changing direction: reform of energy utility sectors in...

Changing direction:Reform of energy utility sectors in Central and Eastern Europe

A report from the Economist Intelligence Unit Sponsored by

Changing directionReform of energy utility sectors in Central and Eastern Europe

© The Economist Intelligence Unit Limited 2010 1

Contents

Preface 3

Executive summary 5

Introduction 8

Part One: Analysis of trends 10

l Regional trends: Putting customers first 10

l Facilitators of liberalisation 11

l Impediments to liberalisation 12

l Ranking the countries 12

l Outlook for further liberalisation 15

l Winners and losers 17

Part Two: Country profiles 18

l Czech Republic 18

l Hungary 21

l Slovakia 24

l Romania 27

l Poland 31

l Russia 35

Conclusion 39

Appendix I: Methodology for the EIU Market Openness Ranking 40

Appendix II: European Commission data on market openness in gas and electricity 42

Appendix III: Participants in in-depth interviews 46

Appendix IV: Economist Intelligence Unit data on utility sectors in six CEE countries 48



Preface

“C hanging direction: Reform of energy utility sectors in Central and Eastern Europe” is an Economist Intelligence Unit white paper, sponsored by Oracle. Like a predecessor study sponsored by

Oracle, “A painful road forward: Utilities in Central Europe” (2004), this study considers the progress of countries in Central and Eastern Europe (CEE) in transforming their electricity and gas utilities from monolithic monopolies to unbundled, competitive and consumer-oriented firms. The study takes an in-depth look at energy utilities in six countries: Czech Republic, Hungary, Slovakia, Romania, Poland and Russia.

The study is based on interviews with utility executives, regulators and other industry experts, as well as desk research that included analysis of industry and market data. Our sincere thanks go to the interviewees—who are listed in Appendix III to this report—for sharing their insights and views. The Economist Intelligence Unit bears sole responsibility for this report; the findings do not necessarily reflect the views of the sponsor.

The authors of the country profiles are Andrew Langley (Russia), Janos Hidi (Hungary), Vladimir Dohnal (Czech Republic and Slovakia) and Paulius Kuncinas (Romania and Poland). Nicholas Redman wrote the analysis of trends and developed the methodology for the Economist Intelligence Unit Market Openness Ranking, a data-based comparison of utility sector openness in the six countries. Aviva Freudmann directed the project and edited the report.

September 2010



Executive summary

A fter two decades of post-communist transition, CEE countries are moving towards de facto opening of their energy utility markets. There is widespread inward investment into the sector by West

European utilities, considerable entry of new players and systematic compliance with requirements to separate transmission networks from energy production assets. However, as with any complex process, progress towards liberalising the region’s energy utility markets has been inconsistent across countries. While the region has made progress towards transforming the legacy of state control of utilities, it still has a long way to go.

For example, despite the presence of privatisation laws and policies, state ownership is surprisingly resilient. In some countries, governments retain majority ownership of supply firms as well as transmission assets. In others, state control takes the form of regulating key fuel sources, or regulating the prices that utilities pay for fuel and/or that end-users pay for energy. Nonetheless, utilities show signs that they are aware of looming competition, and have taken steps to upgrade customer-facing functions. For example, online customer services are becoming more widespread, as are improved in-person and call-centre services. Utilities are also taking steps to improve their public image and are diversifying into alternative and green energy initiatives.

To assess the degree of progress that the region’s utility sectors have made in this direction, the Economist Intelligence Unit interviewed utility executives, regulators and industrial energy users, and combined their views with desk research and analysis of data on market opening. The main findings of the research are highlighted below.

l A major driver of liberalisation is the need to upgrade plant, and attract capital to do so. This has opened the way for strategic investors to enter the market, bringing advanced management practices and technological know-how along with capital.

l Competition appears to be more advanced in electricity markets than in gas markets. This is mainly because the power sector has more varied sources of fuel and greater access to required feedstocks. In the case of gas, there are only two options for obtaining the fuel—access to domestic production or to imports—and both tend to be dominated by governments or monopoly, government-backed incumbents.


© The Economist Intelligence Unit Limited 2010�

Market openness rankings: two approaches

The Economist Intelligence Unit’s qualitative research produced the following ranking of market openness in the six countries surveyed:

Rank Country

1 Czech Republic

2 Hungary

3 Slovakia

4 Romania

5 Poland

� Russia

This ranking tracks approximately the EU’s data for supplier switching among customers in the various countries, although those data are limited.

In addition to the qualitative assessment of market openness, the Economist Intelligence Unit conducted a broader quantitative analysis of the degree to which the six countries met certain benchmarks of competitiveness as of 2008. This analysis yielded the following rankings for electricity and for gas:

l The concentration of gas supply sources (mainly in Russia, via Gazprom) hinders competition in the gas sector by giving suppliers pricing power. When importers of gas must all pay the same prices for fuel, because they are buying from the same source, this leaves comparatively little room for price-based competition at the retail or end-user level.

l Across the region, competition is more advanced in industrial market sectors than among households—as is also the case in other regions. In most of the six states, household prices are still regulated as governments try to protect citizens against rate increases. Governments are more likely to leave large industrial users to their own devices, allowing them to choose their own suppliers and negotiate their own prices.

l EU policies on competition, customer protection and environmental protection are drivers of competitive markets in five of the six countries reviewed. This may be one reason that the sole non-EU nation in the group, Russia, is far behind the others in liberalising its energy markets.

l Politics plays a distinct role in the process of reforming utility markets. In particular, government unwillingness to expose electorates to higher, unregulated prices for gas or power is a factor in prosperous times, and even more so in economically difficult times.

l Unlike most Western countries, the six CEE countries do not have interest groups dedicated to protecting consumers’ interests. This weakens consumers’ voices, making it more difficult to establish a customer focus in both utility regulation and in utilities’ management practices.

Electricity GasRank Country Score Rank Country Score

1 Poland 25 1 Czech Republic 25

2 Czech Republic 22 2 Romania 19

3 Romania 20.5 3 Hungary 1�.5

4 Russia 20.5 4 Poland 1�

5 Slovakia 20 5 Slovakia 15.5

� Hungary 1� � Russia 9.5



l The outlook for liberalisation of the gas utility sector depends largely on the prospects for ending the near-monopoly that Russian gas currently enjoys in CEE. The prospects for this are good, in view of new sources of domestic production and new routes for importing gas.

l The prospects for further liberalising the electric utility sector are also positive, in view of the ongoing need to attract inward investment. But these prospects also depend on the success of the EU’s effort to liberalise national markets and encourage crossborder trading. Further progress is likely to come first in electricity markets, which are already more advanced than gas markets, mainly because the structural preconditions for competition are already in place.

l In general, liberalisation of utility markets is a two-stage process. The first stage is for prices to rise from their artificially low (regulated) levels, in order to reflect the full costs of production and transmission. At this stage end-users are the losers and producers/generators are the winners. In the second stage, when prices have risen to a level that enables producers and distributors to cover all their costs and to make a profit, the benefits in a competitive market accrue to end-users in the form of lower tariffs owing to competition.


© The Economist Intelligence Unit Limited 20108

Introduction

On June 25th 2009, the European Commission made a surprising announcement: it was taking legal action against 25 member states—virtually the entire EU—for violating rules in the

electricity sector. The Commission also said it was suing 21 states for violating rules on gas. Many of the complaints concerned impeding crossborder energy trading across the bloc, a long-elusive EU goal. But a lot of them also dealt with how states regulate their electricity and gas sectors, especially concerning competition. For example, the Commission accused Poland and Romania, among others, of “maintaining a system of regulated prices in violation of the EU directives on electricity and gas.”

The surprising thing about the announcement was not that states are tardy about implementing EU rules, but that the tardiness is so widespread, encompassing developed and emerging economies alike. Italy and France, for example, are among those facing EU infringement cases related to regulated prices. This suggests that, when it comes to promoting competition in sectors that have long been heavily state-controlled, the EU as a whole still has a long way to go.

Against this background, the Economist Intelligence Unit undertook research on the progress made by six Central and East European countries along the road to open and competitive utility markets. The countries studied are the Czech Republic, Hungary, Slovakia, Romania, Poland and Russia. These were selected as examples of former communist countries that are leading economies in the region. Five of the countries are now members of the EU. The sixth, Russia, is by far the region’s largest economy.

All six countries have had large odds to overcome, including a legacy of under-investment in plant and equipment, unfamiliarity with utility market risks, and a dearth of experience in operating competitive, customer-focused businesses. This study looks at the progress these six countries have made in the last two decades in leaving that legacy behind and modernising their energy utility sectors. The focus is on how far the countries have come in introducing competition de facto rather than only de jure.

To determine the degree of liberalisation, the research considered such indicators of competition as the actual ability of customers to switch suppliers, the possibility for new competitors to enter the market, the absence of excessive concentration of asset ownership, the decoupling of ownership of production and transmission facilities, the full or partial privatisation of production assets, and evidence of price competition and other aspects of customer-oriented practices on the part of industry players.



Although the main focus is the progress made by each country—and the trends common to all six—the study also includes a comparative ranking of the countries. There are two types of rankings, each using a different methodology. The main one is qualitative, combining both the electricity and the gas sectors, and is based on the current situation. This ranking relies on desk research and on in-depth interviews with customers, regulators and market participants. Under this analysis, the most competitive energy utility sectors are in the Czech Republic, followed by Hungary, Slovakia, Romania, Poland and Russia. This ranking is reflected in the ordering of the country chapters.

The second ranking is quantitative, and considers electricity and gas separately. The quantitative rankings are based on regulatory and market data for 2008, mostly from the European Commission. This analysis evaluates the countries based on the presence of certain quantitative indicators of competition, such as the proportion of production open to competition, the combined market shares of the three biggest players, and the proportion of transmission capacity that is separate from production.

Under the quantitative analysis, the ranking for openness in electricity is led by Poland, followed by the Czech Republic, Romania, Russia, Slovakia and Hungary. The ranking for gas is led by the Czech Republic, followed by Romania, Hungary, Poland, Slovakia and Russia. The methodology used for the quantitative rankings is presented in Appendix I, and the underlying EU data are in Appendix II.

The rankings differ because they are based on different methodologies and reflect different time periods. The qualitative ranking is based on wide-ranging expert interviews and considers up-to-the-minute conditions. The quantitative ranking is based on a model—that is, on selecting certain indicators and drawing conclusions based on performance in those indicators—and relies on data reflecting market openness as of 2008. While the quantitative ranking may be more methodologically rigorous, the qualitative ranking probably comes closer to describing the current situation in the six-country group.



Part One: Analysis of trends

Companies become customer-facing when they operate in competitive markets and wish to remain there because they can expect a reasonable rate of return. The challenge in the energy utility sector

in Central and Eastern Europe (CEE) has been to create those conditions, including the introduction of competition in generation (electricity) or production and import (gas); introduction of competition in distribution and sales; separation of monopoly transmission facilities from these competitive activities; and lifting of price controls to allow freer competition based on price.

After two decades of post-communist transition, CEE countries are starting to fulfil these conditions. But, as with any complex process, progress towards liberalising markets has been uneven within countries, as well as inconsistent across them. Part One of this report examines the trends common to all six countries, considers the reasons for progress or lack thereof, and evaluates the outlook for further liberalisation. Part Two looks individually at six major CEE economies— the Czech Republic, Hungary, Slovakia, Romania, Poland and Russia—and assesses each country’s progress towards creating competitive, consumer-oriented energy utility sectors.

