It is very difficult to imagine that a private company would voluntarily subsidise the state instead of generating profit. If one is found like that, you have to ask yourself what it will get in return.
Daniel Křetínský sent a letter to Prime Minister Robert Fico in which he “politely” reacted to the publicised price proposal of SPP and the issue of natural gas prices in the context of the government’s social policy. Yet the chairman of the Board of Directors of EHP wrote more between the lines of the letter than in the lines themselves.
First of all, the letter to the PM declares that during the course of 2013 the prices of gas for households will not be increased. We have to remember, though, that the price caps for next year will be decided on in November or December of this year. This means at a time when EPH will still not have a direct managerial influence in Slovensky plynárensky priemysel. A good or bad position for 2013 from the perspective of price caps is therefore being negotiated by a Board of Directors that will realistically not even run the company next year.
From the recently adopted new Act on Regulation we find that price proposals will no longer have to be submitted regularly every year, but only at the beginning of the regulatory period, or rather the last “obligatory” price proposal in the current regulatory period (2012 – 2016) will be the one that is presented at the end of October 2012. The regulatory authority will then fix the price ceiling, which will only change if there is a change to the objective parameters. Assuming that the values of external parameters will not change throughout the whole regulatory period, theoretically this could mean that prices remain unchanged until the end of 2016. But the market doesn’t quite work like that.
The second point is that in his letter Daniel Křetínský states that he noticed the prepared price proposal by which SPP will request a hike in prices next year by 18 to 25 percent. He does not write, however, whether such an adjustment of the price caps would be positive or negative before the sale of Slovak Gas Holding, which owns 49 percent of the shares in SPP. This regardless of whether it is from the perspective of the economic interests of Slovensky plynárensky priemysel or from the perspective of the social preferences of the government. He does not speak directly about whether he is against the Regulatory Office for Network Industries (RONI) approving such a price proposal or not.
Thirdly, in the letter Křetínský assures the Prime Minister that “EPH will give up any claims that it or SPP a.s. would be able to apply in the end against the Slovak Republic on grounds of price regulation in respective arbitration or other proceedings”.
This declaration could be interpreted, for example, in a way that no matter how RONI decides at the end of this year on prices for 2013, EPH will respect them. This formulation can also be understood in a way that EPH is also taking account of the claim against the current French and German shareholders to compensation of losses in the purchase price for the indirect share in the gas company, about which the management of SPP has been talking in recent years and which are supposed to be as a direct consequence of price regulation.
Most important sentence
Fourthly, possibly the most important sentence in the letter is as follows: “This all despite the fact that these steps will necessarily require the absorption of losses (…)”. This fundamental sentence should not be overlooked or underestimated in this discussion. It is extremely difficult to imagine that a private company in which the state holds no interest would change the goal of its business from generating profit to anything else, such as the voluntarily subsidising of the state or its social policy.
The question therefore arises as to whether an agreement, and what kind of agreement, was reached in the triangle of “government – EPH – departing German and French shareholder”. It is possible to read between the lines of the letter to the Prime Minister that the aim of such an agreement could be to satisfy the interests of all involved. The German and French shareholder will sell Slovak Gas Holding at such a price that they will leave from SPP also with compensation of losses caused by price regulation in recent years.
EPH enters the company as an indirect shareholder with the intention that it wants to generate profit despite soaking up losses, this also based on the prices that the outgoing shareholders “battle out” on its behalf and the regulatory authority will either completely or mostly approve them in the end. On the third part, the Prime Minister received a letter that he can interpret as a victory. This regardless of whether RONI decides even before the entry of Křetínsky’s company to SPP to increase prices by five, twenty or more percent.
That is why it is the price decision of the regulatory authority itself that will confirm or disprove the existence of this or some similar agreement. If the new prices for 2013 do not take into account all actual costs and a reasonable margin, EPH will represent an exception to the claim that the primary goal of a private company is to make profit. Furthermore, it will be an example of how a private company subordinates its own economic interests to the political interests of the government, thereby provoking speculations about its motives.
If gas prices were to jump up next year, or more substantially than in recent years, Prime Minister Fico will escort the “insatiable” German and French shareholder from SPP with the situation that a completely different party will profit from the prices that their managers negotiated in negotiations with the regulatory authority. The one that will no longer have to adjust them in 2013 and so keep its publicly declared promise.
Written by Michal Hudec (publisher and analyst at energia.sk)
Notice: The opinion was published by SME daily (29/10/2012).