EPS in fast forward preparation for electricity market liberalization, Interview with Aleksandar Obradovic EPS CEO

17. August 2013. / Uncategorized

“If we use market price on public supply, the price will have to increase by 38% instead of 11% as it was increased. Electricity price has not been changed for two years and four months and inflation during this period was 14,1%. So, we didn’t even cover inflation during this period and it is because so strong social aspect that exists in EPS”.

Aleksandar Obradovic, Acting Managing Director of EPS, dramatically announced at the beginning of the year that EPS is facing bankruptcy. EPS CEO explained recently about what changed during the last year since he became a chairman: how does EPS change and prepare for market liberalization on 1 January 2015, if employees will be dismissed in the case of company reorganization, when will EPS begin to do income business and eternal question about electricity price.

Q: You have stated in October that EPS’s main priority is financial stabilization and then you announced a bankruptcy in February if 50 billion worth credit is taken. Everything calmed down after that. Which financial situation is EPS placed in at the moment?

AO: Situation I found in on 6 September when I was named for Acting Managing Director was complete disaster. I was confronted with 10 billion dinars of unpaid taxes- debts and taxes for overhauls, investments and expropriations. Expected loss at the end of 2012 was 33 billion and we were missing 40 billion dinars in balance sheets of money processes and lack of 50 billion assets was already predicted in preparations of annual business plan. Financially, situation was very alarming and concerning and I think this was the first time in EPS’s history that someone says: “This is real situation”. Someone needed to confess that king is naked especially when it comes to the system which is important for our citizens and industry. However, next to catastrophic financial indicator, we need to mention another thing and that is EPS which hadn’t achieved its law obligation. We were responsible to have special operator of distribution system and company which will be in charge of public supply by 1st October last year. Why is this important? According to our Energy Law and in accordance with EU directives, we need to open electricity market for competition, to arrange market business approach. We had to break electricity monopoly like monopolies in other sectors needed to be broken. So, we didn’t accomplish even the most basic legal duties to separate infrastructure- a part of distribution network that will be in charge of electricity and part that is in charge of supply. This is the point of liberalization and monopoly breakdown- not to mix everything together, but to determine one company that will be responsible for distribution and it would need to have same relation and treatment toward all other market participants- and other competitors will have right to use this distribution network and to offer its supply services to final buyers. EPS didn’t do it and so liberalization of market of endangered because there were no preconditions to launch new opening. However, next to declaring a new team, new administration, we succeeded to turn around this situation completely. We succeeded to solve financial problem. EPS is financially stable at the moment and it accomplishes all its obligations on time. Planned loss for 2013 was around 22 billion dinars and it will be 800 million dinars what means that we succeeded to reduce a loss for almost 21 billion dinars. We improved out money processing- from illiquidity where existed real danger to stop EPS, we improved these results for 42,8 billion dinars.

Q: How did the decision for state authorities’ obligation to pay its debts in 45 days’ deadline and industrials in 60 days’ deadline influenced on EPS’s liquidity?

This decision hindered us because it made a higher pressure on us to pay our taxes on time. Obligation toward suppliers was 24,6 billion dinars on 31 December 2012 and they were 16 billion on 30 June 2013. This is 8,5 billion dinars that were paid during 6 months and they went into industry. However, we have a big problem that many consumers owe money to us and didn’t pay it. We launched several activities related to the debts’ reprogram because we wanted to help industry and citizens and say “We know that situation is difficult, economy crisis is in progress, let’s make an arrangement to write off interests for the last year and so make our debtors easier and more profitable debts’ payout.” We decided to make the last, final agreement for reprogram of the all debts with Ministry of Resources.

Q: Is this correct to citizens who pay regularly?

Used electricity need to be paid. Tolerance of the former government toward spending money through not paying electricity is not an excuse for continuing doing it in the future. We make these reprograms and we are working on some purchases don’t remain unpaid. On the other side, court procedures are expensive and we are trying to save some money and not to launch these procedures. When it comes to justice, I think new administration was pretty clear and I insisted form the very beginning that electricity bills have to be paid. We have support from Ministry of Resources now and legal support: we’ll cut out from the network everyone who doesn’t pay electricity. Many things happened in the past but who don’t pay electricity won’t have supply, at least not from EPS.

