An immediate departure of Czech energy group CEZ from Albania would mean a loss of almost EUR200m for CEZ, according to a report by the Moody’s rating agency
TIRANA, Nov. 26 – Albania’s Energy Regulatory Entity (ERE) has ruled Czech-owned distribution operator CEZ Shperndarje, which is seriously considering leaving Albania and addressing arbitration court over disputes with government, will have to compensate state-owned power corporation KESH over its failure to make compulsory electricity imports this year. In a meeting held this week, ERE decided that CEZ Shperndarje, the Albanian subsidiary of Prague-based CEZ Group, will compensate power corporation KESH with the real costs of electricity imports the Corporation has been making on behalf of CEZ including the cost of overdrafts and loans it has taken for this purpose. Since last summer, CEZ has failed to make compulsory imports to cover the high grid losses in the Albanian distribution system, currently at around 50 percent, nearly double compared to three and a half years ago when CEZ bought 76 percent of shares for Euro 102 million. Power corporation KESH, which has been making continuous power imports during this year because of prolonged drought affecting domestic hydro-electricity generation, says CEZ’s failure to fulfill its obligation of covering grid losses with imports has further aggravated its financial situation. CEZ, which is also in severe financial straits, says the situation is a result of Albanian consumers not paying electricity bills.
ERE also ruled this week that KESH will transmit electricity in interconnection lines without needing to pay fees to other state-owned OST transmission operator.
Government awarded KESH 2 billion lek (Euro 14 million) from its contingency funds in early 2012 to make electricity imports, a Euro 40 million few months ago and is also negotiating with the World Bank over a new USD 100 million loan to cash-strapped power corporation to secure electricity imports. Prolonged drought which led to water levels in HPPs nearly reaching their stoppage point, and a chain of debts by Power Corporation KESH and Czech-owned distribution operator CEZ Shperndarje further complicates the situation at a time when daily imports account for around two-thirds of the country’s electricity needs and cost the state budget nearly USD 1 million each day. Recent rainfall has increased water levels in the biggest Fierza hydropower plant by only 10 metres to 270 metres which is around 20 metres below its historical average rate.
State budget at risk
The state budget has been severely affected by loan guarantees to state-owned power corporation KESH on electricity imports and CEZ’s failure to cover grid losses with imports in recent months. Introducing the 2013 draft budget at the parliamentary economy committee, Finance Minister Ridvan Bode said the need to remove the legal ceiling of 60 percent of the GDP for the public debt was a result of the need to guarantee power supply for 2013. “The energy situation is the country is difficult and we cannot pretend we don’t know anything. We will do everything so that KESH imports electricity until the issue with CEZ is resolved in order to guarantee uninterrupted supply of power for consumers and businesses. Government was forced to remove limits on KESH’s debts, and debts on behalf of the corporation must not pass through Parliament which is dissolved in May and this is why couldn’t leave spaces on this issue as long as conflicts remain unresolved,” said Bode.
ERE’s head Sokol Ramadani said CEZ will have its licence revoked if it does not reflect during the 30-day negotiations. “Since we are in the trial period, I cannot say whether CEZ will leave or not. Since January, they have failed to cover losses. If they don’t reflect they are on the verge of departure from Albania. Their licence is a failure. They are not carrying out imports on losses,” said Ramadani.
Meanwhile, Energy Minister Edmond Haxhinasto said he was optimistic the dispute with CEZ will conclude successfully. “We are within all legal deadlines and I am optimistic that it will successfully conclude. This is a moment when each party wants to guarantee the respective documentation on such contract with great importance to the country,” said Haxhinasto recently.
