Hungary steps up fight with energy utilities

By bne IntelliNews October 10, 2013

Tim Gosling in Prague -

A Hungarian government spokesman said Budapest has received a letter from the EU "attacking" it energy prices cuts. Meanwhile, the ongoing effort to nationalize the country's energy companies continues, with the government saying it is now drafting legislation to ban dividend payments by utilities.

Confirming local media reports earlier this week, government spokesman Andras Giro-Szasz said Hungary has received a letter from Brussels concerning its programme to cut regulated energy prices. "The letter confirms the government's earlier assumption that we must count on further measures attacking the utilities price cut by Brussels and market players," he said, according to state newswire MTI.

In typically feisty fashion, the official insisted Budapest would "pick up the gauntlet" and defend its action.

Development Ministry State Secretary Janos Fonagy was also in combative mood as he announced the government is drafting legislation to prevent utilities paying dividends to investors. That follows calls from Prime Minister Viktor Orban for legislation to transform utilities into non-profit organisations.

Speaking on state television, Fonagy said services forming a "natural monopoly", such as gas, electricity, water and others "serving important public interest", should come mostly under central or local government ownership on a non-profit basis, reports Reuters. "The profit generated as a result of decent corporate activity could not be extracted as dividend, but rather it should be reinvested into the operation, maintenance and, very importantly, improvement of the service," he said.

With the ruling Fidesz party having one eye on elections that will take place by next spring, Budapest said in 2012 that it would force a 30% cut to household energy bills. A 10% cut was imposed in January, with a similar cut due in November. The prime minister, who has handed out harsh treatment to sectors dominated by foreign investors since coming to power in 2010, last month suggested Budapest will also seek to force price cuts for commercial customers, claiming such as move will help boost growth. Analysts point out that the energy price cuts are keeping inflation in line, allowing the government-influenced central bank to continue with its long monetary easing cycle.

The push to re-nationalise utilities started with legislation last year decreeing that all gas storage assets must be state owned. The drafting of new legislation therefore suggests Budapest could be seeking to lower pricing. However, a deal to buy out E.ON's gas trade and storage units via state-owned MVM closed last month for HUF281bn (€878m), which was above previous expectations. Budapest has now also agreed to buy a 51% stake in gas storage company MMBF from MOL, at an undeclared price.

The opposition claims those deals need investigating. Meanwhile, with the E.ON assets in the bag, MVM plans to renegotiate the long-term gas import contract with Russia's Gazprom, which supplies most of import-reliant Hungary's gas needs. None of that is likely to impress the EU, which is pressing Russia to reduce gas prices across CEE, as well as encouraging major customers to diversify their supplies and build up regional links to help reduce Gazprom's sway.

Orban, however, has spent the past three years or so picking loud fights with Brussels in a bid to boost his popularity with an electorate struggling through the crisis and poor economic growth. Fonagy claimed multinationals are behind the latest "attack" from the EU.

Like the Eurozone banking groups that have been fighting tough treatment from Budapest since Orban took office, the likes of E.ON, as well as RWE, EDF, GDF Suez and Eni - who all own substantial stakes in Hungarian utilities - will clearly have the ear of senior officials in Brussels. Reuters reports that none of the companies was willing to respond to news of the forthcoming legislation, but Budapest's advertisement of yet another letter from the European Commission questioning its moves suggests the strategy to plug into anti-EU sentiment among the Hungarian electorate continues.

Reports on October 8 in Hungarian dailies close to the government suggested the European Commission has sent a letter seeking information from the government on the price cuts. Citing BruxInfo, the reports said Brussels has asked Hungary to respond to questions regarding energy market regulation - in particular on possible discriminatory pricing mechanisms. However, cording to an unnamed EU official quoted by, it is Orban's earlier suggestion that regulation for commercial customers could be introduced that will be at the forefront of EU objections.

The source said the European Commission is likely to take a lenient approach to pricing reductions for households as it appreciates the social aspects, but will act more stringently when it comes to enforcing market regulations for businesses, due to concern over single-market competition legislation. "We do not want to be those pointing a gun at some member state to eliminate the regulation of retail energy prices," the official said.

Reflecting that stance, European Commission energy spokeswoman Marlene Holzner said on October 8 that while Brussels is against price regulations and remains in favour of free market prices, central regulation of retail energy tariffs can be justified, although only for the short term and for a specified period. As she pointed out, the ongoing pressure on foreign investors in Hungary looks counter-productive in the longer term.

"If the consumer price fails to reflect the actual price businesses will likely not enter this market because of the expected low profit. There will be no investments or competition, and if there is no competition the situation will be permanent and there will be nothing to push prices lower," Holzner said. However, it seems apparent that Fidesz' concerns are shorter term right now, and targeting the elections.

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