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Sat, May 26 2012
Caught between the state and state
Photo: Anelia Nikolova
Angel Semerdjiev
Photo: Anelia Nikolova
An explanation exists for the tempestuous relationship between the Government and electricity distribution companies, caused by the increase in electricity prices on July 1, but it is not an obvious one. At first sight, it looks as though evil foreign capitalists are exploiting a financial shenanigans to demand higher prices, but the Cabinet has seen the root of it and protected the consumers – and it is an image actively being promoted.
If the story was about tomatoes, public anger would have been directed at the sellers, without too much analysis of what happens along the supply chain. It is not much of a difference with electricity, produced by a number of companies and reaching the distribution companies that then resell it to end-users. The difference is that with electricity there is only one transmission grid and competition is limited, hence the State Energy and Water Regulatory Commission (SEWRC) exists to protect consumers by verifying costs along the supply chain and has to approve prices charged before they come into force.
In June, the regulator and Cabinet launched an unprecedented attack on distribution companies, arguing that the distribution firms' request for a five per cent increase in electricity prices was unjustified, while Prime Minister Boiko Borissov vowed to block any increase above two per cent.
The political reasoning for doing so during a crisis is sound, but the truth is that the state is only leaning on private companies, while at the same time allowing state-owned companies, such as electricity transmission and trading company NEK, to increase the prices at which they sell power to distribution firms. And since no company will take such things lying down, the situation deteriorated to below-the-belt blows.
Operation Energisers
The symbiosis between the regulator and Government was shown clearly when Borissov joined SEWRC head Angel Semerdjiev to say that the Government could fine the distribution companies, thus recovering some of the "illicit gains". Semerdjiev, for his part, said that an audit of distribution companies showed that the firms breached the terms of their licences by outsourcing some of their activities to subsidiaries.
The ensuing media coverage was strange, as several dailies began leaking details of said audit, without it becoming clear whether the audit had been completed and who had seen it, since several members of the regulator and none of the three distribution firms had seen it. As a result of "strong public interest", newspapers started publishing juicy details about consultancy fees and salaries at CEZ, E.ON and EVN – without having seen the report, the three companies declined to comment on numbers, but made no secret of their surprise that regulator officials would comment on an incomplete audit.
Furthermore, the distribution companies claimed that SEWRC had previously approved all the business practices it now denounces, while the National Revenue Agency has repeatedly verified them.
This was the second instalment in the Government's battle against the distribution companies. The first was when two months ago masked agents of the State Agency for National Security raided corporate offices to find the outsourcing contracts. These actions, for the media's benefit, have diverted the price debate in a different direction. A standard practice, outsourcing, has been stigmatised and another one, the regulatory audit, was turned into a tool for whipping convenient targets.
Despite its powers after the privatisation of the three power distribution companies in 2004, SEWRC never carried out a single regulatory audit of the companies. Thus, the problem is not so much the audit, which is important and needed, but in the way it is being carried out – politically-motivated, in less than a month and with the selective announcement of data before the audit is completed.
Economy and Energy Minister Traicho Traikov appeared as the only reasonable person. After reading the preliminary findings, he said: "There are no conclusions yet, which is why I want to give colleagues some time to formulate them, because what I have seen are expert opinions. Some practices they approved of, others they did not."
Price calculations
The three electricity distribution companies, owned by Austria's EVN, Czech CEZ and Germany's E.ON, will sell electricity to households at prices that increased by two per cent on July 1. This increase should include all changes along the supply chain.
At production level, the increased costs come from the launch of new capacities owned by US firm AES at Maritsa East 1 thermal power plant, as well as the feed-in tariffs given to renewable energy and co-generation facilities, which have to be financially stimulated, Semerdjiev said. SEWRC also took into account the higher price of nuclear fuel used by Kozloduy station. To reduce the pressure on NEK, which buys from all sources and then sells at an average price, SEWRC lowered the prices charged by some thermal power plants and increased the overall share of Kozloduy, which produces the cheapest electricity.
But instead of encouraging efficiency at the next stage – transmission – SEWRC is doing the opposite, acknowledging higher costs for NEK and power grid operator ESO. Effectively, the regulator handed NEK a seven per cent price hike, while ESO can charge 40 per cent of the price for transmission services.
Given that price inflation, SEWRC had to cut some costs elsewhere to prevent a big hit on end-users and the target of its efforts became the power distribution firms. Even before the increase in NEK and ESO prices was made known, the three private operators asked the regulator for a 10 per cent increase in their prices, but SEWRC only allowed half that.
After increasing revenues of state firms, the regulator would further cut into those of private companies, arguing that they did too good a job – SEWRC lowered the accepted transmission loss from 18 per cent to 15 per cent, saying that investments made by the three distribution companies have resulted in less electricity being lost along the way.
