Fondul Proprietatea says energy-regulated prices will reduce state revenues and investments distorting the market
Source: Johan Meyer, CEO of Franklin Templeton Investments Limited and Portfolio Manager of Fondul Proprietatea

Fondul Proprietatea expressed its deep concern about the damaging impact on companies and investments in the energy sector, on the energy security of Romania and, ultimately on consumers, if the Order published by the National Authority for Energy Regulation (ANRE) for the approval of the Pricing methodology for electricity sold by producers based on regulated contracts will be passed.

The recently adopted order by ANRE will create severe imbalances in the energy market in Romania, says Johan Meyer, CEO of Franklin Templeton Investments Limited and Portfolio Manager of Fondul Proprietatea.

It will result in an immediate increase in prices on the competitive market, with negative effects on Romania's economy, investors' confidence in the predictability of energy policies and the market value of the affected companies. Household consumers will be adversely affected as a result of rising prices that will go up in prices for different products says the press release.

The ANRE Order fails to treat electricity producers fairly, placing the burden on subsidizing consumers who are subject to regulated electricity supply, especially to producers with the lowest production costs (such as Hidroelectrica and Nuclearelectrica, companies controlled by the Romanian State).

Establishing the regulated profit at the arbitrary value of 5% has no economic foundation, creates significant financial damage to the affected producers and is also inconsistent with the text of Emergency Ordinance 114/2018. Thus, the Order penalizes energy producers who have taken measures to increase efficiency and create an unjustified advantage for inefficient electricity producers. In view of the above, Fondul Proprietatea strongly recommends the use of a market price reference for the determination of the price of electricity sold on the regulated market, such as, for example, the next day's market price.

It can lead to imports of electricity at prices that can not be capped, thus penalizing consumers and producers in Romania.

On the other hand, the Order severely affects companies, forcing them to sell energy on the regulated market says the press release of Fondul Proprietatea.

Establishing specific amounts of energy on the regulated market coupled with the imposition of regulated prices below the market price will have serious consequences for the financial situation of companies that will be forced to sell energy under such regulated conditions. The most affected will be Hidroelectrica and Nuclearelectrica.

The maximum amount of electricity to be sold on the regulated market (up to 65% of the hydro and nuclear energy production) is excessively high, causing Hidroelectrica and Nuclearelectrica losses of hundreds of millions of lei. Also, these measures will have the effect of collecting, in the form of dividends, reduced state revenues from these companies, since all losses are ultimately borne by the shareholders of the two companies.

In addition, imposing on some producers the condition to sell on the regulated market a disproportionately high volume of annual output, amid their current obligations under contracts already concluded, puts them at risk of acquiring electricity on the free market to cover the demand for energy on the regulated market. Thus, producers will report record losses from the purchase of electricity at a higher price on the competitive market compared to the price they will have to sell on the regulated market. This type of practice was one of the reasons that caused Hidroelectrica's insolvency in 2012, corroborated with other factors that have influenced the company's financial situation.

The measure reduces the cash stocks of companies that could be used to finance investments, thus adversely affecting the long-term stability of the energy sector.

Also, the Order setting regulated prices violates flagrant national and European legislation in force. Both Law 132/2012 on Electricity and Gas (Energy Law) and European Directive 72/2009, which sets common rules for internal energy markets, clearly require that price regulation mechanisms be: (1) non-discriminatory to electricity producers; (2) economically justifiable; and (3) transparent. The order does not meet any of these three conditions.

Commenting on the ANRE Order, Johan Meyer said: "The proposed measures are extremely short-lived, short-term benefits with disproportionately high costs. They will result in less sustainable profits for affected companies, impacting both taxes and dividends on the state budget and destroying future investments in the energy crunch and jeopardizing Romania's energy security. Meanwhile, consumers, who are supposed to be protected by the regulated price, could save very little on energy bills. The ANRE Order is based on the false premise that economic mechanisms can be controlled by administrative decisions. It is a recipe for disaster that will lead to significant losses for energy companies and will drive away market investors. In this respect, the most worrying effect is that by burdening companies such as Hidroelectrica and Nuclearelectrica with regulations without economic justification, ANRE kills goose with golden eggs. In the long run, Romanians will not benefit from the Order, and the country may be forced to import energy at higher prices and can not be controlled by the Romanian authorities. "

Fondul Proprietatea calls on ANRE to acknowledge the extremely damaging effects of the Energy Sector Order and recommends in-depth consultations with stakeholders in the industry.

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