The French government backs Veolia Environnement SA (VE) Chief Executive Henri Proglio to become the new head of state-controlled utility giant Electricite de France SA (EDF.FR), the prime minister's office said late Sunday.

The announcement follows a meeting of EDF's board, at which current CEO Pierre Gadonneix' wasn't nominated to remain as a director.

The French state owns 85% of EDF.

Gadonneix' current term at the head of EDF expires Nov. 22.

Proglio already has a seat on the board of EDF, and there are already links between the two companies. There has been much speculation that Proglio will want to strengthen ties between EDF and Veolia.

Already, Veolia owns 66% of the energy-services company Dalkia, with EDF owning the remainder. EDF itself has a 3.9% stake in Veolia.

One scenario for closer ties, much-discussed as Proglio emerged as favorite to take the EDF hot-seat, is that EDF would swap its stake in Dalkia for a bigger share of Veolia.

Closer cooperation between the worlds largest generator of low-carbon nuclear power, and its largest environmental services company, could also chime with French President Nicolas Sarkozy's wish for France to be at the vanguard of the green economy. As Veolia CEO, Proglio presided over an expansion of the company, attracting some criticism as its debt pile grew.

And after profit warnings last year, many said the company had mismanaged market expectations. More recently, however, Proglio appeared to tighten the ship, and began an asset disposal program to generate cash.

Beyond Veolia, Proglio has contacts across the French establishment.

When Nicolas Sarkozy won the presidency in 2007, Proglio was among guests at a celebratory dinner at Fouquet's restaurant in Paris. Last week, meanwhile, Finance Minister Christine Lagarde called him a "great industrialist" and said she has a friendly relationship with him.

Proglio's brother, Rene, heads Morgan Stanley's France office.

Veolias CEO also is widely seen to be competent at dealing with unions. At EDF, a former state power monopoly, union influence remains especially strong.

Indeed, Proglio can expect a change of culture in joining EDF. Unlike Veolia, EDF is a state-controlled company and the French state is the ultimate arbiter of all big decisions.

EDF is the world's largest nuclear utility and is essential to President Nicolas Sarkozy's strategy of promoting French nuclear expertise around the world.

As well as balancing the company's interest with that of the state, Proglio can expect to find a number of challenging files in his inbox. These include finalizing the company's purchase of nuclear assets in the U.S., and then navigating regulatory hurdles to build nuclear power plants there.

The company also is in the midst of an asset disposal plan, which will require Proglio to weigh-in on a wide range of potential deals. Then there is the prospect of a major overhaul of power-market regulation in France, in which EDF looks set to have to yield ground to competitors in its home market.

Unlike Proglio, Gadonneix wouldn't have been able to stay on for a full mandate, as the company's regulations limit the CEO's age to 68.

And Gadonneix' recent call for a 20% rise in state-regulated tariffs over the next few years, which provoked rebukes from the government, appears to have hindered his chances of staying on for another year or two.

According to French Les Echos newspaper, Veolia's board will meet Monday to discuss the succession to Proglio. Antoine Frerot, the head of the company's water division - its largest - has widely been tipped as the favorite to take the reins of the company and there has been much speculation that Proglio will retain a role at Veolia.

-By Adam Mitchell, Dow Jones Newswires, +33 1 40171756; adam.mitchell@dowjones.com