Prague-based CEZ will get in annual installments in the next four years a total of Euro 95 million, an amount slightly lower to its initial investment in the Albanian distribution system, but half of the Euro 200 million CEZ had warned it would claim in international arbitration proceedings.
TIRANA, June 24 – Eighteen months after CEZ had its licence revoked and just before an expected EU decision on Albania’s candidate status that could be endangered by a Czech Republic veto, the Albanian government and the Czech energy giant have reached an amicable out-of-court solution to the Albanian electricity distribution operator whose majority stake was sold to CEZ in 2009 for Euro 102 million and managed for three and a half years by the Czech company until it had its Albania licence revoked in January 2013.
Under the deal signed by the Albanian government and CEZ, whose 70 percent stake is owned by the Czech government, Prague-based CEZ will get in annual installments in the next four years a total of Euro 95 million, an amount slightly lower to its initial investment in the Albanian distribution system, but half of the Euro 200 million CEZ had warned it would claim in international arbitration proceedings.
The deal mediated by the Vienna-based Energy Community foresees that CEZ will receive a compensation of Euro 95.5 million as payment of receivables and transfer of shares in its CEZ Shperndarje subsidiary. This is in addition to Euro 4.5 million already received by CEZ. The amount will be paid in annual installments until 2018. The effectiveness of the settlement agreement is conditional upon several conditions precedent, particularly the procurement of the bank guarantee, approval of the agreement by the Albanian government and parliament, said CEZ Group in a statement.
“I consider the negotiated agreement as a success because we will receive funds significantly earlier and we will not need to wait several years for results of the arbitration proceedings. The agreement is designed so that the financial compensation will be guaranteed by a renowned European bank,” said Daniel Benes, the CEO of CEZ, a. s.
The settlement agreement is a result of lengthy negotiations entered into by the parties with the intermediation of Dirk Buschle, the deputy director of the Energy Community Secretariat in Vienna, Austria. It resolves all claims between the CEZ Group and the Republic of Albania relating to CEZ’s investment in CEZ Shperndarje and the Albanian energy sector. Both parties pledge that the agreement contains no acknowledgement of any wrongdoing by any party, said a joint statement by the Albanian government and CEZ Group.
Announcing the deal in a press conference on Tuesday, Albania’s Energy Minister Damian Gjiknuri said “The final solution to the conflict with CEZ not only clarifies the legal status of the company, but finally paves the way to investments in the distribution system, which has been facing a collapse because of mismanagement and lack of investments.”
“There is at least USD 200 million pending to be invested, of which 150 million dollars by the World Bank will be activated starting this year. The prolongation of the legal conflict and legal insecurity in the distribution sector made the investments impossible,” he added.
Speaking of the alternative legal solution to the conflict Gjiknuri said “the filing of a lawsuit by the Albanian government and Arbitration proceedings would take four to six years. The cost of defence would have been millions of dollars and Albania’s success in the trial was not sure.”
Under the deal, the 76 percent stake will be transferred back to the Albanian government while CEZ will be paid 87.1 million euros and 7.9 million euros in interest rates from September 2014 until the end of 2018.
“I am convinced that the amicable solution considerably improves Albania’s image and legal security for foreign investors,” said Gjiknuri.
He said the status quo until the conflict’s resolution in an arbitration would be a dangerous scenario to the state budget considering losses of around 150 million euros a year in the energy sector, mainly due to massive power thefts and that the deal represents only half of annual electricity losses and thefts Albania faces.
The Socialist Party-led government says the previous government led by former Prime Minister Sali Berisha complicated Albania’s position by using state police, stripping the company of its licence, unilaterally taking over administration and not making the company’s technical and financial assessment in time.
The finance ministry says the installments will be paid by the distribution operator’s income and not the state budget.
Energy Community pleased with deal
Dirk Buschle, the deputy director of the Energy Community Secretariat which mediated the deal said he was convinced that entering into and concluding these negotiations were in the best interest of Albania and its electricity consumers.
