State energy conglomerates cross finish line

The two national energy companies are now taking shape – the project finally received government approval at the end of last week. Specialists say this is just a short-term solution, as the formula adopted merely channels money from the profitable energy companies to the less efficient ones.

By Dana Ciuraru

The reorganization of the Romanian energy sector by forming two national energy companies is now finalized as the government has signed the project that OKs the forming of the two energy champions.

After the project passed through the Supreme Council of National Defense (CSAT) last week, it was awaiting only the final approval of the government, which came late on Friday last week.

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According to the draft of the final project, the first national company, to be called Electra, will include the energy complexes Turceni, Rovinari and Craiova, the nuclear energy producer Nuclearelectrica, the Hidroelectrica branches of Ramnicu Valcea, Sibiu and Targu Jiu, the Hidroserv branch and the National Company of Lignite Oltenia.

The second national company, Hidroenergetica, will be established by merging Electrocentrale Deva and Electrocentrale Bucharest, Termoserv Paroseni and the Paroseni branch of Termoelectrica, the Hidroelectrica subsidiaries in Bistrita, Buzau, Cluj, Curtea de Arges, Hateg, Portile de Fier, Oradea, Sebes and Slatina and part of the National Hard Coal Company. After the splitting and merging processes, Hidroelectrica will cease to exist.

The new entities will be recorded in the Trade Register after approval is obtained for the merger decision. The share capital of the newly established companies will be formed by taking over assets and liabilities of the subsidiaries and branches, set out on the balance sheet at December 31, 2009, which will be updated. The assets determined to be public property will be run without being included in the equity.

All the analysis and studies on this topic show that the best way to achieve these goals requires one of the companies to produce lignite based power, using part of the potential hydro and nuclear fuel and the other to do so based on coal and using other parts of hydro potential. This solution allows the two companies to be close both in terms of costs per MW/h produced and in terms of market share, writes the project draft.

New firms take over debt

Turning to the operational mechanism, the project draft says trade between the two companies will be conducted only on a contractual basis, while the Ministry of the Economy will be required to verify compliance with monthly disbursements.

Also, the restructuring programs approved by the companies will continue to be valid. The Property Fund shares from the reorganized companies and their subsidiaries will maintain the equivalent value in the start-ups.

The two national energy companies, which will become operational by mid-year, will be forced to assume all the obligations of the companies taken over, including internal and external loans guaranteed by the state. They will also need to put up certain units as collateral for the repayment of credit.

In order to guarantee the repayment of loans secured by the state, mortgages on all the immovable properties of newly established companies will be set up along with any other security deemed necessary to cover the sums due the Ministry of Finance and Financial Institutions bank lending, reads the document.

The new companies are also obliged to provide financial sources for environmental investments from European funds and other resources. Initial draft legislation establishing the two national companies, developed last year by the Ministry of Economy, did not include these measures.

Under the project draft, the two companies will assume all the rights and obligations arising from their relations with third parties including ongoing litigation. Moreover, the pair will take over the offset obligations and related outstanding debts resulting from internal and external loans guaranteed by the state or taken out directly by the state.

Commentators cast doubt

The only effect on the energy sector, say commentators, is that it will solve some of the state’s financial problems. The money will go from profitable companies to loss-making ones, but this is a short-term effect. Experts argue that in the long term this approach will not lead to more efficient companies. At the same time, it is unlikely that the two energy companies, Electra and Hidroenergetica, will attract investment if they do not have ratings.

“We will still see loans and state guarantees for commercial companies rather than see them in health and education. State companies make little profit and cannot make investments. We will see investors avoiding Romania because they go where there are not threatened by dominant and discretionary state energy producers,” said Jean Constantinescu, president of the Romanian National Institute for Energy Development (IRE). In his opinion, one of the objectives pursued by the reorganization is simply to privatize the hydro energy producer.

The creation of two big energy companies has split opinion. Both specialists and representatives of state institutions believe that the mammoth companies in the energy sector might lead to the creation of dominant market positions which could result in price rises. As a result of these fears, the Competition Council has already begun an investigation to determine the effects of the government’s decision to establish two national energy companies on the competitive environment of the energy market. 

dana.ciuraru@business-review.ro