In the latest hurdle in the E.ON/Endesa takeover saga, the European Commission has concluded that Spain has violated Article 21 of the EU Merger Regulation, stating that certain conditions imposed on E.ON for the proposed acquisition are incompatible with EC law.

The Commission decision refers in particular to new conditions imposed in a November appeal against a previous decision of the Spanish Energy Regulator, CNE, on the proposed transaction.

The Brussels authority has declared incompatible with EC law a number of modified conditions imposed by the Spanish Minister of Industry, Tourism and Trade, including the requirements that Endesa maintain its brand for a five-year period, that the companies owning electricity assets outside mainland Spain are kept within the Endesa Group for a period of five years, and that Endesa’s power plants using domestic coal continue to use this energy source as foreseen in the national mining plans.

Another condition declared illegal was the requirement that E.ON does not adopt strategic decisions, regarding Endesa and affecting security of supply, contrary to the Spanish legal order.

The Commission said that it considers these modified conditions to be incompatible the EC Treaty’s rules on free movement of capital and on freedom of establishment. The condition on the use of domestic coal is also incompatible with the EC Treaty’s rules on free movement of goods.

Finally, the Commission said that it has taken note that the Spanish minister has not modified, but merely clarified, the condition imposed by CNE with regard to gas supply requirements.

The Commission decision requires Spain to withdraw the illegal conditions by January 19, 2007. If the Spanish authorities fail to do so, the Brussels body could open infringement proceedings under Article 226 of the EC Treaty.