A letter to Troika about the liberalization of Greece's energy market

No doubt the Greek energy market needs reform; however, let's avoid rushing to implement reforms which could lead to further economic havoc.

I should start by stating the obvious that Greece should had liberalized its market long time ago following EU Directives. However, the past can not be changed, so, let's look at the future. Also, let's take into account lessons learned from other countries which have liberalized their energy sectors.

Liberalized energy markets do not work well under tight energy supply conditions. Presently and for the next five years, electricity supply in the Balkans is expected to be inadequate to satisfy peak demand. Delays in the implementation of key projects such as Belene (in Bulgaria) and Kosovo have changed the situation from supply-rich to supply-constrained, and the situation is not expected to change overnight, as you can not build power plants in a few months. Under the circumstances, prices have the potential to increase substantially, as it was the case with California in 2000-2001 when wholesale prices increased by more than 800%. Also, we should remember that energy supply is easy to manipulate (who is going to challenge a power plant owner who claims that his/her plant is not available for technical reasons?); and if market manipulation was easy to happen in California (a State famous for its technological competency, law-abiding institutions and sophisticated financial system), imagine what is possible in the Balkans! So, Greece's market liberalization should take into account the energy supply-demand situation in the region, the liberalization of the markets in neighboring countries and the institutional capacity of the country. Right now, it is not time for experiments.

Under the present circumstances, risk management considerations favor energy sector regulation. Risks (of all types) find their way into electricity prices eventually paid by the consumers. So, how the various risks are managed is essential. The country's risk profile (reflecting Byzantine bureaucracy, corruption, limited ability of consumers to pay, weakness of legal, financial and regulatory institutions, etc.), as well as the project-specific risks are all factored into a minimum acceptable return on investment (ROI), which is established by each investor. Shifting risks to market players who are not in the best position to control them increases further the minimum acceptable ROI. My estimate is that presently private investors will not accept ROIs less than 20-30% in Greece. This does not compare favorably with the typical 3-5% return on assets which is expected in a well-regulated public power market. So, a liberalized market will have much higher risk premium in the tariff than a regulated market.

I am not advocating continuing involvement only of public sector enterprises; in fact, it is very obvious that the private sector needs to participate. However, the transition from vertically integrated public sector to a more liberalized market should follow rational steps. In designing a well-functioning energy market, we need to build up first adequate supply, improve the risk profile of the country and limit political interference on RAE and PPC operations. On the latter:

The regulator (RAE) should be free of any political interference, should employ well-qualified experts and be responsible for tariff-setting. Changing RAE staff by each newly appointed government does not send the right signal to the market and needs to be avoided. Also, tariff-setting should be the responsibility of RAE. The Ministry's role should be policy-setting (including approval of tariff methodology), but not tariff-setting. Long-term, this will be much better for politicians too, as they will not be blamed for increasing energy prices, something they can not control anyway.

PPC should be free of political interference, be managed by a competent team and strive to improve its cost-effectiveness. While every Government would claim that it does not interfere with PPC, there are numerous examples (ranging from personnel appointments to implementation of specific projects) suggesting the opposite. Often, Government-appointed management is not really qualified to manage PPC as a modern power company; also, staff appointments are driven by favoritism. As a result, PPC employs many more people than it needs, not to mention that there is a lot of dead wood, too. A benchmarking comparing PPC to other similar power companies around the world will be most revealing. [A few months ago, I participated in benchmarking a power company of another country in which we included PPC; did not look good!]. So, PPC could improve significantly its cost-effectiveness and competitiveness, if politicians do not interfere in its operation and a world class management team leads the organization.

A few more words on PPC: PPC is a very important institution in Greece, which is worth strengthening, not demolishing. With all its imperfections, it has contributed significantly to the country's economic development, it provides cheap electricity and with some improvements, it could and should play a very important role in the regional energy market.

So, let's address first the key issues facing the energy market right now before rushing to full unbundling and privatization. Let's take important steps in the right direction by building-up energy supply, improving the country's risk profile and reforming the key institutions to play the appropriate role in a well-structured and well-functioning energy market. Such actions will make it easier to transition to a fully competitive (regional) market and will contribute to Greece's long-term economic recovery. The slowly developing regional market (in the Balkans) gives Greece some breathing room to prepare better.


Disclaimers:
A. References to competent staff/management for RAE and PPC is not meant to reflect my opinion about the present staff of these organizations. My intent is to emphasize the need for competency in general and always, independently of who is in government each time.

B. This article reflects strictly my personal views and not the organizations I work for.