Economy minister reveals tactics for energy price cuts

HIS EFFORTS to secure a reduction in energy prices in Slovakia by taking "tough measures" have both pleased the public and concerned investors. Finally, however, Economy Minister Ľubomír Jahnátek seems to have found a tool to achieve his price cuts without running roughshod over privatization contracts or selectively taxing energy companies.

Ľubomír Jahnátek says he blames the previous government for failing to explore Slovakia's energy potential.
photo: Jela Priehradniková

HIS EFFORTS to secure a reduction in energy prices in Slovakia by taking "tough measures" have both pleased the public and concerned investors. Finally, however, Economy Minister Ľubomír Jahnátek seems to have found a tool to achieve his price cuts without running roughshod over privatization contracts or selectively taxing energy companies.

Jahnátek proposes that the Act on Regulation be amended to allow the energy market regulator as of January 2007 to probe much more deeply into how energy firms set their prices, and to "far more aggressively represent the interests of the Slovak economy and the Slovak consumer".

His ideas have yet to take concrete form, and the political opposition has warned that government interference with the independence of the ÚRSO regulator will deform the market. But Jahnátek, like his boss, PM Robert Fico, insists that his government is only correcting a past grievance.

The Slovak Spectator spoke with Jahnátek in his office on September 18.

The Slovak Spectator (TSS): The government has said it wants an independent regulatory office with greater powers, one that can probe all components of the market price of energy, while at the same time it wants greater political control over the office. Aren't these two goals contradictory?

Ľubomír Jahnátek (ĽJ): From 2001 to 2004 the former government of Prime Minister Dzurinda sold off 49 percent minority stakes in Slovakia's energy giants, including electricity distributors and the gas utility, and at the same time signed contracts on the exercise of shareholder rights which de facto put the Slovak Republic in the position of a minority shareholder.

This was very disadvantageous, as the former government at the same time committed to obeying the EU's strategy for energy self-sufficiency and energy security. Slovakia is now in a very difficult position, because we no longer have a way to influence decisions at these companies that have been privatised, while at the same time the Slovak government's obligations to the EU remain.

Given that the Slovak government in its program statement said it would not retroactively seek to alter these privatisation contracts, it has only one option - to strengthen its role in the organs of these companies, even though that role remains a minority one, and at the same time to create a strong regulatory office in order, through the prices of energy, to ensure that other players in the economy have a chance to be profitable, not just energy companies.

With this in mind, the government wants its representatives in these companies to take decisions only on the basis of written instructions from the government, which will be issued to them through the Economy Ministry. It will no longer be possible for anyone to claim they misunderstood their orders.

Then we come to the regulatory office [the Bureau for the Regulation of Network Industries - ÚRSO, ed. note], which is in a very disadvantageous position. Slovak law currently allows the ÚRSO to regulate only 27 percent of the overall price that is paid by the final consumer. This means that the office is empowered to regulate hardly anything. European Union Directives 54 and 55 from 2004, however, permit what they call "complex regulation" of end-user prices, which means that after the law is changed we will be able to audit 100 percent of the inputs into the final consumer price of energy.

This means that the ÚRSO will be able to audit commodity prices [for energy raw materials] as well as all of the costs associated with purchasing these commodities, whereas so far they have not been able to supervise this.

To give you an example, the purchase price of natural gas is 54 percent of the final price paid by the consumer. The ÚRSO's current guidelines allow 12 to 20 percent to be added to this cost in the form of "unidentified cost items" that the bureau has no power to audit. These unverifiable cost elements account for 72.5 percent of the final price, leaving the ÚRSO only 27.5 percent to check up on. This is simply not a good situation, and we lay the blame with the former government.

The current cabinet wants to bring in complex, or 100 percent verification by the ÚRSO, in which case we will leave the regulatory office as an independent body. However, we still have to fix one more deformation at the office, and that is that the ÚRSO board that hears appeals on pricing decisions has the same people on it that make the decisions in the first place. That's ridiculous.

We want to make sure there is no personnel overlap. There will be an independent regulatory office, and then a regulatory council that will contain nominees from both expert circles as well as coalition parties. The main thing is that we will also have nominees there from the consumer network, and we will increase their number from six to eight. They will be under the authority of parliament, and will annually present an account of their activities. If they don't do their jobs they can be recalled.

The upshot of all of this is that there will be a new remedial organ for the regulatory office that will far more aggressively represent the interests of the Slovak economy and the Slovak consumer.

TSS: Given the criticism you have taken from the media and the political opposition of your plans to place the bureau under closer supervision, you must have been pleased last week to hear the president of the European Commission, José Manuel Barroso, complaining that Europe in general had a problem with regulatory bodies that are too close to energy companies and too independent of their governments, and that high energy prices are making Europe less competitive.