“Years of neglecting the energy sector left the Albanian energy sector in a very bad shape, with an unsustainably high share of electricity not paid for, the state-owned companies in serious financial difficulties, and investor confidence alarmingly low. In this situation, settling the dispute with CEZ was the only sensible move. Costly arbitration proceedings with an unclear outcome would have created a long period of uncertainty and instability. By preventing the urgently needed deep reforms, they would have taken the whole energy sector hostage and created liabilities far higher than what was settled by the agreement”.
CEZ’s state administration
One and a half years after CEZ’s departure, the electricity distribution operator CEZ Shperndarje continued remaining under state administration, with the Czech company being the formal owner and the Albanian government the temporary administrator, a situation which was preventing much-needed investments in the dilapidated grid.
The investments are key to reducing losses in the distribution system which at around 50 percent are estimated to cost the Albanian government around 200 million euros annually including power imports.
In a recent country report, the World Bank says that the combination of total dependence on hydropower generation, and its vulnerability to weather patterns, the lack of self-generation capacity, and the extremely high level of distribution losses that require significant power imports is adding financial stress to the sector and the economy.
Prague-based power utility CEZ AS had earlier assured it was willing to consider avoiding arbitration if the two sides agree on fair compensation.
CEZ, which was seeking compensation for damage to its investment in Albania’s power distributor, argued the Albanian regulator ordered it to pay state-owned power producers higher tariffs without allowing the Czech utility to raise prices for customers.
CEZ had warned it would claim Euro 200 million in international arbitration while the previous Albanian government claimed that CEZ’s failure to fulfill its contract obligations over imports, investments and reducing grid losses caused the state USD 1 billion in damage.
CEZ Group, which is 70-percent state-owned, operates in around 10 countries, mainly in eastern and central Europe.
Under a unanimous decision taken on January 21, 2013, the Energy Regulatory Entity (ERE) Board of Commissioners decided to revoke CEZ’s licence in Albania, arguing that the company had failed to make compulsory electricity imports, reduce grid losses, make investments, provide all consumers with power meters, pay debts to state-owned KESH power corporation and OST transmission operator, and stop collective power cuts.
CEZ blamed the situation in Albania on tariff disputes with the Energy Regulatory Entity and heavy fines imposed by local authorities.
The hydro-dependent Albanian energy sector faces a chain of debts involving KESH power corporation and CEZ Shperndarje distribution operator which has been under state management since the Czechs had their licence revoked in early 2013. Government officials estimate the debts the energy system operators owe to each other and banks are estimated at 1 billion dollars.
The escalation of conflict
In November 2012, government-CEZ conflict reached its peak after CEZ cut power to debtor water supply companies leaving half of Albania without water and sparking nationwide protests which lasted for only few hours after police intervened arresting several CEZ employees and forcefully reconnected power. The warned extreme measure by CEZ left some of Albania’s key cities such as Durres, Elbasan, Lezha, Vlora and Fier and Korca without water supply for several hours forcing government to intervene after the company cut power to pumping stations in water supply companies which owed the distribution operator Euro 38 million. Government authorities intervened by arresting several CEZ employees and described the measures taken by CEZ as an unprecedented act which severely compromised public security.
Albania’s Energy regulator officially initiated procedures to revoke CEZ’s licence in Albania over the company’s failure to meet contractual obligations on electricity imports, reduce grid losses and not make collective power cuts.
The Tirana District Court banned CEZ to cut power to water supply companies or public institutions until a final and legal deal is reached.
The CEZ Group entered the Albanian market in May 2009 by acquiring a 76 percent equity stake in the Albanian power distribution company for Euro 102 million. CEZ received a 60 million euro guarantee from the World Bank as an incentive to take over Albania’s OSSH power distributor in 2009 but could no longer claim the guarantee after its departure from Albania in early 2013.
CEZ entered Albania during the Czech EU Presidency in the first half of 2009 when Albania also submitted its application to join the EU. Besides Albania, CEZ also has problems in other countries in the Balkans in which it has invested. In Bulgaria, it faces a fine and a withdrawal of a license. In Romania, CEZ is considering the sale of a part of its wind farm owing to a decrease in local subsidies for renewable sources, says the Prague Post.
