VISEGRAD: CEZ plan fails to loosen grip on Czech mkt, claims report

By bne IntelliNews August 30, 2012

bne -

Following Brussels' invitation to third parties to submit their views on CEZ's plan to see off a competition investigation by divesting up to five Czech power plants, Prague-based advisory firm Candole Partners argues that "none of the divestments proposed reduce market concentration to an acceptable level; CEZ remains the pivotal generator in all scenarios."

In a report published on August 29 and sent to the European Commission's competition authorities, Candole (which counts amongst its clients competitors to CEZ) starts by offering calculations it claims show the state-controlled utility's share of the Czech power market is "significantly above the threshold considered to be indicative of high concentration," with the company accounting for 63% of installed capacity or 78% of yearly generation.

The report insists that none of the five plants that CEZ has suggested it could offload would reduce market concentration to levels acceptable under EU regulations, and that the utility will remain "the pivotal generator" in all scenarios presented by the company.

Further, Candole claims that the figures its analysis on CEZ's proposed divestment produces are on the optimistic side, as the calculations assume a new entrant purchasing the power plants for sale. "If one of the other incumbents, such as EPH, Sokolovska uhelna, Alpiq or Dalkia were to purchase the power plant, the reduction in market concentration would be even lower."

In addition, the analysts stress that the five plants actually produce far less power than their capacity suggests due to their age, costs and difficulties of fuel supply at several of them. Jan Oldrich, one of the authors of the report, told bne in July that the plants "belong in a museum."

In fact, as the report flags up, CEZ has been planning to sell off the assets for some time anyway, facing as it does long-running disputes with their respective fuel suppliers. "In conclusion," write the analysts, "the plants can be divided into two categories: those which CEZ wants to sell because of lignite supply disputes: Pocerady, Melnik III, Tisová 1 & 2; and those which CEZ wants to sell because of their bad economics: Chvaletice, Detmarovice."

Possible Pocerady

As a side note, the report repeatedly points out that Pocerady is by far the largest, most productive and least costly of the five plants, and would have the greatest effect on CEZ's market share if sold - although still not to the extent that it would reduce concentration to "acceptable levels." It's worth pointing out, although Candole does not, that the local press reported on August 29 that CEZ is now reconsidering the planned sale of the plant, and is back at the negotiating table with its fuel supplier Czech Coal.

Candole concludes rather unconvincingly by insisting that "the divestment on which CEZ has now embarked is prompted not by the European Commission investigation but rather by its own strategic goals." However, the company's motivation for divesting the plants is, presumably, irrelevant, despite Candole's opinion that it can see "no good reason for the Commission to regard CEZ's proposal as virtuous from a competition perspective."

However, it's on stronger ground when it points out that despite the headline figures in terms of the capacity CEZ has offered to offload, the age and condition of the assets means they have been contributing a lot less to the Czech power market than they could. "As put forward in this study," Candole sums up, "using installed capacity as the single element for a comparison of CEZ power plants can be misleading. We have shown how generation varies according to the production costs of each power plant and recommend the Commission obliges CEZ to divest those plants with the highest generation, thereby achieving a meaningful increase in competition in the Czech electricity generation market."

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