US WANT TO EUROPE

The combination of asset sell-offs by major European energy players - most notably Germany's E.ON - and increased concern over energy supply security has served to bring back the decade-old utility privatization trend in Central and Eastern Europe. States are attempting to get their hands on long-term gas supply contracts with the Russian natural gas exporter Gazprom and pave the way for a multi-commodity energy supplier business where they can influence end-user prices directly. If mismanaged, such trend in the medium to long-term may reduce investments into pipelines and thus decrease the desired security of supply.

The former socialist Central and Eastern European countries reformed their state energy enterprises upon joining the European Union a decade ago. The main objectives of EU energy sector regulation, such as consumer liberalization, structural disintegration (unbundling), competition and regulated market mechanisms, in most of the CEE countries resulted in at least partial privatization of the main energy companies. Some CEE countries, for instance, Hungary, implemented privatization even before joining the EU.

Often it was investors from the Western European countries such as Germany (in the Baltic States and some other countries together with Russia's Gazprom in joint venture), Italy's Enel, French utility Gaz de France that stepped in to buy the assets.

However, after a decade of a sweeping wave of utility restructuring and privatization in Central and Eastern Europe, the state role has been getting back the grip. In 2013-2014, several countries, such as Lithuania, Hungary, Estonia, and Slovakia, were returning the main energy companies (either the network part, or end-user supply business, or both) to state ownership.

In Lithuania, nationalization of the main natural gas incumbent was a result of the process of implementation of the EU's Third Natural Gas Directive in 2011. The Lithuanian politicians imposed the ownership unbundling on the main incumbent natural gas company Lietuvos Dujos. Previously vertically integrated company Lietuvos Dujos was restructured: new spin-off company Amber Grid became the natural gas transmission system operator, Lietuvos Duju Tiekimas supplies gas to end-users, and Lietuvos Dujos remained a distribution system operator.

By 2014, former owners Germany's E.ON and Russia's Gazprom sold the shares of Lietuvos Dujos to the Lithuanian state-owned electricity company Lietuvos Energija and of Amber Grid to the state-owned company EPSO-G. E.ON also sold its minority shares in the Lithuanian electricity distribution system operator LESTO to Lietuvos Energija.

The next step was a consolidation process that has started by 2015. Lietuvos Energija started to merge the Lithuanian electricity distribution system operator LESTO with the gas distribution system operator Lietuvos Dujos. A supplier Lietuvos Duju Tiekimas is merged with a new company Litgas, which a designated gas supplier to the brand-new Lithuanian LNG terminal. At the same time, electricity distribution company LESTO, natural gas supply company Lietuvos Duju Tiekimas and distribution system operator Lietuvos Dujos started to serve their customers in joint centers located in major cities of Lithuania. In other words, once the assets landed back into Lithuanian state hands, the process was started of consolidation of the similar activities in national utility companies and delivering joint services.

Hungary has chosen a strikingly similar model of energy market structure: previously privately owned natural gas companies were placed under the state electricity company. The Hungarian state started rolling back the privatization in the natural gas market by 2013. Hungary's state-owned utility MVM acquired a 49.8 percent stake in Fogaz, gas distributor to households and business in Budapest, from German utility company RWE. At the same time, MVM acquired 100-percent shares in largest gas supplier Gas Trade Ltd. (E.ON Földgáz Trade) and Hungarian Gas Storage Ltd (E.ON Földgáz Storage ) from E.ON. MVM Group became a vertically integrated group of companies in multiple areas of the energy sector. Moreover, MVM acquired a 50 percent stake in gas trading firm Panrusgaz from Germany's E.ON under an earlier option agreement. Panrusgaz is a joint Hungarian-Russian gas venture, responsible for the import of natural gas from Russia and holds the long-term gas supply agreement with Gazprom.

In addition to all the acquisitions, the Hungarian government crafted the plan to create non-profit First National Utilities Company (ENKSZ), which will supply gas and electricity, and eventually district heating to the Hungarian domestic consumers. ENKZ subsequently have announced its plans to acquire the universal electricity supply business of ELMŰ-ÉMÁSZ, the electricity supplier to Budapest and Northeast of Hungary, controlled by Germany's RWE Energy.

Neigbhoring Slovakia took a similar path. In 2014, the Ministry of Economy of the Slovak Republic increased its shares of the main gas supplier for households Slovenský plynárenský priemysel (SPP) to 100% after former strategic investors E.ON Ruhrgas and GDF SUEZ decided on divestment. The SPP supplies both electricity and gas and promotes savings to consumers by being a single supplier of both kinds of energy. The Slovak prime minister revealed that the rationale behind the acquisition of the company was gaining full control over the calculation of the end-user energy prices.

It may be not the final energy utility shopping carried out by the Slovakian government. Italian utility Enel has launched a program to sell its holdings in Slovakia and Romania including its 66% stake in Slovakian utility and nuclear operator Slovenské Elektrárne, which generates almost 80% of the overall electricity production in Slovakia. The tender is not yet over; however, and the Slovakian government shows interest to acquire control in the company.

There are two things in common between those instances: high import dependence on Russian Gazprom and expiring long-term agreements with this supplier combined with the political concern over the utility prices, possibly fueled by the still recent global financial crisis. Both Lithuanian and Hungarian long-term agreements with Gazprom are due to expire in 2015, and now the state will stand as a main negotiator for new contracts. Even in the Slovakian case, where the SPP and Gazprom long-term contract is due to expire in 2028, the government took on the shares of SPP after renegotiation of the terms of the agreement.

Another reason is for the state to take on direct control of end-user utility prices. As the European energy regulation rules require independence of the energy regulators from both the industrial interests and political interests, it diminishes possibilities to regulate prices based on political will. Nationalization of energy companies that are active in the retail business allows states to control energy prices directly even before they reach the energy regulator. Whereas the main political argument in support of the changes in Lithuania is the energy security, the Hungarian and Slovak counterparts are public about their intentions to keep the end-user prices low.

The consolidation of the energy companies into multi-commodity businesses and providing opportunities to pay single bills for many kinds of energy indeed may offer efficiency and savings. There are risks, however. If the state-owned energy suppliers start selling energy at artificially low prices, it will drive the competition out of the market. In Hungary, two foreign-owned gas supply companies, E.ON and GDF Suez already returned universal supply licenses in late spring 2015, in June 2015 followed by Tigáz, which is owned by Italy's Eni. Whereas consumers may enjoy low energy prices in the short term, energy price cuts, if improperly managed, in the long-term may result in worsening consumer services, a lack of investments in infrastructure and thus deteriorating security of supply.

naturalgaseurope.com