Sales: EUR 15.68 billion ($14.7 billion) (2000)
Stock Exchanges: Madrid New York
Ticker Symbol: ELE
NAIC: 221111 Hydroelectric Power Generation; 221112 Fossil Fuel Electric Power Generation; 221122 Electric Power Distribution
ENDESA S.A., Spain’s largest utility, 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. ENDESA continued to increase in size as the Spanish utilities industry began to deregulate during the 1990s. ENDESA became fully privatized in 1998. Since that time, the company has been restructuring, making strategic partnerships, and increasing its holdings in the telecommunications industry. The firm serves over 22 million customers in 12 countries.
The INI Under Franco’s Regime
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 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 the government.
Much of ENDESA’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 Nazi Germany and fascist Italy—who backed Franco in Spain’s civil war—to join their side in World War II, he announced a policy of “non-belligerency.” 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 the government’s request, INI had to take over failing private companies. This last requirement, the nursing of “lame duck” companies, was 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.
The Creation of ENDESA: 1944
ENDESA was created as a public limited company, 98 percent-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 that had low production levels and lacked modern methods, equipment, and facilities. 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 1958–60 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 persisted up until the 1990s. 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 percent. By 1960, however, 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 function 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 loss-making companies in rescue operations.
ENDESA Reorganizes: 1980s
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.
We concentrate our effort on satisfying the customer, providing competitive and quality solutions. We promote ongoing improvement and innovation to achieve maximum quality with profitable criteria. Our activities are aimed at achieving the objectives of the business project and profitability for our shareholders, endeavoring to exceed expectations. We make a social and cultural commitment to the Community. Our business strategies are environmentally friendly.
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. Nevertheless, after reorganization, 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 over-investments 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 Cataluna (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 percent 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 percent—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 continued in this role in the early 1990s, but its subsidiaries were full-cycle companies that could 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 would cover the country’s electric power demands. This decision was calculated according to the cost at which certain companies could produce electricity regardless of who owned the plant. The basis was strict optimization of the costs. REDES A was able to buy power from other ENDESA companies or it could buy from smaller, privately owned electricity companies. There was a complicated payment system. This in effect put 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—at the time—remained a government institution in an industry in which market forces did not fully dictate its moves.
In another important way, ENDESA continued to function through the late 1980s to the early 1990s as a government instrument. ENDESA 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.
Overcoming Deregulation Fears
The Spanish Socialist Economy Minister Carlos Solchaga stated his intention to use ENDESA as his main weapon to restructure the Spanish energy sector. The government knew that its ability to intervene in the energy sector would be curtailed severely when EC rules for liberalizing the entire European energy network took effect at the end of 1992.
In 1990, the government warned foreign power utilities not to try to buy into their Spanish counterparts. The government feared that French utility companies would 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.
In the early 1990s, critics claimed that ENDESA had high costs and low productivity and was kept alive by the government to buy coal from loss-making, state-owned pits. The government claimed that ENDESA would severely undermine private utilities’ profits if it were allowed to compete directly in the retail market, but it also hoped that its rationalization plan for the power industry would cure any real inefficiencies before it had to compete with stronger EC firms. Solchaga wanted 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.
- ENDESA is created as a public limited company, 98 percent owned by INI, to construct power stations.
- INI is placed under the jurisdiction of the Ministry of Industry.
- ENDESA reorganizes as part of the government’s plan to make INI more efficient.
- ENDESA doubles in size due to an asset swap.
- Twenty percent of ENDESA is privatized when it lists on the New York Stock Exchange.
- The government continues to deregulate utilities and its holding in ENDESA falls to 66.89 percent.
- The firm becomes fully privatized.
- Telecom Italia, Union Fenosa, and ENDESA form AUNA, a grouping of all of their Spanish telecommunications holdings.
The mergers would also be aimed at putting Spain in a position to supply a projected 5 percent increase in annual demand. The government estimated that Spain had to 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, Hidroeléctrica España S.A. and Iberduero, announced that they would merge to form Iberdrola. The new company controlled most of Spain’s low-cost electricity generated from hydroelectric plants and challenged 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 percent without assuming management control. The deal also allowed Sevillana to buy a two percent interest in ENDESA, with a further six percent to be sold on the market. INI’s stake in ENDESA would be reduced to 67 percent. The highly profitable ENDESA had been put in a privileged position by a Spanish government that was determined to build up Spanish bulwarks against foreign domination as the industry deregulated.
Privatization Continues: Mid- to Late 1990s
Indeed, ENDESA held strong to its growth strategy for much of the 1990s. In 1994, INI reduced its holding of the firm to 66.89 percent by way of a second public offering. As full privatization appeared imminent, ENDESA began to bolster as well as diversify its holdings. In 1995, it purchased 9.7 percent of Edenor S.A., the electrical distributor based in Argentina. The company also acquired 7.2 percent of Airtel, the second-largest mobile phone operator in Spain. In 1996, it increased its holding in Sevillana. That year the company reported a profit of $1 billion.
