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Acceding to Succeed

How joining the EU may transform the Central and Eastern European electricity sectors
Fortnightly Magazine - July 2004

the cash collection issue, the problem of bill nonpayment or regular late payment continues to be a concern in Romania and Bulgaria, and the other countries of the former Soviet Union. Cash collection rates for the region vary dramatically. For the countries that joined the EU in 2004, the average rate of cash collection was 95.6 percent, while Romania and Bulgaria had 62 percent and 85 percent respectively. 9 Cash collection is essential to the financial viability of the electricity sector and thus is an important first step in the reform process.

Progress Continues

While this article has focused on the issues that still remain to be accomplished in accession countries to meet the EU electricity directives and on the obstacles that could inhibit private sector investment, significant and impressive progress has been made in reforming the energy sector in most of these countries. There are many ways investors can address these obstacles. Being fully aware of the regulatory and market context in the target country is of paramount importance. Exhaustive modeling of different possible regulatory scenarios to determine asset value will be essential in making realistic acquisition bids. In addition, attempting to have some of the market rules and regulations confirmed in the sale or privatization contract also can be useful for gaining more certainty about future cash flows from the investment. Finally, ensuring that the investor has recourse to an international body of arbitration in the case of future disagreement will help to give the investor more confidence that investment will be appropriately reimbursed.

Endnotes

  1. Exemptions are likely for isolated markets such as Greece and the Baltic states.
  2. London Economics International LLC, , Cambridge, MA: London Economics Press, forthcoming.
  3. Lithuania is somewhat of an exception to this category as it is larger than the others, and has substantial overcapacity. As a result, it has more than one generator, and a few private investors have purchased small plants.
  4. The EU and the International Energy Agency (IEA) also are encouraging the development of a regional electricity market in Southeast Europe as a way to integrate this region into the European electricity system. Participating countries are Albania, Bosnia and Herzegovina, Bulgaria, Croatia, FYR Macedonia, Romania, Serbia, and Montenegro.
  5. Kennedy, David, EBRD Working Paper No. 78, February 2003.
  6. Richards, Mark and Georgia Quick, "Eastern Europe, Nuclear and EU Accession," , Oct. 31, 2002.
  7. , London Economics International LLC.
  8. , "Hungary Wind Power," July 2003.
  9. Kennedy, 2003.


Key Points of EU Energy Legislation:

  • Create an independent regulator
  • Oblige utilities to produce public audited accounts
  • Unbundle accounts of vertically integrated utilities
  • Restrict legal barriers to entry in generation
  • Ensure transparent, fair third party access to transmission and distribution wires
  • Ensure the independence of transmission system operators
  • Allow consumers to choose their supplier (2004 for non-residential; 2007 for all)
  • Delineate public-service responsibilities

Region-Wide Hurdles:

  • Evolving market structures
  • Lack of fully independant and experienced regulators
  • Unwillingness to pay full cost of energy
  • Inetrnal opposition to private sector
  • Corruption
  • High levels of technical and commercial inefficiency
  • Challenges in valuing assets and companies

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