The OECD said Thursday that European energy market needed greater competition, which should be enacted by splintering off network, generation and supply activities among separate companies.
The proposals, in a report from the Paris-based think tank, come as the French government pushes a merger of state-owned Gaz de France with utility Suez SA, which would create one of the world's largest energy groups and Europe's largest buyer and seller of natural gas.
The Organization for Economic Cooperation and Development said "vertically integrated energy giants can treat competitors unfairly and shut out potential entrants."
In the EU's energy market, "market concentration is high, with dominant firms often able to control wholesale prices" and "competition from imports is weak."
The OECD, which brings together some of the world's leading industrialized countries, also called state-ownership a problem "which can distort competition."
The recommendations, part of the OECD's first economic survey of the EU, back European Commission proposals to open the 27-nation bloc's energy markets to greater competition.
Energy deregulation has not been an EU success story. The bloc largely remains a hodgepodge of national or regional monopolies that can manipulate gas and electricity prices and supplies, because they operate at the network, wholesale and distribution levels.
As a result, pricing is unclear and newcomers are largely kept at bay.
In July, national barriers to open trade in energy were dropped, but the OECD said the reforms have "not been implemented well by member states."
The OECD report also recommended introducing more competition in telecoms, transport, ports and postal services to help Europe meet the challenges of globalization.
It urged more regulation, stronger enforcement of competition rules, and less and better-targeted state aid to boost the internal market between member states. Labor mobility should also be encouraged through measures such as making pensions more portable across borders.
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