Moody’s: CEZ to lose Euro 200 mln over exit
An immediate departure of Czech energy group CEZ from Albania would mean a loss of almost EUR200m for CEZ, Business New Europe said this week citing a report by the Moody’s rating agency. The departure would nevertheless prevent CEZ from incurring further losses in Albania and would thus protect its future revenues, according to Moody’s. IF CEZ decided to leave Albania, it would write off EUR102m for its initial investment in Albanian power distributor CEZ Shperndarje and another almost Kc100m that it has transferred to its Albanian division so far. In a sign that it is heading for the exit, CEZ last week applied to claim a Euro 60m World Bank guarantee on its initial investment, which could minimise some of the losses it is facing in Albania.
“The cash effect from an immediate exit from Albania could be less than Euro 200m, as CEZ stopped providing any funding to its Albanian subsidiary this summer. A full exit from the investment would prevent the accumulation of further losses, protecting CEZ’s future earnings. Furthermore, based on 2010 figures, the exit would save CEZ up to Czk4bn (Euro 160m) of investments originally planned over the next five years,” writes Scott Phillips of Moody’s, the rating agency, adding that any write-off “is clearly negative for CEZ”.
World Bank urges amicable solution
The IBRD, one of five institutions that make up the World Bank Group, says it has been officially notified by CEZ Shp쳮darje (CEZ SH) of the existence of a claim against the Government of Albania. “Pursuant to the relevant agreements entered into by the parties, the Government and CEZ SH are required to follow specific procedures to verify CEZ SH’s claim which will trigger a sixty days conciliation period intended to resolve the claim in an amicable manner. We encourage both parties to engage in good faith in this Conciliation period,” says the IBRD.
CEZ says it has launched legal steps to activate a 60 million euro ($76.8 million) guarantee issued by the World Bank for its power-distribution operations in Albania. CEZ received its guarantee from the World Bank, already active, as an incentive to take over Albania’s OSSH power distributor in 2009. While CEZ is seriously considering leaving Albania and getting its Euro 60 mln guarantee, World Bank’s Regional Coordinator for Southeast Europe Jane Armitage said few days ago while in Tirana the Bank is “certainly not ready to execute its guarantee at this point.”
At a time when the Albanian government-CEZ divorce over the management of the country’s problematic power distribution network seems inevitable, both parties are preparing for a solution that would come from an international arbitration court. While CEZ has already hired U.K-based Schindlers law firm to negotiate its disputes, the Albanian government has also recently picked U.S Patton Boggs. CEZ has invested roughly 120 million euros ($155 million) in its Albanian unit, but due to ongoing regulatory and commercial hurdles the company posted a first-half 2012 loss of USD 119 billion.
Konfindustria concerned
Albania’s business community represented by the Konfindustria Association has called on the Albanian government to prepare and unveil its Plan B guaranteeing power supply to household and business consumers despite the deterioration of relations with distribution operator CEZ. The situation appears especially problematic after the latest ERE decision warning to revoke CEZ’s licence. “The never-occurred attempt by CEZ to cut power to water supply companies was a clear menace to the business community and manufacturing industries in particular. Problems with electricity supply would have severe consequences to domestic industries under global crisis conditions, says Konfindustria.
ERE examining CEZ’s licence
The government-CEZ conflict reached its peak on November 16 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. Following the reconnection of power to water supply companies later on Friday, Nov. 16, ERE’s board of commissioners held an emergency meeting deciding to start procedures for the removal of CEZ’s licence. The decision had been postponed three times until then.
In its latest decision, the Energy Regulatory Entity (ERE) determined four conditions CEZ has to meet within 30 days or else it will have to leave Albania. The four conditions are related to the resumption of electricity imports to cover grid losses, the submission of the audited financial balance sheet for 2012, not making collective power cuts, and normalizing financial balance sheets. “If CEZ intends to stay here, it must consider it very carefully,” said ERE head Sokol Ramadani. CEZ has not guaranteed uninterrupted supply of power, it fulfilled only 7 percent of its 2012 investment plan while grid losses have reached a record 50 percent, the ERE head added.
The Tirana District Court recently banned CEZ to cut power to water supply companies or public institutions until a final and legal deal is reached, ruling that the distribution company be fined 100 million lek/hour for each power cut.