Deregulation of both the telecommunications and the electrical utilities industries in Spain went hand in hand. As such, Spain’s second-largest fixed phone operator, Retevision, came under control of ENDESA and a group of investors in 1997. In August of that year, it purchased a 29 percent controlling interest in Enersis, Chile’s main power group, for $1.5 billion. In September, the firm led a consortium that purchased 48.5 percent of Codensa, Columbia’s electricity distributor, for $1.3 billion. By now, ENDESA had become the largest electricity group in all of Latin America. Twenty-five percent of ENDESA was offered to the public that year.
ENDESA became a private company in 1998 when the remaining 33 percent of the firm was made public. By that time, the company controlled 43 percent of its home distribution market and 47 percent of its national generation market. Management emphasized that further diversification and expansion was necessary, especially in the face of increased competition brought on by deregulation. The firm continued to make acquisitions including increasing its interest in Enersis to 60 percent. It also purchased ten percent of the Amsterdam Power Exchange, ten percent of Cable y Televisión de Catalunya, and 3.64 percent of Repsol. The company also divested certain assets including some of its holdings in Antena 3, Cepsa, and Airtel.
ENDESA entered the new millennium a much different company then it had been just five years earlier. Out from under majority government control for the first time, the company continued with its restructuring plan—which had started in 1999—so that it could compete effectively in a deregulated market. The firm created ENDESA Servicios, ENDESA Generación, and ENDESA Distribución to oversee its internal needs, electricity production, and electricity distribution, respectively. In 2000, the company’s separation of its distribution and generation businesses was completed.
That year the company teamed up with Telecom Italia and Union Fenosa to create AUNA Operadores de Telecomunicaciones S.A., a firm that combined all of their holdings in Spanish telecommunications firms. It then purchased SMARTCOM PCS, a Chilean mobile phone operator. In 2001, ENDESA acquired 45 percent of Enel SpA’s Elettrogen, an Italian electricity generation firm. Not all of its attempts were successful, however. In February 2001, it canceled its $13 billion bid for Iberdrola when both companies deemed the merger conditions set by the government were unacceptable.
During 2001, ENDESA launched its new corporate identity and completed streamlining its operations into six distinct business lines, including generation, distribution, commercialization of electrical energy, international lines, diversification, and services. Management felt that this new ENDESA was well positioned to compete in the ever-changing and increasingly competitive industrial market. As one of the largest companies operating in Spain, ENDESA’s future in the deregulated market looked promising.
Amsterdam Power Exchange (10%); Cía Operadora del Mercado Eléctrico Español, S.A. (COMEESA) (5.71%); Compañía Sevillana de Electricidad I, S.A. (SEVILLANA I); Electricidad de Puerto Real, S.A. (EPRESA) (50%); Suministradora eléctrica de Cádiz (33.5%); Electra de Viesgo I, S.A. (VIESGO I); Eléctricas Reunidas de Zaragoza I, S.A.; Gas y Electricidad I, S.A. (GESA I); Termoeléctrica del Ebro, S.A. (ELECBRO); Unión Eléctrica de Canarias I, S.A.; Distribuidora Eléctrica del Puerto de la Cruz; Eléctrica de Lijar S.L. (50%); Hidroeléctrica de Cataluya, S.L.; Nuevas Iniciativas Eléctricas del Sur, S.A., (NUINELEC); Anllares, A.I.E; Aragonesa de Actividades Energéticas, S.A. (AAESA); Carboex, S.A.; CARBOPOR (95.36%); Central Nuclear Almaraz, A.I.E (36.02%); Central Térmica Litoral Almería, A.I.E.; Central Térmica Los Barrios, A.I.E.; Empresa Carbonífera del Sur, S.A. (ENCASUR); Endesa Puertos, S.L.; Hispano-Francesa de Energía Nuclear (HIFRENSA) (52%); Nuclenor, S.A. (50%); Endesa Trading, S.A.; Endesa Gas, S.A.U.; Endesa Telecomunicaciones, S.A.; Endesa Cogeneración y Renovables, S.A. (ECYR); Endesa Chile (59.98%); Endesa Internacional Energía LTD. (Brazil).
Principal Operating Units
ENDESA Generación; ENDESA Distribución; ENDESA Energía; ENDESA Diversificación; ENDESA Internacional; ENDESA Servicios.
Hidroeléctrica Del Cantábrico, S.A.; Iberdrola S.A.; Unión Eléctrica Fenosa, S.A.
“Chile: Endesa Acquired 53.78% Stake in Enersis,” South American Business Information, April 19, 1999.
Donaghy, Peter and Michael Newton, Spain: A Guide To Political and Economic Institutions, Cambridge: Cambridge University Press, 1989.
“Duke Still Guns for Endesa,” Oil Daily, February 24, 1999.
“Endesa Shrinks to Grow,” Power in Europe, October 10. 1997, p. 2.
“Enersis Clash Hits Endesa Sale,” Petroleum Times Energy Report, November 3, 1997, p. 6.
Johnson, Keith, “Endesa Wins Bid to Acquire Italian Electricity Producer,” Wall Street Journal, July 4, 2001, p. 4.
Robinson, Andrew, “Jockeying for Power in Spanish Electricity,” Business Week, October 24, 2000.
“Spain Launches Her Largest Public Offer,” Privatization International, October 1997, p. 5.
—Noel Peter Byde and Clark Siewert
—update: Christina M. Stansell