ENTE NAZIONALE PER L'ENERGIA ELETTRICA History

Address:

via G.B. Martini, 3
Rome
00198
Italy

Telephone: (06) 85091
Fax: (06) 8509-3771

State Owned Company
Incorporated: 1962
Employees: 112,329
Sales: L16.46 trillion (US$14.34 billion)

Company History:

Ente Nazionale per l'Energia Elettrica (ENEL) is the National Electricity Authority of Italy. It distributes 84% of Italy's electricity demand, the bulk of the remainder being generated by industrial self-producers and municipal electricity undertakings. Among similar national boards in the world, ENEL is the fourth largest after Electricité de France, the Central Electricity Generation Board in the United Kingdom (before its privatization), and Tokyo Electric Power Company in Japan.

ENEL was established on December 6, 1962 by a special nationalization law after a long and complex debate. With a few exceptions, the law defines ENEL's task as the implementation of "all activities of production, import and export, transmission, transformation, distribution and sale of electricity from whatever source, on national territory." The exceptions include production and distribution of electricity by local authorities ("municipalities"), by smaller companies with annual production of less than 15 Megawatts/hour (MWh), and by industrial self-producers (subject to authorization). In addition to the production, transport, and distribution of electricity, ENEL performs a number of complementary activities: it operates as an electricity "bank" for the whole country, buying electricity from all producers in the country and reallocating it to its customers; it attends to all stages of plant engineering and construction; it carries out research and development on electricity and related fields; it undertakes consulting activity and technical assistance for foreign electric power companies and Italian companies operating abroad; and it undertakes exploration and development of geothermic sources. While remaining a unified national body, ENEL is operationally divided into a number of specialized departments. In order to ensure greater overall efficiency, this structure is complemented by regional organizations for the distribution of electricity at the Italian administrative levels of compartment, zone, and district.

The production and distribution of electricity remain ENEL's major activities, and the nationalization law requires ENEL to attend to the coordinated operation and enlargement of all its generating plants "in order to ensure--at minimum operating costs--a supply of electricity which is adequate, both in volume and price, for the balanced economic growth of the country." ENEL's activities are undertaken under the supervision of the Ministry of Industry and Commerce and in accordance with the directives of the Interministerial Committee for Economic Planning (CIPE).

Many of ENEL's past and current features cannot be fully understood without considering the political and historical circumstances that led to its formation. After World War II the debate on energy issues in Italy was essentially limited to the desirable nature--private or public--of firms that might operate in this area. At the time, electricity was generated by a large number of private companies, a few municipal plants, and a few generating companies controlled by IRI (Instituto per la Ricostruzione Industriale), a public holding company founded in 1933 to save the substantial portion of Italy's industry that was involved in a major banking collapse. The combined output of the public sector--IRI's public utilities, municipal plants, and the railways--accounted for about 30% of Italy's total electricity supply. In the Constitutional debate, the parties of the political left were in favor of the complete nationalization of the electricity industry, but these demands were blunted by a compromise: while the Constitution retained the principle of nationalizing entire sectors ("when related to essential public services, or energy sources, or situations of monopoly"), any implementation in the electricity industry was deferred. The government formally regulated electricity rates, but the influence of the private sector utilities was strong; they subsidized political parties and newspapers in order to influence political decisions and public opinion, and the rates they charged their largest industrial customers were not fully revealed so that the administrative bodies charged with the determination of rates lacked much of the information necessary to perform the function.

Many felt that full nationalization was the only possible solution, as the decentralization of decision-making was an obstacle to the integration of thermoelectric and hydroelectric power production as well as to the construction of the national power grid. Lobbying was strong, however, in favor of maintaining the status quo, and the anti-nationalization lobby also advocated the privatization of Agip--the national hydrocarbons corporation that was perceived as a remnant of the Benito Mussolini years. While the privatization of Agip was averted by the initiative and determination of Enrico Mattei, who strongly believed in the importance of an autonomous Italian presence in the world oil and gas scene, the utilities succeeded in stalling any nationalization plans for a considerable time.

The vested interests against nationalization were so strong that until 1962 no reform plan was brought to Parliament for discussion. In the meantime, in the absence of any explicit commitment toward a national energy policy from the government, a leading role was assumed by Ente Nazionale Idrocarburi (ENI), the national hydrocarbon corporation created in 1953 under the forceful management of Enrico Mattei. Not surprisingly, most of Italy's industry and its political referents were hostile to ENI, whose dynamism and ambitions served to highlight the stagnation of the electricity industry.

