The European Commission has said it will decide in early September on whether to take legal action against Spain for enacting new laws that could prevent the country's largest power company being taken over by a German energy concern.
Madrid gave extra powers to its national energy commission, CNE, in February meaning it could block Germany's E.ON bid for Spain's Endesa.
"We think the energy committee, as it was set up, is not in compliance with European law. We said we think this is violating basic treaty principles primarily freedom of movement of capital," said a commission internal market spokesperson on Wednesday (26 July).
The empowerment of CNE is seen in Brussels as an attempt to prevent the German takeover of Endesa, which is already in the sights of another Spanish energy firm Gas Natural.
The EU executive has spoken out against creating national energy champions, which it says clashes with its aim of a single European energy market.
The commission is waiting for a letter from the Spanish authorities explaining its decision to give more power to the country's energy regulator. Expected to arrive this week, it will be formally analysed and used in the decision on whether or not to take legal action.
Some believe that Brussels will go ahead with the legal route.
"All signs point to the EU intervening," said head of Endesa Rafael Miranda at a presentation on Tuesday (25 July), according to AFX News.
The comment comes just two days before CNE is expected to decide whether it approves or vetoes the hostile takeover bid of Endesa by E.ON.
Rumours circulated in the Spanish press on Tuesday that the national regulator is considering imposing an eight-month time limit on E.ON to sell its Ruhrgas gas unit as a condition for the regulator's approval of its bid for Endesa.
Ruhrgas is the biggest gas supplier in Germany and the third in Europe with 60 percent of the market.
But analysts generally believe that E.ON will not accept the sale of its gas unit as a condition and will take the issue to the EU commission.
The Spanish government has continuously argued that it is in the public interest to protect energy suppliers from foreign takeover, as this would put their security of supply at risk.
Brussels in April cleared the E.ON bid for Endesa, which it says raises no competition issues.
If the EU executive finds that the Spanish arguments are not sufficient, it could take Madrid to the European Court of Justice.