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Frying pan or the fire: Gas price hike urged

Gas utility SPP has said it will push ahead with a dramatic increase in domestic prices for natural gas, despite opposition from the Finance Ministry, which promised citizens earlier this year that no further gas price increases would be approved until 2001.
Citing soaring gas purchase costs and a weak domestic currency, the state-owned utility proposed August 24 that gas prices for industrial consumers be raised 45% as of September 1. Although a suggestion by the utility in early August that household gas prices be hiked by 25% has been opposed by the Finance Ministry, which sets household rates, the SPP is entitled by law to raise industrial gas prices unilaterally - something it has promised to do if agreement cannot be reached.
"Given that we buy gas for a higher price than we sell it, we can say that in a certain sense we are sponsoring [the citizens of this country] - 3 billion crowns [$64 million] this year for domestic gas users, and 10 billion crowns for industrial users," said SPP boss Pavol Kinčeš in an interview for the Hospodársky denn'k daily paper. "But when we say we want to balance these economic conditions [costs and prices], everyone is against us."

Gas utility SPP has said it will push ahead with a dramatic increase in domestic prices for natural gas, despite opposition from the Finance Ministry, which promised citizens earlier this year that no further gas price increases would be approved until 2001.

Citing soaring gas purchase costs and a weak domestic currency, the state-owned utility proposed August 24 that gas prices for industrial consumers be raised 45% as of September 1. Although a suggestion by the utility in early August that household gas prices be hiked by 25% has been opposed by the Finance Ministry, which sets household rates, the SPP is entitled by law to raise industrial gas prices unilaterally - something it has promised to do if agreement cannot be reached.

"Given that we buy gas for a higher price than we sell it, we can say that in a certain sense we are sponsoring [the citizens of this country] - 3 billion crowns [$64 million] this year for domestic gas users, and 10 billion crowns for industrial users," said SPP boss Pavol Kinčeš in an interview for the Hospodársky denn'k daily paper. "But when we say we want to balance these economic conditions [costs and prices], everyone is against us."

So far, SPP's principal opponents in the price hike battle have been Finance Minister Brigita Schmögnerová and the industrial lobby. Schmögnerová, whose ruling coalition SDĽ party has suffered heavily in the polls since a 50% natural gas price increase on July 1, 1999 and a further 30% rise on February 1 this year, has said she sees no reason for yet another increase, and has called on SPP to reduce costs rather than boost revenues.

Chemical and Pharmaceutical Industry Association head Jozef Kollár, on the other hand, has called for a maximum 5% rise in gas prices for industry, saying a 45% jump would make Slovak industry less competitive on European markets and could lead to widespread layoffs at home.

But while SPP has agreed to delay the price increase until discussions are held between Kollár, Kinčeš and Finance Ministry officials in two weeks time, for now the utility is talking tough. "SPP will use the means at its disposal under law [for increasing prices], even in the case that we don't come to an agreement in two weeks," Kinčeš said.

Sides of the coin

The price that SPP pays for the gas it imports from Russia, according to analysts, is calculated according to the price of oil on world commodity markets, prices which are currently at their highest levels in a decade. At the same time, the Slovak crown has fallen over 10% against the US dollar this year, making gas imports even more expensive.

Although SPP's exact gas purchase price structure is a business secret, part of a long-term contract between the utility and Russian gas monopoly Gazprom, SPP has revealed that its gas purchasing costs rose 71% in the first half of this year compared to 1H99, while its revenues climbed only 18%. The result, while still a profit of 5.77 billion crowns ($123 million) for the first half, was 40% below the profit recorded in the same period last year.

"I think a price hike is definitely justified," said Dušan Meszároš of Comerzbank Capital Markets in Prague. "Consumers are paying significantly less for gas than the cost of purchase and delivery, and while so far this has been strongly cross-subsidised from SPP's gas transit trade, it can't go on for ever."

"SPP is trying to behave correctly and manage its pricing policy," agreed Economy Ministry spokesman Peter Benčúrik. The Economy Ministry, which is the 100% owner of the utility, has said it supports the increases, although Benčur'k would not predict what the ministry would say if SPP pushed ahead unilaterally. "I can't say now whether we would support him [Kinčeš] or not," said Benčúrik. "It's a matter of negotiation."

SPP also has the weight of privatisation expectations on its side. A 49% stake in the firm is due to be put up for sale after it is transformed into a joint stock company next year, but if the Finance Ministry refuses to agree to a price hike now, say analysts, they may be sending a negative message to potential minority investors.

"If the government proves they are able to follow the market [and increase consumer gas prices], it will do a great deal to reassure possible investors and will pay off for Slovakia in the long run," said Michal Benák of Navigator Financial Services. "Regulatory issues are among the most feared by investors, and if the government retains the right to influence prices, there is always a potential problem."

Even tax issues have been brought to bear. SPP last year made almost 14 billion crowns in profit, which was taxed at 40%; this year, however, given the fall in the corporate tax rate to 29% and SPP's expectations of lower profits, the government cannot expect the same windfall. Lower profits also endanger the payment of a 'special fee' - a portion of its profits - to the state budget. SPP is expected to transfer an additional 3.3 billion crowns to the state budget this year, and an additional 5 billion in 2001.

But the Finance Ministry is standing firm, with Minister Schmögnerová asking the government last week to decide on the matter as a whole. "Any increase would be above the limits that the government approved for this year, and therefore the minister is against it," said Finance Ministry spokesman Jozef Mach. "We have maybe a bit of a hard heart for SPP because we think they could take certain other steps to increase profits, and not look for a solution in correcting prices."

Whatever the ministry says, however, many suspect politics, rather than economics, lies at the heart of the matter. "This whole thing is a bit political," said Ján T-th, senior analyst at ING Barings bank. "The fear is that citizens would pay the bills and bear the costs of any increase. But really, the government should be giving tax credits to the poorest families, not dictating the price to the market. That's not a good sign."

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