[BETA] Fortnightly

Social and political attitudes toward cheap power were a major obstacle to electricity liberalization in Poland; they also may be one in Russia.

The Feb. 1, 2003, edition of Public Utilities Fortnightly contained a pair of articles (Competition Lost, and Superpower Opportunities) about utilities that invested abroad during the 1990s. The pairing of the articles leads to the question of what can be learned from the past to facilitate investments in future opportunities.

The experience from Poland is especially applicable for the future of restructuring the power sector in Russia. Poland, the third largest Warsaw Pact country (after Russia and Ukraine), is the most advanced in the restructuring process, and it bears many structural similarities to the power sectors in both Russia and Ukraine. But Poland was quicker to undertake market economy reforms and, consequently, first to encounter problems. An understanding of those problems can guide investors to a better appreciation of some of the issues that will arise during the upcoming reforms in Russia.

Contagious Excitement

The emerging democratic countries got caught up in the enthusiasm, the wave of power market liberalization, and the power plant development boom that started with the United Kingdom in the early 1990s. As early as 1993, Poland made ambitious commitments to The World Bank, and others, to privatize the power sector. Very early, Poland broke off power generation from transmission and distribution. The national transmission company (Polish Power Grid Co., or PSE) was a monopoly buyer of power from more than 50 individual power generating plants. Electricity was distributed by 33 local distribution companies, all of which had to buy their electricity from PSE. Everything still belonged to the state, however. In the subsequent restructuring, all companies in the power sector were converted from state-owned enterprises (a non-commercial legal structure) to enterprises formed according to the Commercial Code. These were either joint stock companies or limited liability companies. They were expected to function as self-supporting commercial enterprises with a profit motive. This is where the trouble began. The root of the problem was the tradition of Communist Socialism that electricity was cheap-and society expected it to remain cheap. In fact, people looked at the results of liberalization in the United Kingdom, saw that the prices had come down, and concluded the same would happen in Poland. They were watching the building boom in the United Kingdom with some envy. They knew they needed similar levels of investment. New to the world of capitalism, they were ready to try anything. Advisors from multilateral institutions, non-governmental organizations, and prestigious consultants urged them on. The free markets would, could, solve everything.

Benefit to No One?

The unfortunate reality was that restructuring of the power markets in Poland appeared not to benefit any of the various constituencies of the power sector: the consumers, the workers, the support industries, or the managements. Government, however, looked with a hungry eye at the potential revenues from privatizing power generation assets. Early results in places like Hungary indicated that there were a lot of bidders with very generous acquisition budgets and large appetites