Friday, August 17, 2012

Hans-Gilbert Meyer: I’ve never heard the argument for ownership unbundling

Slovenský plynárenský priemysel (SPP) is preparing for market entry in Hungary around 2015. Hans-Gilbert Meyer, the incoming chairman of SPP, also admits that crucial arguments of SPP weren’t reflected in the commenting procedure of the newly approved energy legislation in Slovakia. According to him, the procedure did not create enough space for market players to comment.  


You are the incoming Chairman of SPP. What is your evaluation of the current status quo in the company?

When I look at the next 12 months as a Chairman of this company, I see a number of tough challenges in front of us. The first one is the implementation of the third liberalization package of the European Union, secondly, the long-pending issue of the wrongly set gas prices in the household market. The third and ongoing challenge is the reinforcement of the market leader position of SPP in Slovakia and a move towards becoming a multi-commodity energy provider. Further topics include our business activities in the electricity market, strengthening of our international business by further developing our Czech-based daughter company and preparation for market entry in Hungary. Finally, of course, it is the continuous negotiation with our main gas supplier in order to provide Slovak customers with the most beneficial prices.

When I interviewed your predecessor, Dr. Achim Saul, last year, he was not inclined to discuss the then rumored internal changes in the SPP ownership structure, particularly in the shareholder structure of the Slovak Gas Holding. More than a year later, how has the situation evolved and what are the implications for the Slovak gas market?

I am not going to comment on this. The answer is the same as a year ago. This is purely a question for our shareholders, while we are the management of SPP.

I’ll try to ask approach this from a different angle. One of the possible outcomes of the evaluation and negotiation process is that the government will again acquire a majority stake in SPP. Do you want to comment on that?

No.

Let’s move on to some of the challenges that you mentioned earlier. What is your reading of the new energy legislation passed by the current government? What are some of the risks and some of the advantages of the new law?

This is a very complex question. Let’s start with the third energy package and the options for unbundling, or separating the vertically integrated undertakings as prescribed by the EU law.

You know that all countries can choose between three options, whereby the ownership unbundling and the so-called ITO model (i.e. independent transport system operator) are the most important ones. Slovakia has been planning for ITO model since beginning of discussions at the EU level and therefore the shift towards OU is significant. Although Slovakia is a very small country, SPP is a strong player in the gas market, which is able to talk to other big companies within Europe on eye level. Ownership unbundling will clearly weaken the current position of SPP as a key energy player in the CEE region, whereas ITO would ensure it. ITO is a feasible possibility allowed by the EU. ITO model gives the system operator the desired independence and meets the objectives of the third package at the same time.

It is very important that a small country like Slovakia keep such a strong player, who can contribute to the reliability and security of energy supply. It is also important to realize that Eustream significantly contributes to the stability of SPP and, if the two are separated, it will be rather challenging for SPP to meet its obligations of the key and backup natural gas supplier in Slovakia.

As far as we know, Slovakia has always acted in favor of the ITO model within the EU and at home as the most adequate model. The sudden shift towards ownership unbundling is surprising and difficult to understand from our point of view.

To summarize - ownership unbundling is definitely not the right way to increase gas security and supply reliability in Slovakia.

Would you say that ownership unbundling is your biggest concern at the moment?

When I look at how the third package is supposed to be implemented, our concerns are indeed big. I do not take issue with the third package itself. I have a problem with how it is going to be implemented as far as the unbundling issue is concerned.

I’m assuming you’re doing all within your powers to convince the government that this is not a good step. What is the response that you’re getting? We have a social democratic government but a Minister of Economy who, one could say, is an industry insider. How is this affecting the government’s willingness to listen to your arguments?

We are prepared to present our views whenever possible. However, the commenting procedure did not take place as we would like to see it happen.

What are some of the problems with the process?

I understand that Slovakia is very much in a hurry because the time, in which they have to implement the third package, has been over since March last year. So we are more than a year over the time. And now the government is under pressure, because they are afraid of being fined at the end. On the other hand, it is not understandable that such an important issue like, for example, ownership unbundling, new regulatory law, and new energy law is being passed in such a fast procedure that related parties like suppliers and customers are not properly heard in this process. Therefore we use all available possibilities to raise our voice, but what we see at the moment in the law as it has been passed in the first reading, I must say that we do not see our comments there really reflected.

Let’s parse this issue in a bit more detail. What is the big argument in favor of ownership unbundling, if you were to try to understand the government’s position? What is their thinking?

I don’t know why they opt to go for ownership unbundling. I’ve never heard any arguments in favor and after a proper analysis, we came to the opinion that it the ITO model is clearly the better solution for Slovakia.

SPP head of energy law and regulation, Mr. Henrich Krejci, recently said in an interview that the change from the initially planned ITO model of the gas transit system operation to ownership unbundling between SPP and Eustream would weaken Slovakia’s position on the natural gas map of Europe. Why would that be the case?

In this respect I must say that size really matters. There are two major implications of the OU approach. One concerns SPP as the country´s leading gas supplier with special obligations related to energy security. One of the pillars of the company´s stability is Eustream and its sale would logically lead to weakening of SPP’s financial strength and also ability to fulfill its role of a last resort supplier. The second, maybe even more crucial, implication relates to Slovakia and its position as an important gas transit corridor in Europe. If you take into account things like importance of negotiating power, need of significant investments into gas infrastructure in forthcoming years and ability to secure and diversify gas supplies then OU is not the way forward.

Can we expect any price effects of the implementation of the third liberalization package in Slovakia?

