Serbia exclusive: Serbian power utility is preparing for 2014 market liberalization, EPS CEO Aleksandar Obradovic interview

19. November 2013. / News Serbia Energy

By successful operations, loans rescheduling, costs rationalizing and record production, loss of almost 184 MEUR was reduced. – The aim is that EPS become more organized and efficient company. – Consumed energy must be paid. EPS CEO speaks openly about the lost big consuming customer but also about the preparation for 2014 opening. New power gen facilities and modernization of existing ones, including the environment projects are priority.

Measures that were taken in the autumn of last year and this year have resulted in improved operation of “Serbia Power Utility Company”. From the company which in February this year was faced with a difficult financial situation, namely very dramatic, half-year results show signs of recovery and the effects of the implemented measures.

Aleksandar Obradovic, a.d.g of PE EPS, says that the situation he found on 6th September 2012th, when the Government of Serbia appointed him as acting director general, was a disaster. Then the EPS had 88 MEUR of outstanding liabilities – debts and obligations for the current repairs, investments and redemptions, and the expected loss by the end of 2012th was 289 MEUR. It lacked 350 MEUR in cash flow balance.

In the initial annual business plan of EPS, which the Government of Serbia adopted in February, was anticipated shortage of funds of almost 438 MEUR. For the first time in history EPS was facing the possible bankruptcy. Why was it so and what did change in the meantime?

The financial situation was alarming and deeply disturbing, and then happened for the first time in the EPS history that someone came out and said “This is the real situation – emperor is naked!” Apart from catastrophic financial indicators, EPS failed to meet its legal obligation last year. According to the Energy Law, from 1st October last year we have been obliged to have extracted operator of the distribution system and the company that would deal with the public supply. Why is this important? In our Energy Law, in accordance with the European Union directives and signed contract on the Energy Community of South East Europe, we are obliged to open the electricity market to competition and to establish a market business approach. As the monopolies in other sectors were broken, also the power sector is an area where that monopoly has to be broken. EPS did not meet even the most basic legal provisions to separate the infrastructure – part of the distribution network, which will only deal with the electricity distribution, the part that deals with the supply.

Why was it important to separate business?

That is the point of the monopolies and liberalization breaking up. The aim is non-interference all in one pot, but one company to be engaged in the distribution. And that company will need to have the same attitude and treatment to the EPS and the other participants in the market. Other competitors will be eligible to use the same distribution network and to offer their supply services to end customers. This EPS did not do, and therefore the liberalization of the market was threatened, because there were no pre-conditions to start with the market opening. However, with the new team engagement, new management, and with a superhuman effort by colleagues in EPS and in the subsidiary companies, we have succeeded in total company’s reversal for less than a year.

What has been done?

We managed to solve the financial problem. EPS is liquid now and fulfills all obligations on time. I thank to all employees, colleagues in EPS for dedication and hard work to achieve the best results. The plan was that the loss in 2013th would be about 193 MEUR and we expect that it will be 7 MEUR. This means that we by successful operating, loans rescheduling, rationalizing costs and record production have reduced loss of almost 184 MEUR. It was rescheduled the obligation under the loan of 184 MEUR, of which about 132 MEUR should reach the 2013th, which would have a negative impact on liquidity. We have also improved our cash flow – from the state of insolvency and minuses of nearly 431 MEUR, we have improved the results by 374 MEUR. Cash flow is the company lifeblood. If the liabilities arrive and incomes can not settle them, then you cannot pay salaries, suppliers, taxes and other expenses.

When will EPS finally business with profit?

Serbia and EPS strive for an open, liberalized market; it only knows the market price. There is supply and demand, and successful companies will make a profit, they will be able to meet the market at a certain price. The companies that are unsuccessful, inefficient, they will be withdrawn from the market; they will lose consumers and at some point will bankrupt. However, on the other hand, EPS, namely our new daughter company “EPS Supply ” ,besides the buyers supply in the open market , has received a license for a public supply . “EPS Supply” supplies all tariff customers at a price that we call “reasonable price”. This is the price that will enable us to maintain this system and to stable supply of electricity citizens and economy, which will, on the other hand, take into account the general economic situation. Since the open market at high voltage was opened from 1st January 2013th, it is now very easy to see what the market price is. If we apply the market value on public procurement, or if the current market purchase price would be factored into the methodology of the Energy Agency for the electricity pricing, the price would have to be raised by 38 percent instead of 10.9 percent, as it has been increased from 1st August. However, EPS is aware of its social functions, and the market price burden cannot be switched to tariff customers in this economic situation. Therefore, we have reduced the investment resources, maintenance and repair, in order to obtain the current price.

But the recent increase in prices did not cover the inflation costs. What to do?

