The Power Brokers

Throughout southeast Europe, the lights are going off. In Romania alone, about 300,000 households were disconnected for non-payment of bills last year. In Bosnia-Herzegovina, whole villages isolated since a war in the early 1990s can't get reconnected. These are the region's poorest people. They include pensioners who worked for years during communism but now survive on pensions so meager that electricity eats up one-third of their check; Roma citizens who survived on illegal hookups for years and now face a future of no light; and the rural poor who survive in remote regions and do not have the money to connect to the grid.

On the other side are state companies whose governments have agreed to liberalize the region's energy markets. Yet many of them are burdened by massive debt from years of political misuse, infrastructures not ready for the new realities and competition in the form of nimbler and more liquid energy traders.

In between are the energy traders. They say they are the future of low-cost energy but that is a promise yet to be fulfilled. These politically connected and well-financed businessmen have reaped billions in sales, often at the expense of state companies. Investigators in a number of countries are trying to determine whether some of them made their millions in profits illegally or legally in systems that have few laws and not enough regulations.

Reporters from Albania , Bosnia-Herzegovina , Bulgaria and Romania looked at the regional energy market and energy traders. What they found was a murky, closed system that is not open to fair trade and where the state companies are giving away their advantage to well-connected energy traders.

The Wall Falls Down

In the late 1980s, many of the countries in Balkan Peninsula changed their form of governments to democratic systems. But for more than a decade, state power companies continued to provide all of the power from generation plants to transmission lines between cities and distribution lines to individual houses.

Such systems were often inefficient and sometimes poorly maintained but they worked and they provided cheap electricity to the region. Electricity prices were kept artificially low by politicians who saw it was in their interest to keep people happy. But the money that did come in was not enough to pay for maintenence and repairs. Power companies let their systems slide into disrepair.

The heads of power companies were often involved in party politics, as in Albania where the state power company has had eight directors in the past eight years.

In the mid-90s, another phenomenon surfaced in Romania and soon spread. In the absence of a regulated energy trading market, state companies started selling electricity to “energy traders.” These local businessmen bought electricity from state power generators and sold it to companies – often state companies themselves or to other state power companies.

The traders made nice profits from the deals but the role of the energy trader made no sense. Why was a middleman needed? This practice continues today in southeast Europe with energy traders handling most of the cross-border trade. As a report by the Southeast Electrical System Technical Support Project says:

“Only a few traders probably handle between 70 percent and 90 percent of current cross border trade in (southeast Europe). It is not clear why generators with surplus power in the region (such as EPRS, NEK, Hidroelectrica) are trading through traders instead of developing an internal trading business.”

Energy traders give this reason: they fill a need. They add cash or liquidity to a market chronically short of disposable funds. State companies often don't have the cash on hand, so traders float them loans and provide better repayment terms.

Energy traders are also better at maneuvering through the cumbersome procedures, regulations or bidding procedures between countries, says the SEETEC report.

Unified Market

Energy traders have been around for years in Western Europe, but there they tend to assets like power plants. In Eastern Europe, state companies still hold most of those assets.

However, in 2005, most of the region's countries seeking to one day join the European Union signed an agreement to build a transparent regional market open to all traders. The Energy Community Treaty of 2005 committed the countries to massive restructuring of their energy markets and their state companies to create a competitive market.

Promoters of the new system said the new competition will bring more efficient energy systems, lower prices, more investment and better infrastructure.

The agreement sought to integrate and harmonize markets and to open the industry to competition. It sought to split up state industries into three companies: a company that generates power, a company that distributes power around the country and a company that provides power to an individual home or business.

However, such reforms are woefully behind schedule. The market in the region remains closed to outside companies and competition has yet to arrive.

“Since the (Energy Community) treaty was signed …I would say the pace of real market opening and the pace of development of competition in the last couple of years has been very disappointing,” said Peter Styles, a board member of the European Federation of Energy Trading, an association representing energy traders.

Styles said the market in southeast Europe still requires a “negotiated” access. The exception is Romania, which is farther along than its neighbors.

Some energy traders agree, saying it is impossible still to do business in countries like Bosnia-Herzegovina, Serbia and Montenegro where access to either power sources or transmission lines are held by one or more companies.

