Should the energy sector be consolidated or not? The issue has been the subject of so many versatile arguments for and against, business – and naturally national – interests, that a breakthrough solution seems unfeasible at this moment.

Recently, the Bulgarian Government made a couple of moves that unequivocally put it in the camp of those favouring the idea of a national energy giant.

Bulgaria was among eight European Union member states to file a letter with the European Commission and to call against the segregation of energy production and energy distribution assets. The letter represented an indirect appeal to re-write the energy strategy the EC publicised in September last year.

In yet another complementary move, at its Hisarya meeting, the ruling coalition took a political decision to form an energy giant, within whose fold would fall all state-run energy companies. The decision on the mega-structure should be known by the end of the year, Energy and Economy Ministry officials said.

The main parameters of the model for the future Bulgarian energy holding are as follows. The holding would control assets worth four billion euro, would have a profit of 114 million euro and a total installed capacity of 6.6 gigawatts.

The new entity would comprise the assets of gas utility Bulgargaz Holding and its four subsidiaries, the national grid operator the National Electric Company, Maritsa-Iztok 2 Thermal Power Plant, the eponymous mines and Kozloduy nuclear power plant.

The model draws on a feasibility study done by the local office of the consultancy firm Deloitte. According to the study, the state would retain full ownership of all the mentioned companies, either directly or indirectly. Namely, the parent company would be in charge of between 25 and 49 per cent of the holding and the remainder would be in the hands of the Ministry of Economy and Energy in its capacity as principal of the mentioned companies.

At a February 20 news conference dedicated to outlining the parameters of the energy holding, Deloitte analyst Jan Skarvil said the restructuring would be phased because of the disparate structures and management approaches currently used in the individual companies.

The first stage, therefore, would entail the set-up of a financial holding acting as a parent company. It would map out the strategic direction and goals for individual companies but the companies, as operationally and legally independent entities, would be in charge of deciding how to achieve them.

Deloitte initially estimated the first stage to last one to two years; however, the exact timing was to be left to the discretion of the economy and energy ministry, Skarvil said. Earlier, Deputy Economy and Energy Minister Galina Tosheva said the first phase would not begin for another year, until the viability of the new structure had been tested.
“The goal of the restructuring and consolidation was to create a pool of economically sustainable and flexible units... The new entity would also provide for better transparency and generation of higher revenues,” a statement from the government press office said.

Skarvil said that a larger structure, which would have undergone substantial organisational restructuring and with that its financial performance, would help it gain the necessary investments to upgrade its obsolete infrastructure. An entity with merged assets, which has been tested through CEZ in the Czech Republic and more recently in Poland, would help it generate synergies and be competitive on the regional market.

The Deloitte consultant also said that the restructuring of the holding would mean that current projects would be stopped.

Bulgarian Economy and Energy Minister Petar Dimitrov declined to say when the set-up of the financial holding would take place. He said, though, that the holding would try to float up to 20 per cent of its shares on a stock exchange to be decided at a later stage. Again, the minister did not specify a tentative date but said it would only happen once the holding was assigned a credit rating.

Dimitrov staved off concerns that a monopoly-like structure would inevitably lead to price rises. He said that there was a regulatory watchdog to oversee the tariffs for individual kinds of energy. Besides, he said, jocularly referring to the third chapter of Marx’s Capital, prices have always been based on the rules of demand and supply; therefore, the emergence of an energy holding would not change the factors influencing tariffs.

The mega-structure idea met staunch resistance from many energy experts, the Bulgarian Industrial Association (BIA) and other business people. The opponents lashed out at the proposal with several arguments.

Many discarded the ministry’s statement that a larger structure would look more financially sound and, therefore creditworthy, before lenders. Energy experts parried saying that all five companies already enjoyed trust with financial institutions.

Others concentrated on the political thrust of the initiative, saying it was contrary to EU efforts to unbundle energy production from energy distribution assets. By backing the initiative, Bulgaria would in fact be deterring competition.

Responding to a question on this subject, the Economy and Energy Minister said that Bulgaria would comply with the postulates of the draft energy strategy of the EU once it was approved. “Bulgaria would not play the naughty child and would comply immediately by segregating its energy production and distribution assets,” Dimitrov said.
Lyulin Radoulov, from the BIA, said that the existing structure violated the European directives and would skew competition on the market.

Yet a third argument against the proposal came from Atanas Paparizov, an MEP from BSP. He said that through the new structure the state wished to get hold of the state guarantees granted to the NEC and the distribution of annual greenhouse gas quotas.

Many argued that the holding was conducive to the cross-subsidising temptation. Tosheva said the presence of the sector watchdog, the State Energy and Water Regulatory Commission (SEWRC) would prevent this from happening.

Experts, however, had their doubts with regard to the ability of the regulatory body to handout disciplinary actions. Cross-subsidising was already in place between Bulgargaz and its gas transit arm, Bulgartransgaz. Bulgargaz, and not Bulgartransgaz, pocketed gas transit fees from Russian gas giant Gazprom.

Bulgargaz CEO Vassil Filipov told bTV that the creation of the holding was an attempt to hide embezzlements that have happened through the years in the individual holdings.

Criticism from outside the EU was also likely to come.

Despite all the pros and cons, Bulgaria is heading toward the implementation of the energy holding idea. Just like Skarvil said, the country is “not re-inventing the wheel” with this concept, referring to Poland, the Czech Republic and Romania as pertinent benchmark examples. At the same time, there is the problem of timing. The asset bundling starts at a time when the EU is flexing its muscles for the reverse and the new holding will need the approval of the EU anti-trust watchdog. The sparks between proponents and opponents are only just beginning.