Examination of Witnesses (Questions 383
- 391)
MONDAY 10 DECEMBER 2007
Mr Frédéric Granotier
Q383 Chairman: Good afternoon
Mr Granotier. Thank you very much indeed for attending this video
conference. I have to say that I think this is a first in the
history of the British Parliament, where we have taken evidence
by video conference.
Mr Granotier: Thank you. I am very happy to
be with you. I am very honoured that you requested to have POWEO's
opinion on your topic; I will be happy to answer your questions.
Just a few words of introduction, I am the co-founder of POWEO
and I founded the company in early 2002 and I am in charge of
the downstream business.
Q384 Chairman: Thank you.
May I introduce my colleagues sitting around me? Lord James, Lord
Dykes, Lord Walpole and my name is Lord Freeman. We also have
here clerks and the special advisors. We are due to make a report
in February on our views on the Commission's Review of the Internal
Market and we are nearing the end of our evidence session, going
to Brussels on Thursday to take evidence from, amongst others,
Commissioner Charlie McCreevy. When I met your colleague, your
co-founder, in London I was struck by the experience your company
had had, and is having, seeking to compete in the French market
in particular. It would help the Committee if you could first
of all describe what POWEO does.
Mr Granotier: POWEO is an entrepreneurial company
that we founded in early 2002. The initial business model was
the business model of a pure retailer of electricity. At this
time we anticipated the deregulation process in France and we
looked at other similar business models which were already implemented
in countries that had already opened their energy market, especially
the UK market, and we decided to bring this business model to
France through the creation of POWEO. Initially we were just purchasing
electricity from producers and on Powernext, the power capacity
market, and we would sell this electricity to large industrial
customers which were at this time the only ones to be allowed
to leave EDF. We rapidly managed to acquire around 30 large customers—large
French companies mostly and also some European and international
groups—and we also rapidly raised cash to fund our growth
and we prepared the company on the stock market. We went public
very early in the life of the company, in February 2004, and we
raised the cash mostly through UK based investors, so some big
names like Henderson, Gartmore joined our share capital and we
prepared the company for the launch of a professional market segment
in France in July 2004. In July 2004, 3.7 million professional
customers were allowed to leave EDF. We rapidly managed to acquire
80,000 customers through several channels, mostly door-to-door,
telesales and also through the net, although that was a less significant
part. We also rapidly decided to add a gas supply business to
our electricity supply business because of the synergies between
both. At this time we saw the oil and gas prices starting their
increase in the international markets and we saw electricity prices
on wholesale markets going up. We feared the squeeze situation
where we would be obliged to purchase electricity at a price higher
than the selling price of EDF which is our reference, since we
cannot, of course, sell at a more expensive price than EDF. To
avoid this risk of squeeze we decided to integrate upstream. As
early as November 2004 we decided to integrate upstream, ie to
build our own generation capacities. We looked at the French market
and, considering the role of nuclear base load capacities, we
decided to go for CCGTs (combined cycle gas turbines) which are
the most appropriate answers to the expected higher demand in
peak loads. We decided to have our own industrial plan to build
combined cycle gas turbines. We secured some sites, we looked
for a construction partner for the CCGT and we chose Siemens and
we have now our first CCGT being built by Siemens which will be
operational in a year from now and it is only the first one in
an industry plan that will count five CCGTs for a total investment
of three billion euros in the next five years. In order to diversify
our energy electricity generation we decided to focus also on
renewables and so we already have some wind farms in operation
and we also have an aggressive industrial plan on renewable energy
as we are targeting 600 megawatts of renewable energy by 2012.
In order to secure our gas sourcing for our combined cycle gas
turbines we decided to bid for the construction of an energy terminal
in Normandy, in Le Havre-Antifer, and much to the surprise of
our competitors we won this tender offer. So, we are going to
build our own energy terminal in Le Havre-Antifer and we have
accepted some partners in this project which are mostly E.ON Gas
and Verbund. In the meantime we also teamed up with Verbund, the
national Austrian electricity operator, that took 30% of our share
capital and 40% of our generation subsidiary, POWEO Production.
Clearly we want to be an integrated player from the upstream to
the downstream. In the downstream we also, of course, prepared
for the launch of the residential market in France last July.
We now have only a few thousand customers (I think you have some
questions about that, so I will come into more details later)
for several reasons. The market is not really open in the residential
area but clearly our goal is in 2010 to have one million customers
in France. We are targeting, in the mid-term, 5% of total generation
capacities and 5% of total number of customers in France, households
and professional customers. We want to be an integrated operator.
Q385 Chairman: Thank you.
That is very clear and very ambitious. Can you just comment on
what you, POWEO, would like to see in terms of further reforms,
further liberalisation within the European Union, giving you the
chance to access the transmission networks of Gaz de France and
Électricité de France in the same way that there
is liberalisation here in the United Kingdom? You are trying to
build an integrated, private power company in competition with
two giants which monopolise the transmission system.
Mr Granotier: In France the main hurdle at the
present time is, in fact, the co-existence between regulated tariffs
for electricity and wholesale market prices. This makes life for
new entrants very difficult because of the squeeze risk that we
mentioned and the fact that EDF tariffs do not reflect the increase
in oil and gas prices at a global level and do not take into account
the need for additional reduction of consumption. Since electricity
prices are quite low in France this does not encourage customers
to make efforts to save energy whereas it should be done, as in
any other country. This is the first point, the first hurdle that
we have to overcome on the French market. Then in terms of network
it is true that if we could obtain the complete separation of
the network from incumbents that would of course help competition
because we always fear that there exist some cross-subsidies between
activities. We saw this in 2004 or 2005 when the regulator pointed
out some cross-subsidies between EDF and the EDF grid and also
the current transportation tariffs were delayed for this reason
in particular. We think it would of course help to have a complete
separation in terms of shareholding of the network. Even though
we say the situation could be worse we manage to grow our business.
