E.ON, the German energy group, has rejected fresh conditions attached by a Spanish regulator to its purchase of Endesa, the country’s largest power company, setting up a potential clash between Spain and the European Commission.

The regulator, the National Energy Commission, approved the €29 billion (£20 billion) takeover late on Thursday night, after repeated warnings by the EU not to block it. However, the regulator said that E.ON would have to sell almost a third of Endesa’s generating capacity in Spain, in particular its coal-fired stations and nuclear plants.

The Spanish Government also reserved the right to force E.ON to sell Endesa if the German company was itself taken over in the next ten years.

E.ON said that, while it had not been able to study fully the ruling, it saw “no justification for the conditions it is already aware of and reserves all legal options”.

If it decides to appeal to the EU against Spain’s decision, E.ON seems likely to find a receptive audience in Neelie Kroes, the European Competition Commissioner, who regards the takeover as a test case in her drive to open up the energy sector to competition.

E.ON has no existing presence in Spain, so the Government cannot argue that the deal would hurt competition in the country. It is not clear how the Government would justify forcing it to divest 7,600 megawatts of generating capacity.

Spain’s deputy finance minister, David Vegara, said yesterday that he remained convinced that the regulator’s ruling complied with EU law.

Spain’s socialist Government has consistently opposed E.ON’s bid for Endesa, instead backing a rival offer from the Barcelona-based Gas Natural to form a national energy champion. As recently as last week the Government seemed determined to derail E.ON’s bid. In an interview, José Luis Rodríguez Zapatero, the Prime Minister, suggested that, while he would not seek to impede other foreign takeovers of Spanish companies, he regarded the energy sector as a special case.

The threat of legal action by the European Commission appears to have deterred the Spainish regulator from trying to veto the deal outright. But the conditions attached by the panel would significantly reduce Endesa’s value to E.ON. They also appeared designed to keep assets deemed “strategic” by the Government firmly in Spanish hands. Both Gas Natural and Iberdrola, another local rival, stand to benefit from any forced sale of assets by Endesa.

The merger saga has had serious political repercussions in Spain. The Government originally overrode the objections of its competition director to allow Gas Natural to proceed with its hostile takeover of Endesa. Endesa, a Madrid-based company seen as closer to the opposition Popular Party, turned to E.ON as a possible white knight, but E.ON decided to bid for the whole company.

STRAIN IN SPAIN

July: regulator approves E.ON’s bid, but says it must sell up to a third of of Endesa’s generating capacity in Spain. E.ON objects to the conditions

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