There is turmoil in the Spanish energy sector with major companies fighting to gain the lead in the game of power politics. They have suddenly realised that if they want to hold their head above water in a Single Market they must expand.

Endesa, Spain's largest electricity company, is one of the major players. It recently announced a takeover of the country's second largest electricity supplier, Iberdrola, for an estimated price of €16.82 per share. If approved by the monopolies commission, the merger will result in the power giant of a world class. A merged Endesa-Iberdrola would control 80 per cent of the Spanish energy market and have the capacity to generate 52 gigawatts of power to 37 million customers.

Mr Rodrigo Rato, the Spanish economy minister, said no company would be allowed to control more than 45 per cent of the domestic electricity market. To conform with this ruling and with monopoly regulations the enlarged company will have to divest itself of assets. It says it will do this through sales or swaps with other European electricity producers.

The government of Prime Minister Mr Jose Maria Aznar must also approve the merger before it is presented to an extraordinary meeting of shareholders for their approval within the next six months. But this is far from being a foregone conclusion; some major shareholders have made it clear they are not in favour. At least one of them, Banco Bilbao Vizcaya Argentaria (BBVA), which has a 10 per cent stake in the oil company Repsol and a 9.5 per cent share in Iberdrola, is against the merger, complaining that the Iberdrola had ignored better offers from other bidders.

The deal has caused concern among competitors of both Endesa and Iberdrola. Repsol had put in its own bid for Iberdrola and is unlikely to allow the takeover to go through without a fight. Repsol's subsidiary Natural Gas is believed to have approached Iberdrola's chairman last summer with a merger proposal and offered more money than the offer finally accepted by the board, half of which would have been in cash.

Repsol executives accuse the two electricity companies of ganging up on them so as to keep the oil industry out of the power business. Only days before the Endesa-Iberdrola merger announcement, Iberdrola signed a 15-year agreement with ENI of Italy to supply Spain with liquid gas. They aim to gain a 25 per cent share of Spain's gas market by 2005.

Repsol holds a virtual monopoly of the Spanish gas market, and a merger between Repsol and Iberdrola would have liberalised the market. "Gas Natural's offer was better than Endesa's, but a majority of the board refused even to consider it," complained one disgruntled executive.

The government has made it clear it is in favour of consolidating to create larger champions in the European market. "The banks recognised this some time ago and now the major Spanish banks can hold their own with any in the world. But the energy sector has left it late. They only just realised that they lacked the size to compete with their European rivals and are having to make up for lost time," says Ms Isabel Prado, a Madrid-based financial analyst.

The sector offers many juicy prospects. Spain's fourth largest utility company, Hid roelectrica, is also up for sale and is in talks with a German bidder, while further interest has been shown by TXU of Texas, French and Italian American companies. Union Fenosa, the third largest power company, is in the market for expansion, and Hidrocantabrico is considering an offer from the German company, Energie Baden Wurttemburg.

Endesa has also admitted that it has been holding talks with Electricite de France and Enel of Italy to discuss the possibilities of swapping assets or electricity output. Mr Rafael Miranda, the Endesa chairman, said his company hoped to become a major operator in southern Europe including Portugal, Italy and France.

The consumers' associations have been watching these battles with concern. "The creation of international champions in the energy business will be to the detriment of the consumer and national competition," said a spokesman.