LJ: I smiled as you asked that question because I maintain that the Slovak government beat the European Commission to the punch by two months. This issue really has resonated within the European Union, and it has been shown that these energy monopolies are becoming a burden on the European economy. Their profits are reducing overall output. Mr Barroso put his finger on the problem very accurately, and intends to prepare a directive by the end of the year that would end the influence of energy monopolies on prosperity in the European Union.

TSS: The consultants that helped you prepare your new strategy towards energy firms included representatives of Slovakia's largest companies, such as Železiarne Podbrezová, US Steel Košice, Duslo Saľa and Matador Púchov. To what extent is the Fico government's energy policy a reflection of the interests of the industrial lobby, such as the Klub 500 of major industrial firms?

LJ: Allow me to correct that statement somewhat, because it is wrong. The first talks were held only with the energy monopolies. The energy council at the time was not in operation. After three meetings the energy monopolies still didn't want to hear of any alternative other than creating a special fund that would compensate lower income groups. This proposal was unacceptable to me, because it would have returned us to cross-subsidies, which is forbidden by an EU directive.

Following the failure of these talks, the Economy Ministry set up an advisory body, the energy council, where the largest consumers of energy in Slovakia are represented, along with industry experts from the Economy Ministry and ÚRSO representatives. The assertion that the [industrial] consumer lobby, such as the Klub 500, addressed the problem of reducing prices is very mistaken. Under current law these companies negotiate the end-user prices of energy themselves, without aid from the Economy Ministry. In taking this step [setting up the energy council], the Economy Ministry was tackling only energy prices for household consumers. So on the contrary, I'm glad they lent their expertise, and allowed us to get to grips with the price-setting issue very quickly. But these prices affect only households, not large corporations. They got nothing out of it.

TSS: But didn't they propose that the ÚRSO take the setting of industrial prices under its wing, precisely because they had been so unsuccessful in negotiating decent rates?

LJ: A European Union directive forbids us to regulate prices for large consumers in the industrial sector. We merely want to change the law to reduce fees for the distribution of electricity and gas so that other suppliers from neighbouring countries can connect to our distribution network and thereby achieve the liberalization of the market.

Only when we have more suppliers will we be able to speak of rational price-setting by the market. As long as we have Slovenské Elektrárne as the dominant energy provider, or SPP as the sole gas provider, we cannot say the market is liberalized. The only advantage large companies will have is that we will set a more strict division of these fees and secure a reduction in distribution fees. Our fees for energy distribution are the highest in Europe, and are barring other energy suppliers from entering the Slovak market. By lowering them we will allow large companies to buy from other suppliers in surrounding countries, and will give these energy suppliers access to the Slovak electricity and gas grid.

TSS: Didn't the cabinet also just pass a resolution by which the ÚRSO should regulate gas prices for industrial consumers?

LJ: No, the government only took on the task of introducing a category of gas as a raw material for chemical manufacturing. They have it in Hungary and Austria and other countries around us, but in Slovakia gas is treated only as an energy raw material, and thus falls into the category of an energy medium for heating, which is unjust. By way of example, in Austria, the fact that gas is also classified as a raw material for chemical manufacturing means that such users buy their gas for Sk2.20 per cubic metre cheaper than their counterparts in Slovakia. But we're really only talking about a reclassification here.

TSS: You and Prime Minister Fico have repeatedly used strong language during the six weeks you have been in talks with the energy companies. PM Fico even said that everything the previous government did in the energy sector was "treason", meaning by extension that those foreign investors who bought into Slovak energy companies were participating in acts of treachery. Why did you feel it was necessary to use such tough language?

LJ: But this comment was not directed towards our strategic partners. This tough speech was aimed at the previous government, because it failed to draw up a concept of what to do with the Slovak energy sector following privatization.

Take the Transpetrol pipeline company, for example. It [a 49-percent stake in the company] was sold for very little, $74 million [to the Russian Yukos Oil in 2001], and at the same time the state gave up any say in the exercise of shareholders' rights. The government completely failed to realize what a huge impact the piece of pipeline controlled by Transpetrol could have on the diversification of oil supplies in Central Europe. They did not consider the possibility of linking up with the southern Adria pipeline [through Hungary and Croatia]. They did not look into the possibility of a future connection with Schwechat [refinery] in Austria, which would have allowed other customers to import heavy Siberian oil and light Caspian oil [through Transpetrol], as well as a reverse flow for the purchase of Venezuelan oil if supplies from Russia were reduced.

Apart from this, they didn't consider the fact that in gaining access to Caspian oil from the Odessa-Brody pipeline [between Odessa in Ukraine and Brody on the Poland-Ukraine border], they could transit five or six million tons of oil a year to Schwechat, as well as refineries in the Czech Republic and Poland, where they now have to build a connection from Brody to the refinery in Plotsk, which will cost Poland about $17.5 billion.