Regional trends: Putting customers first Although the CEE region has made progress towards ridding itself of the legacy of state control of utilities, it still has a long way to go. Competition has progressed farthest among the EU member states in Central and Eastern Europe, but even in this region it is not always fully in force. State ownership is still much in evidence. The former monopolists are in many cases still the dominant players in their markets, even if they no longer enjoy official monopoly status and are no longer 100% state-owned.

In all six countries, the first formal steps towards liberalising markets have been taken. These include allowing private investment—in particular, by strategic investors from the West European utility industry—in production (and, to a lesser extent, transmission and distribution) assets; unbundling previously monolithic companies into separate production and transmission/distribution entities; passing reform laws allowing new players to compete in the market; and creating a regulatory apparatus to ensure fair conditions for competitors and customers alike. The dismantling of vertically integrated production and transmission companies was particularly important, since transmission and distribution networks are natural monopolies unlike production and generation assets.



In practice, however, the liberalisation of these markets is still a work in progress, For example, despite the presence of privatisation policies, state ownership is surprisingly resilient in the countries reviewed. There is wide variation among the countries in terms of the extent to which the state has actually withdrawn from the supply side of the market. In some countries, states maintain control by keeping majority ownership of supply firms. In others, state control takes the form of regulating or owning the fuel sources that utilities use for production of energy, or regulating the prices that utilities pay for fuel and/or that end-users pay for energy. Such measures can render privatisation moot at best.

On the plus side, utilities in the six countries show signs that they are aware competition is coming, and have taken steps to upgrade customer-facing functions. For example, online access is becoming more widespread, and in-person and telephone-based customer services are becoming more user-friendly. Better-trained marketing departments, with a focus on targeted key-account management, are becoming the norm. Various “green” initiatives intended to conserve energy or reduce environmental impact are also becoming widespread. Most notably, utilities are focusing on pricing their services for industrial users with an eye towards keeping customers from migrating to existing or potential competitors.

Facilitators of liberalisationA major driver of liberalisation is a region-wide need to upgrade plant, and attract capital to do so. This has opened the CEE utilities market to players from outside the region, in particular to large West European utilities including Enel (Italy), Gaz de France, Électricité de France (EdF), E.ON, RWE and EWE (Germany). There are looming capacity shortages (both gas and electricity) in some countries as economies start growing again following the slowdown of 2008-09. While this may accelerate the drive to attract inward investment, in the short term capacity shortages shift the balance of power to suppliers; customers are in a poor position to shop around for better prices and services under conditions of shortage.

Generally speaking, competition is more advanced in electricity markets than in gas markets. This is mainly because the power sector has more varied sources of fuel and greater access to required feedstocks (coal, uranium, wind, waves, biomass). In the case of gas, there are only two options for obtaining the fuel: access to domestic production or import volumes. Because national production in all countries (except Russia) is relatively small scale and tends to be dominated by the former state monopoly, there is little competition. Similarly, because nearly all of the states (again except Russia) rely on gas imports from Russia, there is little scope for competition—and governments often prefer to have their former monopoly as the sole negotiator with Russia’s monopolist, Gazprom.

As in other regions, in the CEE competition is more advanced in industrial market segments than in the household segment. In most of the six states, the household market is still subject to price regulation by governments, for electoral reasons and to ensure that lower-income groups do not fall into fuel poverty. Large industrial users are given wider latitude to shop for supplies and negotiate their own deals, which implies that they also take on more risk regarding prices. Industrial users tend to be far better informed than households about the options available to them. As such, they are at the vanguard of competitive markets: if their experience with freer choices proves successful, governments



may loosen the controls that hold back competition in the household segment.Finally, EU policies concerning competition, customer protection and environmental protection

tend to promote development of competitive markets in five of the six countries reviewed. This may be one of the reasons that the sole non-EU nation in the group surveyed, Russia, is far behind the others in liberalising its energy utility markets. Russia’s focus is on creating conditions to ensure that the sector modernises its facilities and remains viable. Market competition issues are not yet high on the agenda.

Impediments to liberalisationPolitics plays a distinct role in the process of reforming utility markets. In particular, government unwillingness to expose electorates to higher, unregulated prices for gas or power is a factor in prosperous times, and even more so in economically difficult times. For example, Hungary’s recent re-regulation of consumer prices for electricity is expected to curtail competition in the household sector. Such measures protect consumers in the short run, but tend also to discourage inward investment required for modernisation. Ultimately, the customer has to pay for modern, reliable, clean and sufficient generating capacity.

The concentration of gas supply sources (mainly in Russia, via Gazprom) further hinders competition in the gas sector by giving suppliers pricing power. When importers of gas must pay the same prices for fuel, because they are buying from the same source, this leaves comparatively little room for price-based competition at the retail or end-user level.

Even in the most liberalised CEE countries, the political and legal framework for the utility industry is not as reliable as in Western Europe. National regulators require time to develop laws, practices and expertise to ensure competitive markets. Moreover, unlike most Western countries, the six CEE countries do not have interest groups dedicated to protecting the interests of utility consumers. Instead, this function is performed informally by regulators, alongside their other functions as neutral market referees. This means that utility consumers have a weaker voice in CEE than in Western Europe, putting them in a poorer position to advocate for their interests in regulation and in utilities’ management practices.

Ranking the countries

A qualitative analysisWhile rank ordering was not the primary purpose of this study, the research on individual countries (see Part Two) allowed us to generate a comparative ranking of the countries in terms of the openness of their energy utility markets. That ranking is shown overleaf.

The most open utility sectors are in the Czech Republic and Hungary. In the Czech Republic, three major players compete for business in the electricity sector and large new entrants into the gas sector are making inroads into the incumbent’s dominant position; in Hungary, where the dominant electric utility has had to make room for newcomers, as many as eight significant players compete for the industrial gas market.



Rank Country

1 Czech Republic

2 Hungary

3 Slovakia

4 Romania

5 Poland

� Russia

At the bottom end of the qualitative ranking are Poland and Russia. In Poland, supplier switching is negligible despite the presence of several strong competitors, as customers apparently are unaware of the options available to them, and gas is still very much dominated by a government-controlled incumbent; in Russia, competition is hardly on the agenda, as utilities and policymakers struggle just to keep up with energy demand.

This assessment is based on a wide range of factors: whether competing suppliers of electricity and gas are present in the market, whether market concentration among suppliers is kept to a minimum and/or is on the decline, whether customers can choose among suppliers and the degree to which they exercise this freedom, whether utilities compete on price and on service, whether strategic investors have been able to introduce modern management techniques, and whether utilities are showing signs of greater customer focus, for example through improved customer services.

The ranking based on these considerations tends to track the available EU data on the incidence of customers switching suppliers. While data on supplier switching by electricity customers are patchy at best, an approximate rank ordering of the switching rates based on EU data by eligible metering point puts the Czech Republic first, followed by Romania and Slovakia. (Comparable data on electricity supplier switching by eligible point in Poland and Hungary are not available. According to the EU, however, when switching rates by volume rather than metering point are considered, rates of more than 10% were reported for large industrial users in Poland and Romania.)

What persuades most customers to switch is, of course, the chance to save money through lower bills. The Czech Republic does best on this measure since it allows markets to determine the price of gas and electricity for both households and businesses. Thus EU data show that in the large-industrial segment in the Czech Republic, 33% of customers by eligible point switched supplier in 2007. That proportion rose to 45% in 2008. By any standard, these are very high levels of switching.

Moving between suppliers was also prevalent in the medium-industrial segment in the Czech Republic, reaching rates of 15% and 18% respectively in 2007 and 2008. By contrast, neighbouring Slovakia continues to regulate gas and electricity prices, which limits the ability of suppliers to compete on price. This is reflected in switching rates of only 2-3% in the large-industry segment of Slovakia’s electricity market in 2007 and 2008, and negligible switching rates in other market segments.

One indicator of the newness of competition in the region’s utility markets is the dearth of data on customer switching. In electricity, an EU report on the industry published in March 2010 had no data on switching by electricity customers in Poland or Hungary. In the gas industry, the EU report included



data on supplier switching by metering point in the Czech Republic (5.3% and 6.7% among large-industrial users in 2007 and 2008 respectively), but none for Hungary, Poland, Romania or Slovakia.

A quantitative analysisIn addition to a qualitative assessment of market openness, the Economist Intelligence Unit conducted a broader quantitative survey of the degree to which the six countries had fulfilled certain preconditions for competitiveness as of 2008, the most recent year for which EU market-openness data are available. Using EU data for the five EU member states in the sample, and national data for Russia, this analysis rates the progress of these six states against EU best-practice and the EU’s competitive benchmarks.

This analysis yielded the rankings in the following tables, which present the full scores for each country on each of six indicators, as well as each country’s total score. The scoring of market openness was done on a 1-5 scale, where 5=fully open, 4=mostly open, 3=somewhat open, 2=mostly closed, and 1=fully closed. The full methodology behind the scoring and ranking is explained in Appendix I. The EU source data used for the scoring appear in Appendix II.

Economist Intelligence Unit Market Openness Ranking

ELECTRIC POWER Market open? Production sector

competitive?

Distribution sector

competitive?

Transmission unbundled

from production?

Industrial prices set

freely?

Household prices set

freely?

COUNTRY

TOTALS

Poland 5 4.5 4.5 3.5 5 2.5 25

Czech 5 1.5 1.5 4 5 5 22

Romania 5 3 4.5 3 2.5 2.5 20.5

Russia 4 4.5 4 3 4 1 20.5

Slovakia 5 1 3.5 4 3.5 3 20

Hungary 4 2 2 2 3 3 16

GAS Market open? Production sector

competitive?

Distribution sector

competitive?

Transmission unbundled

from production?

Industrial prices set

freely?

Household prices set

freely?

COUNTRY

TOTALS

Czech 5 2 5 3 5 5 25

Romania 5 2 4 4 2 2 19

Hungary 2 2 3.5 3.5 3 2.5 16.5

Poland 5 1 1 4 2.5 2.5 16

Slovakia 5 1 1 1 5 2.5 15.5

Russia 2 2 1 1 2.5 1 9.5

In electricity, Poland leads the ranking based on strong data showing lack of concentration in both the generating and distribution sectors, and based also on 2008 data showing that prices for industrial consumers were freely set and were lower than an EU benchmark. Poland was followed closely by the Czech Republic, where the market was similarly open to competition, but where market concentration in the power sector was greater than in Poland. Hungary, surprisingly, appears at the bottom of this ranking, based on 2008 data showing concentration in both the production and the distribution



markets, and also based on data saying that the Transmission System Operator had not unbundled transmission and production assets at that time.

In gas, the Czech Republic leads the quantitative ranking, based on strong scores for competition in its distribution market, and strong scores on free-market determination of both industrial and household prices. Romania also scored well on competition measures in the distribution market, and on legal unbundling of its distribution sector. Russia is at the bottom of this ranking, owing to a variety of factors: a market dominated by Gazprom with scant competition to speak of, bundled transmission and production ownership, and tightly controlled prices.

