Berlin (DPA) - German power giant RWE AG's shareholders are meeting Thursday with the nation's big utilities groups having reaped the benefits of a three-year drive to sharpen their focus on core business activities.

The meeting of the Essen-based RWE will also mark a further cultural change in German business with the group's long-running chief executive Dietmar Kuhnt bowing out to be replaced by Harry Roels, who will become the first person outside the company and the country to be appointed to the top post.

A Royal Dutch Shell board member, the Netherlands-born Roels move into the top job at RWE follows the transfer of power last month at Germany's biggest bank, Deutsche Bank AG to Josef Ackermann.

The Swiss-born Ackermann became the first foreigner to head up the bank. The 53-year-old Roels is to formally take over on February 1.

RWE said last month that it expected 2002 operating profit to outperform last year's four billion euros (3.7 billion dollars) with the group's core water and electricity businesses helping to boost earnings.

"The electricity business will make the largest contribution to value growth in 2002," Kuhnt told the group's annual press conference.

With an economic rebound taking shape in its German home-market, RWE is forecasting a 10 per cent rise in earnings from the electricity division.

A similar picture emerged at RWE's rival, E.ON AG with Europe's biggest utility group also reporting a buoyant first quarter result on the back of its core energy business sectors.

E.ON said first quarter operating profit jumped by 46 per cent to 1.3 billion euros with the E.ON Energie division contributing one billion euros of that amount. The division's performance marked an 89 per cent improvement from one year before.

The strong first quarter performance follows about three years of restructuring in the German power sector which has been characterised by mergers and the companies hiving off non-core activities and reinvesting in their core activities through a series of acquisitions.

Indeed, both E.ON and RWE were forged as a result of a series of mergers across the German power market.

Liberalisation of the European power market has also forced the pace of German utilities' overseas expansion as the groups moved to fashion global business empires to escape the pressure on domestic energy prices.

After joining the rush into the German telcoms market during the mid-1990's, E.ON's sale of its 45 per cent stake in Viag Interkom AG to British telecommunications contributed 11.4 billion euros alone to its war chest.

E.ON has sold off assets totalling almost 30 billion euros since the late 1990's with the group using the proceeds to buy Sweden's Sydkraft and the British-based Powergen.

"Through several big steps we have approached our aim of forming E.ON into a pure energy service group," E.ON chief Ulrich Hartmann told last week's shareholders' meeting.

Likewise, RWE has been also been on spending spree of about 34 billion euros aimed at strengthening its core activities, buying Britain's Thames Water in 2000 and last month launching a five billion euros bid for British-based power group Innogy.

Last year RWE made a bid for the leading U.S. water company, American Water Works with the giant U.S. power market emerging as a major target for the German utilities.

At the same time, RWE is planning to acquire Transgas AS, the Czech Republic's largest gas company, which it hopes to use as a springboard into the new energy markets of Central and Eastern Europe.

Meanwhile, E.ON is battling to win control of the key German gas group Ruhrgas through a series of complex deals but is facing opposition from German monopoly authorities who have indicated concern about competition in the German gas and power market.

Securing control of Ruhrgas would transform E.ON into Europe's biggest gas importer and further help the group fulful its ambitions of becoming a global player in the energy market.

At the same time, E.ON is hoping to further hone its core businesses by selling its remaining 49 per cent stake in Veba Oel to U.K. oil group British Petroleum next month. E.ON has already sold a 51 per cent stake in Veba Oel earlier this year.

"Diesel is coming to be seen as sexy these days," Stewart Pedder, automobile analyst at the DRI-WEF consultancy told Reuters at the sidelines of an energy refining conference in Monaco. "It's fast losing its old image of a sluggish, dirty and slow fuel suitable only for trucks."

Its growing acceptance is reflected in car sales which have seen diesel powered light vehicles account for 40 percent of all sales in first quarter of this year in Western Europe, up from 36 percent last year and less than 10 percent in early 1990s.

Pedder said the shift was spearheaded by Europe's automobile industry, banking on buyers' cost-consciousness just as diesel fuel was coming to be seen as environmentally acceptable.

European Union legislation has forced refiners to produce eco-friendly, lower sulphur diesels.