It is true that the electricity price has not been changed for two years and four months, and that inflation in this period was 14.1 percent. We did not even cover inflation, and if we take into account the market price in the past eight years, we would get to the information that the EPS gave six billion EUR to the economy and citizens. These six billion was not included in the investment in new production capacities, and the current capacities with its service life are no longer reliable as when they were new. The question is how to reconcile the social aspect and deal with the real situation, because what if unfavorable climatic situation happens and some the rowlock “falls“? This indicates the social policy, which should exist, but in the short term, when takes too long than eats businesses core. It is true that the price is not the only one, but it is a key factor. Because when someone forces you to sell far below market price, it is not good from the start.

What are the other factors?

The goal is that EPS becomes more organized and efficient company. The Serbian government adopted the starting points for the EPS reorganization in November last year by which the company should become profitable and successful. One of the first tasks is the opening of and participation in the open market. Since from 1st January this year, EPS is no longer equal to the entire power system of Serbia. Now we are just one of the participants in the market and we have to behave market. As the market would open up, no one will guarantee for us that we can keep the consumers.

And how much did we move forward in the application of those Starting Points for the reorganization?

The Ministry of Energy has agreed, and the Serbian government in November 2012th adopted the direction in which EPS should go to become more efficient and profitable. The key parameter to improve the EPS business is reorganization through corporatization. Today, the EPS is parent company, with its 13 affiliated companies, which operate quite independently. The idea is to make some savings precisely in the corporatization and centralization of various functions – legal, financial, IT, human resources. So we should not do some things for 13 times in all companies, but to take it centrally. In the Starting points clearly states that it should be established one supplier and one operator of a distribution system, and not to have 5, 10 or 20 , and again create a new company, with new directors. But from these Starting points we have met just a part related to the “EPS Supply “establishment. It here were some obstructions within the system and on the side, because in this way lots of interests were endangered, starting from local politics. Even obstructions came from the previous Board of Directors, who steadfastly refused to allow the establishment of “EPS Supply” and thus worked against the EPS interests. If we had not created the “EPS Supply “, we could not ask for price increase. The management is not able to create an environment for the Starting points’ fulfillment because the corporate way of governance requires also the statute change and the founding documents change, even a change of the EPS legal form. And these changes are the responsibility of the founders or the government. This management tries to look on the EPS as a company that has to make a profit to its owner, the state. Every year, the market is more open, from 2013th was liberalized the high voltage, and from 1st January 2014th the medium voltage will be opened, it is more than 4,000 new companies that will enter on the market. According to the Energy Law, from 2015th practically all the customers will have the right to choose their supplier.

The market for buyers of high-voltage was open. Are you satisfied with the results?

One of the main successes, for which I am particularly proud of the new management, colleagues in EPS, is that we succeed to keep 97 percent of the market at a high voltage. And with an improved, market price, we have achieved revenues of 21 MEUR. We have succeeded to increase revenue on the one side, and to keep 97 percent of the market. We only lost one customer, the German company “Messer”, which has opted for a new supplier.

That one customer repeatedly said that he was not satisfied with the EPS price. How is it possible that Slovenian company gives them a more favorable price than the EPS?

The customer does not see the manufacturer, but only a supplier, because according the market rules, the function of electricity production and supply are two different things. Electricity can be bought on the open market and re-sell, or to self- produced, and that the customer does not see and does not know it. All manufacturing facilities in EPS will sell electricity or to “EPS Supply” or to the “Elektromreza Srbije”. But it should be clear that no one will be able to buy electricity directly from TENT or “Kostolac “.All companies  do in this way- RWE, CEZ, they have their own companies for supply. And on the market everything is allowed. It can go with a smaller margin or even with a loss, but in order to take part of the market. And I still think that we will try to bring back the “Messer “, which we lost because EPS is a strong and stable partner. Together, our production, distribution and supply capacities can give the most to our customers.

At the market opening there were complaints that EPS increased rates too much. Is that true?

This is not true, and almost during a decade all of today’s buyers of high voltage have benefited from the social electricity cost and none of them have complained on electricity purchase at much lower prices than they should have been. However, they had saved hundreds millions of euros. In the last eight years, they had the right to buy electricity on the open market, but they did not do that, because EPS was the most favorable. And when on one side you see the tariff price on which you have right and that the market price is much higher, so of course that no one will go where it is more expensive, but will pay the tariff price. Now, if some merchant offers cheaper electricity, it’s not a criticism of EPS, because EPS is manufacturer, and has more expensive electricity. The question is when that trader arranged the purchase – maybe than its purchase price was lower than our production price. The fact that we are the manufacturer does not mean that we have the cheapest electricity in every moment, and insurance is always expensive. In order that EPS ensure itself for next winter, it should buy electricity at some fixed price, but then to come quiet into the winter. But how do you know what will be the price? What if that what has been bought now much more expensive than it will be later, and someone in February says “And why did you buy at 55, when now the price is 45?” Or, it may be vice versa, that we make a great profit. That is why I do not understand when some people ask “Why did you buy electricity a year in advance, why you did not wait for a lower price?” Price is a dynamic category, which depends on many factors, and no one can predict it.

