Integrated Energy Companies – Good or Bad?
Sep 29th, 2009 by SAR
In the past two years there have been two attempts to restructure the Romanian energy sector. First, the previous Liberal government wanted to create one electricity company, containing practically the whole state-owned generation, distribution and supply, Now, the new Socialist-Popular government considers the creation of two integrated companies, this time including a part of the gas sector and, most importantly, the notoriously inefficient mining sector (particularly hard coal).
SAR issued three papers (against one energy champion, against two energy companies, and a chapter dedicated to energy in a report written jointly with the Competition Council). Here are some of our points and arguments against the creation of such integrated companies, in a nutshell:
- the creation of large companies with the potential to dominate the market would seriously affect competition and the interests of private investors in generation; European experience shows that, the more companies in the energy sector, the lower the price to end-consumers; there are no reasons why prices would decrease unless there is a major change in the generation structure (such as investments in more efficient technologies);
- the one/two companies could not compete regionally because of infrastructure connection constraints (we can export max 10% of the energy we produce), so instead of becoming more competitive regionally we create two dominating companies locally;
- increasing market concentration could seriously impair the trading on OPCOM, our electricity exchange with perspectives to become a regional market;
- the two companies cannot get better lending terms than their components, and cannot be listed on the stock exchange unless they prove good financial performance for 3 years;
- there are risks of cross-subsidies that could be penalized by the European Commission (illegal state aid). Romania negotiated to phase out subsidies to the hard coal sector until end-2010, but trade unions now demand extensions of subsidies, debt rescheduling and debt cancellations and the hard coal company would be part of one integrated energy company. There is a serious risk that hydro electricity would subsidize hard coal;
- IMF will monitor debts and subsidies to several large companies, including CNH and Termoelectrica, so debt cancellation prior to restructuring is impossible.
We base our arguments on the information publicly available, so if we missed important points we would be glad to hear them to improve our policy proposals. Please share with us your impressions and opinions!
Foto: http://stormgrounds.com/media/Electricity-World-Map_tt.jpg
These 3 papers are very well done and raise important issues. The world experience to date suggests that it is difficult enough to create workably competitive markets in electricity generation even in the best of circumstances. Things are made much more difficult if the restructured generation sector has only two major players and if there are political pressures to purchase coal from domestic sources. In fact both of these caused big problems in the UK’s electricity restructuring, well described in David Newbery’s book, Privatization, Restructuring, and Regulation of Network Utilities (1999). As Newbery summarizes the UK experience: “The most serious criticism of the performance of the electricity market is that the restructuring in 1990 created an effective duopoly…. In the first three years the two fossil generators set the pool price 90 percent of the time, and … they raised pool prices even though fuel costs were falling….” (pp. 226, 271)