Serbia: Power utility Elektroprivreda Srbije CEO Aleksandar Obradovic says EPS will be a regional leader in the power industry sector

2. July 2015. / News Serbia Energy

Despite these atypical weather conditions prevailing the power system of EPS is fully stable; we have no disorders,neither related to coal production nor in the production of electricity and in the distribution system. Practically, everything is under control. According to the latest weather parameters we have received, we do not expect problems. As always, the power system of EPS will work because we are ready, no matter what happens, says Aleksandar Obradovic, the director of the Electric Power Industry of Serbia public company whose production and distribution systems were be threatened by heavy rains and floods last year.

It is the anniversary of last year’s May floods. What’s the damage suffered by EPS?

Speaking of last year, I would like to emphasize that we were not affected only by the May floods. We had three to four waves of severe weather and weare currently doing an analysis of the latest damage assessment. They are in line with the first estimates of damages, given by the World Bank and other experts, that EPS has suffered damage of around half a billion euros. We will have the final assessment when all information is put together. But, at the time of the last year’s floods as well as now it is clear that the blow to the business was great. Only thanks to the enormous strength and will of my colleagues, we managed to make a few wonders. Despite the terrible weather we never had blackouts. We defended production capacity and electricity system and maintained it without failing. We had electricity shortages only in those areas and villages where it was necessary for security reasons.

I would point out that we have started producing coal in Kolubara open pits mines flooded in December last year, when no one expected it. The first estimates were that it would not be done for at least two years. Earlier this year we got to all of the mechanization in mining basin Kolubara, and we immediately started overhauling those systems, and by June they will have been fully functional.

Does this mean that sludge is to be removed from open pit mine Tamnava – West Field by June?

A good portion of the sludge is located in parts of the basin underneath which, actually, there is no more coal for excavation. We were lucky. I want to emphasize that we have broken all records, we started production earlier than had been announced. Looking from the technical side, everything went great thanks to the efforts of staff in the EPS system. We beat all records, we have come to coal, we will capacitate all of the equipment and in June we will be fully prepared technically to continue to excavate coal as before the flood.

The financial effect is this other blow. We felt it last year, and we will feel it, I’m sure, this year and in the next few years. Those half a billion is damage as well as lost earnings because we were a big exporter of electricity and then due to flooding, we suddenly became an importer.

It is always easy to be wise after the event but I would point out a couple of good moves, we made a couple of good management decisions: last year, when flooding struck in the middle of summer, we started importing higher amounts of electricity, which saved our coal landfills for the winter when imported electricity is more expensive.

This annoyance made us closer and showed how important it is that the EPS works as one. We have shown that the system of EPS can function as a unified whole in the most difficult conditions.

It has been shown how important it is to coordinate the functioning of the Kolubara mines with Kostolac, with thermal capacities and our hydro power plants, but also with trade partners and distributors. Our misfortune forced us to work as one, and fortunately the first phase of the corporatization should be completed now – on July 1st, when we will formally become a single system.

Does that mean that you have reduced coal imports from Romania according to the needs?

We started last year’s winter period with maximum coal landfills. Despite the disasters, we managed to reduce the negative impact of the floods using smart importing and good production planning. The first estimates were that we would be short of six million tons on coal for the Obrenovac thermal power plant last winter, but that forecast was lowered to three million tons. We made a contract for importing 1.2 million tons of coal, but the contract envisioned paying only for what was ordered, and we ordered and supplied only 370,000 tons. We didn’t require more because we had enough Kolubara coal.

Will you be importing coal for the next heating season?

For the next heating season we do not plan to import coal. But the equipment used for unloading coal will not be dismantled. For now, we are considering the possibility that part of the equipment, since it is already built, remains to be a plan B in Obrenovac.

When we talk about pumping water from the Kolubara mines it seems, though, that most of the work has been done by EPS itself, that is, MB Kolubara workers. Was it it necessary to engage the side firm for the job?

That is not exactly true. Most of the water was pumped by the company South Backa. Hiring companies for pumping pumped was financed by the World Bank, which has very strict procedures, not only in terms of contractor selection but also for process monitoring, in particular the environmental protection. We got a high score on all three of these parameters.

