German utility E.ON shocks with plan to sell grid

FRANKFURT/BERLIN (Reuters) - German utility giant E.ON said on Thursday it would sell parts of its power grid if the EU dropped two antitrust cases against it, in a shock reversal likely to anger the German government.

Until now, Germany's four largest utilities and Chancellor Angela Merkel's government have been united in opposing demands from the European Commission for energy companies to divest their networks to boost competition.

Germany and seven other European countries that oppose the so-called unbundling have proposed a "third way" which would allow energy companies to keep ownership of their networks, while taking steps to make them more independent.

E.ON, Europe's largest utility, appeared to have undermined that strategy on Thursday, announcing it was ready to sell its electricity grid and some generating assets -- a move that was welcomed by the EU but described as "astounding" by a senior German official.

One analyst who declined to be named estimated that E.ON's long-distance power grid had annual sales of about 1 billion euros ($1.51 billion).

The Frankfurter Allgemeine Zeitung reported that Merkel had summoned E.ON chief Wulf Bernotat for a crisis meeting in the coming days to discuss the company's shift, although a government spokesman denied there was such a plan.

Owning networks was once vital and lucrative for the utilities as it gave them access to customers and earnings from competitors that wanted to use the networks.

But a new regulator in Germany, overseeing prices, has been lowering profits from network units and at the same time guaranteeing that electricity suppliers without a grid can gain access to customers, in line with EU initiatives.

"It is not as lucrative as it was to own networks," said Trudbert Merkel, who helps manage 31 billion euros in shares at German asset manager Deka in Frankfurt.

"Regulation is hitting earnings and pressure from the Commission to sell the grids will continue," he said.

E.ON shares ended the day down 1.1 percent at 124.78 euros, outperforming the DJ Stoxx utilities index, which was down 1.3 percent, and the benchmark German DAX index, which closed down 1.9 percent.

START OF TALKS

E.ON said it was prepared to sell its long-distance, high-voltage power grid in Germany and divest 4,800 megawatts of generation capacity.

The company did not say whether it was already talking to potential buyers, nor did it give an indication of the value of the power networks.

"This is the start of negotiations and a possibly lengthy process," said another analyst who also requested anonymity.

By selling the grid, E.ON is hoping to settle two antitrust cases -- an investigation into whether its power-grid unit favored E.ON's own divisions over competitors and whether E.ON artificially raised wholesale electricity prices.

The European Commission has been trying for years to get European utilities to divest their energy grids to increase competition by giving rivals easier access to the networks.

A debate on the subject was taking place in Brussels on Thursday and a senior official in the German Economy Ministry questioned whether the timing of the announcement was mere coincidence.

"It's very astounding what happened here," State Secretary Peter Hintze told reporters in Brussels.

The Commission welcomed E.ON's proposals and would "market test" them and possibly drop the charges against the company.

Smaller peer Vattenfall Europe, the German unit of Swedish utility Vattenfall said it was looking at all options for the future of its German power grid, including a sale.

RWE and Energie Baden-Wuerttemberg, Germany's second- and third-largest utilities, both reiterated that they planned to keep their networks.

"If E.ON by itself does it and other big utilities in Germany don't move, probably the German government will stick to its position," said Colette Lewiner of consultancy Capgemini.

"If all (the German utilities) move, the German government will be in a very strange position. The government would have to retreat," she said.

The "third way" proposed by Germany and seven other EU states would defend vertically integrated giants such as France's EDF, Gaz de France and the big German utilities, which Brussels says have no interest in increasing capacity or helping newcomers enter their markets.

(Additional reporting by Gernot Heller, Markus Wacket and Barbara Lewis; Editing by Quentin Bryar)