The three firms reacted immediately, with E.ON threatening to go as far as suing the state for changing the regulatory methodology in the middle of a five-year period when such modifications cannot be made.
NEK in the dark
In all that noise, raised deliberately, the real problem is lost. In 2009, right before the elections, the electricity price was cut and the goal was to avoid any increase this year. The regulator has repeatedly said that it would do everything in its power to prevent a price hike, using "reserves" along the supply chain. These "reserves" were found at the beginning and end of the chain, with the mostly private electricity producers and distributors – the Cabinet is leaning on private investors to pay the price for the inefficiency of state companies.
According to Traikov, speaking to Standart daily, the distribution companies' share in the final price has gone down. "They have managed to become more efficient and make a profit because of that. The state companies have not, and are standing still with a small profit, but their spending has increased. That is why my goal was to decrease the spending of state companies, but this time the state companies are being given wiggle room while distribution companies are being taken from."
E.ON Bulgaria's calculations showed that the company's share in the final price has decreased from 26.9 per cent in 2005 to 19.3 per cent in 2009. With household consumers, the drop was even more drastic – from 39.3 per cent in 2005 to 19.7 per cent in 2009.
The elephant in the room that no one is talking about is NEK, which in the flush years was the tool used by the previous cabinet to keep the prices low. Despite rising commodity prices and investment, the price of electricity in Bulgaria remained the lowest in the European Union, mostly thanks to NEK, which sold electricity at a loss at home but compensated with profits from exports. But the economic downturn has resulted in lower demand throughout the region, which meant lower revenue for NEK, whose financial situation got worse because of its own debts on two major undertakings – Tsankov Kamuk hydro-power array and Belene nuclear power plant.
The blame for NEK's problems lies squarely on SEWRC, which sets the prices. As private companies have come under attack, nothing is being said about the audit's results on NEK, although Semerdjiev told Kapital that the intermediate results of that audit had been presented to the regulator two months ago and "helped set the prices for NEK". In layman's terms, having seen NEK's poor state, SEWRC raised the company's revenues.
The root cause of the problem is the non-transparent way used by the regulator to set prices, using a top-down approach that is a recipe for disaster. It remains to be seen whether the regulator's actions will serve as a wake-up call for the market or will turn out to be an attempt to save the monopoly. But sooner or later prices will have to increase and then, the decisions taken behind closed doors will turn to have been to no one's benefit – not the producers, not the traders, not the consumers.
Price shocks
With the focus on electricity prices, much bigger price hikes have taken a back seat. At its closed-doors meeting on June 28, following two months of deliberation, SEWRC decided to allow a 24.6 per cent increase in gas prices starting July 1, to 542.5 leva a 1000 cubic meters.
Bulgaria's employer associations have repeatedly warned that such a drastic increase would make the country's industry lose some of its competitive edge and would crush households, leading to redundancies and inflation.
Even so, the increase was less than the 30 per cent hike demanded by state-owned company Bulgargaz, as SEWRC said it did not agree with the way the firm calculated the variations in the lev's exchange rate to the US dollar, one of the three key factors in setting the price.
Bulgargaz chief executive Dimitar Gogov said earlier that any increase below 29 per cent would force the company to sell the gas for less than it cost. After SEWRC announced its decision, he said that he had not decided yet whether to appeal the regulator's decision in court.
As a direct consequence of the gas price hike, central heating prices would also go up, by an average of 11.7 per cent. The highest increase would be in Sofia, where central heating would cost households 18.6 per cent more, or 78 leva for one MWh.
Kapital weekly, issue 25
If the story was about tomatoes, public anger would have been directed at the sellers, without too much analysis of what happens along the supply chain. It is not much of a difference with electricity, produced by a number of companies and reaching the distribution companies that then resell it to end-users. The difference is that with electricity there is only one transmission grid and competition is limited, hence the State Energy and Water Regulatory Commission (SEWRC) exists to protect consumers by verifying costs along the supply chain and has to approve prices charged before they come into force.
In June, the regulator and Cabinet launched an unprecedented attack on distribution companies, arguing that the distribution firms' request for a five per cent increase in electricity prices was unjustified, while Prime Minister Boiko Borissov vowed to block any increase above two per cent.
The political reasoning for doing so during a crisis is sound, but the truth is that the state is only leaning on private companies, while at the same time allowing state-owned companies, such as electricity transmission and trading company NEK, to increase the prices at which they sell power to distribution firms. And since no company will take such things lying down, the situation deteriorated to below-the-belt blows.
Operation Energisers
The symbiosis between the regulator and Government was shown clearly when Borissov joined SEWRC head Angel Semerdjiev to say that the Government could fine the distribution companies, thus recovering some of the "illicit gains". Semerdjiev, for his part, said that an audit of distribution companies showed that the firms breached the terms of their licences by outsourcing some of their activities to subsidiaries.
