ENDESA Group

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ENDESA Group

Principe de Vergara 187
28002 Madrid
Spain
(91) 563 0923
Fax: (91) 563 8181

State-Owned Company
Incorporated: 1944
Employees: 15,700
Sales: Pta348.77 billion (US$3.61 billion)
Stock Exchanges: Madrid New York

The ENDESA GROUP, one of Spain’s largest electricity producers, has enjoyed phenomenal growth since its reorganization in 1983. The reorganization changed its relationship with its state parent company, Instituto Nacional de Industria (INI), by transferring all power companies under INI control, to ENDESA’s authority. Prior to 1983, Endesa was one of a number of power companies controlled by the Spanish government through INI. At present, 33% of INI’s holding in ENDESA has been privatized. The Spanish government hopes that ENDESA will become a private but Spanish-controlled utility giant that will be able to hold its own in the competitive post-1992 European single market.

If ENDESA’s history was undistinguished from the time of its founding in 1944 to its reorganization in 1983, it was because it was a small, bureaucratic state organization without much policy- or decision-making power of its own. ENDESA was run by a succession of state appointees, often military or political figures close to the Spanish dictator Francisco Franco, but real power rested with INI which, in turn, had to refer all major decisions to central government.

Actually, much of the power company’s pre-1983 history is INI’s history. INI had its origins in the Law of Protection and Development of National Industry of October 1939. It was designed to help the nation rebuild an economic infrastructure that had been, at best, weak before the devastation of three years of civil war.

The law, drafted by Juan Antonio Suanez, a close childhood friend of Franco, continued the protectionist traditions found in Spain and typically in economically weak countries that find they must compete with powerful neighbors. Every investment decision required government approval, and no industrial facility could be constructed without official sanction.

As stark and bureaucratic as this law sounds, it made sense to the new dictator Francisco Franco and his government. No foreign money and very few domestic resources were available to develop the economy. Many of these had to be diverted to national defense. Franco had won the Spanish Civil War, but the country was politically isolated. Under pressure from his German Nazi and Italian Fascist civil war backers to join their side in World War II, which had engulfed Europe by the time of Franco’s victory, he announced a policy of “nonbelligerency.” In effect, non-belligerency meant sympathetic gestures to the Axis powers, the most dramatic of which was the dispatch of the Spanish Blue Division to aid Hitler’s troops on the Russian Front, while maintaining relations with Britain and the United States on the basis of Spain’s neutrality. Franco had to have strong military forces to bolster this policy, and he had to quell nascent Republican support for the war. Spain was in an effective state of siege that seemed to justify strict government controls on all areas of life, including the economy.

A state economic apparatus was necessary to control the major sectors of the economy. It is no surprise that the chosen model for INI was Italy’s Instituto per la Riconstruzione Industriale (IRI), created to reconstruct Italy’s economy under the direct control of its dictator Benito Mussolini. Like its Italian counterpart, INI had a strong initial defense production orientation, but it was also directed to invest in enterprises that were unlikely to attract private capital and, at government request, INI had to take over failing private companies. This last requirement, the nursing of “lame duck” companies, has been a burden on INI for most of its history.

Electricity generation was one of the early major nonmilitary sectors to receive special attention and investment from INI. By 1944, Franco’s government was able to look toward the end of World War II and began to take more economic initiatives. Spain remained a backward country. There was little electricity available outside major industrial areas, and even there, it was not sufficient enough to supply the industries.

ENDESA was created as a public limited company, 98%-owned by INI, to construct badly needed power stations. Unlike most other INI companies, ENDESA was not an industrial monopoly. Two years later, in 1946, INI formed the Empresa Nacional Hidro-electrica del Ribagorzana (ENHER) to develop power generated from the River Noguera-Ribagorzana and its tributaries. Other state and private power companies were allowed to sell in local markets. Prior to the 1983 reorganization, ENDESA was responsible for less than one-third of the country’s electricity output, but it was the largest generator in the sector.

INI poured investment into dams and power stations, but blackouts and electric power shortages persisted in Spain throughout the 1950s. The electricity industry, like others under INI’s control, suffered from all the usual problems found in businesses run by massive state organizations. The two most prominent problems were bureaucratic inefficiency and inability to raise private and foreign capital for new investment projects. By 1948, Spanish industrial production only matched 1929 levels.

