NO to the Energy Holding!
This year looks like very interesting from the point of view of the changes in the Bulgarian energy sector. We are not talking here about the number of agreements which the state will sign, whether oil and gas pipelines will be passing through the territory of the country, will there be a tax on the pipes on question, or how the price of oil will change on the world markets. We are not talking about whether NPP "Kozloduy" will produce sufficient energy and whether there would be a regime on the electric supply. This which we expect to be in the centre of attention is the state policy itself with respect to the energy sector and possible tern toward consolidation of the sector.
After the acceptance of the Energy Strategy of Republic of Bulgaria in 2002, the Bulgarian energy sector could be characterized with the words: restructuring, privatization and liberalization. It is important to note, that this process is very slow and the energy sector continues to be ineffective and is fare from the understanding of the words "competitive sector". The distribution of electric energy is already separated from production and is in private hands, however this does not change the fact that "a huge part of the electric energy is produced by state own companies". The electric power grid is also owned by the state. The claim the there is already a free market for electric energy and almost any user could freely negotiate the price of his supply is arguable. It is clear that the National electric company (NEC) is buying enormous quantities of electric energy (including long term contracts for buying electric energy from TPP "Maritsa 1 and 2" and TPP "Maritsa 2", as well as electric energy from renewable sources), which inevitably affects the market and the price. On the other hand even if the consumers negotiate freely with the distributors of electric energy or directly with the producers, the fact that these producers are state owned is sufficient for us to claim that the price is not determined entirely by the market conditions.
Actually, everything in the Bulgarian energy sector turns around one simple word – "competition". The aim of the current state policy in the last few years (the same objective is followed by the EC as well) is to reach a high level of competition in the sector. The main question, however remains how exactly to achieve this competition?!
Until now the Bulgarian government considered that, to achieve competition in the sector, it is sufficient mainly to liberalize and to a lesser expend to privatize. Liberalization in this case meant artificial break up of the large government monopolies and creation of smaller but still state owned companies. The smaller companies in question are than privatized and pass into private hands. In other words the logic is approximately the following: "it is nice to have competition and many players on the market, however if by chance there is a larger player than the rest then it must be state owned." Such logic however is twisted. It is based on the understanding that the state monopoly is something good, while the big business and the aspirations for growth and taking over market niches are something bad. The sector, however, offers the presence of large players and if this does not change we would never have a competitive energy sector. An interesting example with a similar sector is telecommunications. We all remember how this sector looked with the state monopoly and we could all see what happens now with just several big private players on the market. Would you say that the big business damaged the sector?! Or made it one of the most developed in the country?!
The understanding of the ways to achieve competition in the sector must be changed from "let us first liberalize (break down the large state companies) and than eventually privatize" to "let us privatize immediately, than the liberalization (the restructuring of the existing structures and the entry of new players on the market) will happen by itself".
Apparently the probability that the government will change its approach to the energy sector during 2008 is very high. Unfortunately the variant reviewed above to achieve higher competitiveness in the sector may remain a low priority and to start the process of consolidation. Few days ago the Minister of economics and energy announced that "the ministry is working on creation of an energy holding, which will combine the open cast mines at "Maritsa-East", TES "Maritsa-2", NPS "Kozloduy", NEC and "Bulgargas"." The Minster also stated that this will be "a significantly competitive structure". It is interesting to note that in all official documents of the country they talk about creation of a more competitive sector and nowhere is mentioned the creation of competitive structures. This structure practically will have no one to compete with! This is the vision for a "competitive sector"!
Apparently, the Bulgarian government has a quite mixed vision about the energy sector and as a result the misunderstanding of the term "competition". The misunderstanding of competition was illustrated perfectly during July 2005 by the state arm responsible for those issues – The Commission for Protection of the Competition (CPC). On July 6th 2005 CPC allows the purchase by PAO "EEC Russia" of TES "Varna" JSC. The Russian company won that tender by offering a price which was double that offered by the next competitor (CEZ). On July 8th 2005, only two days later, CPC allowed the purchase by PAO "EEC Russia" of Ruse Central Heating Plant. The offered price was over four times higher than the next contender (CEZ). CPC however, placed a restriction which does not allow the execution of both deals. The deals in question are for over one billion levs, but according to CPC they would lead to establishing a predominant position, which will significantly limit the effective competition on the market. The Russian company was forced to choose which one of the two companies to acquire and as a result both deal failed.
When we remember these events the question arises: if acquiring two companies with relatively small market share by a private company could limit competition and has negative effect on the market, how the consolidation of the largest companies in the sector and the formation of a very large state owned holding will help market competition?!