In the 1950s three main factors contributed to the acceleration of the drive toward nationalization: the development of nuclear technology in the production of electricity, which called for a substantial public intervention because of the massive investments involved; the long lead times--time necessary for project design, planning, and implementation--needed before reaching commercial generation; and the economic boom of the 1950s, which emphasized the risks and limits of thriving economic growth when not adequately supported by the necessary infrastructure. The issue of a national energy policy was put back onto the agenda, and three main bodies of opinion formed: a defensive position, championed by the private electricity companies, supporters of the status quo; the concentration in ENI of all activities related to the production of energy, including electricity from all sources; and the creation of a separate national electricity board. The third lobby prevailed, and this was probably the most important and long-lasting achievement of the first center-left government in Italy's republican history. The Parliamentary debate was intense, but the decision was reached comparatively quickly, as the powerful avant-garde of Italy's industry--led by FIAT--had come to the conclusion that defending the status quo in electricity was no longer a primary concern.

As for the choice of the legal status of the new body, the possible options included: an IRI-type formula (a holding company of which the majority of shares would be held by the State); an ENI-type formula (a state-owned holding company with its own equity, which would carry out its statutory tasks via the creation of companies fully or partially controlled by the state); a full integration of the electricity sector in the public sector; or an autonomous public body that would finance itself by issuing bonds but could not create affiliated companies or hold shares in any other company. The latter option prevailed, and 1,189 electricity companies of different sizes and with different structures were merged into a unified and integrated body for the production, transmission, and distribution of electricity throughout Italy. It was an operation of unprecedented complexity compared with electricity nationalizations in France (1946) and Britain (1947), which were effected in considerably simpler conditions. In 1963, 73 companies were consolidated, representing about 85% of the total assets being nationalized; the companies consolidated in ENEL rose to 221 at the end of 1964, representing around 92% of the industry's asset value, and to 905 at the end of 1966. This year marked the de facto completion of the nationalization process, as the 284 companies transferred to ENEL in the following years were of relatively minor importance.

The nationalization law decreed that ENEL's original assets were to be obtained through the transfer of assets from the former generating companies. Unlike ENI, ENEL was not endowed by the state with any initial capital, and the nationalization law established that funds for the compensation of shareholders and for future investments were to be raised by issues of special ENEL bonds guaranteed by the state, within the limits set on a case-by-case basis by an interministerial committee.

The weight of social and political considerations on ENEL's management has been very heavy from its inception. First, the law established that ENEL paid compensation not to the individual shareholders, but rather to the nationalized companies as such, so as to encourage them to carry out activities in other strategic sectors. The favorable terms adopted for compensation were intended to encourage this transition. ENEL was to pay the former electricity companies stock market prices for their shares, which led to a flurry of speculation on the stock market such that ENEL actually paid inflated prices. In addition, all compensation was to be completed in a comparatively short period with a number of credit and fiscal allowances made in favor of the nationalized companies; the agreed amounts were to be credited in cash every six months over a total period of ten years, with an annual interest of 5.50%. The total principal and interest paid amounted to L2.3 trillion. These conditions had the effect of imposing a heavy financial burden on ENEL, given that ENEL had to finance itself by external borrowing and bond issues. For several years the debt incurred for compensations to ex-producers severely affected ENEL's balance sheet. Another burden for the newly-created body was that nationalization, while creating some efficiency gains in transport and distribution, also generated pressure for an increased work force and higher levels of wages and salaries: the total number of ENEL's employees grew from nearly 68,000 in 1963 to an all-time high of nearly 118,000 in 1981.

On the technical front, the crucial challenge for the electricity industry was to undertake the transition from a structure predominantly based on hydroelectric generation to a system that was better equipped to meet the needs of fast industrial growth. In 1960 hydroelectric power was still the predominant source--about 75% of the total--while electricity from petroleum products (fuel oil), natural gas, and solid fuels represented 15%, 3%, and 7% respectively. This structure was bound to change rapidly. In order to meet the fast growth in electricity demand, ENEL started a massive investment program focused on the construction of new thermoelectric plants. At the end of the 1960s thermoelectric production had come to represent 60% of the total, thus becoming the axis of the whole system. Within this share, electricity from fuel oil represented 80%. The policy of diversification of sources also embraced nuclear power generation, and three nuclear plants were built.