The ensuing media coverage was strange, as several dailies began leaking details of said audit, without it becoming clear whether the audit had been completed and who had seen it, since several members of the regulator and none of the three distribution firms had seen it. As a result of "strong public interest", newspapers started publishing juicy details about consultancy fees and salaries at CEZ, E.ON and EVN – without having seen the report, the three companies declined to comment on numbers, but made no secret of their surprise that regulator officials would comment on an incomplete audit.
Furthermore, the distribution companies claimed that SEWRC had previously approved all the business practices it now denounces, while the National Revenue Agency has repeatedly verified them.
This was the second instalment in the Government's battle against the distribution companies. The first was when two months ago masked agents of the State Agency for National Security raided corporate offices to find the outsourcing contracts. These actions, for the media's benefit, have diverted the price debate in a different direction. A standard practice, outsourcing, has been stigmatised and another one, the regulatory audit, was turned into a tool for whipping convenient targets.
Despite its powers after the privatisation of the three power distribution companies in 2004, SEWRC never carried out a single regulatory audit of the companies. Thus, the problem is not so much the audit, which is important and needed, but in the way it is being carried out – politically-motivated, in less than a month and with the selective announcement of data before the audit is completed.
Economy and Energy Minister Traicho Traikov appeared as the only reasonable person. After reading the preliminary findings, he said: "There are no conclusions yet, which is why I want to give colleagues some time to formulate them, because what I have seen are expert opinions. Some practices they approved of, others they did not."
Price calculations
The three electricity distribution companies, owned by Austria's EVN, Czech CEZ and Germany's E.ON, will sell electricity to households at prices that increased by two per cent on July 1. This increase should include all changes along the supply chain.
At production level, the increased costs come from the launch of new capacities owned by US firm AES at Maritsa East 1 thermal power plant, as well as the feed-in tariffs given to renewable energy and co-generation facilities, which have to be financially stimulated, Semerdjiev said. SEWRC also took into account the higher price of nuclear fuel used by Kozloduy station. To reduce the pressure on NEK, which buys from all sources and then sells at an average price, SEWRC lowered the prices charged by some thermal power plants and increased the overall share of Kozloduy, which produces the cheapest electricity.
But instead of encouraging efficiency at the next stage – transmission – SEWRC is doing the opposite, acknowledging higher costs for NEK and power grid operator ESO. Effectively, the regulator handed NEK a seven per cent price hike, while ESO can charge 40 per cent of the price for transmission services.
Given that price inflation, SEWRC had to cut some costs elsewhere to prevent a big hit on end-users and the target of its efforts became the power distribution firms. Even before the increase in NEK and ESO prices was made known, the three private operators asked the regulator for a 10 per cent increase in their prices, but SEWRC only allowed half that.
After increasing revenues of state firms, the regulator would further cut into those of private companies, arguing that they did too good a job – SEWRC lowered the accepted transmission loss from 18 per cent to 15 per cent, saying that investments made by the three distribution companies have resulted in less electricity being lost along the way.
The three firms reacted immediately, with E.ON threatening to go as far as suing the state for changing the regulatory methodology in the middle of a five-year period when such modifications cannot be made.
NEK in the dark
In all that noise, raised deliberately, the real problem is lost. In 2009, right before the elections, the electricity price was cut and the goal was to avoid any increase this year. The regulator has repeatedly said that it would do everything in its power to prevent a price hike, using "reserves" along the supply chain. These "reserves" were found at the beginning and end of the chain, with the mostly private electricity producers and distributors – the Cabinet is leaning on private investors to pay the price for the inefficiency of state companies.
According to Traikov, speaking to Standart daily, the distribution companies' share in the final price has gone down. "They have managed to become more efficient and make a profit because of that. The state companies have not, and are standing still with a small profit, but their spending has increased. That is why my goal was to decrease the spending of state companies, but this time the state companies are being given wiggle room while distribution companies are being taken from."
E.ON Bulgaria's calculations showed that the company's share in the final price has decreased from 26.9 per cent in 2005 to 19.3 per cent in 2009. With household consumers, the drop was even more drastic – from 39.3 per cent in 2005 to 19.7 per cent in 2009.
The elephant in the room that no one is talking about is NEK, which in the flush years was the tool used by the previous cabinet to keep the prices low. Despite rising commodity prices and investment, the price of electricity in Bulgaria remained the lowest in the European Union, mostly thanks to NEK, which sold electricity at a loss at home but compensated with profits from exports. But the economic downturn has resulted in lower demand throughout the region, which meant lower revenue for NEK, whose financial situation got worse because of its own debts on two major undertakings – Tsankov Kamuk hydro-power array and Belene nuclear power plant.
