UPDATE 1-New French power tariff calculation to use market prices-sources
* New power tariff reform to be based on 2010 law - sources
* Formula to use low wholesale prices to limit future rises
* New method to be more legally sound - source (Adds quotes, detail)
By Michel Rose
PARIS, June 19 (Reuters) - A planned reform of regulated French power tariffs will bring an element of market prices into the calculation, removing a link with utility EDF's production costs and making them less open to challenge by rivals, sources close to the matter said.
With wholesale prices currently under pressure, the reform will also lead to lower tariff increases than would otherwise have been the case - in the short-term at least - offering some relief to France's hard-pressed consumers.
French Energy Minister Segolene Royal said on Thursday she had cancelled a planned 5 percent rise in regulated tariffs, set to take effect on Aug. 1, which had been decided by the previous government, hitting EDF's shares.
Until now, regulated electricity tariffs were calculated according to EDF's production costs, with the French energy regulator CRE making sure the government increased tariffs enough to cover the costs.
But in the reform prepared by Royal, the new formula would stop using EDF's production costs as a benchmark and use a method described in the so-called NOME law of 2010 that was supposed to take effect before 2016 and would be moved forward.
The new method would work by adding up transport costs (called TURPE costs in French), historical nuclear power costs (called ARENH) and new so-called "power supply complement" costs that would include wholesale power market prices.
"If we move to a logic of accumulating costs as authorised by the NOME law, in an anticipated manner, we would have tariff increases that would not reflect EDF's accounting costs anymore," one source close the matter said.
"And since wholesale prices are low and stagnating, it would make for smaller tariff increases in the future. At least at the beginning," the source added.
A source close to Royal confirmed the new decree would introduce more market prices to contain future tariff rises.
The introduction of a market price element in tariffs is also confirmed by its mention in Article 46 of the new energy transition law, unveiled by Royal in its broad lines on Wednesday and of which Reuters obtained a copy of the full text.
EDF MARGIN HIT
The new method is also likely to cut EDF's margins if wholesale market prices continue to fall.
"The method used so far, based on EDF's production costs, included a remuneration for EDF, which is normal. If EDF's accounting costs are not covered, it's actually EDF's remuneration that shrinks," the first source said.
"But if tariffs fall too much or don't rise enough, we'll end up hitting core costs, so it won't just be reducing remuneration, it will even be selling at a loss."
Benchmark French wholesale power prices for delivery next year last stood at 41.85 euros per megawatt-hour (MWH), down from around 60 euros per MWh when the NOME law was voted around 2010, hit by overcapacity and low power demand in Europe.
Smaller competitors of EDF and gas utility GDF Suez had successfully challenged previous government price caps on energy in court, arguing they created artificially low prices that did not cover utilities' production costs and prevented smaller competitors from winning market share from the big two.
But the first source said power producers would not have a strong legal base to challenge this new method in court because it would reproduce the way alternative power companies such as Direct Energie supply themselves on the market already.
"The NOME law replicates what an alternative power company pays when it supplies itself on the wholesale market, that's what guarantees the tariffs won't be challengeable," the source said.
However, the introduction of a market price element means this move could backfire on the French government should wholesale electricity prices start to rise again.
"If coal prices started to rise or if an economic recovery took hold quicker than expected, tariffs could start rising again, so it could just be a short-term gain," the source said.
A spokeswoman for EDF declined to comment. (Additional reporting by Marion Douet; Editing by Geert De Clercq and Mark Potter)
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