Power industry competition still stifled by agreements
More customers will enter the energy market in January. But will this be enough to develop the free electricity sector?
Polish power market liberalization is expected to take a step forward on Jan. 1 as the number of energy users will be increased to include those who purchase more than 10GWh (gigawatts per hour) annually. Currently, the right to select a power supplier is given only to customers purchasing more than 40GWh per year.
This means that from January, customers representing about 50% of the total capacity of the Polish electricity consumption market will be able to shop for cheaper power. However, practical experience shows that taking advantage of competition among electricity suppliers is not an easy task and could be made even more difficult in the future.
Cases where end users have chosen to quit buying their electricity from local power distribution companies are rare. There are several reasons for this, but most of them result from the legal framework applicable to the Polish power market.
At the end of 2000, the government announced it wanted to increase substantially the level of competition by resolving the issue of long-term power purchasing agreements, which today cover just under 70% of generating capacity. The government authorized a transmission system operator - Polskie Sieci Elektroenergetyczne (PSE) - to convert long-term contracts into financial agreements. Under the proposed structure, power generators are supposed to sell power on the free market to PSE. PSE then has to enter into agreements that are intended to provide compensation fees to generators in cases where the power plant is unable to earn enough money in the free market to cover its expenses. These cases include the need to repay debts that are undertaken through the long-term contract to finance investment projects.
The proposed system failed to be implemented mainly because the laws that were supposed to provide a legal background for this proposal were ambiguous and created legal problems with, for example, value-added tax (VAT). The problem remains unresolved and there has yet to be issued any information about whether the new government supports the proposed system. If so, to implement the system successfully, substantial changes in the energy and tax laws are required.
As well as the 70% of the market locked up in long-term power purchasing agreements, a further 10% can also be closed to competition by the introduction this year of the requirement of local power distribution companies to purchase power from combined heat and power plants. Such a solution is aimed at the optimization of the costs of heat produced in cogeneration. However, it has served to close an additional piece of the market to free competition.
The mirror purchase obligation of local power distribution companies was introduced regarding renewable power. Renewable power is, for the time being, a symbolic portion (little more than 1%) of the total generation capacity in Poland, but if the legal obligation of mirror purchasing remains in force, it may increase significantly soon.
The existing legal regulations also limit the alternatives for end users. As recently as October, the Anti-monopoly Court, which hears appeals against the decisions of the Energy Regulatory Authority (ERA), agreed with the ERA in its interpretation of the definition of a customer under the Energy Law and refused to accept that a major supermarket chain could count the demand from all its shopping outlets in various parts of Poland to be eligible to purchase power on the free electricity market.
The court agreed with ERA that the annual energy costs for each facility should be counted separately. Although group-owned chains of shops or industrial plants joining together to purchase power is common in other markets, this is not the case in Poland, according to Polish regulatory bodies and courts. As a result, Polish electricity customers must wait until the market is fully liberalized, i.e. until Dec. 5, 2005.
Another example of a law that harms competition in the supply of power is the ordinance of the economy minister, which requires energy trading companies to enter into transmission system agreements with system operators.
This is in addition to the transmission agreements entered into with the system operators by the end user. This requirement makes it difficult for the trader to offer electricity directly to the end user. The customer is granted a special protection under the Energy Law that obliges the power distribution company to enter into a power transmission agreement with the customer. The power trading company operating on the free market is not granted similar protection. If the economy minister wants to liberalize the market, he should immediately remove this requirement from the ordinance.
In addition, the power distribution companies are setting difficult conditions for those customers looking for alternative sources of power. The execution of power transmission agreements are necessary to secure the transport of power purchased directly from the generator or from the power trading companies.
It is not surprising that, where the end user must cope with so many legal problems, he does not feel encouraged to change his power supplier. A simple increase in the number of customers entitled to change suppliers is unlikely to alter this.
The new government announced that it is considering a vertical integration between some power plants and local distribution companies. Taking into account the German example, this is unlikely to lead automatically to limits in competition, but considering the circumstances described above, if such integration is accomplished on the Polish market, it will, in all probability, limit competition. For competition to be genuinely encouraged, the government must first solve the issue of long-term power purchasing agreements.
Igor Muszyński is a partner at the law firm White & Case W. Daniłowicz, W. Jurcewicz i Wspólnicy.