The Holders of Power

Two companies most typify energy trading in the region: Energy Holdings in Romania and the UK- based but Serbian-operated Energy Financing Team.

Both got their start before regulations were in place and both used “negotiated” access to trade with state power companies. Both are alleged to have near monopolies on local access to both power sources and transmission capacity. Both have allegedly managed to get state energy companies to sell them energy at below market prices and even below the costs of generating the electricity and both have also been scrutinized by government or law enforcement for their operations.

Neither has ever been charged with crimes, and both vehemently deny any wrongdoing.

In EFT's case, multiple investigations have not led to prosecutions in Serbia and Bosnia-Herzegovina. A Serbian parliamentary commission ended in recommendations for parliament to look into EFT but the lawmakers did not. A Belgrade police pre-investigation was not followed up and an investigation in Bosnia-Herzegovina was stopped by lack of evidence and insufficient resources. A USAID inspector general investigation has not been formally closed.

The most serious investigation of EFT is being conducted by the UK Serious Fraud Office. A number of investigative bodies are awaiting the outcome of that probe.

Energy Holding

Energy Holding has not been without controversy either. The Romanian company, which like EFT works throughout the region, came under scrutiny in 2006 by theRomanian National Anticorruption Directorate. A Ministry of Economy report said Energy Holding, together with other companies, allegedly bought electricity from the state-owned Turceni and Rovinari power plants at prices below the production cost.

Energy Holding is controlled on and off by Romanian Nicolae Bogdan Buzaianu and Swiss resident Beat Eugene Corpataux. Through a complex series of corporate relationships the two are associated with Russian oligarchs, the Kremlin, former Moldovan politicians and a couple of high-profile scandals.

EFT, along with another dozen companies, was also purchasing from the two Romanian plants, although they have not been investigated.

Both companies have been remarkably successful in winning tenders and signing long-term electricity contracts in the negotiated markets of Easten Europe.

An interesting insight into the business of negotiated access, energy trading and privitization can be found in the ALRO privitization. ALRO is one of the largest Aluminum companies in Eastern Europe. The company was taken over by a Russian Oligarch according to a court case and company records using help from Romanian authorities.

Until the market gets away from negotiated access and develops open and transparent markets, consumers in the region will not get he lowest prices.

Obstacles to Energy Trading

A number of issues thwart the develpment of open markets.

Energy is short in the Balkans and there are only a few places where energy-starved countries can buy electricity. Bulgaria, Romania and Bosnia-Herzegovina are the only exporters of energy in the region. Bulgaria, shutting down two aging reactors at their nuclear power plant next month, is likely to not have excess energy in the near future.

On the legal side, many of the countries have yet to pass all the regulations needed or properly set up the regulatory bodies to oversee a market. Energy traders are supposed to be licensed in each country, but that is not the reality. There are some 120 licensed traders in Romania, two in Bosnia-Herzegovina and none in Serbia and Montenegro.

In addition, countries are supposed to split their giant state companies into power plants, transmission lines to move energy around the region, and distribution lines to move energy to houses. This would allow all companies to fairly use transmission and distribution lines. Some countries like Serbia have not begun to break up the old monopolies.

Electricity is not like oil or gas. It can't be stored easily. It can't be “moved.” Selling electricity between countries requires that agreements be made with every country in between the supplier and the end user. If the Albanian power company wants to buy electricity from a Romanian power plant, then agreements must be made between Romania and Serbia , Serbia and Montenegro and Albania and Montenegro .

However, there is limited capacity at borders to transfer electricity between some countries. One example is Albania which has connections to Greece and Montenegro.But the lines between Montenegro and Albania have little capacity and that is often reserved by energy traders who have long-term contracts. This limits use by other traders.

Some countries are not allocating enough capacity even though they have more. These problems have led to blackouts in Albania, where energy could not get into the country.

In addition, the countries have not resolved other issues, including tarriff, pricing, payment, and technical compatibility problems.

The lack of a market is leading to higher prices and shortages of electricity in some countries.

The people who will end up paying for the vast profits of well-connected businessmen and oligarchs, investing in news plants and equipment and the sins of past government officials are the people least able to do so – the working poor and the disadvantaged.