* Policy switch follows EU-wide trend
* Government tries to protect purchasing power
* Related graphic: http://link.reuters.com/sed47t (Adds market closing price and volume)
By Geert De Clercq
PARIS, June 19 (Reuters) - State-controlled French utilityEDF lost more than $5 billion of its stock market valueon Thursday as the Socialist government scrapped a plannedincrease in electricity prices to protect consumers.
Energy Minister Segolene Royal told a morning TV show shehad cancelled a 5 percent rise in regulated tariffs, set to takeeffect on Aug. 1, which had been decided by the previousgovernment of Jean-Marc Ayrault.
Royal, a powerful Socialist politician who lost apresidential election to conservative Nicolas Sarkozy in 2007,was appointed energy minister in the new government of PrimeMinister Manuel Valls in early April and immediately begantalking about lowering energy costs.
The tariff review is part of a Europe-wide trend to capenergy prices as governments try to bolster consumer spending inthe face of stubbornly high unemployment.
French President Francois Hollande is struggling at recordlows in opinion polls, and his Socialist party took a drubbingin recent European and municipal elections.
Royal, Hollande's former partner and mother of his fourchildren, had already scrapped a planned tax on truck traffic.Earlier this week she presented a new energy law that aims toboost France's use of renewables but did little to implementHollande's promise to reduce reliance on nuclear energy.
"A 5 percent tariff increase had been set for Aug. 1. Thebills will not increase," Royal told BFM television, adding thatnew tariffs for Jan. 1 would be announced in October.
"I will make the calculation with energy regulator CRE, anindependent authority, which will work out the increase or maybea fall, based on the reform I have put in place," she added.
At the energy ministry, officials could not be reached forcomment.
Shares of EDF, which is 85 percent state-owned, fell as muchas 11 percent, their biggest slide since their 2005 stock marketlisting. They later recovered to close down 7.7 percent - theirbiggest fall since August 2011.
Nearly 11 million shares traded, the biggest trading volumesince December 2006. At the Wednesday close, EDF had a marketcap of $67.14 billion.
"The market is edgy because these comments are considered asinconsistent with communication to date and undermine theconfidence in the regulatory visibility on EDF, which should beentitled to cover its costs," Societe Generale (Paris: FR0000130809 - news) analyst VincentAyral said.
EDF shares are highly sensitive to tariff moves.
They jumped as much as 10 percent on July 9, 2013, when theAyrault government announced a 5 percent increase in electricitytariffs for the summer of 2013 and a second increase for thesummer of 2014, in a bid to help EDF meet its costs.
Those tariff hikes were the biggest in at least a decade,and EDF shares doubled between March 2013 and March 2014 as themarket anticipated their impact on its profits. The shares hadbeen on a downtrend since early April this year and were down 7percent over the past three months based on Wednesday's close.
French consumers association UFC-Que Choisir welcomedRoyal's decision to scrap the planned hike but urged her to comeup with a new legal framework to set power prices and preventlegal challenges.
Smaller competitors of EDF and gas utility GDF Suez (TLO: GAZ-U.TI - news) have successfully challenged government price caps on energy incourt, arguing they created artificially low prices that did notcover utilities' production costs and prevented smallercompetitors from winning market share from the big two.
Royal's comments follow a Europe-wide trend to cap powerprices and mark a sharp reversal in government policy.
Thanks to the 2013 tariff hike and despite a warm winter,EDF in February posted a 4.8 percent rise in core earnings in arare show of strength among Europe's struggling utilities.
Other European utilities such as Iberdrola (Other OTC: IBDRY - news) , Endesa (TLO: ELE-U.TI - news) and Enel (Milan: ENEL.MI - news) face similar pressures. Spain isoverhauling its energy sector by introducing a new powergeneration tax and cuts to renewable energy subsidies, whileItaly's government advocates a cut in network costs as part of adrive to reduce energy bills.
In Britain, power prices have risen to the top of thepolitical agenda following opposition leader Ed Miliband'spledge in September to freeze bills for 20 months if he wins the2015 election. ($1 = 0.7368 Euros) ($1 = 0.7336 Euros) (With reporting by Marion Douet; Editing by James Macharia andJane Baird)
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