INI’s empire had expanded into most of Spain’s major industries, including petroleum, aviation, transportation, engineering, and manufacturing. Much of the rest of the economy was composed of small companies lacking in modern methods, equipment, and facilities, and with low production levels. Spain’s industrial production expanded but failed to reach the boom levels of growth in Germany, Italy, France, and other European countries that, unlike Franco’s Spain, had agreed to participate in the Marshall Plan.

In the late 1950s Spain suffered an economic crisis involving high inflation, low export levels, and insufficient growth. In 1958 the government cut off budgetary support for INI, but INI and its constituent companies borrowed heavily from private sector banks.

The government began to realize its mistake and in 1958-1960 adopted a “cold bath” stabilization plan similar to that typically favored by conservative economists today. The plan imposed ceilings on borrowing and forced ENDESA and other INI companies to become self-financing. The liberalization of business restrictions that had begun in the 1950s was speeded up to attract long-term and foreign investment.

However, little privatization was allowed. There was still a widespread fear that privatization would mean foreign domination. The fear has persisted to the present time. It was a major reason why Spain remained behind a protectionist wall until it moved to join the European Community (EC) in the early 1980s.

Initially, the impact was inflationary and electricity prices were allowed to rise by up to 50%, but by 1960 the groundwork was laid for what has been referred to as the Spanish miracle. The so-called miracle did not extend much beyond the major metropolitan areas. Concerns about “the two Spains” caused the government to once again rely on a centralized approach to national development.

Three national development plans aimed to develop regional industry. INI’s role was limited in the first two, but it was crucial to the third of these plans, which were generally successful in creating new industrialization. The government made a number of attempts to reform INI during the 1960s and 1970s in an effort to make it and INI’s constituent companies more businesslike. In 1968, INI was placed under the jurisdiction of the Ministry of Industry. Claudio Boada, appointed INI president in 1970, set up a three-year reorganization plan designed to make the company more profitable and less dependent on government subsidies.

ENDESA and other subsidiaries were expected to operate more like regular companies that operated on a profit-and-loss basis. A steel crisis hit INI in the early 1970s. The oil shocks of 1973 and 1979 hit Spain badly because the government continued to subsidize oil price levels until the death of Franco in 1975. INI nevertheless continued to expand and absorb lossmaking companies in rescue operations.

In 1978 a new INI president, Jose Miguel de la Rica, set significant reforms in place when he won the right not to be required by the government to take over failing companies, except by parliamentary order. From the beginning of the 1980s, this development and the general world trends that favored free market solutions and privatization encouraged INI to act more like a public sector company. INI sold all or part of its interest in a number of unprofitable companies.

The ENDESA reorganization of 1983 was part of the government’s general plan to make INI more efficient and modernize Spain’s institutions in preparation for full Spanish membership in the European Community. INI transferred all its power companies, Empresa Nacional Hidro-Electrica del Ribagorzana (ENHER), General Europea S.A. (GESA), Union Electrica de Canarias S.A. (UNELCO), and Empresa Nacional Electrica de Cordoba (ENECO) to ENDESA. The reorganization did not create a monopoly, however; at least seven major power companies remained in private hands. After reorganization, however, ENDESA became the country’s largest electricity producer.

Ownership of several of the private companies was heavily concentrated in the hands of Spain’s traditional elite and families who were close to General Franco. Unused to competitive pressures, these companies made some disastrous overinvestments in nuclear power during the 1970s. In 1983, a government moratorium was imposed on further investment in nuclear plants.

The government called on ENDESA to bail out these companies. As a result of a 1985 asset swap, ENDESA was further strengthened. The Spanish government required heavily indebted private and public companies like ENHER, Union Fenosa, and Fuerzas Electricas de Cataluña (FECSA) to sell large parts of their power stations and market share to ENDESA. This asset swap added more than Pta5 billion to the consolidated balance sheet and caused ENDESA to double in size.

In 1988 ENDESA followed Repsol as the second of three Spanish companies to be floated in New York, which, in effect, privatized 20% of the company for $670 million. Telefonica was the third. ENDESA quickly became acknowledged as an appreciating stock. INI’s stake in ENDESA—then 75%—was now one of INI’s most important assets because ENDESA accounted for most of the INI group’s profits.

As a result of these reorganizations, ENDESA changed from being solely a power-generating company wholesaling electricity, to a more diversified—but integrated—energy production company with interests in coal, oil, nuclear, and hydroelectric-generated power.