Germany, the largest motor fuel market in Europe, was using diesel with 500 parts per million (ppm) sulphur a few years ago and will switch next year to just 10 ppm fuels.

Pedder said the small car segment which was initially holding back diesel's advance appeared to have caved in.

"The sharpest rise in diesel penetration in the past three years has come in the small car segment. In 1998 there were no diesel-powered small cars but in two years 15 percent of small cars will have diesel engines."

Clean diesel engines will allow manufacturers to meet the carbon dioxide emissions limit of 120 g/km by 2010, specified by the Kyoto Protocol, Pedder said, adding that new high speed diesels offered 30 percent more fuel economy than gasoline, as well as being cheaper.

"At present diesel has a tax advantage of almost 20 percent over gasoline which makes it especially atrractive in times of economic crisis," he said, adding that any government efforts to harmonise diesel and gasoline taxes were likely to be opposed by the powerful haulage lobby.

FALLING GASOLINE SALES

One industry analyst, who asked not to be named, said the next three years would see gasoline sales declining by at least 1.5 percent a year while in the long term the fall would accelerate to over two percent a year.

He said demand for gasoline peaked in 1998.

"The number of diesel cars registered in the European Union has almost doubled since 1990," the analyst told Reuters. "As the car fleet is generally replaced every 12 years, the shift from gasoline to diesel will be the big structural change of the next decade."

The shift could present problems for some refiners who could be left with excess gasoline capacity after investing heavily in the 90s to install catalytic crackers to produce gasoline.

But most large players had seen the shift coming. Royal Dutch Shell in 2000 cut 17 percent of refining cover, most of this in gasoline, analysts say. Others are following suit.

"With the gasoline market falling by one percent a year, it's going to be difficult to see anyone investing in gasoline production," TotalFinaElf Senior Vice President for refining, Jean-Claude Company told Reuters.

But some problems are likely to haunt diesel for years to come, among these the issue of minute particulate emissions, seen as potentially carcinogenic.

Pedder said a challenge could also come from fresh Japanese advances for a new fuel efficient gasoline engine.

And in the United States, the land of cheap gasoline and the biggest car and petrol market, diesel cars have been slow to catch on.

"Experiments with diesel cars in the 1980s created the impresion in Americans' minds that diesel is a dirty and above all, slow fuel," one U.S. oil executive said.

"It's going to be difficult to convince them otherwise."

"I see this as a big success," German Industry Minister Werner Mueller said in a statement. "It is more than we would have expected not long ago."

The decision was needed to replace the European Coal and Steel Community treaty - the historic 1952 accord which paved the way for the creation of the EU - which expires next month.

Germany has invested considerable diplomatic effort securing its right to prop up the mining sector ahead of a general election in September.

Other countries, including Spain, France and Britain, provide some state aid to their coal sectors, but the biggest handouts are in Germany where mining is considered a vital employer in the Ruhr region.

The regulation agreed by ministers decrees that, as of next year, countries must gradually reduce coal aid from 2001 levels.

PHASE-OUT

Aid aimed at covering the costs of closing mines must stop by 2007, but a second category of aid - intended to support unprofitable mines - can continue until 2010.

The decision to continue allowing large scale, albeit decreasing, aid was opposed by a handful of northern European countries which oppose the support to what would otherwise be an unprofitable energy source.

Belgium and Sweden issued a formal statement expressing their concerns that although overall aid would have to be reduced, the aid to cover operating losses could, in fact rise, over the coming years.

Environmentalists have attacked the EU's willingness to go on funding an energy source which is one of the main producers of "greenhouse gases" blamed for global warming, but the EU defended its move.

"Strengthening the European Union's energy security...justifies the maintenance of coal-producing capability supported by state aid," the ministers said in the introduction to the regulation they agreed last week.

The EU is reliant on imports for 50 percent of its energy, a percentage that is predicted to rise to 70 percent by 2020. Around a quarter of EU electricity comes from coal and lignite.

The question of coal aid in the EU seems settled, at least until 2007 when the European Commission, the bloc's executive arm, reviews the policy. By then, Germany will no longer dominate the issue, Energy Commissioner Loyola de Palacio said.