Poland faces an electric shock

By bne IntelliNews December 3, 2007

Jan Cienski in Warsaw -

Spooked by the possibility that electricity prices next year could jump steeply, Poland's new government is looking for ways to edge away from a recent decision to radically deregulate electricity tariffs. As it does so, the new government will also have to figure out whether it wants to continue its predecessor's policy of creating large vertically integrated power companies controlled by the state or strike off in a more liberal direction.

The pricing decision was taken in November in the waning days of the government of former prime minister Jaroslaw Kaczynski and his Law and Justice party. With very little consultation, Adam Szafranski, the head of the Energy Regulatory Office, decided to free up electricity prices.

Kaczynski promptly fired him, one of his last acts before leaving office, but the way in which Szafranski ended price controls creates enormous legal difficulties if the government of Donald Tusk, the new prime minister, tries to roll them back.

"We are going to think about how to return some form of regulation," said Tusk. "Our predecessors took a decision they probably did not completely understand."

Szafranski's replacement, Mariusz Swora, has promised that companies will only be able to increase prices by as much as his office permits. But if companies, especially foreign ones operating in Poland like Vattenfall and RWE, take the decision to court, many lawyers feel they will easily win.

Tusk also said that he didn't feel the EU demanded full price deregulation: "The EU is not demanding that; it is a direction in which the EU is heading."

Conforming

Szafranski's unexpected decision is part of a wider trend of Poland's energy market preparing to conform with the EU's proposed third electricity and gas package, which foresees splitting up power generators from power transmitters, so-called unbundling, a step towards the creation of an open energy market in Europe.

In Poland, the Kaczynski government last year decided on a strategy of creating four large vertically integrated power companies. Power transmission is in the hands of the state treasury, which owns PSE, the national energy grid operator.

In May, the largest of these, PGE, was created. It is intended to be the largest energy company in central Europe, controlling about 40% of Polish electricity generation and with annual revenues of about €9.2bn.

The Law and Justice government intended to prepare the four companies to eventually be partially floated on the Warsaw Stock Exchange, which would provide the capital needed to upgrade Poland's decrepit power plants - more than 60% of generating capacity is more than a quarter century old, and almost half don't meet the EU's sulphur dioxide emissions rules.

That approach has been thrown into confusion by Law and Justice's defeat in the October parliamentary elections. Tusk's party, Civic Platform, is more economically liberal, and the party's leaders have said that they want to get rid of most of the 1,200 companies still in state hands and not retain control through partial sales.

"Privatisation is needed in the energy sector," says Adam Szejnfeld, one of the party's leading economic spokesmen and likely deputy minister of the economy. "This sector demands unimaginable investments - billions of euros. This should be done by private business and not by the government."

That stance is already creating friction with Civic Platform's smaller coalition partner, the Peasants party, which is more left wing, and which is questioning the whole idea of vertically integrating the industry.

"The efficiency is sometimes doubtful in these conglomerates which link production and distribution," says Waldemar Pawlak, the economy minister and leader of the Peasants party. "I think that in the last few years several steps backward have been taken in this matter."


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