CEZ points finger at Czech Coal over EC raids

By bne IntelliNews December 3, 2009

Nicholas Watson in Prague -

The competition officials from Brussels may have left CEZ's buildings on November 27, but the recriminations over who was responsible for the unannounced inspections of the Czech utility continue.

On December 1, the powerful director of sales and trading at CEZ, Alan Svoboda, waded in, telling Reuters that the Competition Commission is likely focusing on issues surrounding the lignite, or brown coal, market rather than the wholesale power market, which was the stated reason for the surprise inspections. This points the finger squarely at Czech Coal, with whom CEZ has been in dispute with for over a year over brown coal supplies.

"The investigators interviewed about 20 managers and staff, and after two days they took some documents related mainly to coal mining," Svoboda told the newswire. "I doubt there will be any significant investigation into the wholesale power market... We have no way to distort the market even if we wanted to, we are a price-taker on the wholesale market."

CEZ spokeswoman Eva Novakova also tells bne that the Commission mentioned in the statement of the reasons for the probe, "that CEZ Group might create obstacles for power plant projects of their competitors, that it might be involved in the limitation of the trade in brown coal and that it might influence the prices on the Czech wholesale electricity market."

Without naming Czech Coal by name, Novakova says the Czech state-controlled utility sees the Commission's inspections as an opportunity to counter the misinformation spread by competitors and the companies with which it has had long-term business disputes. "We presume that it is their information that inspired the Commission's inspection," she says.

Czech Coal has been in dispute with CEZ for over a year about long-term coal supplies to power stations in the country. Ironically, the two sides were reportedly close to a deal to solve the dispute, involving an asset swap whereby CEZ would get the brown coal mine Dul Ceskoslovenske armady and Czech Coal would get a power plant in Pocerady, northern Bohemia, before the Commission's raids put a halt to talks. "When the EC probe began, CEZ stopped any negotiations related to solving the disputes between CEZ and Czech Coal," says Petr Pudil, chairman of Czech Coal.

Yet Pudil makes no secret of his desire to see CEZ and its partner the Czech/Slovak J&T Group, which is also a target of the Commission's probe, investigated for anti-competitive practices. "We believe that CEZ and J&T groups' concerted steps should be investigated over whether they are capable of deepening the imbalance on the market of electrical energy generation and on the brown coal market. In such a case these steps might be unfavourable for the Czech and European markets and customers," says Pudil.

While Pudil talks of "the tide of oligopoly power sweeping over the Czech energy market," there's no doubting that CEZ has strengthened its position on the Czech energy market this year through a series of high profile, and sometimes controversial, acquisitions.

Mine shafted

CEZ spokeswoman Novakova admits that the investigation by the Commission is "a logical consequence of the growth of CEZ," which has taken on new proportions this year as the utility switched its focus from a laboured foreign expansion to growing its role on its home turf.

CEZ has suffered several setbacks in its international ambitions, which industry experts say stems from the state-owned utility's conservative approach and reluctance to overpay for assets. The latest failure came in November when CEZ and its Turkish partner Akenerji were beaten in the tender for three Turkish electricity distribution grids, a disappointing outcome as the country, with its rapidly expanding population and economy, is expected to be a bonanza for the region's power industry. Earlier this year, CEZ's expansion into the western Balkans, another much touted region of opportunity, faltered when it had to abandon a deal to buy a power plant in Bosnia's Republika Srpska due to arguments with the government there.

Faced with obstacles to its foreign expansion, CEZ has been busy leveraging its economic and political power at home, investing in its traditional generation business, as well as moving horizontally into other areas such as gas and heating.

CEZ's latest deal was in the Czech district heating segment of the power market, where private companies supply heat generated from brown and black coal, natural gas, heavy fuel oil and biomass direct to homes and businesses. On 9 November, CEZ announced that it had agreed to buy a 15% stake in the Czech operations of Dalkia, a joint venture of Electricite de France and Veolia, as well as an 85% stake that Dalkia owns in its Dalia Usti nad Labem subsidiary, which includes the Trmice Heating Plant.

This follows another deal in the summer when CEZ and J&T managed to get the UK utility International Power to halt its tender for its Czech assets, the coal-fired combined heat and power plant Opatovice power plant and a 49% stake in Prague's major heat supplier Prazska teplarensk, 24 hours before the July 1 deadline by offering what the UK firm called "a pre-emptive offer that we pursued in order to maximise shareholder value."

J&T's role in this deal was as the listed buyer of the assets, because CEZ could not bid for all the assets on its own due to competition concerns. J&T then agreed to sell on the stake in Prazska teplarenska to CEZ. Jan Ondrich, an energy expert with the advisory firm Candole Partners in Prague, describes J&T - with which CEZ also bought the German coal mining company MIBRAG earlier this year - as acting like "an off-balance sheet special purpose vehicle of CEZ."

This deal infuriated Czech Coal, which had its eye on International Power's Opatovice power plant, as it is the sole coal supplier to the plant. J&T and CEZ could nnow supply the Opatovice plant from the Mibrag coal mine. "Czech Coal had prepared its bid for International Power, but before it had had a chance to deliver it by the required date, which was on July 1, it learned from the media about the sale to another bidder. We regret that we had not been enabled to deliver our bid, which was competitive, to International Power," Pudil tells bne.

On August 3, Czech Coal filed an objection to the proposed merger of J&T and Opatovice with the Czech Office for the Protection of Competition (UOHS) and noted that because the "CEZ and Dalkia groups are also participating in the acquisition of control over International Power Opatovice in addition to J&T, the European Commission is competent to assess this merger by the European legislation's turnover criteria rather than UOHS."

And then the inspectors from Brussels arrived.

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