* State-run EDF operates all France's nuclear reactors
* Smaller power firms can buy electricity at fixed price
* EDF says existing mechanism unfair, needs reform
By Bate Felix
PARIS, Sept 19 (Reuters) - The French government plans to reform the way independent power firms buy nuclear electricity from state-run EDF, but has drawn criticism from the smaller firms which say the draft proposals will reduce competition and increase their costs.
Under the existing Arenh mechanism, EDF offers up to 100 terawatt/hours (TWh) per year, or about a quarter of its French nuclear production, to its smaller rivals for year-ahead delivery at a fixed price of 42 euros ($49) per megawatt.
The mechanism was set up to encourage competition and offset EDF's monopoly on nuclear power production. EDF operates all 58 of France's nuclear reactors that generate more than 75 percent of the nation's electricity needs.
EDF has long complained the mechanism gives rivals unfair access to its nuclear output and says competitors profit from arbitrage trade -- buying power via the Arenh window at a fixed price and reselling it when wholesale market prices are higher.
The proposed reform aims to curb this arbitrage by setting new conditions for purchasing nuclear power, changing quantities allocated for a given period and locking buyers into contracts, the draft reform seen by Reuters showed.
"The proposed reform poses a serious threat to competition in the electricity market," the independent power providers said in a statement sent through their gas and power lobby groups.
They said the reform would mean they would carry more risk, would have less visibility about the volume they would receive and would face increased costs for accessing the mechanism.
Under the changes, sales of nuclear power under the Arenh mechanism would be staggered, with 40 percent of the 100 TWh sold on Jan. 15, 25 percent on July 15 and 35 percent on Nov. 15. Supplies would be delivered from the following January.
Currently, independent providers bid for the whole Arenh volume at the same time, in November, with delivery made from January the following year.
The independent providers have urged the French new energy minister, François de Rugy, to halt the reform and increase their access to EDF's nuclear power.
"The reform could artificially reduce the size of the Arenh mechanism," a source at one independent power provider said, adding the changes could violate European competition laws.
French and European electricity contracts for year-ahead delivery have soared well above the Arenh price in recent weeks, tracking gains in coal, gas and European carbon emission prices.
The French Cal'19 delivery contract hit an all-time high of 63.50 euros/MWh on Sept. 11. It was trading at 58.80 euros/MWh on Wednesday.
$1 = 0.8570 euros Reporting by Bate Felix Editing by Geert De Clercq