Are you powering a nice little place like the Netherlands, Austria or Portugal? Or a wealthy city in a big country? Your days are numbered. Confirmation of the Veba-Viag merger is not a warning, but an ultimatum. Grow or be gone with you – two of the top three German utilities are forming a giant that you may never slay, no matter how many clever Davids you have on your side (if you have any). And it is only a matter of time – a few days? – before a second German colossus takes shape, by merger or by acquisition or by both.

Consider the size of a combination of Veba’s PreussenElektra and Viag’s Bayernwerk. "German Power AG" (the entity has yet to be named) had sales of 174.5 TWh and power revenues of $12.5 billion in 1998. Stack those against national power systems, and you have a group roughly twice the size of the Netherlands system, three times the Austrian system and five times the Portuguese system. "German Power AG" will be the biggest player in its own market, eclipsing RWE Energie, which headed the German league table in 1998 with sales of 132.5 TWh.

What is to be done? The unthinkable in Europe has become inevitable just eight months after the market opened to competition. Your banking-hardened correspondent and an army of analysts, managers and strategists have been left floundering by the pace of change. In the City and in Frankfurt, as in New York, madcap merger ideas once developed in jest, after hours and strictly for entertainment, are presented at the morning meeting as done deals. Veba-Viag, a competition authority non-starter if ever there was one, is suddenly deemed perfectly acceptable, perfectly rational, and, for the companies, absolutely essential.

Deal approval has a price. German competition authority may clear the deal, recognizing widespread price pressure has transformed the German market. The combination will still face big rivals within Germany and in cross-border trading. But it will insist on open grid access across the entire combined service area. Officials have almost a full year to impose conditions before expected deal closure next summer.

Its scale could make it a vital component of an integrated European power market. PreussenElektra’s northwestern area stretches from the German border with Denmark to a southern frontier with Bayernwerk’s area, which extends through Bavaria to the Austrian border. Impose total transparency and market friendly regulation on this, and Europe could have a vibrant trading market at its core, rather than a wires mess that makes a mockery of the ‘European’ competition players often cite as a justification for mega-mergers.

The chance of having a big grid for trading rather than obfuscation is too good to pass up, no matter how powerful the merged group will be. It will face bitter challenges from RWE and others from day one, and good grid practice will ensure those challenges hit their targets hard if they pack the right commercial punch.

A new German boxing ring will welcome pugilists from 1 January, 2000. The Veba-Viag news was followed by reform of the national grid charging system, notoriously chaotic and anti-market. The new system is full of trading go-go. The distance component of transmission prices will be scrapped, prices and payment simplified to allow transparent and rapid interaction with a power exchange, and load profiles introduced to make supplier switching feasible even at the residential level. German power veterans pushed into the spotlight must come close to nervous collapse when they think of the cosier local rings of old. Several hundred national knock-outs coming up…

Liberals should have no illusions about how much remains to be done. There are some ominous phrases in grid reform announcements, such as "details are to be worked out by system operators", and "how the competitiveness of cogeneration and renewable output is to be managed must still be negotiated between stakeholders". The proposed reform also splits the German grid into a northern and southern area. Flows across this border will have a 0.25 pfenning/kWh (0.14 cents) charge – enough to count in razor-thin-margin trading business. There may be an excellent base to work with in the new agreement, but a settled, established, proven and cheap grid solution that leaves the likes of Nordic critics speechless is a long way away.

Nor should power price cuts spur too much celebration. German prices were absurdly high in some segments and must still fall further to match prices elsewhere, including dirigiste France. Prices are not static elsewhere: regulatory intervention and market pressures are making deep marks across Europe. Even systems that already achieve low prices, such as the Nordic region’s, endured commercial stress in 1999.

There is the question of top level competition in the long term, which may be just a year if the current pace is sustained. RWE is mighty, but will its planned multi-billion acquisition binge make it over-mighty? Is Electricité de France (EDF) riding for a fall? EDF remains Europe’s colossus, with 1998 power sales of 454.6 TWh. But it can’t issue a single share to finance acquisitions – the state insists on full control, and is in no position to fund an equity capital increase without sparking a firestorm of controversy in Brussels. EDF can issue debt, but there are limits to debt funding. EDF is under financial pressure already: unions are furious about plans to dump EDF property assets on banks in return for cash and lease agreements.

There are other big names. Italy’s Enel is about to be privatized, and its managers are eager to wheel and deal as tough market players after a boring and not very distinguished life in public service. But Enel looks set to lose its number two position in Europe (1998 sales of 226.2 TWh). It must divest 15 000 MWe and some choice urban distribution assets. It is also increasing debt after years of debt reduction. This fits with financial analysts’ preference for geared utilities (more near term cash rewards for equity holders), and allows the state to collect a handy $2.5 billion special dividend from Enel. It reduces room for manoeuvre.

Then there are the Americans. They have a long way to go in Europe, but there are no problems with size. Reliant, TXU and Enron (all "everything is bigger here" Texans) are fearsome matches for Germany’s leaders. The irony could be that German domination of Europe is no disaster, and certainly nothing to prevent, but only because the necessary European balance should soon be in place – thanks to American capital.

1998 Electricity sales