Let me remind you, there were so many companies that came to see this lake and which said they would participate in the tender for the pumping, and in the end we only had three valid tenders, which told us that South Backa was very brave to venture into the job. Fortunately for them I think they showed and proved themselves through our misfortune, and they now get a world reference because exhausting this amount of water which they did, with some of our help, really is something that must be appreciated.

The restructuring has commenced. How do you comment on mainly political remarks and reviews of this transformation of EPS, especially in terms of Elektrovojvodina?

First, there is one big lie released into the public – that Vojvodina assets are being seized. And, Elektrovojvodina is not tha property of Vojvodina Province. Elektrovojvodina is property of EPS. So it was the property of EPS until this reorganization, and will remain the property of EPS. Secondly, all the employees and all the assets will remain in Vojvodina. We will not take neither substation nor cables or buildings, we will not put them behind our backs on and bring to Belgrade. All these assets remain there, as well as employees who remain to work where have worked so far. Employees in Elektrovojvodina will be neither better nor worse off than other employees in EPS.

And the most important thing is the policy of this government, which is very clear that the price of electricity must be the same everywhere. All Serbian citizens should receive the same level of service, the same level of quality and the same price of electricity from EPS. Of course, we’re talking about the public supply. If it came to having more than one distribution system operator, we would have to have more network charge, the since the network charge is a part of electricity price, then we would have different prices for consumers in different parts of Serbia.

I think Elektrovojvodina and employees in this part of the company have a small advantage compared to other parts of EPS because they have so far showed the best results in their work. My idea is to make their results become a landmark for the entire system. Now I will use a lot of pressure in the rest of the system to get to that Elektrovojvodina level, and EPS as a single company, with the experience exchange and knowledge sharing will have greater efficiency.

It is a benefit to both colleagues from Vojvodina and the state. We have committed to become more efficient and better system. All expert public even remotely understanding the system, of course, says it is better to have one distribution system operator than five.

After all, let’s look at an example of Telecom, which is unique in the whole territory of Serbia. Regardless of whether you call from Belgrade, Novi Sad or Nis message or call price is the same, because it is a unique network. No one in Telekom thought of having different network fee prices.

When you break these walls which until now have existed between all these fiefdoms in the distributions, the flow of people and ideas will be much better.

So, on July 1st the first phase of the corporatization will have been complete: we already have EPS Snabdevanje, and we will have a distribution system operator, and all production companies will enter into EPS and will become branches within the EPS. What does it mean?

Thus, we fulfill the main condition – that we can optimize the work process and that we can start with what I keep talking about – great savings in the system. When, for example, in the production part everything is set in the framework of one company, will be able to make big savings, both in the administrative part, because corporate affairs which every firm now does for itself will be organized from one place. But we will also be able to unify the system of planning and procurement. Of course, it will go gradually, nothing can be completed overnight. Another thing is that a unique distribution system operator comes to life. We will then look at how we can make savings in these two systems. In practical terms, to get the EPS group to operate on a single platform in the most efficient way possible.

These are general prerequisites for change. We expect that in the next two – three weeks the Government of Serbia, in cooperation with the World Bank, the International Monetary Fund and the EBRD to decide on the financial consolidation of EPS. With that, all the financial parameters that we as a system we need to achieve will be given. I still stand by my statement that in the process of corporatization we need to save at least those 100,000 Euros a day, which is 36 million a year. That’s my goal. But, it can easily happen that the Serbian government raises that ladder up.

It is not just a question of efficiency but also better planning, better work coordination … When we have that one central system everything will be easily measured.

You yourself said you had a surplus of employees in the administration and lack in the production. How are you going to solve this?

In an agreement with the unions. Both union and we are here on a mission. We all know what the situation in the system is. We all know where we have a shortage of workers, and where the excess. The idea is to open a dialogue, now, when we have one system, and make a detailed analysis. I hope that we will be able to specify the discussion by the end of the year and reach an agreement with the union regarding the optimal number of employees.
Please note, no matter what happens on July 1st this would be a general story. After this date, the system will practically be corporatized, and we will be able to go into reform.

I remind you that the Government gave us a very clear task as far as organizational changes are concerned form an organizational – legal aspect: July 1st, 2015 is the end of the first phase of the corporatization and on July 1st 2016, we must be turned into a stock company. The Government will provide specific financial parameters: what is expected of EPS in terms of savings. Practically, it’s the first time in the history that EPS will be very transparent and we will have a very clear lap time we have to achieve.