Q: Does it include both industry and citizens?

When it comes to industry and citizens, we have the same attitude, electricity bills must be paid.

Q; Restructuring corporations also?

Of course, there are some legal rules in come corporations that are protected by law. EPS is not above the Law here, but we will use all legal mechanisms and support from Ministry of Resources that those companies, which don’t pay electricity, should be dismissed from supply. Ministry of Resources launched an action for energy-protected buyers that are legally defined as socially endangered to have right on certain amount of electricity and gas. This is paid directly from EPS’s budget at the moment, but we hope that this will be budget’s issue.

Q: When EPS will begin to do business with an income? How this price increase brought electricity price closer to economy price?

When you say economy price, you probably think on the price that justifies expenses, investments…That won’t “eat” a corporation.

When we talk about open, liberalized market Serbia strives to, it recognizes only market price. There is an offer, there is a purchase and successful companies will make a profit because they will succeed to take care of the market at determined price and the unsuccessful, inefficient companies will pull back from the market, they will lose consumers and they will go bankrupt at one moment. However, EPS i.e. it new subsidiary “EPS Supply” got a license for public supply next to supply of all qualified buyers at open market.

“EPS Supply company” will supply all tariff buyers. There occurs a new price category which is called “justified price”- it is a price that will enable us to maintain this system and to supply citizens and industry steady and which will consider the whole economy situation on the other side. Considering that we have open market on high voltage since 1 January 2013, it is pretty clear now what market price is and how high is the price at which production capacities of EPS supply “EPS Supply”. If we use market price for public supply i.e. if current market purchase price is accounted in methodology of Energy Agency, the price would need to be increased by 38 instead of 11%. However, considering that EPS is a public company and we got social function seriously, we said: we can’t transfer burden from market price to tariff buyers, let’s take one part from our profits and decrease investment, maintenance and overhaul in order to enter this price. Electricity price was not changed two years and four months. Inflation in this period amounted 14,1%. So, we didn’t even covered inflation for this period, but it is again because of strong social aspect that exists in EPS. I’ll give you one more example: if we think about market price during the last 8 years, we can come to data that EPS gave 6 billion EUR to the industry and citizens. So, we decreased our incomes for 6 billion. These 6 billion EUR was not part of investments, new production capacities and what’s going on right now? Many our TPPs are not confident as they were when they were new, what makes even bigger pressure to us: what if climate situation is not good and some thermal block jumps out. This is the way how this social policy which supposes to be short-termed and if it lasts too long, it eats company’s center. The price is not the only, but it is a crucial factor- when someone makes you to sell below market price, it is not good from the start. These 6 billion EUR is praiseworthy in social point, but it is ad for the company.

This is a concept change that this government adopted and that is we have an obligation to open the market. EPS is not equal to the whole electricity system of Serbia. We became only one of the market participants and we need to act in accordance with market what means that as market is opened, no one can guarantee to us that we can keep consumers and therefore there were so many signals and campaigns from EPS in order to increase electricity price so we can provide safety of supply as much as possible. But this is not about the price only. We enabled market liberalization since 1 January and all buyers on high voltage can choose who they want. One of the biggest successes is that we accomplished to keep 97% of this market and to achieve incomes of 23 billion dollars with improved market price. We lost only one consumer, German Company Messer which decided for other suppliers.

Q; In what condition is the company restructuring?

Ministry of Resources decided last year to help EPS and brought Beginning bases for EPS’s restructuring: which direction EPS should follow in order to become more efficient and profitable. The key is improvement of business parameters of EPS restructuring within corporatization and centralization of different functions. What that means? EPS is the seat company with its 13 subsidiaries at the moment. These subsidiaries work independently. Idea is to find savings in corporatization and centralization of different functions: legal, financial and human resources- we shouldn’t do some stuff 13 times in all companies but centrally. In these beginning basics is written that one supplier and one operator of distribution network should be established, not 5, 10 or 20 and to create new companies with new directors, financial directors and secretaries… However, we accomplished only one part of these bases related to “EPS Snadbevanje”. There were many obstructions inside of system and sideward because many interests were endangered this way, starting with local policy.

Source;Serbia Energy/EPS

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