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Energy distributors attract 10 binding offers

THE PRIVATISATION of Slovakia's electricity distribution sector entered its final phase in mid-April with the submission of 10 binding offers for 49 per cent stakes in the country's three regional distributors - Western Slovak Power (ZSE), Central Slovak Power (SSE) and Eastern Slovak Power (VSE).
The restructuring and eventual privatisation of the Slovak energy sector, a project launched in 1998, first separated the three distribution companies from the main state electricity producer, Slovenské elektrárne (SE), and then planned to sell off both distributors and at least chunks of SE itself.

THE PRIVATISATION of Slovakia's electricity distribution sector entered its final phase in mid-April with the submission of 10 binding offers for 49 per cent stakes in the country's three regional distributors - Western Slovak Power (ZSE), Central Slovak Power (SSE) and Eastern Slovak Power (VSE).

The restructuring and eventual privatisation of the Slovak energy sector, a project launched in 1998, first separated the three distribution companies from the main state electricity producer, Slovenské elektrárne (SE), and then planned to sell off both distributors and at least chunks of SE itself.

The aim of the project, say its authors, was to allow all Slovak energy producers access to the distribution system, as well as to create a competitive energy market and let consumers choose their own suppliers. Added benefits should include reduced corruption at the state-owned companies, and the extension of market conditions to the energy sector, even at the expense of increased energy prices.

Five potential investors carried out due diligence at ZSE, the largest of the three distributors, while six studied SSE and VSE. On April 12 a total of 10 firms submitted bids to three privatisation committees, which will choose winners for each distributor by the end of April.

The three biggest bidders are German energy and utility companies E.ON and RWE Plus and French Electricité de France. Firms from Austria, Spain, Italy and the Czech Republic also submitted bids.

The Privatisation Ministry expects a total sale price for the three stakes of around Sk20 billion, although earlier estimates ranged from Sk13 to Sk26 billion. Government advisers were to continue negotiations aimed at raising bid prices until April 19.

Backers of the impending sales have said the presence of foreign investors will improve choice for consumers.

Andrej Devečka, general director of ZSE, said: "The future of the Slovak energy sector will be greatly influenced by opening the market to foreign companies. Over time, the number of customers able to buy energy from different suppliers will increase."

Economy Ministry spokesman Peter Chalmovský explained that a separate trade unit in each distribution company would give all three "the possibility to sell their energy everywhere in Slovakia". He said the only barrier to firms selling outside their geographic 'region' would be cost, "because transferring energy through other distribution systems will presumably not be free".

But the energy sector privatisation project has been opposed by critics both within the ruling coalition and SE itself. Andrej Hanzel, head of SE's technology department, argued that "distribution of energy is a monopolistic activity. For a consumer in VSE's region, for example, it is not possible to work with ZSE. The creation of competition between distributors is unrealistic."

Nor, Hanzel said, would some of the projected benefits, such as efficiency, filter down to energy consumers.

"The investor will not have a lot of room to decrease costs. They are already at a very low level and some items, like depreciation and decommissioning fees, simply cannot be affected."

Hanzel argued that foreign investors were above all interested in the new market opportunities the distributor stakes offered them. "None of these investors want to privatise a company, they want to privatise the market. All investors need is those 2.2 million consumers in Slovakia," he said.

For western energy sector specialists like Navigator Finance partner Paul Greeman, however, privatisation of the distribution companies is an overwhelmingly positive step. New shareholders, Greeman said, will make companies more efficient, lower production costs and eventually result in a decrease in energy prices from free market competition.

"In the end, the companies will also have very effective and accountable management," said Greeman.

All sides agreed that privatisation would mean an increase in energy prices, with Hanzel predicting that "end-user prices will rise by approximately 20 per cent immediately after the investor steps in."

Privatisation will not mean unfettered competition, however, as the state regulator Office for the Regulation of Network Sectors will still put caps on electricity prices, trying both to protect consumers and allow investors a return on their investments. Deputy Prime Minister for Economy Ivan Miklóš estimated the rate of return would be around 15 per cent.

While Greeman said he also expected layoffs to result from the privatisations, Devečka projected that labour would be used more efficiently. Instead of layoffs, he said, "the power distributors will separate certain activities and move them to daughter companies, while the parent companies focus on key activities, especially the distribution and sale of electricity."

Slovak energy sector labour unions are studying the impact of the sales on employment, but have yet to finish their report.

SE's Hanzel remained critical of the Slovak sale procedure, noting that in Slovakia, "no analysis preceded the separation of the energy companies [from SE]. The process is not being supervised by specialists, which, in my opinion, is very interesting."

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