Outlook for further liberalisation

GasThe outlook for liberalisation of the region’s gas utility sector depends largely on the prospects for ending the near-monopoly that Russian gas currently enjoys in Central and Eastern Europe. Among the five CEE states, only Romania has sizeable domestic production, and only the Czech Republic imports a significant proportion of gas from a non-Russian source. So-called Central Asian gas is actually Russian in origin, although it is supplied by traders rather than Gazprom. In any case, since 2009 this source of gas has dried up and there is little reason to believe that it will re-emerge.

The good news for liberalising gas markets in future is an increased possibility of domestic production. Foreign investors are currently developing conventional gasfields in Hungary. Across the region, and particularly in Poland, it might be possible over a 10-20-year period to develop significant production of unconventional gas, using advanced extraction techniques pioneered in the US, where unconventional gas has become a major source of domestic production. In nearly all cases in CEE, new sources of domestic production will be managed by new entrants and so will increase competition in production. This could increase national self-sufficiency, as well as breaking the hold of former monopolies.

The addition of new gas import sources—made possible by new pipeline infrastructure—is likely to help as well. The gas dispute in January 2009 between Ukraine and Russia exposed the over-dependence of the EU’s eastern members on Russian gas delivered via a single route. However, plans are under way to remedy this. There are several planned import pipelines, including Nord Stream, South Stream, Nabucco and ITGI, some of which will bring new suppliers to the EU market and hence increase competition. There are also plans for new north-south interconnection lines, to complement existing and planned east-west ones, which will allow the CEE region to tap gas entering Europe from other points, such as North African or Middle Eastern liquefied natural gas (LNG) coming in through France, Spain, Poland and perhaps Croatia.

All this will boost competition in gas import markets, for example by introducing Azerbaijani or perhaps Turkmen gas into Europe. Moreover, planned LNG terminals in Poland and Croatia hold out the possibility of CEE states obtaining gas from a range of producers in the Middle East and North Africa, including Qatar and Algeria. Because these cargoes are unlikely to be priced according to the oil-indexed formula that governs Russian exports to Europe, it has the potential to increase price



competition significantly. A case in point: in 2009, the increased availability of non-European LNG in continental Europe stoked an unprecedented level of price competition, in some cases forcing Gazprom to cut its prices by amending the oil-indexed formula.

The position within the Russian gas market is different from that of the other states, because Russia is self-sufficient in gas and is a huge exporter. The key to development of competition in the Russian market lies with the government in two respects. First, it has the ability to force Gazprom to give independent gas producers and oil companies non-discriminatory access to its pipeline system; this will increase competition among producers. Second, the government plans to either liberalise prices or else raise the fixed tariff by a considerable margin, by the middle of this decade; either decision would raise incentives for producers to operate in the domestic market, creating more scope for price competition.

The driving force for Russia to make both these changes could be the need to secure investment in new fields and also to make domestic consumption more efficient. Whereas in most cases liberalisation largely benefits end-users, in Russia it will benefit producers, since the regulated prices for households and industry are very low. The main losers will be households, which will have to pay more for gas.

ElectricityThe prospects for the further liberalisation of the region’s electric utility sector are positive, in view of the continued need among the region’s utilities to attract inward investment to upgrade ageing production capacity. For example, the need to attract investment was the main driver of the complete overhaul of Russia’s power sector, which today is much more liberalised and competitive than the gas sector (although the state still plays an important role in power production and transmission, as well as regulating end-user tariffs). A further boost to competition will come from the EU’s ongoing efforts to liberalise national markets and encourage crossborder trading.

The main barriers to liberalisation, as noted above, have been the efforts of governments to shield voters from free-market pricing for power. The development of competition in generation has also been stymied by governments determined to retain a controlling minority stake in former state monopolies. This applies particularly to Slovakia, although in different ways the government remains an influential player in all of the other CEE states as well. Furthermore, the existence of complex and opaque contracts, tacit renewal clauses, unclear pricing and switching fees are deterring consumers from changing supplier.

Despite these barriers, further progress on liberalisation is likely to be seen in electricity markets, which are already more advanced than gas markets. This is mainly because the structural preconditions for competition are already in place. Competition in power generation will increase as privatisation proceeds (for example, in Poland) and new energy projects come online. The need to cut budget deficits will also impel governments to rethink whether they can afford to subsidise end-user tariffs. Finally, pressure from the European Commission should remove more of the impediments to competition at the retail level, such as administrative barriers to switching supplier.

Liberalisation in gas markets is more dependent on external developments, such as the lengthy process of building of new pipelines, and the equally long-term process of increasing domestic



production through new projects. But despite the delays, these projects are likely to contribute to a liberalising trend in gas markets as well.

Winners and losersWho wins from the ongoing process of liberalisation, and who loses? As a general matter, there is a two-stage process. The first stage is for prices to rise from their artificially low levels, in order to reflect the full costs of production and transmission. At this stage end-users are the losers and producers/generators are the winners. In the second stage, when prices have risen to a level that enables producers and distributors to cover all their costs and to make a profit, the benefits in a competitive market accrue to end-users in the form of lower tariffs. There is also a universal benefit for the countries concerned, in that the introduction of competition to energy markets tends to raise the efficiency of energy use, and along with this stimulates innovation.

At a more basic level, utility customers stand to benefit from an increased customer orientation on the part of utilities, driven by competition. Some of the changes in utilities’ management practices, as noted in the country profiles that follow, include upgrading the quality of customer service and encouraging energy conservation and environmental improvement projects. An example of a customer services measure is an effort by some utilities in the region to streamline their tariff structures and provide customers with simple, clear and informative bills for gas and electricity.



Part Two: Country profiles

Czech Republic

Electricity: Power to the people

Competitive overviewOn paper, and to a growing extent in practice, the Czech power sector is fully liberalised, with customers free to choose among competing power companies. The old days under the communist regime, in which the industry was dominated by the then state-owned integrated utility, ČEZ (Ceske Energeticke Zavody), are long gone. The industry today is unbundled, and several large private players are involved in both production and distribution. These providers compete with each other for both industrial and household customers.

The opening of the Czech power market has evolved over two decades. The first step occurred in 1990, when the government split ČEZ into separate generation, transmission and distribution entities. The distribution part was subdivided into eight regional companies. The unbundling was an important forerunner to partially privatising generating plants and distribution networks.

Then, ahead of EU accession in May 2004, the government passed legislation opening the electricity market to competition. Transmission and distribution companies were required to open their networks to competing suppliers. By 2002, large industrial and commercial users were free to choose among competing suppliers. Households acquired the same privilege in 2007. Customers’ interests are looked after by two regulatory bodies: the Energetický Regulační Úřad (ERÚ), which regulates prices for power distribution services; and the OTE, which ensures that customers wishing to switch suppliers can do so without hindrance.

While all this represents a considerable market opening, in one sense the liberalisation of the Czech power market is still a work in progress. New players are free to enter the market, but in practice the market—and in particular the power generating market—is still fairly concentrated in the hands of a few companies: ČEZ, E.ON and Prazska Energetika. The eight regional distribution companies are



controlled by the same three companies. This market dominance by the Big Three is being challenged, albeit slowly, by new entrants.

Interestingly, given a choice between the incumbent, ČEZ—Central Europe’s biggest utility—and other providers, more than one-half of customers stayed with tried-and-true ČEZ. According to 2008 figures from Mintel International Group, a research consultancy, 56% chose ČEZ as their power supplier, 22% opted for E.ON, 10% chose Prazska Energetika and 12% chose others. By 2009, according to ERU, ČEZ’s market share had fallen to 45%, E.ON held steady with 21%, Prazska Energetika climbed to 12%, and newcomers Lumius (4%), Czech Karbon (3%) and Czech Coal (2%) made good initial showings.

When looked at from the perspective of installed capacity, a similar picture emerges: ČEZ is well ahead of the pack. The former monopoly, which is still 70% state-owned, accounted for 74% of power production in 2009. Its installed capacity is 12,405 mw. Other players are much smaller: Sokolovska uhelna has installed capacity of 590 mw, Energeticky a prumyslovy has 330 mw, J&T-owned International Power Opatovice has 363 mw, Dalkia CR has 550 mw, Pražská teplárenská has 484 mw and Alpiq Generation has 415 mw. Power distributors are free to choose among any of these generating companies, as well as to buy power on the Czech or foreign energy exchanges.

The customer’s viewParadoxically, the economic crisis of 2008-09 was good for competition, first because reduced demand forced distributors to fight for every customer, and second because lower prices on the spot market helped alternative suppliers to gain a foothold in the market, as they were relatively less likely than the incumbents to be locked into long-term purchase contracts at high prices. The ultimate beneficiaries of both factors were electricity customers, who were able to negotiate lower and more flexible tariffs.

One example is offered by Formplast Purkert, a small manufacturer of plastic car components with annual sales of €15m. Zdeněk Purkert, the company’s owner, says he was able to cut his electricity bills by 5-10% when he switched power supplier. He notes approvingly that his new supplier, Lumius, is also quick to step in and help a customer, as for example when he had a problem connecting an expanded manufacturing plant to the power grid in 2009. He adds that when he notified ČEZ that he was switching to Lumius, the large incumbent did not make a counter-offer to keep his business.

The incumbent, however, says that it is indeed courting customers, in various ways. One example is CEZ’s Zelená energie (Green energy) programme, which provides grants that match customers’ investments in environmental projects. These projects can include anything from developing renewable fuel sources, to implementing energy conservation measures or planting trees to improve the environment. The idea is to link the ČEZ brand with environmental awareness, and to contribute towards more economical and environmentally sound operations of industrial facilities.

Gas: Transgas battles other titans

Competitive overviewLiberalisation of the Czech gas market lags behind that of the electricity market, both in terms of chronology—liberalisation began only in 2005—and in terms of degree of market opening. On paper,



the market was fully open to competition by 2007, and competition is gradually being introduced. But—as is the case with electricity—the market is still dominated by the formerly state-owned incumbent. The former monopolist, Transgas, is now owned by RWE and controls about 67% of the gas market. In recent years, alternative players have made inroads into Transgas’s market. The biggest competitor is Pražská plynárenská, which had a 12.4% market share in 2009, followed by Vemex (majority owned by Russia’s state-owned Gazprom) with 9%, and E.ON Energie with 4.3%.

There are signs that competition is gathering pace. The former Slovak gas monopoly, SPP, entered the Czech market in 2008 and has already acquired a 6% market share. Then in June 2010, ČEZ entered the retail gas market, offering cheaper gas acquired on the spot market. The utility believes it has an advantage over the incumbent, which it says is more likely to be committed to long-term take-or-pay contracts. ČEZ entered the industrial market in late 2009, and claims to have already signed contracts representing 5% of that market segment.

The customer’s viewAlthough the gas market is officially open to competition, provider-switching by customers has made a fairly modest start. Between January 2008 and November 2009, only about 18,000 customers changed their gas supplier. the figure THEN jumped by 10,000 customers in December 2009 alone, and the totals have been on an upward trend ever since.

Transgas is taking steps to stem the outflow. Its owner, RWE, has brought in Western management practices, including segmenting the customer base and appointing account managers for key customers. In 2008 Transgas established an internet portal that provides customer services online.