However, ENEL's overall efficiency and productivity of labor in its first decade of activity was very low, largely because of two factors: the difficulties inherent in the nationalization process itself and the constraints imposed on personnel management by politicians and unions. As for the former, ENEL had incorporated a large number of heterogeneous plants not adequately interconnected, and the rationalization and restructuring of plants and grids required massive investments in the first few years. As for the latter, it was soon clear that for political reasons the creation of ENEL was not to be allowed to result in any redundancies, and this led to a rapid expansion of the work force. In short, in the first decade of nationalization, the dramatic expansion in the work force and the rise in labor costs counterbalanced the advantages of nationalization in terms of scale and grid economies. Furthermore, for many years ENEL had to suffer the consequences of a political ceiling imposed by government on the rates it could set and other allowances in favor of household users, which created distortions in the patterns of consumption and investment.

The first oil crisis of 1973 transformed the underlying premise of Italy's electricity industry, an abundant availability of cheap imported oil. At the time Italy was already in a position of strong dependency on hydrocarbons for electricity generation, which made the need for a change of direction in national energy policy even more pressing. The approach chosen, in the Italian tradition, was to widen the scope of central planning in defining broad aims and policy lines, thus imposing a further layer of bureaucracy on the existing powers of guidance of the national energy boards (ENI and ENEL). Furthermore, since the time involved in the preparation and discussion of these programs tended to be very long, it often happened that by the time definitive approval was given many of the key elements of the picture had become obsolete.

The 1975 and 1977 National Energy Plans (PENs) recommended a major shift toward coal and nuclear power stations, together with fuller exploitation of domestic energy sources, increased imports of natural gas, and the encouragement of energy conservation. In the Italian institutional system the planning stage is only the initial phase of a complex procedure to be completed before reaching the implementation stage; very soon obstacles were put in the way of the implementation of these programs and the construction of planned capacity. Electricity generation from fuel oil, which was to be phased out in the context of the proposed diversification of energy sources, remained the cornerstone of Italy's electricity generation. During the period 1970-1974, the consumption of Italian thermoelectric power stations, essentially petroleum products, increased from 15.7 million tons oil equivalent (Mtoe) to 22.8 Mtoe.

The debate over the future of energy policy became more intense in the wake of the second oil shock of 1979, which had grave consequences for domestic inflation rates. But the seriousness of the situation did not stimulate a more decisive approach, and the 1981 and 1986 PENs essentially reiterate most of the previous documents' recommendations. The commitment to the nuclear sector remained, together with major emphases on coal, increased imports of natural gas, and the development of domestic sources of gas. During the period 1980-1987, the consumption of thermoelectric power stations increased to 33.3 Mtoe, of which 19.3 Mtoe was oil products. The only concession to diversification was the start-up of the Caorso nuclear station and the conversion of some power stations from fuel oil to coal. On the demand side, the transition from a model of economic development based on heavy industry--highly energy-intensive--to a lower energy intensity manufacturing industry caused a decline in industrial energy demand from 41.5 Mtoe in 1974 to 31.5 Mtoe in 1985. This was more than offset by an increase of electricity consumption in the household and service sectors.

On the whole, there is no doubt that ENEL's efficiency has been heavily constrained by bureaucratic delays and the failure of government and parliament to devise and implement a workable energy policy. The major problem for ENEL lies in the bureaucratic procedures for the authorization of new plants. Attempts have been made to simplify and speed up procedures, but in essence the government lacks the power to authorize the construction of a plant against the wishes of local authorities. Local opposition to the setting-up of electricity plants has also had the effect of preventing ENEL from optimizing the choice of plant-types on the basis of their expected economic merit.

ENEL is also heavily dependent on the political authorities for investment financing, both because electricity rates are imposed by CIP for all users and because any recourse to external borrowing by ENEL is subject to government authorization. The control of electricity rates is a sensitive political issue, as they have been used as an instrument for attaining more general policy objectives, such as the battle against inflation and the subsidization of particular consumer groups or areas. This contributed to ENEL's serious financial difficulties in the first part of the 1980s, when soaring production costs added to the burden of interest repayments. These difficulties were eased in the second part of the decade after a substantial increase in rates and an injection of funds from the government; between 1986 and 1990 the ratio of overall financial charges on ENEL's total assets declined from 65.4% to 58.6%. Another substantial rates increase was granted by CIP in December 1990 after some years of steady or declining electricity prices. In the 1980s ENEL also began an overdue rationalization of its work force. The total number of employees declined to 112,000 in 1988 and has remained fairly stable since. At the same time, electricity sales have increased substantially; in 1990, 4.7 times as many kWh were sold as in 1963, with an associated growth of productivity measured in terms of sales of electricity per employee.