The blame for NEK's problems lies squarely on SEWRC, which sets the prices. As private companies have come under attack, nothing is being said about the audit's results on NEK, although Semerdjiev told Kapital that the intermediate results of that audit had been presented to the regulator two months ago and "helped set the prices for NEK". In layman's terms, having seen NEK's poor state, SEWRC raised the company's revenues.
The root cause of the problem is the non-transparent way used by the regulator to set prices, using a top-down approach that is a recipe for disaster. It remains to be seen whether the regulator's actions will serve as a wake-up call for the market or will turn out to be an attempt to save the monopoly. But sooner or later prices will have to increase and then, the decisions taken behind closed doors will turn to have been to no one's benefit – not the producers, not the traders, not the consumers.
Price shocks
With the focus on electricity prices, much bigger price hikes have taken a back seat. At its closed-doors meeting on June 28, following two months of deliberation, SEWRC decided to allow a 24.6 per cent increase in gas prices starting July 1, to 542.5 leva a 1000 cubic meters.
Bulgaria's employer associations have repeatedly warned that such a drastic increase would make the country's industry lose some of its competitive edge and would crush households, leading to redundancies and inflation.
Even so, the increase was less than the 30 per cent hike demanded by state-owned company Bulgargaz, as SEWRC said it did not agree with the way the firm calculated the variations in the lev's exchange rate to the US dollar, one of the three key factors in setting the price.
Bulgargaz chief executive Dimitar Gogov said earlier that any increase below 29 per cent would force the company to sell the gas for less than it cost. After SEWRC announced its decision, he said that he had not decided yet whether to appeal the regulator's decision in court.
As a direct consequence of the gas price hike, central heating prices would also go up, by an average of 11.7 per cent. The highest increase would be in Sofia, where central heating would cost households 18.6 per cent more, or 78 leva for one MWh.
Kapital weekly, issue 25
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Appointments
Employment Agency
Kamelia Lozanova has been appointed the executive director of the Employment Agency, a position she has held ad interim since September 2011, following the resignation of her predecessor Rossitsa Stelianova. Prior to that, Lozanova was the agency's deputy executive director in charge of international projects and European programmes. She has been with the agency for more than 20 years. Lozanova has a degree in Slavonic philology from the St Kliment Ohridski University of Sofia.
Uniqa
Gloria Dimitrova has been appointed executive director and member of the managing board at Uniqa Life Insurance Bulgaria. Dimitrova began her career in 1998 at the insurance supervision directorate, but moved to the private sector and worked for professional services and insurance brokerage firm Marsh&McLennan and US insurer AIG, both in Bulgaria and the Middle East. She joined Uniqa as regional director for Sofia in 2010. Dimitrova has a degree in economics from the University for National and World Economy in Sofia and a master's degree in insurance from the Business Academy in Svishtov.
Kamenitza
Yassen Lyubenov is the new head of marketing at Bulgarian beer brewer Kamenitza. Lyubenov has 12 years of experience in marketing in the fast-moving consumer goods sector and has started his career as assistant brand manager at Kraft Foods Bulgaria. He later became brand manager at Wrigley Bulgaria, with responsibilities for Bulgaria and Macedonia. Prior to joining Kamenitza, he was senior marketing manager at Wrigley Russia, where he was in charge of brand expansion into Ukraine, Belarus, Central Asia and the Caucasus. Lyubenov has a bachelor's degree in international business administration from the University of Lincoln, UK.
Beiersdorf
Bedros Kalfayan, general manager of skin care and cosmetics company Beiersdorf Bulgaria, will oversee the parent's company units in Romania and Moldova starting April 1. Following company restructuring, Beiersdorf's subsidiaries in the three countries were merged and are now one unit, part of Beiersdorf Central and Eastern Europe. Kalfayan joined Beiersdorf in 2007 as sales manager and was promoted to general manager in 2008. Prior to that, he worked for Axxon Bulgaria, Ferrero and Rubella. Kalfayan has a master's degree in industrial management from the Technical University in Sofia.
Hewlett-Packard
Sasha Bezuhanova has been appointed Hewlett-Packard public sector director for emerging markets, where she will oversee HP public sector activities in 63 countries, including Bulgaria. Bezuhanova will also be in charge of HP's relations with the European Union. Bezuhanova has been HP's public sector director for Central and Eastern Europe since 2008; before that she was general manager of HP Bulgaria since 1998. Bezuhanova has a master's degree in electronics from the Technical University in Sofia and has completed a managment programme at INSEAD.
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As far as I can see in my area there is NO competition, the ONLY supplier appears to be EVN. If the grid system is owned by another party (either state controlled or ex state controlled) and ALL suppliers use this, why am I only being offered electricity from one company?