Unholy alliances operate in Romania's power sector

By bne IntelliNews March 30, 2007

Adina Postelnicu in Bucharest -

It began with remarks by President Traian Basescu a few months ago on television about unholy alliances operating within Romania's electricity market and has since snowballed into loud accusations of dodgy power deals between private and state companies. The announcement on Monday that more power suppliers will be privatised this year is welcome news for those who feel it is the only answer to these problems of corruption.

The outspoken president accuses some private energy trading firms of using political connections to buy cheap energy from state companies and sell it at higher prices to consumers. He described these dealmakers as "smart guys," a term that has since become code for corrupt dealings in the power sector.

Inevitably in the current climate of political infighting within the creaking coalition, this issue has been used by various squabbling parties to bash each over the head. However, the problems that afflict the power market lie at the heart of a wider problem in Romania of endemic corruption between powerful insiders, who are trying to hold back reform.

Suspicious contracts

It's no secret that for years Romania's entire energy sector has been used as a political instrument. Most analysts and officials who bne spoke to agreed that the current situation reflects the lack of competition among energy producers.

"If producers had been private, we would not be having this conversation," says Nicolae Opris, president of the Romanian Energy Regulatory Authority (ANRE).

He acknowledged that although electricity producers have their own management, with the state as the only owner, "there are suspicions about the way that some contracts with private energy suppliers were agreed."

Jean Constantinescu, president of the Romanian Institute for Energy (IRE), agrees. "Energy was bought from producers for €20 when the market price is around €40. This would not have been possible without strong political connections," he says, adding that some directors of energy state companies only got their jobs with political support.

Last year, the minister in charge of the Economy and Commerce Ministry issued a directive instructing the big five power producers to sell all their available output on the transparent market of OPCOM, the Romanian power market operator.

Lucian Palade, director of Electricity Market Surveillance at OPCOM, argues that the directive has produced results, increasing the percentage of energy traded on this market from 8% in 2005 to 18% today – a level of spot transactions he says is comparable to that in France and higher than in any other Central and Eastern European country.

"Around 8% of national electricity consumption is traded now on the spot market, and 10% on the centralized bilateral contract market of OPCOM," Palade told bne, adding that almost 50% of national consumption is taking place now through yearly regulated contracts and only 30% through the long-term contracts.

However, it's these long-term contracts between state and private companies that are at the heart of the recent scandals.

Long-term problems

One case that has made front-page news in the last weeks involves three companies: Hidroelectrica, a trade state-owned company under the authority of the Ministry of the Economy and Commerce; Alro, the largest aluminum smelter in Southeast Europe, which is owned by the Dutch-based investment holding Marco Industries; and Energy Holding, an electricity power provider owned by Geneva-based Societe Bancaire Privee, or SBP.

SBP has been accused of buying energy from Hidroelectrica at prices far lower than the market price, selling it on to Alro and pocketing millions of euros. The problem, as described by analysts, is that the bilateral contract between Hidroelectrica and Energy Holding was signed outside the transparent market. Recently, Alro has cancelled the contract with Energy Holding and decided to buy the energy directly from Hidroelectrica.

The IRE's Constantinescu says this lack of transparency stems from a new energy law, which doesn't force the parties to disclose to consumers all the information that they should be disclosing. For instance, data about investments that's cost gets included in state producers' prices are considered confidential, as are the prices at which they sell energy to private companies.

"There are too many loopholes which leave room for meddling," Constantinescu says. "The interdiction for a ministry to change the [energy] tariffs is not clear, there are incomplete definitions [and] the authorities' role is not clearly stated. On the one hand, it seems that energy policy is a component of government policy, but on the other it looks like this should be a strategy outside election cycles."

With its 326 power plants, Hidroelectrica produces the cheapest energy in Romania. According to ANRE data, Hidroelectrica produced 18% of the country's power in 2006, although the company represents a third of the installed generation capacity.

Thermal power represented 60% of power generation in 2006, but Constantinescu says only 50% of what thermal power plants produce is competitively priced, but the companies have been "kept alive artificially, with subsidies that did not motivate people to invest."

Investment should improve as more of the power sector is sold off. Hidroelectrica sold 48 small hydro power plants in 2006, and another 150 are on the list to be sold. And on Monday, Romania's National Privatization Authority, or AVAS, said it aims to sell this year the shares of over 300 companies, among them the power suppliers Electrica Muntenia Nord, Electrica Transilvania Sud and Electrica Transilvania Nord.

The privatisation of Electrica Muntenia Sud, which was bought by Italian Group Enel for over €800m, will also be completed, though this sale too was dogged by controversy. The signing of the contract was postponed following suspicions about the legality of the advisory contract signed with investment bank Credit Suisse First Boston. Several CSFB employees as well as the former minister of economy, Codrut Seres, and the former telecommunications minister, Zsolt Nagy, are under investigation for conspiring to obtain and to disclose, respectively, highly confidential data about privatisations in the energy sector.

Despite this privatisation programme, there are still hurdles to be overcome. "In Romania there is still a very strong group who does not look kindly on privatisations," says ANRE's Opris. "The privatisations then run behind schedule."

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