of EdF’s domination of its home market, far more radical action must be taken if competitive choice is to become a reality - an unlikely prospect given the traditional attitude towards EdF as a public service provider.’