Time to see who`s who in the zoo

Junior Isles,

Managing Editor

Life is full of contradictions. With the Millennium nearly over, politicians push for single pan-European markets yet go to war in Yugoslavia. Even stranger, forced to take in refugees from Kosovo, Albania may now have a case for early entry to the EU. Their argument is that it will bring stability to the Balkans sooner rather than later. Fortunately, most countries in the Balkans and central and eastern Europe looking to gain entry to the EU will not have to go through such a painful process.

Over the last four to five years, central and eastern European countries have been working towards liberalizing and privatizing their electricity markets in order to gain entry into the EU at the earliest possible opportunity. Progress has been slow. Yet judging by the turn out at this year`s CEEPIF (Central and Eastern European Power Industry Forum) conference, there is still tremendous interest in the region.

Speaking at the conference, Peter Hoffman, project executive for German utility, Bayernwerke explained: “With no opportunities in Germany, Bayernwerke is looking to eastern Europe where there is an increasing demand.”

Poland, Hungary and to a lesser extent the Czech Republic have been the front runners in liberalizing their markets and opening up to investment. But each country has been dogged by the political implications of quickly moving to a liberalized market.

Hungary is a classic case that privatization policies in central and eastern Europe are vulnerable to politics. The Hungarian example highlighted the fact that balancing the interests of utilities and users is probably the toughest problem facing liberalization of the central and eastern European markets. It was only a few years ago that the government attempted to reduce the rates of return it promised to some investors when it realised what the resulting increase in tariffs would have been to users.

Much of the problem was down to what some now see as the previous government`s desire to make quick money. It attempted to push through the privatization of most of its generation assets in just six months. Like Poland is doing now, it has now adopted a gradual pricing policy.

In 1997 Poland enacted its Energy Law which prepared the way for full price liberalization. The country freed its power prices on January 1 of this year, although there is a “safety net” for residential consumers. This meant that prices could not increase by more than 13 per cent. From January 1, 2000, however, the safety net will be removed and what will happen then remains to be seen. Rafal Zagorny, Poland`s deputy minister of finance commented: “I hope that removing the safety net will not cause too much of a shock to residential and industrial users.”

Poland realises that the move towards full privatization is a difficult one. In addition to solving pricing problems, it will call for substantial financing. The country is planning to set up “entities that will inspire investors” this year.

The problems caused by long term power contracts will have to be overcome and strict accountancy standards will have to be imposed. Privatization will also reveal mismanagement in the sector. Poland also knows that power sector reform must be gradual in order not to threaten security of supply. In short, Poland wants to be in the lead in the race to privatization and entry to the EU, but it does not want to be a trailblazer. Next year is the year slated for privatization of its power plants with completion of the whole process in 2001.

Despite the obstacles facing the entry of these countries to the EU and a pan-European electricity market, our friend from Bayernwerke remains confident of his company`s chances in the region. The utility is the biggest investor in the Hungarian and Czech Republic utility sectors and believes it is a case of “having courage and being prepared to take the risk.” With the first phase of the EU Directive now in effect, Hoffman was full of fighting talk on Bayernwerke`s attitude to opportunities both outside and inside the EU. “Pre-competition, the utility business could be compared to a zoo: there were dangerous animals, but because they were separated by cages nothing happened. Now it is more like a jungle, the cages have been removed and it`s survival of the fittest.”

I agree. Although the new market may not be quite a jungle, it will surely sort out who is who in the zoo.