Cablegate: France's Constitutional Council Postpones Gdf

VZCZCXRO6830
RR RUEHAG RUEHDF RUEHIK RUEHLZ RUEHROV
DE RUEHFR #7680/01 3391612
ZNR UUUUU ZZH
R 051612Z DEC 06
FM AMEMBASSY PARIS
TO RUEHC/SECSTATE WASHDC 3580
INFO RUCPDOC/USDOC WASHDC
RHEBAAA/USDOE WASHDC
RUCNMEM/EU MEMBER STATES
RUEANFA/NRC WASHDC

UNCLAS SECTION 01 OF 02 PARIS 007680

SIPDIS

SENSITIVE
SIPDIS

STATE FOR EUR/WE; DRL/IL; OES; NP; EB/ESC, AND EB/CBA
USDOC FOR 4212/MAC/EUR/OEURA
DOE FOR DAVID PUMPHREY PI-32 AND KP LAU NE-80

E.O. 12958: N/A
TAGS: ENRG EPET EIND EINV ELAB PREL PGOV FR
SUBJECT: FRANCE'S CONSTITUTIONAL COUNCIL POSTPONES GDF
PRIVATIZATION, REINSTATES ELECTRICITY AND GAS PRICE LIBERALIZATION

REF: PARIS 6678

NOT FOR INTERNET DISTRIBUTION

Summary
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1. (SBU) On November 30, the French Constitutional Council indicated
that the GOF energy bill was constitutional with two changes: 1)
the Suez-Gaz de France (GDF) merger cannot legally take place before
July 1, 2007, when GDF loses its monopoly to supply gas to private
homes; 2) the GOF energy bill's provisions on regulated prices are
invalid since they are incompatible with the 2003 EU energy
directives. The Suez-GDF deal, which looked like a done deal a few
weeks ago, could become an issue for debate in the upcoming
Presidential campaign, with reversal all but certain in the case of
a center-left victory by Segolene Royal, and possible even if the
center-right wins. End Summary.

Privatization of Suez-GDF postponed until July 2007
--------------------------------------------- ------

2. (SBU) The merger of French energy groups GDF and Suez hit trouble
on November 30 when the Constitutional Council, which rules on the
conformity of government legislation with the French Constitution,
decided to delay the deal until July 1, 2007. This is the date on
which France will fully deregulate its natural gas market, ending
GDF's monopoly as a public gas service. The companies and the GOF
had hoped to finalize the 83.0 billion euro (USD 106.8 billion)
merger by the end of this year. However, the Council stated that
the postponement did not preclude preparation for the merger. As a
result, the annual general shareholders' meetings of both Suez and
GDF are expected to take place early next year, and the management
of the two firms will continue to discuss the details of the merger.
Although this is clearly a setback for the GOF, the government
claimed victory, indicating that the court found the legislation and
the merger constitutional.

3. (SBU) The 120 Socialist and Communist parliamentarians who
brought the case before the Constitutional Council likewise claimed
victory. Together with the GDF unions, they oppose a deal entailing
GDF privatization. National Assembly Socialist Party faction leader
Jean-Marc Ayrault stated that the Council had put "the future of GDF
in the hands of the French people" and that "a majority on the left
would be in a position to put an end to this privatization"
following the election. The CGT Communist-led union called the
Council decision "a major slap for (French Prime Minister Dominique
de) Villepin and (French Economy and Finance Minister Thierry)
Breton."

4. (SBU) This decision follows another major legal setback on
November 21 when the Paris Court of Appeals ordered a postponement
of a GDF board of directors meeting, scheduled to discuss the
planned merger, to provide the GDF workers' council sufficient time
to review the merger proposal and give its opinion. The court also
granted the GDF workers' council the right to designate an expert to
review the proposed merger. The GDF workers' council, which
represents employees and unions, filed a suit to delay the GDF board
meeting until it has enough information on the social impact of the
merger. During Parliamentary debates, French energy unions claimed
that dozens of thousands of jobs would be lost as a result of the
Suez-GDF transaction. GDF immediately appealed, but the appeals
court upheld the original ruling. The delay in the shareholders'
vote on the deal until next spring means that it will take place
during the campaign for the April and May 2007 presidential and the
June 2007 legislative elections.

Ruling against regulated energy tariffs
---------------------------------------

5. (SBU) While the energy bill was being debated in the National
Assembly, legislators from all political parties introduced a
formula for regulating tariffs on energy prices, to be renewed every
year. Their clear hope was to protect themselves against
anti-merger sentiment in their campaign for the June 2007
Parliamentary elections. They argued that gas prices would rise
more quickly under a privatized entity than under state control.
However, the Constitutional Council ruled against these
parliamentary amendments, indicating that they were contrary to the
EU energy directives. Although this part of the Council's decision
has received very little press and public attention, it effectively
restores the original purpose of the GOF energy bill, which was to
liberalize the French energy market and transpose the 2003 EU energy
directives into French law.

PARIS 00007680 002 OF 002

Comment
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6. (SBU) The two appeals this month prove that the unions and their
political supporters on the left intend to fight GDF's privatization
and make it a political issue during the upcoming Presidential and
legislative elections. Doing the deal before the election would be
tricky, but postponing it until July 2007 will be even harder.
Socialist candidate Segolene Royal, has vowed to renationalize GDF
if she wins. Likely ruling UMP candidate Nicolas Sarkozy might drop
his half-hearted support for the merger. Energy experts, however,
are relieved that the Constitutional Council eliminated the
regulated tariffs, and markets welcomed the news by bidding up EDF
share prices. The decision is an important step in fully opening
French energy markets to competition by July 1, 2007. End Comment.

Stapleton

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