Czech energy regulator seeks to take on water companies

The main Czech energy sector regulator is seeking to broaden its remit to take in the country’s water and water services companies. Energy Regulatory Office (ERÚ) chairwoman Alena Vitásková voiced ambitions for her office to take over responsibility for the problematic sector at a two-day conference on energy regulation in Prague.

“I am convinced that it is applicable that we, as the regulator, deal with this,” she said on Thursday, the final day of the conference, adding that water, like energy, was one of those essential services it is not possible to do without.

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Vitásková’s bid for the go-ahead to deal with another natural monopoly and series of utility companies would take competencies away from three ministries now sharing responsibility for the water sector: the ministries of finance, agriculture, and environment.

Sector insiders describe the Agriculture Ministry as the key partner since it deals with water supplies, long-term planning, pipes and subsidies to water companies. It is the Finance Ministry, however, that decides the final charges for drinking water and waste water services.

Finance Ministry spokesman Jakub Haas told Czech Position that while it made the final price calculation, most of the groundwork for establishing costs and other factors is carried out by the Agriculture Ministry. He declined to comment further on Vitásková’s vision.

The principal task of the Environment Ministry is to make sure that banned chemicals don’t pollute the national resource. But it has also been a key player in trying to channel EU subsidies for Czech waste water installations so they can meet EU clean water rules.

While already voicing her ambitions, Vitásková told Czech Position she is waiting for an analysis of current water services regulation in the country before taking the next official steps to take the sector in hand. “I have asked for an analysis first of all and that should be ready within the first half of the year,” she said.

‘I have asked for an analysis first of all and that should be ready within the first half of the year.’

Handing over responsibility for water regulation to the body dealing with other natural monopolies, such electricity and gas pipelines and distribution, would be a fairly standard step. Slovakia’s Regulatory Office for Network Industries (ÚRSO) already includes setting the price for drinking water and waste water along with regulation of the electricity, gas and heat sectors.

In other countries, a specific regulatory body for the sector has been created, such as the Water Services Regulation Authority (OfWAT) in England and Wales.

Muddy waters

Charges for drinking and waste water services in the Czech Republic have far outstripped inflation over recent years. Annual increases in charges hovered around 5.0 percent in the five years up to 2008; in that year they shot up to 8.4 percent, according to figures from the Czech Statistical Office (ČSÚ). In 2009 charges climbed even higher, to 9.2 percent, before falling back to 4.1 percent in 2010.

The ČSÚ pointed out that these were average rises with the increase in local charges varying greatly from region to region. In comparison, the target inflation rate of the Czech National Bank (ČNB) since the start of 2010 has been 2.0 percent.

The water sector as a whole has now settled back after a turbulence in the mid-1990s, when foreign companies sought to take stakes in or seal deals with local and regional water companies in a mad scramble following the transfer of ownership from national to local hands a few years earlier.

In many cases, long-term agreements giving management of the water companies to foreign firms were agreed, often for around 15 years or more and sometimes for up to 25 years — and amid often murky circumstances, with suspicions that corruption was involved. Local town and cities in most cases maintained ownership of the infrastructure although they lost day-to-day management control.

One of the most suspicious deals of the time centered on Prague’s water company Pražské vodovody a kanalizace (PVK) and the staggered sale by Prague City Hall of a majority shareholding and then the remaining 34 percent stake in late 2002 to French utility Vivendi, now Veoilia Voda.

The second deal was done at breakneck speed — and for a much lower prices per share than the first — with no guarantees sought or given that water charges would be curbed over the long term. Veolio currently provides water 3.8 million Czechs and waste water services to 3.2 million with its empire including Plzeň, Pardubice, Hradec Králové, Olomouc, Zlín, Sokolov, Chomutov and Most.

ERÚ chairwoman Vitásková admitted that some water companies might welcome a more simplified regulatory structure than the current confused Czech model, but added that others might have reasons to fear more systematic and concentrated focus. “The reaction might be 50:50,” she commented.

‘Consultations with the energy regulator are now at a dead point.’

Within the energy sector it is clear that her arrival to head the ERÚ eight months ago and her subsequent steps have clearly ruffled a lot of feathers. Top managers of local gas and electricity distribution companies complained on Wednesday, the first day of the two-day regulatory conference, that the regulatory environment was no longer as stable as before and that this made planning and investment decisions more difficult.

The board chairman of E.ON Distribuce, Josef Havel, complained that “consultations with the energy regulator are now at a dead point,” adding, however, that a meeting between Vitásková and a grouping of regulated utilities next week might change that situation.

The head of gas pipeline company Net4Gas, Thomas Kleefuss, was even more critical. He said the company was taken completely by surprise when ERÚ announced that it would be issuing an information memorandum to possible investors in the company (which is being sold off by German parent company, RWE). The memorandum should inform investors about the existing regulatory environment and possible changes to it which, as Vitásková admits, might have a key impact on whether they decide to become bidders for the strategic Czech assets.

Kleefuss said the ERÚ announcement made it appear that important regulatory changes are being planned when the current regulatory regime is still due to last until the end of 2014. Vitásková  shrugged off the criticism and refused to give no guarantees that earlier changes are not in the pipeline.