Ever since it was proposed last year, ownership unbundling has dominated energy talk in Europe and split the 27 EU member states almost down the middle into proponents and opponents of the process. Most expected February’s meeting of EU energy ministers to effectively kick the ownership unbundling proposal into touch, given that the European Commission had earlier rejected a Franco-German alternative proposal. But as energy ministers gathered in Brussels they were greeted with the news that E.On had agreed to sell its network business in return for the Commission’s dropping two antitrust investigations against the German utility.

The fallout was predictable. With a number of antitrust investigations in progress, which include investigations into both EDF and RWE, the Commission was rubbing its hands in glee, and hoping that both RWE and EDF would now follow E.On’s example and sell up rather than face continued antitrust investigation. But RWE and EDF refused to play the Commission’s game, and continued to protest their innocence of the antitrust claims. And perhaps more importantly, the German government expressed disappointment with E.On’s actions as it was hoping to present a united government/utility lobbying front against the Commission’s proposals. With the French government naturally supportive of anything that increases protectionism there is still a strong Franco-German political opposition to Brussels’ unbundling proposals and the next time energy ministers formally gather to discuss the topic it will be under the rotating EU Council presidency of France.

E.On’s decision to sell its network, and divest 4.8GW of generation capacity, may have seemed surprising when announced – after all the utility was the most vocal opponent of the ownership unbundling proposal – but looked at in the cold light of day it makes rather good business sense.

By voluntarily deciding to sell its network E.On will not have to divest the asset via a forced Commission auction, and thus stands to get a better price for the network, and this sales revenue could then be invested in other acquisitions, and in particular supply assets.

Unlike RWE, for example, E.On considers itself more of a European utility than a domestic utility and its long-term objective is to be a major international utility group. To achieve such a status requires international investment in generation and supply, and should it look to acquire some European assets the Commission may be more favourably disposed now it has supported the ownership unbundling initiative.

But just because E.On took the Commission’s bait there is no reason to believe Germany’s other dominant utility groups will follow. RWE has a strongly national agenda, even allowing for its non-domestic acquisitions, and central to maintaining a strong national presence is ownership of a grid, particularly since RWE has Germany’s largest generation capacity.

ENBW, the third of Germany’s four grid owners, is even more nationally focused than RWE, making grid ownership just as important. And with 45% of the utility owned by EDF it would simply not be allowed to sell its grid for fear of undermining EDF’s grid ownership and weakening the French government’s social (read ‘protectionist’) model.

This leaves Vattenfall Europe, which like E.On is more internationally focused, and may well consider selling its network to generate cash to fund further international expansion. Vattenfall’s German subsidiary has underperformed over the past year and the sale of its grid could even precede a gradual retreat from Germany if a better investment opportunity can be found.

There is one problem with E.On, and possibly Vattenfall Europe, selling their grids. Who would buy them? Both grids require significant modernisation investment, make relatively little money compared to generation and domestic supply businesses, and would have to compete with RWE and ENBW. The UK’s National Grid has been suggested as a possible buyer, and it has already proved its business acumen with its other foreign acquisitions, but Germany’s quasi-competitive market may be a challenge too far.

Assuming Vattenfall Europe follows E.On’s lead and puts its grid up for sale, while EDF, RWE and ENBW sit firm, where does the Commission go from here? Some commentators believe it will now rethink a forced split of utilities production and distribution assets and veer towards the ownership unbundling alternative of increased regulation of distribution assets. And if it does it may never get another opportunity to shape Europe’s competitive market future. But equally it will only have itself to blame.

Ever since electricity markets started along the liberalisation process almost two decades ago the key issue has been how to structure the ‘competitive’ market. The UK, which was the first member state to develop a competitive market, desperately wanted a horizontal structure whereby there was no cross-ownership between generation and supply with the belief that a horizontal structure would spur competition as generators would have to compete for supply business and thus push down prices. But this market structure failed to meet security concerns and the market quickly gravitated to a more vertically-integrated structure without any government/regulator objections.

Other European markets never really looked beyond vertical integration, but the real issue with the continental Europe markets was the so-called ‘national champion’ utility. Led by France and Germany, some governments have looked at energy as a national asset and decreed that domestic ownership of this asset is in the national interest. Thus the national champion utilities were conceived, and with the dominant domestic utilities being cash-rich they could snap up non-domestic assets and evolve into European champion utility groups.

The Commission’s competition mistake has been to allow this consolidation process to take place. In doing so it has allowed the national champion utility groups to win their argument that utility consolidation provides greater security, rather than trusting its own (correct) instincts that a competitive market provides security and also encourages cheaper prices.

At the end of the day energy is a commercial business, and a very profitable business. E.On’s decision to sell its network was taken because it made business sense, just as RWE’s keeping its network also makes sound business sense. These utilities can make these decisions because of the market structure sanctioned by both member state governments and the Commission.

Certainly Europe’s energy market could be more efficient, but if the Commission truly believes in market forces it will allow these efficiencies to evolve. Just as certainly, ownership unbundling would make a positive difference to Europe’s energy market – so why was it not legislated for in the first energy package rather than in the third?

The answer is control. The Commission may espouse the benefits of competition, but deep down it wants to exercise control over the market. The Commission may think it had the upper hand with E.On, but the utility did not have to sell and didn’t accept any guilt over the antitrust investigation. E.On will be a stronger business for its decision and will also have the Commission on its side. Ironically, by pushing E.On to sell its network in return for dropping its antitrust investigation the Commission has weakened its energy mandate and set an unfortunate precedent. Now if Brussels wants a utility to sing its tune it will have to give something back.