Country:

Hungary

Subject:

Hungary's new electrical energy law

Summary:

With four-party consensus, the Hungarian parliament endorsed the modification of the electrical energy bill (VET) at the end of 2005. This amendment was a decisive momentum for the reintegration of the electricity network regulation system MAVIR, which has functioned independently since 2003 into the Hungarian Electricity Works (MVM) holding. In terms of the consensus, the legislation insisted that 100% of the Hungarian Electricity Works (MVM) (already integrated) would remain a state asset.

The parties celebrated the deal as the (re)-birth of the national energy company. (Note: the Horn-government privatised the majority of the electricity industry companies in 1995-96.) Several reports appeared at the time criticising the abolition of the independent network operator, arguing that this move would jeopardise the success of the domestic electricity market competition, since it would further strengthen the dominant wholesale trade market position of the MVM. Today, this company is in charge of 85% of Hungarian electricity production and at the same time - with regulatory control - supervises traffic along the cross-border electricity grids - vital for foreign electricity trade. Such overwhelming advantage - even if it involves a state company - hampers competition. It had been forecast too, that in case the socialist-liberal government coalition was to win the elections, it would privatise the MVM.

Analysis:

The events of the last year and a half have repeatedly verified the forecasts. The wholesaler MVM creates an artificially restricted selection in the electricity market and thus, the wholesale electricity market tariff is enduringly and considerably higher than in Germany. By today, the dimension of the free market has been reduced to 20% of the consumption; we have returned to the level of that in the early summer of 2003.

Consumers and local governments attempted without avail to obtain favourable energy supply deals, since there is no one to make good offers to them. Today, the situation of the electricity market - from the point of view of competition - is depressing and another nailing in the coffin of economic growth too. Notably, electricity consumers in the processing industry are - instead of protesting – 'voting with their feet' and relocating their production somewhere else.

Following the emergence of such patterns and situations, some important news appeared about the electricity sector in the course of the last few weeks. The government presented to parliament a new draft law governing the electricity sector, which would enable all domestic electricity users to choose electricity providers freely. At the same time, the government postponed a decision concerning the so-called long-terms electricity purchase contracts (HTM), as well as proposed the reduction of the 100% state share in the MVM to 75% (privatisation).

Government communication and public discourse is primarily about the new electricity bill and the need for effective electricity market competition. The real issue however concerns the privatisation agenda.

If we combine the aforementioned steps correctly, the conclusion is as follows: in terms of the new bill, national tariff regulation will be abolished, the maintenance of monopolistic positions arising from long-term energy purchase agreements (the situation of the HTMs and the MAVIR remain unchanged), the privatisation of the monopoly (MVM) (from 100% to 75% state ownership). From the consumers' point of view this is the worst possible combination.

In order for the new electrical energy bill to create an effective electricity market competition, at least the three conditions mentioned below should be implemented simultaneously: the creation of competing electricity market choice (in the field of production and import competition), a guarantee in the sphere of business (electricity production and trading) for the establishment of neutral and strictly regulated network operating companies (monopolistic activities); the restriction to the minimum of national tariff regulation vis-a-vis end-users. Among the three conditions the bill makes provisions only for the last i.e., the condition for the reduction of national tariff regulation to the minimum. But what is the situation concerning the other two?

We can hardly talk of a competitive electricity market choice. All the signs indicate that unless the Union applies pressure, the government will not cancel or initiate new substantive renegotiation with respect to long-term electricity purchase agreements (HTMs) (the Prime Minister's Office has taken over the task from the Ministry of the Economy, which has been urging the cancellation of the contracts). This conserves the situation in which the MVM holds a dominant market position, but does not generate income for its owners (the Hungarian citizens). The profit from the state-owned Paks nuclear power station is being used to finance the production of expensive power stations - protected by long-term agreements. The income-related after-tax results of the MVM amounted to 0.23% and that of Paks was 0%, while the privatised power stations with long-term contracts produced over 20% profit for their owners. Meanwhile, the import competition is artificially restricted along the Slovak, Romanian and Ukrainian borders, which are most important from the point of view of import supply.

The new bill does not cater for the establishment of commercially neutral electricity network companies, albeit this is the alpha for the creation of electricity market competition. This also transpires from the debate in Europe concerning directives issued in January this year by the European Commission to separate - on the ownership level - of production from trade, which is vital for the creation of competition in the energy sector. Fifty percent of the member-states have complied with the recommendation as regards high voltage grids in the electricity sector.

Furthermore, the Commission highly recommends to the member-states the use of the independent regulatory system-model, which Hungary abandoned in 2005. By contrast, the new bill does not react to these accomplishments and efforts neither at the transmission (MVM) nor at the distribution-company level. This implies that after the full opening of the market, the distortion of competition in the domestic market, dictated by the commercial interests of the proprietors of dominant electricity network companies - will continue to prevail.

All this means that the privatisation of the MVM - if parliament were to endorse the government-sponsored document concerning the management of state assets and the new institutions for privatisation - would entail great risks for the domestic electricity market: At present, the MVM holding embraces the state-owned Paks nuclear power station, which produces 40% of domestic electricity, as well as other smaller producers; the MAVIRT, which maintains systems security, operates the general national electricity network and guarantees conditions for foreign trade; the contract governing the production of the major private power stations, as well as several important long-term import agreements; and finally, a market trading company.

Each market research document demonstrates that - among the domestic power stations - only Paks is a significant market force, i.e., after the opening of the market this company could - if it wanted to - force wholesale tariffs above the competition level profitably through the regulation of its performance. Thus, the privatisation of Paks would entail a considerable tariff risk for consumers. The privatisation of MAVIR - combined with other components of the holding - would create a situation whereby our domestic electricity network - focussing on the production and commercial interests of the MVM - would distort domestic competition. This would entail further tariff-risks for domestic consumers. Finally, private owners certainly would not tolerate the 'non-profit' mode of operation of the MVM and they will expect - at the holding level - to operate with 40-50 million forint annual profit. If the company were to attempt to achieve this objective without cancelling unfavourable long-term contracts, more price increases would be unavoidable. In light of these risks, the consumers, as well as economic policy decision-makers would become exposed, since European liberalisation would abolish the national regulation of tariffs.

Furthermore, we have not discussed the risks arising from Russian acquisition of additional assets.

Conclusion:

The issues discussed above demonstrate that the present draft plan concerning the electricity market is harmful and dangerous. The new electricity bill cannot be debated in substance without legislation governing the cancellation/management of long-term contracts. On the other hand, privatisation has certain preconditions, which are not given today. These include the need to separate the main network regulating system (MAVIR) from the MVM holding and retaining it under state control, as well as to remove the privatisation of the Paks Nuclear power station from the agenda.