Czech Republic: In Brief

2005 2010* 2015*

GDP per head (US$ at PPP) 20,271.2 25,430.0 32,�10.0

Real GDP (% change pa) �.3 0.9 2.4

Population (millions) 10.2 10.2 10.1

Industrial production (2005=100; av) 100.0 10�.7 –

Gross Electricity Generation (Gwh) 81,931.0 87,7�4.0 90,778.9

Gross domestic electricity consumption (GWh) �4,917.0 70,721.8 79,3�3.9

Electricity: Gross domestic energy consumption (% change y/y) 2.2 1.7 2.3

Natural Gas Production (ktoe) 154.1 80.0 30.0

Natural gas: Total imports (ktoe) 7,�01.� - –

Natural Gas: Gross domestic energy consumption (ktoe) 7,701.2 7,127.4 8,028.2* EIU forecast

ktoe= kilotonnes of oil equivalent

Source: EIU CountryData



Hungary

Electricity: MVM makes room for newcomers

Competitive overviewHungary’s electricity market was fully liberalised under a reform law in early 2008, which widened the scope for competition among generating and distribution companies. This law built upon the break-up and privatisation in the late 1990s of the state-owned incumbent, MVM (Magyar Villamos Muvek), which saw the transfer of many of the monopolist’s generating and distribution assets to private companies. Many of the buyers were foreign utilities, including E.ON and RWE of Germany and EdF of France. The result has been enhanced competition for certain market segments, but in practice MVM retains a dominant position, particularly in power generation.

MVM still controls 55-60% of Hungary’s power production through its full or partial ownership of power plants, and through power purchase agreements. Through MVM and its ongoing hold on power supplies, the government is able to continue ensuring that low-cost power is allocated to households. In addition, the government moved earlier this year to ensure that it has a direct tool to let households benefit from regulated energy prices. In June 2010, parliament reinstated the old system of government-set electricity and gas prices for households, in effect potentially making this market segment unattractive for would-be competitors.

The upshot is that Hungary’s power market is mixed, with competition developing in the industrial and commercial segment, but virtually non-existent in the household segment. On paper, 11 regional “universal service providers” and some other traders compete for household business based on price and service; households are technically free to choose among any one of the universal providers as well as any other supplier on the open market. In practice, however, households have little reason to switch suppliers, since prices for households nationwide are set by regulators. And, in fact, nearly all households in Hungary are served by the universal service provider in their own regions.

Even before the latest move to re-regulate household prices, households were hesitant about switching suppliers. Since 2008, households and small businesses typically have stayed with their current suppliers even if a competitor offered small businesses as much as 5% lower electricity bills. According to industry estimates, only 8-10% of small businesses switched suppliers.

Price competition is more evident in the industrial segment. Large energy users are free to shop for power anywhere—at unregulated prices—and in fact do so. The law refers to the large-user segment as the “open market”. Major companies compete actively for this segment. In 2008, the most recent year for which market share figures are available, E.ON and RWE were in the lead, with market shares of 29% and 28% respectively. MVM and EdF followed, with 14% and 13% market shares respectively. The remainder of the market was shared by 13 other companies.

The opening of the industrial and commercial market to competition, which began in 2004, has put power producers and distributors as well as consumers on a steep learning curve. Industrial customers



have had to learn to manage the risks that came along with their new-found freedom of choice, and in particular how to shop for the best deals. Producers and distributors have had to learn how to access a market that previously dealt with only one supplier, and how to manage the risks of ramping up capacity only to see demand fall, as it did during the recession of 2008-09.

The customer’s viewThere are signs that this learning process has been successful. Suppliers have improved their customer-facing functions, with more attractive websites and online services available in many cases. Customer-facing offices have been refurbished, and anecdotal evidence suggests that waiting times have been reduced. A customer satisfaction index produced by Hungary’s Office of Energy shows a steady improvement over the past two to three years, according to Dr Gábor Szörényi, director of that office’s Directorate of Energy Supply and Consumer Protection.

In addition to enhancing customer services, some power suppliers have started to offer energy consultancy services—usually for a fee—as well as a wider range of tariffs. Some market observers say that power companies have also become more tolerant about late payments, to avoid alienating customers. Another sign that competition is heating up is the recent appearance of a new market entrant, Magyar Telekom. This firm, a Deutsche Telekom subsidiary, is piloting market entry as an electricity and natural gas trader.

Above all, many large customers report a drop in their electricity bills—both because of a fall in market prices following the economic slowdown and because of competition among power producers. For many end-users, however, price declines occurred only after a one-year delay, with the benefit of lower wholesale prices accruing mainly to energy traders during that period.

Gas: Turning up the competitive heat

Competitive overviewThe re-regulation of household prices announced by parliament in mid-June applies to household purchases of gas as well as electricity. On paper, households may still choose among 11 universal service providers as well as open-market providers. But as long as households benefit from price regulation, they are unlikely to exercise this right. Indeed, according to Zsombor Szilágyi, head of industrial relations at EMFESZ Natural Gas Trading and Service Provider LLC, a natural gas distribution company, the regulated gas price in the universal service segment does not even cover suppliers’ costs.

The universal service market segment (consisting mainly of households) has existed under law since July 1st 2009 and is mainly served by E.ON, RWE, GdF Suez (France) and ENI (Italy), as well as some further smaller service providers. These companies face a squeeze from two directions: the price they can charge households is regulated, and the price they must pay for their gas purchases is kept high by the fact that the wholesale supply is fairly concentrated. About 70% of Hungary’s gas comes from Russia (mainly Gazprom), another 20% from domestic sources, and the rest from the West, mainly Austria.

The gas suppliers in the wholesale segment are E.ON, with 55% of the market in the second half of 2009, MOL with 16%, ENI with 15%, and RWE with 7%. The rest of the market is supplied by smaller



providers. Despite the squeeze on profits, at least one company has entered the price-regulated household

market, hoping to compete with the larger players. The new entrant, EMFESZ, quickly achieved a 20% market share by offering a 8% discount on the incumbent’s prices. EMFESZ was able to do that by finding cheap gas sources, but that advantage may prove short-lived. In 2009 EMFESZ lost its wholesale supplier in Ukraine, and since then it has had to buy wholesale gas at higher prices from E.ON.

The customer’s viewAs in the electricity sector, competition among suppliers is livelier in the industrial and commercial segment than in the household segment. In 2009 there were eight significant players competing for the industrial market: E.ON with 23% of the market, EMFESZ with 17%, GdF Suez with 15%, RWE with 14%, MOL with 12%, ENI with 9%, BC Energy Trade with 5% and Shell Hungary with 4%. One factor that spurs competition among suppliers is that regulators now require owners of transmission pipelines to provide access on a non-discriminatory basis and at transparent, cost-based prices.

Given the wide choice of suppliers, industrial gas users have been busy shopping for the best deals. In 2009, 12% of large gas costumers switched suppliers, up from fewer than 5% in 2008. Small and mid-sized businesses were more reticent; only 1.7% of this segment switched supplier in 2009. These proportions could increase in the next several years, particularly if diversification of wholesale gas sources drives down prices. There are some signs of such diversification already, with distributors expecting new supply sources via the planned Nabucco pipeline. In addition, an integrated regional pipeline system (called NETS) aims to allow more gas trading within the region. Beyond that, a long-term gas purchase agreement between E.ON and Gazprom expires in 2015. If and when this is renegotiated, supply sources may become more diversified, giving competition a better chance to grow.

Hungary: In Brief

2005 2010* 2015*

GDP per head (US$ at PPP) 17,148.3 18,950.0 24,870.0

Real GDP (% change pa) 3.9 -0.3 2.8


Industrial production (2005=100; av) 100.0 100.1 –

Gross Electricity Generation (Gwh) 35,75�.0 40,010.1 43,7�0.3

Gross domestic electricity consumption (GWh) 38,042.0 39,919.5 43,089.1


Natural Gas Production (ktoe) 2,330.0 2,251.9 2,237.3

Natural gas: Total imports (ktoe) 9,804.7 – –

Natural Gas: Gross domestic energy consumption (ktoe) 12,090.5 10,34�.7 11,550.4* EIU forecast





Slovakia

Electricity: Competitive sparks

Competitive overviewConsidering that it has formally been open to competition for more than five years, the Slovak electric power market shows a considerable affinity for times past. The state still holds large stakes in power generating and distribution companies, and a group of three former regional monopolies still controls more than one-half of the distribution market. As a result, Slovakia has some of the highest electricity prices in the EU, particularly in the household and small-business segments. There are sparks of competition evident in the industrial user segment, however, and these may well ignite into full-fledged competition in that segment in the years ahead.

Slovakia formally liberalised its power market for industrial users in 2005 and for households in 2007. The government established three regional power companies as independent entities and invited private companies to invest in them. It also granted new suppliers equal access to distribution networks, and designated the regulator, Úrad pre reguláciu sieťových odvetví (URSO), to supervise the market.

Although the three former regional monopolies are now partly owned by large West European utilities, they are still 51% owned by the state: ZSE is partly held by E.ON, SSE by EdF, and VSE by RWE. In addition to upgrading plant and equipment, the new part-owners have introduced modern management techniques. Nonetheless, their collective market share is slipping. The three incumbents controlled a combined 56.4% of the market in 2009, down from 57.7% in 2008.

Market concentration is stronger on the production side. The former monopoly power producer, Slovenske elektrarne (SE, now partly owned by Enel and still 34% state-owned), accounts for about 80% of power production. So, although modernisation is taking place within the regional power companies, most get their power supplies from the same source—SE—and this tends to put a brake on price competition, particularly in the household and small-business segment. According to Eurostat, the EU’s statistical agency, in 2009 Slovakia had the ninth-highest electricity prices in the EU. This was only a slight improvement from 200�, when it ranked eighth.

The customer’s viewProbably as a result of limited opportunities for cheaper power, only about 10,000 of Slovakia’s more than 2.3m households switched electricity supplier in 2009. Part of the reluctance to switch suppliers can be traced to administrative barriers, such as fees charged for switching suppliers or requirements to give long notice periods before doing so. But mainly it is because there is not much price incentive for small users to switch, since supplies tend to come primarily from the same provider.

Competition is somewhat in evidence in the industrial market. Some large industrial users have switched to competitors of the incumbent SE, including Magna, Slovakia Energy, ČEZ Slovensko, Lumius and Korlea Invest. This trend may accelerate as additional suppliers enter the market.



Smaller regional utilities such as KLF-Energetika benefit from increased competition among power producers. Milan Letko, the company’s CEO and co-owner, says that in addition to paying about 5% lower wholesale power prices in the past year, his firm has enjoyed more flexibility, for example not having to commit to power purchases that prove unnecessary and having recourse to suppliers for damages caused by supply interruptions. He adds that this is causing the incumbent distribution company, ZSE, to become more flexible as well. In general, however, “the incumbents still tend to impose their price lists and technical conditions of supplies on their clients,” he complains.

For its part, ZSE is reaching out to customers in various ways, including operating a web portal called www.setri.sk (save.sk) offering tips on energy-saving measures, such as the use of certain low-energy appliances.

Gas: SPP still in charge

Competitive overviewThe gas market has been opened in a similar manner to the electricity market, that is, first for large industrials (200�) and then also for households (2008). The market opening allowed competing gas suppliers to enter the market. But SPP is still the dominant player, and the state still has majority ownership (51%). SPP’s 2010 market share is expected to be 82%, down from 93% in 2009.