In 1990 the company expanded into coal production with the acquisition of another INI company, ENCASUR. Traditionally, ENDESA was a wholesaler of power from generating stations. It continues in this role, but its subsidiaries are full-cycle companies that can produce and sell their own products.

In 1983, however, the government also created Red Eléctrica de España or REDESA, with ENDESA as the majority shareholder, to regulate the distribution system by deciding which plants will cover the country’s electric power demands. This decision is calculated according to the cost at which certain companies can produce electricity regardless of who owns the plant. The basis is strict optimization of the costs. REDES A may buy power from other ENDESA companies or it may buy from smaller, privately owned electricity companies. There is a complicated payment system. This in effect puts ENDESA in a role sometimes played by regulatory bodies and electricity-generating boards in other countries. It must not be forgotten, however, that despite a degree of privatization, ENDESA remains a government institution in an industry in which market forces do not fully dictate its moves.

In another important way, ENDESA has continued to function through the late 1980s to the early 1990s as a government instrument. ENDESA has recently embarked on a campaign of buying interests in private companies dictated not so much by economic self-interest as by the dictates of Spanish government policy. In early 1991, ENDESA took over the small Electra de Viesgo private utility in northern Spain and increased its stakes in other small private generators and distributors.

The Spanish Socialist Economy Minister Carlos Solchaga has stated his intention to use ENDESA as his main weapon to restructure the Spanish energy sector dramatically. The government knows that its ability to intervene in the energy sector will be curtailed severely when EC rules on liberalizing the entire European energy network come onstream at the end of 1992.

In 1990, the government warned foreign power utilities not to try to buy into their Spanish counterparts. The government fears that French utility companies will sell their cheap nuclear power in Spain after 1992, severely undercutting Spanish companies, threatening Spanish jobs, and making Spain dependent on France for her power needs.

Critics claim that ENDESA has high costs and low productivity and has been kept alive by the government to buy coal from loss-making, state-owned pits. The government claims that ENDESA would severely undermine private utilities’ profits if it were allowed to compete directly in the retail market, but it also hopes that its rationalization plan for the power industry will cure any real inefficiencies before it has to compete with stronger EC firms.

Solchaga wants the power industry—including ENDESA, seven large private-sector generating and distributing companies, and several small local suppliers—to merge into, at most, three large conglomerates which would be the sole generators of electricity in the sector. The three would then supply a central network that would sell electricity to four or five distribution companies.

The mergers would also be aimed at putting Spain in a position to supply a projected 5% increase in annual demand. The government estimates that Spain must spend an estimated Pta600 billion to add the further 7,500 megawatts of electricity required by the end of the decade.

In April 1991, two major private utilities, Hidroelectrica España S.A. and Iberduero, announced that they would merge to form Iberdrola. The new company would control most of Spain’s low-cost electricity generated from hydroelectric plants and challenge ENDESA’s market position. The merger thwarted a possible bid by ENDESA, which then mounted a July bid to gain management control for Seville-based Compañía Sevillana de Electricidad S.A.

After a legal wrangle in which Sevillana’s lawyers threatened to bring ENDESA before the European Commission on grounds of unfair competition, a compromise formula was found, enabling ENDESA to raise its stake above 20% without assuming management control. The deal also allowed Sevillana to buy a 2% interest in ENDESA and a further 6% will be sold on the market. INI’s stake in ENDESA will be reduced to 67%.

The highly profitable ENDESA has been put in a privileged position by a Spanish government that is determined to build up Spanish bulwarks against foreign domination in the post-1992 single market. Prospects for further privatization of the company’s shares are uncertain.

More partial privatizations of ENDESA are likely to take place. Solchaga has said the government intends to privatize ENDESA once its rationalization plans are in place. In the short term, however, it seems unlikely that the government would want INI to give up control and risk foreign domination over ENDESA, one of Spain’s largest electricity producers and the most influential player in the power sector.

Principal Subsidiaries

Empresa Nacional Hidro-Electrica del Ribagorzana (91 %); General Europa S.A. (55%); Union Electrica de Canarias SA (99%); Empresa Nacional Electrica de Cordoba (99%); Union Fabricantes Electrodomésticos S.A. (99%); Empresa Nacional Carbonifera del Sur S.A. (86%); Red Eléctrica de España (50%).