Liberalisation of the European Union's energy market is failing to deliver the benefits of increased competition, according to two separate studies released last week.

With the exception of the UK and Scandinavia, the markets in Europe are criticised as producing greater market concentration and a failure to produce price savings and customer choice.

"Germany has disappointed in failing to deliver the regulatory environment necessary to engender competition, while France has opposed competition and liberalisation every step of the way," according to consultants Accenture in a study of energy market competition.

Germany's Institute for Applied Ecology has reached similar conclusions in a study of market concentration in the power generation sector. "The remaining and upcoming market concentration in the field of power generation has to be seen as endangering fair, competitive and sustainable energy markets," it said in a report released by Claude Turmes, the European parliament's rapporteur on electricity liberalisation.

According to one estimate the seven biggest players in electricity generation spent a total of more than €43bn on acquisitions last year - almost three times the previous year's figure, increasing concerns about concentration.

"Without stricter rules on market dominance and a phase-out of the existing market distortions in favour of some big players, the European electricity market will become dominated by a handful of oligopolies," Mr Turmes warned yesterday.

Both studies exempt the UK from criticisms. Accenture says the UK market "stands alone as the most successful in both delivering effective com petition and realising the benefits in terms of price saving and customer choice."

The German study described electricity generation in the UK as "the first and most strictly liberalised market in Europe."

However the UK has its own concerns about energy market liberalisation. Callum McCarthy, chief executive of Ofgem, the British energy regulator, said yesterday that gaining access to the German gas transmission network was "of critical national importance" for the UK.

He said: "Some time in the next 20 years there will be substantial gas imports to the UK from Russia and these can only come here via Germany.

"Making sure there's access to these on reasonable terms is of critical national importance." In contrast, even 100% liberalisation of the French domestic market was a matter of third or fourth interest to Ofgem.

Mr McCarthy criticised the German authorities for failing to appoint a gas regulator - a move which, in his view, underlined the "myth that Germany is an open economy".

When Eon turns to the international capital markets on Friday to raise between E5bn and E7.5bn to finance its E16bn acquisition of Powergen, it will be a test of investor sentiment towards the European utilities sector.

If the German utilities company raises the maximum amount in the range, it will be the largest bond issue ever in its sector.

If the amount is closer to E5bn, which is widely expected, it will still be one of the benchmark bonds in European corporate debt - but it will be a strong indicator that the easy ride European utilities have had in the bond markets could be over.

"The supply-demand balance is definitely less favourable than it was earlier in the year," says Jonathan Segal, on the bond syndicate desk at Barclays Capital, one of the bookrunners for Eon's bond.

Eon is the second German utility in as many months to issue jumbo bonds. Last month, RWE issued E6.5bn to finance its £3.1bn takeover of Innogy.

While RWE and Eon are busy wondering who will emerge victorious from the rapid consolidation of the energy industry in Europe, bond investors are asking how many more jumbo bonds utilities can get away with before supply overwhelms demand.

Corporate debt supply in the European utilities sector grew from E18bn in 2000 to E36bn last year on the back of a flurry of mergers and acquisitions which followed deregulation in many countries. It is showing no signs of dying down, with E21bn having already been issued so far this year.

Now, the struggle for consolidation in the European utilities market has reached a critical stage, and the large companies are keener than ever to raise cash in order to expand internally or push ahead with, in some cases, costly acquisitions.

"M&A activity has been the driving force behind the large, new bond issues," says Jens Jantzen, a utilities analyst at Bear Stearns. "And it will continue that way."

Some leading southern European operators such as Enel and Endesa are due to step into the market as deregulation in their domestic markets forces them to expand abroad. But if supply continues to grow as expected, stability in the credit markets will only be maintained by high levels of demand.

Until now, that has not been difficult to come by. Utilities were always a safe-haven for investors looking to balance their portfolios with highly rated, predictable credit.

In a year that saw high volatility and sharply wider bond spreads in the other two main sectors of European corporate debt - telecoms and autos - utilities debt became all the more sought after.

"With utilities, you don't have the technology risk, and you have huge amounts of profits coming from natural monopolies which offer stability in revenues," says Marc Watton, senior utilities analyst at BNP Paribas.

But it may not always be the case. M&A activity and deregulation have gradually pushed credit ratings downhill as companies have become more leveraged and in some cases are losing their domestic dominance.

"As the large utilities become more leveraged, there will be downgrades, albeit gradual downgrades, one notch at a time," says Mr Watton.

Last month, Standard & Poor's downgraded Eon's rating to double A minus from double A citing the strain on the company's financial standing posed by its acquisitions strategy. Overall, the ratings in the sector are falling from double A to single A.

European bond investors are also watching the extent to which the fall-out from the collapse of the largest US energy trader, Enron, will affect European utilities.

Until now, issuers have successfully shown that the fundamentals of European utilities are much sounder than their American counterparts and are all consolidated on the balance sheet.

Investors got a taste of volatility last week, when Vivendi's ratings came under pressure, sending its spreads 80 basis points wider, before they recovered.

Overall, utilities have underperformed the rest of the credit market by 2 basis points since early March. Could the sector's traditional stability be faltering ?

MEXICO CITY - Mexico, the world's no. 7 oil producer, plans to develop technology to pump for oil in deep offshore fields to offset a decline in output in mainland wells, the research arm of the nation's energy ministry said yesterday.

Currently the deepest site in Mexico is producing oil from is 90 meters (295 feet) below sea level.

"Our goal is to be ready to give technical support to Pemex to exploit these (deep water) fields in four years," Valle told Reuters.

While many foreign oil companies have the technology and know-how to produce oil in deep water, Mexico's constitution gives only Pemex the right to exploit the nation's oil.

Pemex in February authorized the creation of a special research and development division in the IMP to work on deep water production.

Foreign companies have contracts with Pemex to drill for oil and gas and provide technical services but exploration and production of Mexico's hydrocarbon resources remains out of bounds to foreign oil majors.

Pemex is currently drawing up controversial contracts for companies to offer multiple services to produce gas at its Burgos field which it hopes will bring private capital into the gas sector and boost production.

But the issue is likely to face strong political opposition given that Mexico's energy industry has been regarded as a symbol of sovereignty and independence since it was nationalized by former president Lazaro Cardenas in 1938.

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