This reduction in market share is one signal that SPP is slipping slightly from its perch. Another signal is that the other 49% of SPP is held by GdF Suez and by E.ON Ruhrgas, which bring investment funds and management know-how to the market. Moreover, RWE has entered the market and has lured several key industrial customers away from SPP.

Such movements are fairly limited. A mere 45 customers switched their gas supplier in 2009, according to URSO. The market has only a few alternative suppliers, compared to dozens in the Czech Republic, for instance. Jiří Písařík, CEO of Slovakia Energy, an alternative supplier of gas and electricity, argues that regulation of household prices by URSO has slowed competition by removing incentives for households to switch suppliers. Despite regulation that holds prices down, however, Slovakia’s households paid the EU’s fourth-highest gas prices in 2009, according to Eurostat. That was an improvement over 200�, when they paid the EU’s highest gas prices.

Administrative barriers to switching suppliers play a role as well. According to Mr Písařík, it can take a household �-12 months to change gas suppliers.

A further reason is the lack of alternative sources of gas. Until 2009, virtually all of Slovakia’s gas came from Russia. After the gas crisis in January 2009, when Russia’s supplies to Western Europe (including Slovakia) were halted for 13 days, SPP signed contracts with Western firms. This was aided by reverse flow—gas flowing from the Czech Republic to Slovakia instead of the traditional east-west direction, which had been deemed unfeasible beforehand. Talks under way within the EU are likely to lead to more international gas pipelines, such as South Stream and Nabucco, connecting Slovakia’s system with that of neighbouring countries (mainly Hungary and Austria). All this is expected to diversify supply sources, thereby both boosting competition and improving energy security.



The customer’s viewThe market leader, SPP, is aware of these trends and the implications for its future market share. Indeed, SPP projects that the Slovak gas market could become as competitive as the Czech market within two to three years. It has responded with some customer-friendly initiatives. For example, it set up a help line for households in 200�, and for small businesses in 2009. It reorganised its marketing department, assigning account managers to key customers. It also stepped up spending on improved service and reliability. The firm’s regional distribution arm increased its capital outlays to €75m in 2009, 50% more than in 2004.

In addition, SPP set up Ekofond, which invests in energy-saving measures and environmental protection. The fund has provided almost €3m to this end since 2008. Projects supported by Ekofond include insulating blocks of flats, building clean-burning gas-fired power plants, and supporting technologies that use compressed natural gas.

Slovakia: In Brief

2005 2010* 2015*





Gross Electricity Generation (Gwh) 31,352.0 25,398.9 35,274.4

Gross domestic electricity consumption (GWh) 2�,503.0 29,400.9 33,203.1

Electricity: Gross domestic energy consumption (% change y/y) -3.2 2.� 2.3

Natural Gas Production (ktoe) 12�.3 138.8 128.5

Natural gas: Total imports (ktoe) �,044.� – –

Natural Gas: Gross domestic energy consumption (ktoe) 5,882.0 4,838.5 5,13�.9* EIU forecast





Romania

Electricity: Not quite a free market

Competitive overviewOn paper, the Romanian electricity market is subject to lively competition in the generating sector. In practice, the competition is less than it should be.

Beginning in the early 1990s, Romania created CONEL, a state-owned power company, out of RENEL, the former integrated monopoly. The aim was for CONEL to retain ownership of the grid and of local distribution, while generating assets would be spun off and partially or fully privatised. Many generating assets were indeed partly privatised, with foreign utilities including Enel, ČEZ and E.ON acquiring stakes. Moreover, independent power producers and industrial users were told they are free to generate power and either use it themselves or sell it to others. Despite this legal overhaul, 85% of generating capacity is still in state hands, a factor that limits competition in the market.

A big stumbling block on the road to opening the market has been that the government has focused on influencing the mix of fuels used to generate power, rather than allowing the market to decide that for itself. The Ministry of Economy set targets for nuclear, hydro and fossil fuel sources, and has focused on achieving those targets rather than on promoting competition among power generators. A further complicating factor is that much of the generating plant is outmoded and in need of an aggregate of several billion dollars worth of investment. But the government’s involvement in setting policy on the fuel mix has dampened investors’ interest in making those outlays. The continued regulation of some industrial tariffs has further slowed investor interest. This, in turn, has tended to perpetuate the government’s dominant role in the sector, thus limiting customers’ choice among suppliers.

However, several independent power producers—many using government-favoured fuels such as hydropower and other renewable sources—have entered the market, thereby expanding the range of supply options available to customers. A further encouraging signal has been the development of a spot market, which industrial customers can access to make up for surpluses or shortfalls under long-term contracts. All generating companies are required by law to feed excess power into a pool, which then makes the capacity available on the open market.

The situation in the distribution business, which is a natural monopoly, is more straightforward. This business remains in the hands of Electrica SA, a state-owned holding company that owns eight regional subsidiaries. Of these subsidiaries, five have been partially sold to foreign utility giants, and the other three are on the way to a similar partial privatisation.

The customer’s viewIndustrial customers have started to take advantage of what opening there is in the market, with many large industrial users either renegotiating their purchase contracts—presumably using the fact that they could potentially switch to other suppliers—or actually changing suppliers (including, in some cases, becoming their own supplier, that is, generating their own power). Immediately after the



liberalisation in the middle of the last decade, there was a surge of such switching and renegotiation. That activity has now subsided, since some of the renegotiation resulted in long-term contracts, which are still in force.

The initial surge of activity was dramatic: according to the electricity regulator, ANRE, by December 2005 some 552 industrial users were active in the competitive market, representing about 40% of Romanian electricity consumption. By May 2010, however, the number of companies actively shopping was down to �5, according to the Romanian Power Market Operator (OPCOM). In addition to the presence of long-term contracts, which has for now reduced the incidence of shopping around, industrial users have been held back by a dip in demand attributable to the 2008-09 economic crisis.

As in neighbouring countries, households have been much slower than industrial users to search around for a better deal, not least because of lack of awareness and lack of clear economic benefits. The regulated prices for residential electricity tend to remove incentives for households to do so—and for new players to seek their business. The main players in the residential market are the eight regional distribution companies. Although they are not driven by competition, most are trying to improve their operating efficiency in order to boost their bottom lines. This effort, in turn, is being driven largely by the foreign utility giants such as Enel, ČEZ and E.ON that have entered the sector. Although they effectively enjoy a captive customer base, the distribution companies are under pressure to show a return on the foreign utilities’ investments, and to position themselves for future competition.

This pressure has brought about some notable improvements in the distribution companies’ dealings with customers. Enel, for instance, has instituted a 24-hour technical help line, while ČEZ has introduced a new document management and customer relations procedure to speed up invoice processing. The distributor can now perform multi-supplier billing, creating more flexibility both for competing energy suppliers and for customers.

Gas: In Gazprom’s grip

Competitive overviewThe share of natural gas imports has risen steadily in Romania, as domestic resources have become depleted and consumption has risen. According to the EU, reliance on imports has risen from 20% of consumption in 1990 to an estimated 60-65% in 2010. While Romania has tried to diversify its supply sources—most notably taking part in the proposed Nabucco pipeline—the bulk of the gas still comes from Russia and is supplied by Gazprom.

This has put Gazprom in the driver’s seat, along with two large gas import companies—WIEE and Wirom Gas—which are jointly controlled by Gazprom and by Wintershall (Germany). Together, they import most of Romania’s gas. The rest of consumption is mainly supplied by Petrom, which is majority owned by ÖMV (Austria), and by state-owned Romgaz.

As with electricity supply, there are two faces to the liberalisation of gas supply: the theoretical one and the actual one. Theoretically, market opening was completed in 2007 with a law unbundling transmission and production assets and allowing new suppliers to enter the market. This led to the appearance of 24 new gas supply companies—mostly very small ones with very small market shares. In



the main, however, competition has been held back by continued government tariff-setting at below-market levels on domestically produced gas, which has discouraged new entrants. The concentration of gas supply sources has in any case limited the choices available to customers.

The downstream distribution business has been privatised, but as a natural monopoly it is hardly an arena for competition. This market is divided between two incumbents, each serving a different region: Distrigaz Nord, owned by E.ON Ruhrgas, and Distrigaz Sud, owned by Gaz de France.

The customer’s viewAlthough they enjoy a natural monopoly, distribution companies have started to take a more customer-oriented stance, mainly in an effort to improve their bottom-line performance, and perhaps with a view to positioning themselves in case competition becomes a bigger factor in future. E.ON, for example, now offers customers more flexibility to be invoiced based either on their own metre reading or on a company-determined monthly average. The company has also teamed up with local banks to offer more payment options, including cash, direct debit, bank transfer or internet banking.

E.ON also offers upgraded technical support to industrial customers, enabling them to get a more accurate reading of their consumption patterns, and has set up a Key Accounts department offering consultancy services to industrial users. Gaz de France has taken a somewhat different tack, focusing on investing in pipeline upgrades to reduce leakages and improve safety.

While these may improve the picture for customers, their real problem is the concentration of suppliers and supply sources, which limits price competition. The three largest suppliers together control about 83% of transactions in the wholesale and industrial market, and about 59% of those in the retail (household and small business) market. Two domestic gas producers, Petrom and Romgaz, moreover, have a lock on most of the country’s proven gas reserves, leaving little room for small independent players to make inroads as alternative suppliers drawing on domestic sources.

Nor is it much of an option for customers to seek supplies from competing importers of foreign gas. Surprisingly, considering its legislative approval of a competitive market, the government discourages small suppliers from becoming active in the import and resale market, saying this would fragment the importing sector and weaken it in negotiations with large foreign suppliers such as Gazprom. This, believes the government, would hardly bring benefits to consumers.

The government also discourages competition for rights to develop the dwindling quantities of domestic gas, arguing that this would weaken the existing domestic production industry. Among the levers the government uses to discourage new entrants is to keep a regulatory lid on gas tariffs for both industrial and residential consumers. This is a sensitive economic and social issue, and it remains the main impediment to developing a more competitive gas market.



Romania: In Brief

2005 2010* 2015*

GDP per head (US$ at PPP) 9,393.0 11,8�0.0 1�,570.0

Real GDP (% change pa) 4.2 -0.� 3.9

Population (millions) 21.� 21.4 21.3


Gross Electricity Generation (Gwh) 59,413.0 �1,250.� ��,280.2

Gross domestic electricity consumption (GWh) 50,430.0 54,541.7 �3,555.4


Natural Gas Production (ktoe) 9,�98.5 8,�43.0 7,981.0







Poland

Electricity: Awaiting de facto competition

Competitive overview With the largest power-generating sector in Central and Eastern Europe, and a market led by four large, vertically integrated utilities, Poland has the potential to set a regional example of a vibrant, competitive utility industry. The country is, in fact, part of the way there, with laws giving customers choice among suppliers and a strategy to attract investors. But a legacy of long-term under-investment—particularly in environmental mitigation—and the prospect of capacity shortages as early as 2014 are slowing progress towards a fully competitive sector.

In the past five years, Poland has created four large integrated electricity groups—Polska Grupa Energetyczna (PGE), Enea, Energa and Tauron—out of regional distribution companies, large generators and some brown-coal mines. PGE is the largest of the four and accounts for one-third of the country’s generating capacity. The intention was to privatise all the companies in the sector except for the grid operator. So far, however, PGE and Tauron are still largely under state control, although EdF (France), Vattenfall (Sweden) and Tractebel (Belgium) have invested in the sector.