As for the Regulatory Act, I must say that regulation is by far not a guarantee for fair and sustainable pricing. The regulation can even be misused for market distortion and therefore has to be very carefully set according to very clear criteria. The only driver for sustainable, appropriate pricing is active competition. It is also what EU’s third liberalization package wants to achieve. The intention is not to regulate, the intention is to facilitate competition. And this is what we should also try to do in Slovakia.

If I look at the situation at the moment, I must say that we have already well-functioning competition in Slovakia. Last year we had 19 companies selling gas, the year before we had 10. Currently, there are roughly 25 competitors active. And roughly 140 companies are holding a license, according to my information.  Eight companies are also already active in the household market. So the competition is there and it’s well functioning. I’m of the opinion that we do not need any regulation at all anymore in the gas trading business.

Do you get a sense that there is an understanding of that on the government side?

This is difficult for me to assess. I only see the passed legislation, which I’m assuming is reflecting the thinking of the government.

Presumably, SPP is not too excited about some of the elements of the new energy legislation, particularly a step towards regulation of prices for small and medium sized enterprises and the relatively loose definition of socioeconomically vulnerable customers…?

Absolutely, you are right. These are big problems in the passed energy law and especially the Regulatory Act. It is ambiguous, definitions are vague. When it comes to energy poverty, the definition contains a phrase “substantial part of the income”, not specifying what it exactly means. As for vulnerable customers, they are taking into account all households and SMEs and not considering that there may be some very rich households, which are for sure not vulnerable customers. We have had regulation for a couple of years and we are at a point where it should at least be considered to differentiate more, if not cancel it completely, which is what I would prefer.

How would you describe the current relationship between SPP and the Regulatory Office for Network Industries? Do you see any room for improvement?

We respect the authority of the regulator and we always comply with all laws and duties arising from the law. However, our duty as management is to manage this company in a sustainable, most effective and profitable way. For us it is crucial to have a predictable and transparent regulatory environment as well as an independent and impartial regulator. And here, I have sometimes problem to believe that this is the case. You know about the double function of the regulator – the current draft bill anticipates that the Head of the Office will also be the head of the appeal body, the Regulatory Council . If you look at price setting, I must say that from time to time I have a feeling that prices are set upfront ignoring the economic environment and the world-marked prices, so ignoring the reality.

This ongoing clash is nothing new. As an incoming Chairman, will you be looking at innovative ways to get your point across to the regulator?

There’s really nothing innovative I can do. The only thing I can tell you is that we keep making our point and trying to change things in a proper way.

SPP has been reporting losses in the household market segment for a couple of years now. Can we expect this conflict regarding household prices to be settled through courts?

It is publicly known that we have started several court cases and we are now waiting for the decisions.

Can you briefly summarize SPP’s economic situation “by numbers”? What are SPP’s strong and weak areas?


If you look at the results from 2011, they were good. We reported consolidated profit after tax of 564 million euro. This is roughly the level of 2010. In the time of fiscal consolidation it is important to mention that SPP is the biggest contributor to the state budget from all companies in Slovakia.

We can say that our international gas transmission business was strong EBIT provider to achieve this. The distribution business was also stable, well-functioning part. However, each activity we are doing should be able to stand alone. But in the household gas trading business, this is not the case. We are recording losses since 2008 and in total we have recorded a loss of almost 200 million euro and the situation is deteriorating. I can tell you that also this year we’ll run a loss of up to several tens of millions euro, so I don’t think you can call this a sustainable business. Things have to change.

In addition to the often mentioned stability of gas supplies, what are some of the other ways SPP is planning to attract and keep its customers in ever increasing competition in the gas market?

Our product offering for our business customers is versatile, competitive and I am happy to say that also very successful.  On top of that we have a sophisticated and tailored system of customer care and support – ranging from web-based tools to account management system for our key clients. We have several special offers for our household customers. We have entered the electricity business for SME as especially smaller customers prefer to have a single energy supplier. Additionally, we have just started a pilot project of electricity sales to households, which we are planning to expand. These are measures we are taking, as the competition is alive, and we have continuously to develop in order to stay attractive.

Can you explain your internationalization strategy via Czech Republic and Hungary?

In the Czech Republic, our daughter company SPP CZ has been operating in 2008 and has already become a significant player in the market. In 2011 SPP CZ was the third biggest importer of gas to the Czech Republic with the contracted volume of gas of roughly 590m m3. Our sales keep increasing despite the fact that the market in the Czech Republic is highly competitive. But we are used to that and therefore we are successful there.

Secondly, there are plans to connect the Slovak and Hungarian pipeline systems and SPP is hence preparing its market entry into Hungarian market for 2015.

What is the stage of your negotiations with Gazprom, your main supplier?

This is an ongoing process. The whole European gas market has changed and it’s not a secret that all big customers of our Russian supplier are in talks with them and this is what we are also doing. We are constantly working to get the best terms for our customers.

You have rich experience working in the gas industry in Europe.  What is your prognosis of the future development on the world gas market, particularly focusing on the so-called “war over the European market” between traditional suppliers with long-term contracts with pipeline deliveries and LNG suppliers?

There are different ways to get gas to a country. You can do it via pipeline and you can do it by a ship, if you are close to a port. But Slovakia is a landlocked country, so we can only buy LNG, put it in a pipeline and bring it to Slovakia. If this is more competitive than the pipeline gas is a question. At the end of the day, you are operating in the same energy market.

Notice: The interview was prepared in cooperation with energia.sk's Mrs. Michaela Jacová.

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