POOOOOR CEZ

CEZ is complaining about the monopolistic situation in Romania. Poor CEZ -sometimes regulators are so unfair - especially when you are NOT the incumbent.. I would expect that they will be soon filing a complaint with the Czech regulator about their OWN monopolistic position.

It is also awful to see that they only made 34 million in net profits. I wish I had that problem

CEZ blames energy regulator of tolerating monopoly

Power distributor CEZ Romania, operating the regional grid in Southern Romania, blames energy regulator ANRE of tolerating the monopoly situation on the market and warns to sue the state in this regard. Specifically, CEZ says that the long-term contracts signed by the regional electric distribution company with some customers, before the privatisation, impair the functioning of the free market. CEZ also says that ANRE has not consulted the market operators when amending the new methodology for calculating the electricity transportation tariffs. The state has moreover broken promises not to change the methodology prior to 2012, CEZ says. Separately, CEZ announces that the regional electricity company in Romania will end the year with a net profit of RON 120mn (EUR 34mn) and a turnover of RON 1.5bn. (IntelliNews, Dec 07, 2007)

Tariffs to Hell

The Hungarian government announced in its official gazette Magyar Közlöny on 21 October that it would introduce a HUF 4,426 /MWh (EUR 17.63/MWh) fee for power exports, starting in January 2008. The European Federation of Energy Traders (EFET), a virtual organisation designed to improve the conditions of energy trading in Europe, said it deplores this action for several reasons. It also called upon the government to “reconsider this unilateral measure and to face up to the realistic consequences of its planned actions, in close consultation with the European Commission and authorities in neighbouring countries." (portfollio.hu)

OK, sometimes (well a lot of times lately) my government doesn't do so well in the field of rationality. But what the Hungarian government has announced the HUF 4,426 /MWh fee is totally illegal. That is directly contravenes the EU 1228/ 2003. Let me quote from section 13,

(13) It would not be appropriate to apply distance-related
tariffs, or, provided appropriate locational signals are in
place, a specific tariff to be paid only by exporters or
importers in addition to the general charge for access to
the national network.

Now I'm waiting for the Hungarian Energy Office to step in, because according to section 20,

(20) National regulatory authorities should ensure
compliance with the rules contained in this Regulation
and the guidelines adopted on the basis of this
Regulation.

So I'm sure everything will be alright.

But I'll be setting up a trading company for 2008, and then I'll sue for damages and make a little money in a few years time for lost earnings. Then I'll take the money buy a large slice of MOL and when the EU overturns the Lex MOL law I'll be able to sit on the board. I'll have more on this story later for sure.

AmCham CEE regional Forum: Big Biz and Big Gov = Giant Hope

I attended the first AmCham First Regional Energy Forum in Budapest last Thursday night and Friday. Besides an impressive line up of politicians and business leaders, the conference can be considered a good kick off to an ambitious goal. I guess :-( that goal in the context of the conference could be defined as seeing regional cooperation to increase the security of supply in the CEE region. A broad and undefined goal, but I believe the point of this conference was to establish a starting point and work towards more substantive goals.

The region in the context here included Hungary, Slovakia, Czech Republic, Poland, and the Ukraine. Now it can be debated what the region is (Austria will be involved next year), but as with all regional attempts drawing boundaries is difficult.

Overall, while there were big speeches the most useful speech was the final one, when many were not in attendance, Monika Michaliszyn, Commissioner of the Polish Prime Minister for the Regional Energy Cooperation for Baltic States, gave a straight forward speech about the difficulties in creating regional cooperation. She talked about her experience of the dealings between Poland and the Baltic states. Her key suggestion was to find a project - any project - and work on it between all regional partners. This will help to build a level of trust and knowledge among the participants. All I have to say is right on. That is exactly what is needed in the region, a clearly defined project that will allow the politicians and institutional staffs to work with each other.

I won't go into detail of the other impressive speakers. I listened to both PM Gyurcsany and Koka. While they said the right things for this audience and the need for greater regional cooperation, their current deeds of destroying the Hungarian electricity market , resulting in a 50 percent price increase for industrial customers and the lack of transparency on the energy markets do little for their credibility. A week ago, I was not this cynical about their efforts, but after looking into more and seeing other comments, there is no other way to be.

So in the end, the person with the most creditability and substantial words were from a person who has been through a regional cooperative project. Let's just hope that the leaders in the CEE region can act together and not against each other - even if they may be Hungarian or Slovakian.

Hungary Bites off its Nose: no transparency means no jobs

The realization of high electricity prices are going to impact the Hungarian economy and the subsequent jobs and tax revenue may be hitting home. One can only hope that the Hungarian government takes note at what the country's manufacturers are saying.

In an FT article:

Soaring electricity prices and uncertainty about energy regulation could put a halt to a €220m ($311m, £153m) industrial project that stands to generate more than €1.1bn of investment and create 4,000 jobs in a depressed region of Hungary, according to one of the country’s leading chemicals companies.

Electricity prices are already among the highest in the European Union – and are set to rise by nearly 50 per cent in 2008.

Now how did Hungary find itself in this position.... through protecting a variety of interests. That is wanting the state to be in control of electricity prices and reaping the benefits from it.

As explored in REKK's Central Eastern Europe's Electricity Market project in 2005 and 2006, the lack of generation in Hungary, the lack of cross-border capacity, the use of long-term contracts and the opaqueness of cross-border allocation of capacity all lend themselves to an unstable, uncompetitive and disfunctional market. This has only been exacerbated by Hungary's recent attempt at introducing 'competition' to comply with the EU's 1224 directive of all members states allowing comeptition by July 2007.

