bne -

To the surprise of few, following a long and bitter fight Albania's power regulator ERE on January 21 followed through on its threat to revoke the distribution licence of the local unit of Czech utility CEZ.

The regulatory board voted 5-0 to revoke the licence of CEZ's loss-making local subsidiary CEZ Shperndarje, arguing that the Czech company, had breached the terms. It failed to invest in order to limit electricity losses in the distribution system, and failed to import the required amount of power needed to meet the percentage of Albania's power deficit agreed in the licence, the regulator said.

The move is the latest twist in a long-running saga that has seen CEZ at loggerheads with Tirana since it bought the distribution company for €102m in 2009. The deal gained World Bank backing, as the Czech company was seen as a strong player to help improve the sclerotic Albanian power sector. Analysts say the issue will almost certainly harm Albania's reputation as a foreign investment destination.

ERE did not specify the amount it would seek in damages from the Czech company, but the Albanian government has estimated the cost at $1bn. "The main thing is they could not control the power losses ... that means they could not control debt and they could not control problems in the industry," ERE chairman Sokol Ramadani

told Reuters after the hearing.

However, CEZ counters that it has been forced to run the company at a loss due to a hike in wholesale prices from the state-owned generator, while not being allowed to raise consumer tariffs. Furthermore, many households and businesses, both state and private sector, simply don't pay their electricity bills. In November, CEZ cut off several of the country's water companies for non-payment, but the authorities went to the politically pliable courts, which forced the company to hook them back up.

CEZ criticized the regulator's decision and said that it would seek international arbitration while it looks to sell the subsidiary, which is dragging on the group's earnings. "Such a move is in violation of local laws and CEZ will file a formal protest. At the same time, the company will take initial steps toward international arbitration," the company said in a statement.

Tirana is blocking any sale by CEZ until it coughs up compensation for the alleged breaches. Following the revocation of the licence, ERE leveraged Albanian energy legislation to put CEZ Shperndarje in temporary administration and appoint a new manager to oversee the business while the dispute persists.

"We see the news neutral [for CEZ], as it was more or less expected," says Petr Bartek of Ceska Sporitlena, who notes that there is a €60m guarantee provided to CEZ from the World bank, which should cover most of the losses, depending on the result of any arbitration.