Monday, January 17, 2011

How low can you get?

This one really pissed me off. I generally have little tolerance for state-controlled, market-dominant companies, of which Polish power group PGE is a perfect example. But I do understand the specifics of the energy market and thus am able to cut them some slack.

However, when I hear its chief executive, who happens to be at the helm of the largest market player on the Polish energy market and one of the biggest companies on the Warsaw bourse, say "we are an instrument of  government policy," then I just think something is amok.

I understand any manager who gets a 2.6 billion US dollar merger blocked by the anti-monopoly office is unhappy, to put it mildly, but to go on TV and whine about it is pretty low. To say you should be allowed to carry out a transaction that will turn a four-sided oligopoly into a three-sided one just because you "are an instrument of government policy" means you sink even lower imo. But if you resort to rumour-mongering and add personal innuendos to the mix about the regulator head's state of health, it means you are...well, dear reader, you be the judge of that.

What tips the scale in my books is that the aforementioned executive used one-sided data -- to be polite and not to say outright lies -- to present his side of the argument. He basically said that since there will be a joint European energy market, we Poles should suffer having one national champion or we will have one foreign champion. His other argument is that prices are regulated and therefore further consolidation does not carry the risk of higher prices.

The CEO unsurprisingly did NOT mention the following:

* A common market is a European project slated to come into life in 2015; but will it come on time, in the EU? Anyone want to take that bet?
* Poland has some electricity interconnection capacity with countries like Germany and Czech Republic, but it is not used. Why not? Because the internal grid needs so much investment and such investment takes so long it physically cannot import energy. Think of a highway with no exits that suddenly turns into a gravel road.
* Credit Suisse estimates the interconnection capacity compared to energy demand is at 4-5 percent, that is, at the UK level. The UK, as in the United Kingdom, as in an ISLAND.
* The CEO's contention a combined retail market share of over 40 percent will not impact household prices since they are regulated is true, but at the same time all energy companies are lobbying for price liberalisation, the sooner the better. Isn't it a little cynical to use something you want abolished as an argument in your favour for a merger that will clearly restrict competition?
* De-regulating business-sector prices led to double-digit price growth as companies pushed for ever higher margins to compensate for losses on households. How much do you want to bet they won't touch these rates once household prices are freed?

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