The major problems for ENEL in recent years have been the veto imposed on the operation and construction of nuclear power plants and the growing hostility--for environmental reasons--toward thermoelectric plants, with the exception of natural gas. The consolidated features of Italy's energy policy were put into serious question by the Chernobyl accident in the former Soviet Union in April 1986. The ensuing debate culminated in a National Energy Conference in February 1987 that embraced all themes of the economic, technical, and institutional viability of a series of energy options and took on a number of environmental concerns neglected in previous decades. However, the fundamental problem of Italy's energy policy--the wealth of programs contrasted with the lack of implementation and choice--was not solved as the conference could not provide a definitive answer to the question of how to reconcile economic viability, environmental concerns, and safety.

Together with other factors, the failure of the political parties in the government coalition to find an agreement on these issues led in April 1987 to the fall of the government that had convened the conference and to an early general election. A referendum was held in November 1987 that revealed strong public hostility toward nuclear power. This referendum effectively marked the end of nuclear electricity in Italy, and ENEL was forced to interrupt the operation of all existing plants and to convert plants under construction--at a huge overall cost--to coal-fired or oil-fired power stations.

The major effect of this development was a dramatic rise in Italy's net electricity imports, which reached almost 35 billion kWh in 1990, equivalent to nearly 15% of all electricity consumed. Imports of electricity have always found their economic rationale in the fact that the unit cost of imports can be lower than domestic production costs, due to overcapacity in neighboring countries, in particular France, with its excess of nuclear power. But to a very large extent this increase in imports has become a necessity in recent years. While the domestic supply/demand ratio improved between 1980 and 1985--because electricity demand slowed down and approximately 9,000 MW of capacity was brought into use--in the second part of the decade the situation deteriorated considerably. Despite sustained demand growth and the closure of the existing nuclear plants, with capacity totaling approximately 1,300 MW, only a modest increase in capacity has been possible in hydroelectric, geothermic, and thermoelectric plants. The growth of electricity imports is responsible for a fall in productivity over the last few years; given that the production process is very rigid in the short term, a rise in imports does not translate into a proportional reduction in the use of other production factors, and the result is an efficiency loss. ENEL's strategy in the early 1990s was to sign more long-term supply contracts with different suppliers: in addition to traditional imports from France, Switzerland, and Germany, ENEL import contracts were being negotiated with Tunisia and the former Soviet Union. In short, despite having achieved many of the objectives it had originally set, ENEL has not quite succeeded in fully providing for Italy's electricity requirements. This failure, however, cannot be blamed exclusively on the board's management, but rather on the influence of social and political factors. The increase in imports is a direct consequence of the block imposed on nuclear power, while the excess of regulation that has burdened ENEL throughout its history has made it nearly impossible to construct large thermoelectric power stations, which are also those with lower unit costs. On a few occasions, attempts have been made to initiate a reform of ENEL. The first of such reform commissions was set up by the Italian government at the end of 1984, with the task of advancing proposals for restructuring ENEL's organization and changing its ownership structure. The commission's conclusions, however, were that the organization of ENEL had to be left unchanged, while the question of ownership was left for the government to decide. In February 1990 a second commission was appointed by the Ministry for Industry to study the reform of ENEL, and it had three objectives: to analyze the relationship with other Italian producers, to analyze possible ENEL-private sector joint ventures for the production of electricity, and to consider amendments to the law that might allow the entry of private capital into ENEL. As of mid-1991, however, the commission's conclusions were not yet known.

Considering that the debate over privatization has been going on for some time and is gaining support, the possibility cannot be excluded that a decision in favor of full or, more likely, partial privatization will eventually be made, but it will require delicate political mediations. In the meantime, the emerging supply constraint led to the approval of a new law (January 1991) intended to relaunch self-production of electricity and to liberalize--within certain limits--the production of electricity. ENEL is obliged to transport electricity produced by the new undertakings, but at the same time they remain committed to selling any surplus production only to ENEL. The law also introduced partial decontrol of electricity sales, whereas before the self-producers of electricity were forced to sell any surplus only to ENEL, now they can sell this surplus to other end-users, provided the electricity is produced from renewable resources or from combined heat and power plants (cogeneration).

ENTE NAZIONALE PER L'ENERGIA ELETTRICA History

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