Poland now plans to speed up the sale of shares in state-owned utilities to help fund acquisitions and to boost generating capacity. PGE alone estimates that it will spend Zl 38.9bn to 2012 on expansion, and on meeting EU environmental requirements. Plans to build around 10,000 mw of new capacity by 2015 have been announced, but it is estimated that around 12,000 mw will be required. At the same time, efforts will continue to be made to modernise existing plants to make them cleaner and more fuel-efficient. There is likely to be significant investment in clean coal technology and coal gasification.

All this points towards a robust power supply, a prerequisite for healthy competition. Nonetheless, Poland is expected to start running short of capacity in 2014-15. In a report released in March 2010, the Polish Office of Competition and Consumer Protection (known by the Polish acronym UOKiK) warned of looming shortages. “In UOKiK’s view, the basis for the development of effective competition in the sector is… reconstruction of the surplus in the available generation capacity,” the regulator said, adding that more inward investment is needed.

For the moment, however, the conditions are present for customers to benefit from competition. The four largest utilities each have significant market shares, thereby preventing undue concentration. According to Mintel International, a market research firm,, in 2008 Tauron led the market with a 27% share, PGE followed closely with 26%, Enea had 16% and Energa 15%. In March 2010 the regulator overruled an attempt by PGE to acquire Energa, saying this would harm competition.

That said, Polish consumers seem less than eager to take advantage of the right they have had since 2007 to shop around for better deals. Only 1,054 households had done so by 2010, according to the regulator, and 90% of households surveyed said they would not know how to go about changing



suppliers. “Enhancing competition between providers would undeniably lead to greater consumer mobility,” the regulator commented.

The customer’s viewDespite its under-investment problems, Poland is still among the cheapest electricity producers in Europe. This could explain in part why electricity customers are relatively inactive about switching suppliers: they may be happy where they are. There is also the fact that prices for households are still regulated, which reduces the incentive to change supplier. The government believes that liberalisation of prices could lead to a sudden spike in prices, a politically unacceptable outcome.

There is, moreover, some indication that utilities have been trying to keep their customers through a variety of modernisation and customer outreach efforts. PGE, for example, has announced investments in technologies to reduce carbon emissions and in increasing its use of fuels from renewable sources such as wind and hydropower. In addition, PGE offers retail customers such amenities as help from a call centre, and an online customer services system informing them about the status of their electricity accounts and how to control their consumption.

Gas: Still PGNIG’s world

Competitive overviewThe main issue for Polish gas market is the lack of a competitive source of supply, with the sector over-dependent on long-term contracts from Gazprom. Of the nearly 14bn cu metres of gas consumed in Poland every year, only 30% is domestic. The proportion of imports is growing, as national supplies are depleted and demand grows. Of the gas imported, around 80% comes from Russia, and most of the rest from Central Asia. Unless Poland finds alternative sources, its dependence on Russia will increase, as consumption soars to a projected 20bn cu metres by 2030.

Although gas demand has grown steadily, Polish importers have been unable to negotiate lower purchase prices with Gazprom. The result has been high consumer prices, combined with under-investment in the gas distribution network. One ray of hope for distributors and end-users is that Gazprom has signalled that it may lower prices for gas intended for trading on the spot market.

The distribution business is dominated by the Polish Oil and Gas Company (known by its Polish acronym PGNIG), an integrated, largely government-owned company involved in exploration, production, transportation and distribution of gas. It controls an eye-catching 98% of the market, leaving little room for others to break in; competitors tend to lack sufficient economies of scale to take on the giant. PGNiG is 73% government-owned, with the rest of the shares held by employees (12%) and others (15%).

Four other companies, which are privately owned, serve the remaining 2% of the market. They are G.EN. Gaz Energia, Media Odra Warta (owned by EWE), Enesta and Kri Poznan

On paper, these and other competing suppliers have a right to non-discriminatory access to PGNIG’s network of pipelines, but in practice they are not in a position to acquire enough gas to move through the system. Would-be competitors also complain of complex grid-connection requirements and stringent rules relating to compulsory gas stocks. For consumers, PGNIG’s dominance of the market,



together with Russia’s control of gas supplies, translates into limited choices. The development of new supply routes from Norway and Qatar (mainly LNG) could eventually loosen

PGNiG’s grip. KRI Poznan has been particularly active in trying to adopt LNG technology focusing on towns and select regions. The main constraint here is limited LNG import capacity. The new LNG terminal in Swinoujscie is not likely to come on stream until 2014. Until then, LNG will be a small albeit competitive alternative source of gas.

Another major breakthrough could come from shale gas exploration with as many as 58 exploration licences issued as of July 2010 with global oil majors such as Exxon Mobil, Chevron and Conoco Phillips all hoping to strike gas in Poland. When and if that happens, the supply market will become less concentrated in the hands of PGNiG, with small independent gas suppliers able to choose their supplier.

The customer’s viewPGNiG recognises this competitive threat and is preparing for it by focusing on operating efficiency, for example by investing in storage expansion, upgrading its transmission network and improving its interconnections with gas networks in other EU countries. It is also seeking access to its own LNG supplies—most recently through an agreement signed with Qatargas for 1.5bn cu metres annually starting in 2014. PGNiG is also improving its agreements with Gazprom to ensure uninterrupted stable supplies for large consumers, hoping thereby to minimise switching in future. It is also targeting new customers in the power generation sector planning to increase the proportion of gas in their fuel mix.

The incumbent is also paying closer attention to the softer side of wooing customers. Among other measures, it has started a corporate social responsibility (CSR) programme aimed at upgrading its image as a responsive and responsible corporate citizen. This programme should also support the company’s marketing efforts. It is a clear sign of change in what is otherwise still essentially a monopolised market.

The efforts by smaller competitors centre on offering good customer service, lower prices and more flexible volume delivery plans. Gen Gaz Energia, which had around 18,000 customers in 2009, also offers online services tailored to retail and industrial clients. Services include a free telephone help line, outreach efforts offering customers information on how to change suppliers and brochures aimed at making gas billing transparent.



Poland: In Brief

2005 2010* 2015*


Real GDP (% change pa) 3.� 3.0 3.2



Gross Electricity Generation (Gwh) 155,359.0 157,999.5 1�9,94�.8

Gross domestic electricity consumption (GWh) 131,187.0 14�,977.� 15�,375.8

Electricity: Gross domestic energy consumption (% change y/y) 0.� 2.0 0.7


Natural gas: Total imports (ktoe) 8,5�4.8 – –

Natural Gas: Gross domestic energy consumption (ktoe) 12,231.0 13,937.9 1�,922.9* EIU forecast





Russia

Electricity: Keeping the lights on…

Competitive overview On May 25th 2005, the lights went out all over Moscow and nearby provinces, after a power station in the south-east part of the capital failed. Tens of thousands of people were stranded in underground trains and in lifts, traffic was stopped as railway and road signals went dark, and many commercial and government organisations were paralysed. In all, the power outage affected more than 2m people.

The incident focused attention on Russia’s dire need to modernise its electricity supply and distribution systems. While neighbouring countries in CEE might entertain debates on how to introduce price competition into the sector, in Russia the discussion is focusing on more basic issues: ensuring that the lights stay on—reliably and sustainably—in the first place. A central part of the debate involves how to ensure that electric utilities have the financial incentives to do so, and in Russia this means considering relaxing Soviet-era price caps and allowing prices to rise.

Another key part of the modernisation has involved privatising the ownership of the power sector. A phased break-up and sell-off of Unified Energy System (UES), the Soviet-era government power monopoly, took place between 2003 and 2008, in which the former monolith was divided into more than 25 parts. Many foreign utilities invested in these spin-offs, including Enel, E.ON and Fortum (Finland), which acquired gas- and coal-fired generators across Russia.

Although privatisation attracted capital and know-how to the sector, the state retains substantial control. It owns hydropower generating plants, nuclear power production, the national transmission network and the operating company that manages daily electricity flows. Moreover, some of the spun-off UES generating plants were acquired by government-run companies such as Russian Railways and Gazprom, the natural gas giant that also has close ties to SUEK, the coal producer.

Regardless of who owns generating and distribution assets, the challenges facing the sector are vast: modernising facilities that suffered for decades from under-investment. Respondents to a recent KPMG survey estimated the makeover price at up to US$550bn by 2020. The magnitude of the challenge became painfully clear in the fatal accident in 2009 at the Sayano-Shushenskaya hydroelectric plant in Siberia. For Russia, modernising electricity generating and distribution remains a race against time to ensure that the country does not run short of the power it needs to fuel a growing economy.

There has been some progress in this direction. The recession of 2008-09 did not slow the modernisation process. Moreover, the sector is starting to adopt some competitive practices, such as attempts at more cost-efficient operations. “In an international comparison, the Russian electricity market is fairly competitive,” says Simon-Erik Ollus, chief economist at Fortum, which paid €2.5bn for TGK-10, a thermal power generator, in 2008. “The reform and liberalisation of the Russian electricity market has progressed as planned despite the recession.”

For its part, the government is looking for ways to allow regulated prices to rise for industrial users,



without placing too great a burden on rate-payers hurt by the recent recession. Today only 20% of wholesale electricity in Russia is subject to regulated tariffs—a level that is due to fall to zero at the start of 2011. In practice, this means higher prices for electricity, which in turn means that parts of the industry could turn a profit for the first time in memory. Beyond removing caps on wholesale electricity prices, the government is offering investors various financial incentives for investing in plants and making long-term generating capacity available.

Households, however, appear to be getting a break from the government, after the 2008-09 recession reduced their ability to pay higher prices. Household tariffs are now set for deregulation later than originally planned—by around 2014, although some fear that the presidential election in 2012 could delay this process. In response to postponement of rate increases, some investors now want to reduce the level of investments they committed to under their 2008 privatisation deals.

This is causing alarm in the government, as electricity demand starts to rise to pre-recession levels. Earlier this year, the prime minister, Vladimir Putin, scolded some of the country’s wealthiest power sector investors for reneging on their promises. He said a group led by billionaires Mikhail Prokhorov, Vladimir Potanin and Viktor Vekselberg had spent only about one-half of the amount it had pledged, and threatened fines and limited access to the long-term sales market if the group fails to make the promised investments.

The customer’s view Paradoxically, for consumers market liberalisation will mean higher prices, at least in the short term, and at least for industrial customers. The hope is that over time, as new capacity comes on stream and new players enter the market, competition and efficiency will drive prices down. But it will be a while before such market forces take a hold, particularly in view of the higher prices that generators will have to pay for fuels such as natural gas.

Price increases will be especially acute for industrial users. “As a result of liberalisation and higher natural gas prices, industrial and commercial customers are likely to see power prices rise by around 30% annually during next two to three years,” predicts Derek Weaving, an analyst at Renaissance Capital, an investment bank in Moscow. “There will be short-term pain, but that will give way to massive long-term gains, as customers won’t have to suffer blackouts and the sharp tariff increases that would inevitably follow them.”

The government seems intent on protecting households from these price increases as long as possible. In addition to delaying the lifting of household price caps until 2014, the government has delayed raising tariffs charged to households for power distribution. The Ministry of Economy is even discussing a new cap on price increases for households in 2011 and 2012. Such plans could be shelved, however, as Russia’s economic recovery gathers pace and worries over capacity constraints, including blackouts and brownouts, loom large once again. “A balance will be found, as it is in the government’s interest to keep electricity investors happy,” confirms Dominique Fache, Russian and CIS country manager for Enel, which owns generator OGK-5.



