Tax blow for London Electricity parent

EUROPEAN Competition Commissioner Mario Monti is threatening to force Electricité de France, parent of London Electricity, to repay almost e1bn (£695m) of alleged tax benefits received from the French government.

The Commission claims EDF, owned by the French government, benefited from e888m of French tax relief from 1986 until 1997, and wants the money paid back with interest. Any such repayment would be a bitter blow for the company, which had net profit of e728m in the first half on revenues of e23.1bn.

The group already has a massive pension fund shortfall and the French government has repeatedly blocked price rises for its domestic users.

EDF has a monopoly over household supply until 2007. Chairman François Roussely was scheduled to meet Monti in Brussels today.

The Commission has been studying EDF's accounts since April. The initial inquiry centred on unlimited guarantees given to EDF by the French government, which were potentially contrary to European competition rules.

EDF is suspected of having been able to secure loans at lower rates than rivals because its borrowing was effectively underwritten by the French government.

That would have given it considerable advantages in bidding for foreign power assets.

Now, however, the Commission has apparently concluded that EDF also benefited from special French accounting rules in respect of its transmission network that enabled it to avoid huge sums of tax.

The Commission launched its inquiry after complaints from rival power groups. Italian and Spanish rivals, in particular, are angry EDF has been able to expand abroad from a protected French market.

EDF has spent e19bn on overseas acquisitions, buying London Electricity, SWEB and Eastern Electricity in the UK among other assets, to seize a 10% share of British generation and distribution markets. However, the UK investments have been only marginally profitable.

The French government wants a partial privatisation of EDF within the next couple of years. The project faces numerous hurdles, including resistance from the group's 100,000-plus employees.

EDF had a net profit margin of just 0.2% last year on sales of e40bn, and the profit for the first half was bolstered by exceptional gains. The Commission and EDF both declined to comment today.