I think since France was late to deregulate, the regulator could
take time and have a look at, and examine carefully what was done
in other countries and then the regulator could take the lessons
of what was successful in other countries and what could be implemented
in France. I think we are quite happy with what we have. We can
grow our business in such a context but of course it would be
better if we could have the further step of deregulation.
Chairman: I think you just made a very
important point and one of my colleagues would like to ask a question
about it, but let me frame what the possible question might be
in my mind at least. You have just pointed out that the regulation
of tariffs, that is to say state subsidy through EDF to the retail
market preventing effectively competition is the first problem.
Q386 Lord James of Blackheath:
Thank you for the excellent account of what you do but I am a
little confused as to what your corporate objective is. Are you
effectively there in order to create a profit progressively for
your shareholders or are you there to make a contribution to the
economic life of Europe by securing, and then enabling, the distribution
of energy supplies within an economic structure that is workable
for everybody?
Mr Granotier: Clearly we have several goals.
It is clear that one goal of course is to grow the company and
to make profits and to create value for shareholders; that is
for sure. Just as important as that is that we want to help French
consumers to get additional services. That is why we have been
focussing on services for POWEO supplying business since 2004.
We want to help them to consume less, to understand better how
they consume and to consume less in order to help with the common
interest of the French people. This is a very important goal that
we have. Considering those goals it is true that if we could make
sure that there is no cross-subsidy between EDF's several entities
we would be more comfortable. This can indeed go through the creation
of a subsidiary for the network or at least more rules and more
independency and more control of the independency than exists
at the present time even though, as I was pointing out, it could
be worse; it could be much worse.
Q387 Lord James of Blackheath:
We all applaud the need to try to reduce energy demands but are
you actively seeking to create reserves of energy sufficient to
see the European Community through any crisis of supply by building
up reserves, by sourcing externally as an integral part of the
European-wide energy policy?
Mr Granotier: Our industrial plan is to build
additional capacities which will be needed in the short term in
France. When we decided to integrate upstream and to bid on the
nation's capacities back in 2004, it was not obvious that France
would be lacking capacities in the future. The first report from
the RTE (the high voltage network) dates back to 2005, it was
the first report that points out that there is a need for additional
capacities. It followed our decision to integrate upstream. By
building our CCTGs we want to make sure that France will not be
lacking generation capacities, in peak times in particular, in
the next few years. It is true that electricity produced by France
can be exported to other countries so yes, we are helping the
common interests of the European companies at all levels to secure
sourcing of electricity.
Q388 Lord James of Blackheath:
That is very helpful but does it not raise the issue that if the
European Community is demanding a process of unbundling between
the sourcing and the distribution you will, effectively, not be
able to control the whole process. Does the unbundling demand
from the Community not create an almost impossible commercial
problem for you?
Mr Granotier: It depends on how it is organised.
At the present time, with the RTE network independent from EDF
but still owned by EDF, the system can work. However, we always
have a doubt that there can be some cross-subsidies and that is
where customers finally subsidise, through the transportation
tariffs, other activities of EDF. As long as this system exists
we will have this doubt. Of course, we would be happy to move
to another system but this one is not too bad.
Lord James of Blackheath: Not yet anyway.
Q389 Lord Dykes: If you see
the UK edition of the Financial Times today on page six,
one of the senior members of Mr Sarkozy's presidential team, Mr
Guaino, was saying that he very much hoped, and the French Government
hoped, that the European Commission would emphasise individual
countries being freer to make their own decisions. Whilst that
would appeal to quite a lot of people in Britain who hesitate
about certain EU objectives and priorities, of course it would
not apply to the more conservative elements studying the British
economic market opportunities if the Single Market itself was
affected by that. There is a feeling that the French Government
still wants to promote both what they call European champions
European-wide in the Single Market but also French champions.
Do you feel that that general background is irrelevant to your
own particular plans or does it fit in with your objectives and
are you glad to hear what Mr Guaino said today?
Mr Granotier: We know very well the position
of the French Government. What you have summarised is accurate.
We are also doing some lobbying to try to convince the government
to go a step further.
Q390 Chairman: I have just
one final question for clarification. As you know the Commission
has proposed either full unbundling as a model for consideration,
that is to say the separation of supply, transmission, generation
transmission and supply, complete separation of ownership and
management but also what they call an ISO model, which is similar
to what occurs in Scotland here where the grid network, for example,
might be owned by the same company or institution that is the
supplier of gas or electricity but someone else manages it, makes
decisions about investment and pricing. Do you have a view as
to which of the two models is best for France and best for POWEO?
Mr Granotier: Personally, I think that the more
unbundling we get the better. Things are clearer, more transparent;
we are sure there is no conflict of interest and so it is the
best situation. For political reasons or historical reasons we
can understand that this model of full unbundling may be difficult
to implement so I think that we can live with an ISO type of model
for a while under the condition that there is a very strict control
on the way it works and we avoid any potential risk of conflict
of interest or cross-subsidy.
Q391 Chairman: Mr Granotier,
thank you very much for very clear evidence; you have helped us
greatly. We will send you a copy of the transcript. Thank you
very much indeed and good night.
Mr Granotier: Thank you very much and good night.
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