If the Slovak government had considered these possible connections at the time, it simply couldn't have sold Transpetrol. Slovakia could have played a key role in supplying oil to Central Europe, as well as in diversifying this supply. But no such vision was even outlined, and Slovakia gave up on any such ambitions very cheaply.

In terms of electricity, the [Dzurinda] government agreed to shut down two reactor blocs at the Jaslovské Bohunice nuclear plant, but failed to say what was to come next. This year the first bloc will already be taken off line, meaning that Slovakia will lose 10 percent of its electricity production, and very cheap production at that. You might have expected that they would have timed this with the possible completion of the third and fourth blocs at the Mochovce nuclear plant to take up the slack, or at least allowed for a temporary link with the energy grids of surrounding countries. But nothing was done in terms of infrastructure, meaning that at the end of this year we will lose 10 percent of our electricity production, and we still have nowhere to replace it from. When the second bloc is shut down in 2008 the situation will become catastrophic.

All they had to do was to build a frequency converter at the Slovak-Ukraine border, and buy very cheap energy from that country. Instead, they chose the system at Lemešany [part of the trans-European energy network in eastern Slovakia], which doesn't address the coming shortfall, but only allows us to buy energy irregularly from Poland to level out fluctuations in usage. And Poland itself doesn't have enough energy for its own needs. So the new government faces the difficult task of ensuring a sufficient quantity of energy in a very short time.

TSS: So what's the answer?

LJ: I confirmed to the EU Energy Commissioner in Brussels last week that we would keep our promise to shut down Jaslovské Bohunice, but at the same time we agreed that in January and February next year we would hold an international conference with experts and Greenpeace and everyone else to gather opinions on how to use the infrastructure of Jaslovské Bohunice. We're going to shut down those aging reactors, that's for sure, but we're also going to consider what new source of energy we will build at Jaslovské Bohunice in order that the production of electricity could be renewed there.

TSS: Have you given any thought yet to your ministry's policy towards foreign investors, what kinds of investment stimuli you might be offering?

LJ: We are currently preparing an update to the Act on Investment Stimuli. We have said that this government will continue with investment stimuli as they have been designed, but we want to make a few changes as well. We want to increase stimuli for investors whose projects bring with them higher added value. We don't want only assembly plants in Slovakia, we also want research and development centres, places with a higher concentration of creative employees. We have already prepared limits in terms of employee structure, such as what ratio of employees must have university education in order for the investor to qualify for higher stimuli.

Secondly, given that capital knows no borders, we also want to give a chance to Slovak investors, because this country has also developed a couple of financial groups that are equally capable of creating new jobs and founding new investments on Slovak territory. They should get the same crack at state aid as foreign investors, just as they will be under the same obligations and have to fulfil the same criteria. Every investor is welcome here, and we want to use the added-value indicator to raise the state aid we already offer.

TSS: Is there any tension within the current cabinet over how to prepare laws that are popular among voters but which at the same time don't worry investors or chill the business climate?

LJ: To answer that let me go back to the topic of household energy prices. We have to remember here that we are talking about only 20 percent of overall energy consumption in this country. It's not decisive.

We also have to note that in the first regulatory period, from 2002 to 2005, prices were artificially inflated by 20 percent because the previous government wanted to allow these energy sector investors to recover the money they had paid out in privatisation.

In 2006 a new regulatory period was to have started that would have eliminated this deformity, but it didn't happen. The companies, the government and the market regulator realized that consumers had already become accustomed to the new prices, so why should they reduce them?

Then came a new government which put its foot down and said it wasn't going to continue with this policy.

TSS: Even if you don't feel any tension in creating such laws, the foreign energy companies that bought these stakes in privatisation must be fit to be tied. How have they behaved in closed-door negotiations with your ministry?

LJ: They defended their positions, of course, because they want high profits, just like any business. But the talk ceased and they ran out of steam when we showed them our price calculations.

We told them exactly where they had provided false data, and when they discovered that our expert group saw into their kitchens, and knew how they had created their prices, then that was the end of the debate. Instead, we began to talk about the future.

Economy Minister Ľubomír Jahnátek

photo: Jela Priehradniková

Born:September 16, 1954 in Nitra.
Education:Chemical Technology Faculty of the Slovak University of Technology in Bratislava, majoring in the use of plastics and dry rubber, from 1973 to 1978. In 1991 he received a CSc. scientific degree for his work in macromolecular chemistry, and in 2000 became a guest lecturer at the University of Technology.
Employment:From 1978 to 1992 he worked at the Plastics Processing and Application Research Institute (VÚSAPL) in Nitra, rising from the position of researcher to divisional director. In 1992 he joined the Plastika, a.s. Nitra company, becoming its general director until 2001. In that year he left to become strategy director at another chemical company, Duslo, a.s. Šaľa, returning to Plastika from 2003 to 2005 again as its CEO. He was fired from the position, according to his own words for the second time, by Plastika owner Juraj Široký.
Political affiliation:None.

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