German utility E.ON shocks with plan to sell grid

By Peter Dinkloh and Noah Barkin

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.