How did the EPS liquidity influence on the decision that state institutions and firms must pay their debts within 45 days and businessmen in a period of 60 days?

That decision has harmed us, because it made more pressure that our obligations were paid on time. But obligations to the suppliers were 216 MEUR on 31st December 2011th, and 140 MEUR on 30th June 2013th .That was 75 MEUR, which was paid in six months and entered to the economy. However, we have a big problem because many consumers owe money to us and do not pay it.

How to solve that?

We have initiated several activities related to the debts rescheduling, because we wanted to to satisfy also the economy and citizens. In agreement with the relevant ministry the last, final agreement on debts rescheduling is underway.

Regular payers are not happy for that!?

Electricity consumption has to be paid. The fact that the previous government and the previous EPS managements tolerated waste of state assets through non-payment of electricity is not an excuse to continue so in the future. We do this rescheduling and work that some claims do not remain receivables. On the other hand, our trials are expensive and we are trying to save money also to the EPS and to the state, and not to enter into the court proceedings. All those who do not pay for electricity, we will exclude from the network. In the future we will deal with more regular payers and we will invest more in relationships with them.

More than two decades we have been waiting for the construction of a new facility. Is there any shift?

Among the projects that the EPS has begun in 2013th there have been the purchases of mining equipment for MB “Kolubara”, valued at 181 MEUR, and the revitalization of hydropower plant “Zvornik”, worth 70 MEUR. It is very important that strategic EPS directions by 2025 / 2030th and project management have been created in accordance with the best practices of reputable electric companies. Also the basis for the investment projects selection has ben defined in a way that ensures profitability of the company. EPS will meet the signed obligations from the previously signed memorandum and protocol. Whatever projects would be selected, the main criteria will be profitability and this is our strategic goal. The preparation of a feasibility study for the project of the reversible hydropower plant “Bistrica” is underway and current projects TENT B3, “Kolubara B “, “Kostolac B3” and power plant with a combined gas-steam cycle “Novi Sad” are actual. The preparation of feasibility studies and all projects costs are underway, and it is expected to be completed by the end of the year.

Response on the market

Incentive tariffs for renewable sources attract investors. When will we attract investors in the thermal or gas power plant?

Electricity production is the market activity and everyone has the right to make production capacity. The question is why this does not happen. The answer lies in the fact that they have to create the market conditions that someone desire to invest. Offset in this field should start with the market opening.

We need to reduce costs

Do employers in the system have reasons for fear, because it was mentioned that there are surpluses in EPS, especially in the administration?

In order to be more effective, we have to reduce costs. We are doing a great analysis of the jobs systematization, because now we do not observe EPS and every company in particular, but looking at EPS as a whole. In some areas we even have a labor shortage, especially in those difficult jobs – fitters, miners, engineers at the plant, and on the other hand, we have many workers in the administration, who are not productive. When we have a lot of unproductive people in the system then for those productive areas we have to hire other companies, so you have double cost – and beside that you have people who are not sufficiently involved in the work, then what we need, we have to buy in the market. But people cannot just be moved, because the preconditions have to be created first. It is necessary to fulfill the objectives of the EPS reorganization and the corporatization establishment. The problem is the age structure, because the average age is 45 years. We do not have a generation that can take all the plants, and the first thing that should be done is that older ones train a new people. So we cannot wait for someone to retire in order that someone new comes. Who will train them!?

Record production, good sale

What are the six-month production results?

Serbia Power Utility Company“ for the six months of this year produced about 19 billion kilowatt – hours and achieved the record production for this period. By the end of the year it is expected production of up to 37 billion kilowatt – hours. According the plan, electricity production increased by 0.8 percent, and compared to the same period last year by 6.4 percent. At any moment there were not problems in production proceedings in the power plants in PE EPS. According the plan, total production increased by 154 million kWh, and in the first half of 2013th was produced by 1,137 billion kilowatt – hours more than the previous year. For the six months EPS sold 1.66 billion kilowatt – hours, which is valued at 67.35 MEUR, or 33.4 percent more than planned. The energy value sold by the end of 2013th will exceed 100 MEUR.

Procurements under the law

Earlier the public procurements were often emphasized as one of the major problems in the system. What has been done in this field?

For the first time have been consolidated the procurement plans in PE EPS and subsidiary companies whose planned value is about 2.186.442.309 MEUR. By centralization of public procurement it was achieved more rational spending, efficient use of resources, it were enabled more bidders and more competitive bids and unified technical specifications. The conditions and requirements in tenders who provide quality, competition and favorable conditions to the company were defined, the process integrity by the procurement control was ensured and transparency of the procurement process in accordance with the Law on Public Procurement was provided. One of the examples for saving is the joint acquisition of licenses and maintenance services of “Microsoft” software products, because thus were obtained the most favorable financial conditions and a discount of 33 percent. That is a savings of 1.7 million dollars.


Source; EPS Kwh

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