Banks put the Squeeze on Energy Contracts Bill

A new law may trigger an expensive war with the banking industry, a war that may go on at the expense of all electricity users.

By Kamil Tchorek

The drafting process of a new Energy Contracts Bill has become strained, as several major banks and power companies lobby to ensure that the bill - as originally drafted - will never become law.

At the law firm White & Case, which specializes in providing legal services to the power sector, Igor Muszyński says that the proposal is heavy-handed, imprecise and would violate the rights of both investors and banks involved in the energy sector.

On the government side, the bill is presented as an anti-competition measure. Wojciech Tabiś of the Department of Energy at the Ministry of Economy, Labor and Social Policy says "Long-term contracts cover sixty percent of electricity consumption in Poland. We are forced to end these under EU Directive 54, which came into force in the European Union earlier this year. The virtue of this law is that it will pave the way for opening the market for competition in 2006."

But opponents argue that the proposed legislation is flawed and even unconstitutional. Article 21 of the First Chapter of the Polish Constitution protects "ownership and the right of succession", and states that expropriation may be allowed "solely for public purposes and for fair compensation and due process of law." And in this case, "fair compensation and due process of law" is the crux of the matter.

The proposed law would liquidate long-term contracts in the energy sector, thereby cutting off a source of bank investment revenue. The bill provides for a state 'compensation company', which opponents of the legislation fear will be answerable to no one.

The banks have voiced their concerns, and hope that the bill will be quickly and radically re-worked before its submission deadline of September 30th.

"The ball is in the other court," says Robert Moren, spokesman for Bank Pekao SA. "We have made it very clear to the government that we would like to have our long-term contracts guaranteed so that for us, nothing effectively changes on the current situation. Of course, if the compensation is large enough then we will be pleased with that alternative."

Some political analysts, at their most cynical, speculate that the bill is a crude money-making ploy by a government which knows that the banks will have to move their investments out of energy and into bonds.

In the event of the bill succeeding, foreign power companies with major stakes in the domestic energy sector, including Electricité de France and the American firms Enron, AES and PSEG, could be the next group of foreign investors to get stung by unforeseen legislation. According to legal experts, the bill poses a significant risk of the compensation being inadequate and unfair, providing no legal remedy to power companies if such a situation occurs.

Poland's direct foreign investment in the energy sector has slumped to a five-year low, and some blame this on a record number of controversial compensation arrangements. This may be the bill's opponents' trump card, as President Kwaśniewski, increasingly sensitive to the issue, may block the bill if it seems to have been weighted against foreign investors.

The final burden of the bill could rest on individual households. "Termination of the long-term contracts is supposed to lower the price of electricity by introducing competition," White & Case's Igor Muszyński says, "whereas the outcome could be the reverse. The government could create a battlefield with power companies and banks, while alternative solutions - that would enable an open market and would respect investor's rights - can be proposed. This law would go too far and would harm too many people, with too little benefit for anyone other than the government."