… and the gas flowing

Competitive overview Although there are structural differences between the gas and electricity sectors—the power industry has been broken up while gas is still dominated by state-owned Gazprom—the basic issues are the same. The challenge is to ensure sufficient investment in developing new gas supplies so that Russia’s gas giant can continue to meet demand over time.

To keep the company’s finances healthy, the government plans to deregulate industrial and commercial gas prices by 2014, allowing prices to rise. As with electricity, gas prices for households will remain regulated for an “extensive” period of time, according to Gazprom. The deregulation of gas tariffs for industrial customers will bring those prices into line with the prices Gazprom receives from its industrial customers in Europe.

Deregulation of industrial users’ tariffs will help Gazprom. But it will also boost the prospects of smaller, more nimble independent gas producers and oil firms, which can operate more efficiently than Gazprom and therefore could potentially offer lower rates to commercial customers. At the same time, such competitors have begun to enjoy better access to Gazprom’s pipeline network after energy tsar Igor Sechin pushed the state-run company to open it to competitors.

One example of this dynamic is the emergence of Novatek, a gas producer, as a potential competitor to Gazprom—which, incidentally, owns a 19.4% stake in the challenger. In 2009 Novatek achieved what some in the industry called a competitive breakthrough when it attracted two big customers— Inter RAO, an electricity trader, and OGK-1, a power generating company—away from Gazprom. The two customers signed five-year deals with Novatek for gas supplies.

The advantages for the customers were clear. Novatek offered lower and more flexible tariffs, and better payment terms including lower penalties for declining gas volumes under take-or-pay contracts. Analysts estimated Inter RAO’s annual savings at up to Rb1.5 bn (about €39m). The switch also sent a signal to others in the market that it is possible to go elsewhere for gas. “The switch by the big electricity companies was hugely important,” says Jonathan Stern, director of gas research at the Oxford Institute for Energy Studies. “It indicated that major things are happening.”

Yet as with many things in Russia, there is more to this story than meets the eye. As noted above, the upstart Novatek is nearly one-fifth owned by the monolith it is challenging. Curiously, Gazprom representatives on Novatek’s board voted in favour of supplying the utilities through Novatek rather than through Gazprom. Moreover, one of the customers, OGK-1, is managed by the other one, Inter RAO. Igor Sechin, a close associate of Novatek’s biggest shareholder Gennady Timchenko, is also the chairman of Inter RAO.

The customer’s viewThe switch by those two industrial customers, then, may or may not be the proverbial swallow that announces the spring. Switching among gas suppliers has in fact been a rarity so far, and it is not likely to rise dramatically in the years ahead. Russia’s Energy Strategy through 2030, approved in November 2009, sees independent gas producers increasing their market share to 27% in 2030 from 20% in 2009.



Perhaps of more immediate concern to Gazprom is the government’s effort to reduce the amount of associated gas—a by-product of oil production—that oil companies flare to 5% by 2012. Oil companies typically flare this gas because they do not have access to a gas pipeline to transport it to market. The new policy gives oil companies access to Gazprom’s pipelines, thereby loosening its tight grip on domestic gas sales. According to analysts at Citigroup in Moscow, Gazprom’s share of domestic gas sales is likely to fall from 66% in 2009 to 63% by 2015, as oil producers and independent gas firms enjoy greater access to its network.

The Russian government is hardly resolute in its initiatives to open the gas sector to competition. While his government is promoting more open access to the pipeline network for the purpose of reducing flare-off of associated gas, Mr Putin has hinted that a more generalised open access to Gazprom’s network is not in Russia’s interests. Speaking at a conference in September 2009, he conceded that giving third-party access to pipeline infrastructure would probably boost production levels and reduce customer prices, but added, “in the end this could also create threats for the same customers and for the budget.”

Nor is Mr Putin’s government in a hurry to break up Gazprom into separate production and transportation businesses, in a similar fashion to the break-up and privatisation of UES. “As long as there remains a disparity in energy prices on the Russian and world markets, we will preserve the integrity of such companies as Gazprom,” Mr Putin said at the Russia-EU summit in November 200�. Although that disparity should now disappear by 2014 under new regulations, the central role of Gazprom is likely to continue largely undisturbed.

Russia: In Brief

2005 2010* 2015*

GDP per head (US$ at PPP) 11,8�1.2 15,850.0 22,020.0



Industrial production (2005=100; av) 100.0 10�.� –

Gross Electricity Generation (Gwh) 951,159.0 1,022,�91.5 1,208,4�4.2

Gross domestic electricity consumption (GWh) 828,118.0 908,88�.2 1,070,�59.8


Natural Gas Production (ktoe) 515,�95.0 513,231.0 5�4,428.0


Natural Gas: Gross domestic energy consumption (ktoe) 349,5�9.5 357,052.0 388,020.3* EIU forecast





Opening energy utilities to competition has been a long-term project in the EU as a whole, and not an entirely smooth one. As noted in the introduction to this report, the European Commission has

expressed its displeasure at the slow pace with which most member states have approached energy utility reforms. For example, the legislation requiring separation of transmission/distribution from non-network activities has been on the EU’s books for years, as have regulations requiring utility systems to be open to new suppliers. Yet progress towards opening networks and markets has been slow, and not only in Central and Eastern Europe. But it has been slower in CEE than elsewhere in the EU, in part because the region’s utility sectors are burdened with the legacy of inefficiency, under-investment and a lack of customer focus, all inherited from the former communist regimes.

For these sectors, the EU push to continue opening markets to competition is a useful impulse. So is the need to increase the opportunities for suppliers of alternative and more environmentally friendly energy to gain access to transmission grids and to markets. Both sets of pressures—the political and the environmental—along with an economic imperative to upgrade outmoded facilities to meet the requirements of growing economies are moving the region’s utility sectors towards needed reforms. The progress made by the region’s utilities in the past five years has been encouraging. With the combined pressures of EU regulation, environmental concerns and economic imperatives, these sectors are well positioned to continue closing the competitiveness gap with their West European counterparts.

Conclusion

Appendix I

Methodology for the EIU Market Openness Ranking

The EIU Market Openness Ranking represents an effort to quantify the degree of liberalisation of the electricity and gas utility sectors in each of six countries, rating them along various indicators and

tallying each country’s scores for the various indicators to devise a total, which is then compared to the other countries’ totals.

The source data used in this analysis were compiled by the European Commission. They can be found in the annex to a Commission staff report titled “Report on progress in creating the internal gas and electricity market”. The data annex can be found at:

http://eur-lex.europa.eu/LexUriServ/LexUriServ.do?uri=SEC:2010:0251:FIN:EN:PDFThe full report can be found at:

http://ec.europa.eu/energy/gas_electricity/doc/2010/com_2010_0084_f_en.pdfThe data extracted from the annex for use in preparing the ranking are presented in Appendix II.The indicators of market openness, for which EU data were found and which form the basis of this ranking, are as follows:

l Is the market open to competition?

l Is the production sector competitive (ie, not concentrated)?

l Is the distribution sector competitive (ie, not concentrated)?

l Is transmission unbundled from production?

l Are prices are set freely for industrial users?

l Are prices set freely for households?Since the answers to these questions are rarely yes or no, the data record the degree to which these

conditions were met in each of the countries as of 2008. The scores for each country and for each indicator (done separately for electricity and for gas) reflect that degree, on a simple 1-5 scale, with five representing the highest level of market openness.

The following describes in more detail the basis for the scoring countries in each of the six indicators:

l For the indicator on market openness to competition, scoring was based on the Commission’s data on the percentage of the market that is allowed—de jure—to choose among different energy suppliers. Where the law allows 100% of users to choose their suppliers (which is the case in most EU countries), the model assigns a score of 5 for that indicator. (No direct data are available on de facto competition, and therefore the model does not capture this element.)

l The two indicators on concentration of ownership of assets—one indicator for production companies

40 © The Economist Intelligence Unit Limited 2010

Appendix IMethodology


and the other for distribution/marketing companies—use market concentration data as proxies for determining market competitiveness. This is an inverse relationship: in general, the less concentration (that is, the more dispersion) of ownership, the more competition is presumed to be present. To score countries on this indicator, the model considers first the percentage of the market served by the three largest players, with lower combined ownership percentages yielding a better score. That score is then adjusted based on the data for the number of players in the market that have a market share of more than 5%, as compared with EU best practice; a large number of such players raises the score.

l For the indicator on the extent to which transmission has been unbundled from generation, scoring is based on a comparison of the number of Transmission System Operators (TSOs) which have unbundled ownership of transmission and other assets, compared to the total number of TSOs in that sector.

l For the two indicators on how free companies are to set prices—one indicator for setting prices for industrial users and the other for household pricing—scoring considered first the EU data on whether the sector is free of price controls. Where a sector is subject to full or partial price controls, the score is then adjusted to take into account how far the regulated price is from the EU average (a figure also taken from EU data sources). The regulated price is assumed to be a ceiling price, above which suppliers are not allowed to charge. If the regulated price is set higher than the EU average market price, this—somewhat counter-intuitively—can be considered an incentive to competition, since it allows room for market players to price lower than the ceiling, and also provides an incentive for new players to enter the market.

Russia, as a non-member of the EU, was not included in the European Commission data set and therefore was scored separately on a qualitative basis, based on the author’s knowledge of and experience in Russian energy markets, and with reference to national data.*

*The author of this ranking methodology, Nicholas Redman, is a Central and Eastern Europe specialist and currently is editor-in-chief of EIU Viewswire. He was previously a senior editor for the Economist Intelligence Unit responsible for Eastern Europe and Russia. He also previously taught at the Department of War Studies, King’s College London, and was an Eastern Europe analyst for a consultancy. He holds a DPhil in International Relations from Oxford University.

Appendix IMethodology


41© The Economist Intelligence Unit Limited 2010


Appendix IISource data


Appendix II

Source data for the Economist Intelligence Unit Market Openness RankingsThe following tables are the source materials used to develop the EIU Market Openness Rankings for electricity and gas. The numbering of the tables below corresponds to the numbering system used in the source European Commission report. The source for all the data in this Appendix is the European Commission, Report on progress in creating the internal gas and electricity market, March 2010, Technical annex. The Economist Intelligence Unit bears sole responsibility for the conclusions of the Market Openness Ranking.