All the law did was 'open' the market to an unregulated monopoly (state owned) MVM, creating further in-transparency in the market and not at all sending the right signals for competition to take off. Actually, even if the laws allowed competition to occur, further market changes would have to occur, like getting ride of long term contracts, building more cross-border capacity, and building more generation.

The prices that will be charged to industrial users in 2008 is a direct result of these past state actions and their inability to create a transparent marketplace. The result is now a lack and a loss of investment for industrial users and more unfairly to the people of Hungary the loss of jobs.

OMV attempt at MOL: Kicking out foreigners

This makes a good truism of the day:

Hungary's passing of “lex MOL" a law aimed at shielding strategic companies from hostile takeovers, is a brutal attempt by the state to protect private interests, Lajos Bokros, Hungary's former Finance Minister and now deputy chief of Budapest's Central European University (CEU) told the Financial Times on Wednesday.

This is from Portfolio.hu, but the summary is very correct. I won't go into the background to this offer of OMV merging with (taking over) MOL, but to say that the passage of the latest law in Hungary does do what Bokros points out. More importantly, and within reason, as Bokros points out in the same FT article:

"Bokros said lex MOL protected Hungary's business “oligarchs", headed by Hernádi, Csányi and the politicians who receive political donations from such oligarchs."

How true is this? I would believe very, as the excuse that MOL is now offering as to why this deal is NOT going to happen is very weak. That is as explained, in the FT, by Mr. Hernádi:

"However, officials were looking at the fact that Mol was now under threat from a state-dominated group, he pointed out.

“They have said, ‘Why am I selling and another state is buying?’ ”

More pointedly as also stated in the FT:

Mr Hernadi told the Financial Times that government officials across the region were calling to express concern that Mol, a fully privatised company, was facing an unsolicited offer from OMV – a company in which the biggest shareholder is the Austrian state, with 31 per cent.

Now to my point: Hungary has a rich history of selling off its energy assets to foreign firms and to companies owned by foreign governments. We can just see that EDF and Gaz de France are in Hungary - they have a large share of government ownership. Does this mean that the Hungarian government will be kicking out and re-nationalizing the distribution companies that they own?

If we look at the present, the current deal under consideration between E.ON and Gazprom for E.ON to swap a minority share (49%) in its gas storage division in Hungary, plus other assets, is bringing in a foreign government owned company into Hungary. Is this now forbidden?

If the logic of Mr. Hernadi , the MOL board and the Hungarian government is to be believed, we should be expecting not just action against OMV, but against other companies as well.

I rather like Porfolio.hu's ending to their story:

"management are likely to be in a rather awkward position when they need to explain why HUF 27,500 is more than HUF 32,000.

Catching the Second Wave Towards Regional Energy Markets

It is important to understand the movement towards regional electricity markets in Europe. How the coming period of regionalization is quickly becoming a second wave of company and market consolidation in Europe. The goal of a single European energy market must be seen as only achievable if there are smaller steps taken that can eventually lead up to a pan-European market. Let me briefly reflect on the first wave of company expansion in the EU energy market then lay out why the second wave may have the momentum for completion.

The collapse of the Iron Curtain and the subsequent flow of investment into Eastern Europe’s energy sector, chiefly by Western European utilities in the 1990s can considered the first wave of consolidation. While the assets like distribution and generation of these Western companies may have been less interconnected, they existed in countries that would one day join the EU. The expansion of the EU held the possible advantage of enabling coordination among the different units – whether on management and technical expertise or economies of scale in energy production.

The EU took steps in 2001 with Directive 1228 and later with accession in 2004 to promote an ease of energy commerce across the union’s borders. It is best to view the Directive 1228 as an initial step to opening up national markets to competition and indirectly holding out hope that cross-border trade would develop. In 2006 and 2007 it is clear that the intended consequences are not being fulfilled and a stronger regulatory response is needed to crack both national markets open and to spur energy companies to compete.

This prompts the second wave of pan-European change which is just beginning to rise up. The lack of success in the liberalized EU energy market has prompted the EU Commission to take stronger action to ensure competition replaces state controlled monopolistic markets. The call for ‘regionalization of energy markets’ emerges as the cornerstone of the second wave. There should be optimism and less cynicism for such efforts. Here is why.

First, the ducks are lining up. The EU Commission is seeing regionalization as an interim step towards their goal of a single European energy market. This places the considerable resources and prestige of the EU behind the effort of regionalization, lending credibility to the effort and helping to shape policy to enable regional cooperation to go forward. Existing regional groups, like the mini-for and ERGEG, gain extra impetus through verification of a regional approach.

Second, utility companies after their wave of acquisitions in Eastern Europe and a heavy round of investment and restructuring along with the commonality that exist across EU states, can restructure their operations to function in a more regional manner. This may be limited to management and/or technical operations but the possibility may even exist for them to gain greater economies of scale from better coordination in generation.

The third point sits on unstable ground and involves the opinions and permission of national governments. Do they see regional markets as benefiting their citizens, economies and companies (including energy companies)? Their questions are legitimate, mainly, can regional markets provide the benefits that exist in national markets, predictability, stability and control? The recent sector enquiry and the push towards competitive markets are now making governments realize they have limited control over their energy markets. In addition, some countries and their energy companies may be able to benefit from exporting their energy regionally and within a common market.

Moving towards regional integrated markets in Europe may becoming more possible as various interests are seeing the economics advantageous in scaling up energy markets. A single energy market may be a long ways off, but regional markets with neighbours where cooperation exists can be done to provide benefits for the end users and most market participants.