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SLOVNAFT HOPES THE SECOND AUDIT INTO ITS PRICING POLICIES IS "MORE BALANCED"

State threatens price regulation

FINANCE Minister Ivan Mikloš could choose price regulation as a tool to discipline Slovnaft for its price policies, putting the cost of fuel directly into state hands.
The Finance Ministry says that the oil refinery continues to abuse its dominant position on the market, a gambit that critics say has spiked prices at the pump.

FINANCE Minister Ivan Mikloš could choose price regulation as a tool to discipline Slovnaft for its price policies, putting the cost of fuel directly into state hands.

The Finance Ministry says that the oil refinery continues to abuse its dominant position on the market, a gambit that critics say has spiked prices at the pump.

While fuel consumers in the Czech Republic have seen the cost of fuel drop by 2.9 percent since the beginning of 2005, Slovaks have watched fuel prices climb 4.9 percent, the ministry argues.

Late December last year, the ministry imposed a Sk1.3 billion (€33.9 million) fine on Slovnaft for what it called "unjustified profit and abuse" of the refinery's industry monopoly.

Slovnaft claimed that the ministry's decision disregarded market trade principles.

The fine was the result of an audit that investigated the company's financial records between 2002 and September 2004.

The ministry now wants to initiate a new audit that would look at the company's figures from October 2004. It also plans to initiate a legal proceeding, which might result in Slovnaft having to pay back what the ministry considers unjustified gains.

"If the audit proves the ministry's suspicions about the abuse of a dominant position on the market, the ministry will consider its option to regulate fuel prices," the Finance Ministry told the press.

The Finance Ministry also might initiate talks with the Economy Ministry about the possibility of renting reservoirs of oil that are currently administered by Slovnaft to other competitors on the market.

Slovnaft said it hopes that the new audit will be objective.

"The company has so far been open to audits from state institutions in the same way it is open to controls from the Finance Ministry. However, it hopes that the new audit will be more balanced than the previous one, which had its results determined in advance," the company's press department told the Slovak media.

The state supports price liberalization since price regulation is considered by most as a legacy of the previous regime. Thus, the Finance Ministry's decision comes as a surprise to many even though others welcome the move.

The Klub 500, an organization representing companies exceeding 500 employees, approves of the state's intervention.

"Businessmen are convinced that [Slovnaft's] unjustified increase in profit, which is the result of a lack of competition, has been harmful to consumers and deserves penalizing," Klub 500 Executive Director Tibor Gregor said.

"In select spheres where there is neither effective nor equal competition, the state must simulate the conditions of free trade. A monopoly without regulation has the tendency to abuse its market position and every functioning state must prevent against this abuse," Gregor said.

According to him, Slovak businesses are convinced that the current tax burden on fuel is too high. Some 60 percent of the retail fuel price consists of excise and value added taxes. Gregor wants to see an eventual decrease of excise taxes so that fuel prices will stay affordable.

Peter Stanek works at the Slovak Academy of Science's Institute of Slovak and World Economy. He says that Slovakia is trying to extinguish a blaze that has been burning for some time.

"The key problem emerged in [1990] when the Antitrust Office allowed Slovnaft to enjoy a special position in which it is a key fuel producer and at the same time owns a prevailing part of the distribution network," Stanek told The Slovak Spectator.

He said that Slovnaft's arguments for increasing fuel prices must also be considered.

"After all, Slovnaft's investments into environmental programmes have been relatively high. Logically, if Slovnaft is to meet EU emission requirements, it has to keep making these investments. This puts the question of Slovnaft's profit into a completely different light," Stanek told The Slovak Spectator.

Stanek said that he does not see direct price regulation as a justified move and he is certain that there are some other tools that the ministry could use to influence prices.

"Another issue is the longevity of the price regulation. Is it maintainable? Should it be three months or six? Considering the dynamic development of oil prices, the price is again climbing to $50 a barrel. Price regulation could drown the firm," Stanek said.

It should be the Antitrust Office that takes the step to control Slovnaft, Stanek added.

The Finance Ministry has two options for regulating the price of fuel. It could set a fixed price or a maximum one. The ministry is inclined to set a maximum price.

Legally, the state can opt to regulate prices under certain circumstances: if there is an extraordinary market situation; if the market is threatened by the lack of competition; the public's interest is at stake; or if there are links between the seller and the buyer.

Minister Mikloš thinks that at least three of these conditions will be fulfilled once the latest audit is completed.

Mikloš denies allegations that the state is taking steps against Slovnaft to increase its tax revenues.

If Slovnaft is forced to return its unjustified gains to the state, Mikloš says that the ministry will seek avenues to return it to the public. He acknowledged, however, that it would be impossible to return the money to each driver.

The Finance Ministry acknowledges that fuel prices seem high in Slovakia, but it maintains that the matter has nothing to do with excise tax levels.

The excise tax on one litre of gasoline in Slovakia is Sk18.50 (€0.46); it is slightly lower on diesel, at Sk17.30 (€0.43).

Finance Ministry advisor Papanek told The Slovak Spectator that taxes alone do not determine the end price a customer pays for fuel.

"It is the producer and distributor who establish the end price," he said.

According to the last audit's findings, unjustified prices resulted in additional profits of Sk252 million [€6.5million] in 2002, Sk276 million [€7.1 million] in 2003 and Sk824 million [€21.3 million] in the first nine months of 2004.

The audit also shows that Slovnaft tripled its total profits in 2004. In the first nine months of 2004, Slovnaft recorded Sk1.9 billion (€49 million) in profits, a figure that exceeds the company's costs by 16 percent. In comparison, for the same period in 2003, the company made a profit of Sk842 million [€21.8 million], or exceeding its costs by 7.16 percent. In 2002, also for the same period, it made Sk516 million [€13.7 million], or exceeding its costs by 5 percent.

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