Poland

Czech Republic

Romania

Slovakia

Hungary

100

100

100

100

64

Table 1-1: Market opening for gas and electricity: Proportion of market open to competition - electricity(Eligible consumption TWh/GWh by annual consumption in the country;% market opening, 2008)

Indicator 1: How open is the market to competition? (electricity)

Czech Republic

Romania

Poland

Slovakia

Hungary

100

100

100

100

34

Table 1-1: Market opening for gas and electricity: Proportion of market open to competition- gas(Eligible consumption TWh/GWh by annual consumption in the country; % market opening, 2008)

Indicator 1: How open is the market to competition? (gas)

Poland

Table 3-2: Wholesale market position; electricity, 2008

Number of companies with more than5% share of generation capacity

Market share of 3 biggest companiesby capacity; %

Hungary

Romania

Czech Republic

Slovakia

68

71

75

84

53

5

1

1

5

5

Indicator 2: How competitive (non-concentrated) is the production sector? (electricity)

Table 4-1: Market structure in import and production of gas, 2008

Number of companies with more than5% share of available gas

Market share of 3 biggest companiesby available gas; %

Czech Republic

Romania

Hungary

Poland

Slovakia

87

83

4

1

1

3

20

100

100

Indicator 2: How competitive (non-concentrated) is the production sector? (gas)




Table 3-4: Retail market position; electricity, 2008

Number of companies with more than5% share of the whole retail market

Market share of 3 biggest companiesin whole retail market; %

Poland

Romania

Slovakia

Hungary

Czech Republic

60

48

44

81

99

3

4

3

5

6

Indicator 3: How competitive (non-concentrated) is the distribution sector? (electricity)

Table 4-2: Structure of gas retail market, 2008

Number of companies with more than5% in the whole retail market

Market share of 3 biggest companiesin the whole retail market; %

Czech Republic

Romania

Hungary

Slovakia

Poland

73

59

478

6

7

1

1

100

100

Indicator 3: How competitive (non-concentrated) is the distribution sector? (gas)

Indicator 4: To what extent is transmission unbundled from production? Electricity

Table 7-1

Unbunding of network operators: electricity transmission*

Number of Transmission System Operators Number of TSOs with Unbundled Ownership

2007 2008

Poland 1 1

Czech 1 1

Romania 1 1

Slovakia 1 1

Hungary 1 0

*Long distance transmission from plant to local distribution systems

Indicator 4: To what extent is transmission unbundled from production? Gas

Table 7-3

Unbunding of network operators: gas transmission*

Number of Transmission System Operators Number of TSOs with Unbundled Ownership

2007 2008

Czech 1 0

Romania 1 1

Hungary 1 1

Poland 1 1

Slovakia 1 0

*Long distance transmission from production point to local distribution systems




Table 7-2: Unbundling of Distribution System Operators (DSOs) in electricity*

* Local electricity distribution systems.

Number of DSOs Number of DSOslegally unbundled

Number of DSOsownership unbundled

20

6

6

58

140

0

0

0

3

3

3

3

35Romania

Poland

Hungary

Czech Republic

Slovakia

Indicator 4: To what extent is transmission unbundled from production? (electricity) - continued

Table 7-4: Unbundling of network operators: gas distribution

91

46

80

0

0

11

238

38

10

6

5

6

Czech Republic

Slovakia

Romania

Hungary

Poland

Number of DSOs Number of DSOslegally unbundled

Number of DSOsownership unbundled

Indicator 4: To what extent is transmission unbundled from production? (gas) - continued

Slovakia

Hungary

Czech Republic

EU 27

Poland

Romania

Free priceformation?

14

12

11

9

8

11

yes

no

yes

yes

no

Table 5-3: Electricity prices for industrial consumers, 2009(Electricity prices in purchasing power standards (PPS) per 100kWh)

Indicator 5: Are industrial prices set freely? (electricity)

Slovakia

EU 27

Czech Republic

Hungary

Poland

Romania

11

9

9

8

6

10

Table 5-6: Gas prices for industrial consumers, 2009(Gas prices in € per gigajoule)

Indicator 5: Are industrial prices set freely? (gas)


yes

no

yes

no

no




EU 27

Slovakia

Hungary

Czech Republic

Poland

Romania

16

15

13

11

10

17

Figure 5-2: Electricity prices for household consumers, 2009(Electricity prices in purchasing power standards (PPS) per 100kWh)

Indicator 6: Are household prices set freely? (electricity)


yes

no

no

no

no

EU 27

Czech Republic

Hungary

Slovakia

Poland

Romania

14

12

12

10

8

17

Figure 5-4: Gas prices for household consumers, 2009(Gas prices in € per gigajoule)

Indicator 6: Are household prices set freely? (gas)


no

yes

no

no

no

Output indicator: Is supplier switching on the rise? Electricity

Table 2-2

Annual switching rate electricity, %, 2007 and 2008, by eligible point

Large industry Households and small industry

2007 2008 2007 2008

Czech 33 45 0.8 0.9

Poland NA NA NA NA

Hungary NA NA NA NA

Romania 4.4 4.2 0.1 0

Slovakia 2 2.8 0 0.2

Output indicator: Is supplier switching on the rise? Gas

Table 2-4

Annual switching rate gas, %, 2007 and 2008, by eligible point

Large industry Households and small industry

2007 2008 2007 2008

Czech 5.3 �.7 0 0.2

Hungary NA NA NA NA

Poland 0 0 0 0

Romania NA NA NA NA

Slovakia 0 0 NA 0

4� © The Economist Intelligence Unit Limited 2010

Appendix IIIParticipants


Appendix III

Participants in in-depth interviewsThe following individuals participated in a programme of in-depth interviews as part of the research for this report. The Economist Intelligence Unit would like to thank all interview participants for sharing their insights and expertise.

Czech Republic

l Radim Fiala, PhD, Head of Business Development, Lumius (electricity/gas distributor in Czech Republic and Slovakia)

l Jiří Písařík, CEO, Bohemia Energy (electricity/gas producer in Czech Republic and in Slovakia through a Slovak subsidiary)

l Zdenĕk Purkert, owner and CEO, Formplast Purkert (manufacturer of car components)

Hungary

l István Bakács, Member of Board of Directors, E.ON Hungária

l Zsófia Beck, Strategy consultant and energy specialist, Accenture

l Gábor Farkas, Director, Directorate of Price and Economic Analyses, Office of Energy

l Balázs Felsmann, Partner, Force Motrice, consultancy specialising in network industries

l Lajos Kerekes, Head of Department, Dept of Economic Analysis and Environmental Protection, Office of Energy

l György Kóbor, Managing Director, E.ON Energy Supplier

l Lajos Nagy, Head of Risk Controlling, ELMU (an RWE Group company)

l Attila Ságodi, Partner, KPMG Energy & Utilities Advisory Services

l Zsombor Szilágyi, Head of Industrial Relations, EMFESZ Natural Gas Trading and Service Provider LLC.

l Dr Gábor Szörényi, Head of Directorate for Energy Supply and Consumer Protection, Office of Energy

l László Varró, Senior Vice-President, MOL Hungarian Oil and Gas Company

Slovakia

l Milan Letko, CEO and co-owner, KLF Energetika (alternative energy supplier)

l Jirina Repaska, Marketing Director, Gas Trading, SPP (main Slovak gas supplier)

l Jiří Písařík, CEO, Slovakia Energy (please see Bohemia Energy, above)

Appendix IIIParticipants



Romania

l Lucian Palade, Director of Development, Products and Trades Division, Opcom (Power Exchange)

l Eugen Georgescu, Vice-President, Romanian Energy Regulatory Authority (ANRE)

l Delia Vasiliu, Partner and Head of Energy Sector, Pachiu & Associates (law firm)

l Neil Barnet, CEO, Istok Associates (business intelligence firm specialising in CEE)

l Poland

l Sonia Jozwiak, Lawyer, Office of Competition and Consumer Protection, Department of International Relations and Communication, Government of Poland

l Przemysław Wasilewski, Investor Relations Manager, Polska Grupa Energetyczna (PGE—largest electricity group in Poland

l Agnieszka Majchrzak, Senior Expert, Polish Office of Competition of Consumer Protection (UOKiK)

l Rafal Matelka, Energy Analyst CEE, Citigroup Investment Research

Russia

l Dominique Fache, Russia and CIS Country Manager, Enel

l Simon-Erik Ollus, Chief Economist, Fortum

l Jonathan Stern, Director of Gas Research, Oxford Institute for Energy Studies

l Matvei Taits, Utilities Analyst, Uralsib Financial Corp, Moscow

l Derek Weaving, Utilities Analyst, Renaissance Capital


Appendix IVData tables


Appendix IV

Economist Intelligence Unit data on utility sectors in six CEE countries

Czech Republic: In Brief

2005 2010* 2015*

GDP per head (US$ at PPP) 20,271.2 25,430.0 32,�10.0



Industrial production (2005=100; av) 100.0 10�.7 –

Gross Electricity Generation (Gwh) 81,931.0 87,7�4.0 90,778.9

Gross domestic electricity consumption (GWh) �4,917.0 70,721.8 79,3�3.9


Natural Gas Production (ktoe) 154.1 80.0 30.0

Natural gas: Total imports (ktoe) 7,�01.� - –




Hungary: In Brief

2005 2010* 2015*


Real GDP (% change pa) 3.9 -0.3 2.8



Gross Electricity Generation (Gwh) 35,75�.0 40,010.1 43,7�0.3

Gross domestic electricity consumption (GWh) 38,042.0 39,919.5 43,089.1




Natural Gas: Gross domestic energy consumption (ktoe) 12,090.5 10,34�.7 11,550.4* EIU forecast






Slovakia: In Brief

2005 2010* 2015*





Gross Electricity Generation (Gwh) 31,352.0 25,398.9 35,274.4

Gross domestic electricity consumption (GWh) 2�,503.0 29,400.9 33,203.1

Electricity: Gross domestic energy consumption (% change y/y) -3.2 2.� 2.3

Natural Gas Production (ktoe) 12�.3 138.8 128.5


Natural Gas: Gross domestic energy consumption (ktoe) 5,882.0 4,838.5 5,13�.9* EIU forecast



Romania: In Brief

2005 2010* 2015*

GDP per head (US$ at PPP) 9,393.0 11,8�0.0 1�,570.0

Real GDP (% change pa) 4.2 -0.� 3.9

Population (millions) 21.� 21.4 21.3


Gross Electricity Generation (Gwh) 59,413.0 �1,250.� ��,280.2

Gross domestic electricity consumption (GWh) 50,430.0 54,541.7 �3,555.4


Natural Gas Production (ktoe) 9,�98.5 8,�43.0 7,981.0








Poland: In Brief

2005 2010* 2015*


Real GDP (% change pa) 3.� 3.0 3.2



Gross Electricity Generation (Gwh) 155,359.0 157,999.5 1�9,94�.8

Gross domestic electricity consumption (GWh) 131,187.0 14�,977.� 15�,375.8

Electricity: Gross domestic energy consumption (% change y/y) 0.� 2.0 0.7


Natural gas: Total imports (ktoe) 8,5�4.8 – –

Natural Gas: Gross domestic energy consumption (ktoe) 12,231.0 13,937.9 1�,922.9* EIU forecast



Russia: In Brief

2005 2010* 2015*

GDP per head (US$ at PPP) 11,8�1.2 15,850.0 22,020.0



Industrial production (2005=100; av) 100.0 10�.� –

Gross Electricity Generation (Gwh) 951,159.0 1,022,�91.5 1,208,4�4.2

Gross domestic electricity consumption (GWh) 828,118.0 908,88�.2 1,070,�59.8


Natural Gas Production (ktoe) 515,�95.0 513,231.0 5�4,428.0


Natural Gas: Gross domestic energy consumption (ktoe) 349,5�9.5 357,052.0 388,020.3* EIU forecast



While every effort has been taken to verify the accuracy of this information, neither The Economist Intelligence Unit Ltd. nor the sponsor of this report can accept any responsibility or liability for reliance by any person on this white paper or any of the information, opinions or conclusions set out in this white paper.

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