Where is the electricity price increase in these financial considerations? It is interesting that you as the CEO of EPS do not seek the prices correction. Whether and how much the price of electricity will increase is announced by the Serbian government and it appears that the Energy Agency was moved aside although Serbia, as a member of the Energy Community of South East Europe, has accepted the obligation of the Agency deciding on the price increase.

These reforms of EPS should not be viewed in isolation. They have to be seen in the light of all the reforms that should occur in Serbia. EPS has the fortune but also very difficult task to be a demonstration point where the reforms will happen. You know that in all the discussions with the World Bank, the IMF and the EBRD, EPS is taken as an indicator of substantial changes. This government has shown that it is ready for substantial change. When this government was set, EPS was affected by the biggest misfortune, natural disasters. We have managed to overcome all of this with the help of government and are now implementing the first phase of the EPS corporatization. This government has received support from the World Bank and the IMF, and now we have concrete tasks. Therefore, the EPS should not be viewed separately, but as part of the reforms and therefore talks about financial consolidation EPS last a little longer.

You need to look at the whole complex story. Unions will also be involved because we are all on one task: to have a better, more efficient, profitable EPS.

Is that what the Prime Minister of Serbia announced, that EPS should enter into the privatization of surrounding electric power industries?

We have to be strong at home field in order to win away from it. Of course, it will be an object of our analysis. We think about that on the way. We have the opportunities. You follow the region. EPS really has the potential and capacity to become a regional consolidator in this part of the region. In Western Europe, consolidation is already well under way, large electric power companies are being created already. And the size of these companies makes more efficient and they have greater financial capacity and greater savings potential. Electric Power Industry of Serbia, with the support of the Government of Serbia, could be a regional consolidator.

Has HEP recognized EPS as the biggest competition in becoming a regional leader, so now they raise the question of its former investment in thermal capacities in Obrenovac?

We have not received anything official from HEP. I would not comment on speculation. And, in any case, whatever happens we are ready. EPS is yet to be real and strong regional player. EPS’s this time is yet to come.

When will the new valuation EPS start because those who attack you say you do not advocate for electricity price increase because you want to lower the value of EPS?

That’s not true. The evaluation of assets and capital of EPS will be done in the second phase of the corporatization. We have an obligation to turn into a stock company until to July 1st 2016. The evaluation of assets and capital is a part of these activities. It has to be done and it will be transparent. It is not the will of directors. For a company to be a joint stock company, it must be very clearly defined what the company’s assets are and how much it is worth.

Is the property of EPS transferred from the state to EPS?

Networks have been solved, and negotiations are in progress for other assets. Ministry of Mining and Energy has taken the leading role and they will be the coordinator in front of all ministries, because it is not a matter of our line ministry but also of others. This is a rather complex story. You have seen this government managed to start the corporatization of EPS, although no one thought it would happen on July 1st in EPS. And for so many years EPS reforms have been talked about.

How do you see tomorrow EPS? As a holding company, which…

I see it as a strong EPS group, which will, starting from July 1st , have only three legal entities instead of 14, plus EPS Trading in Slovenia and on the basis of the Brussels Treaty we are in the process of establishing EPS Trading in Kosovska Mitrovica. So it will be a strong vertically integrated Electricity Company, which will operate efficiently and which will, I hope, be a regional consolidator in this part of Europe. EPS will be very transparent, so that our objectives will be clear, what financial parameters we have to establish, and who is responsible.

So we can no longer play: this one is responsible or that one is. The most responsible for the whole system of EPS will be the CEO, together with the executive directors.

There were comments from abroad that Balkan electric power companies plan to build new, primarily thermal capacities that they do not require. How do you comment? What about the building a new thermal unit in TP-KO Kostolac?

We still have several agreements and projects, international, where along with our colleagues from the Serbian Republic and Montenegro we are still developing some projects. They are in the planning stage.

Unit Kostolac B3 is the largest investment project in the recent history of EPS. It is our strategic project which will be built because we need to stabilize the electricity supply.

Air is not the most suitable for conventional energy producers. The price of electricity is constantly falling. For example, when I worked in the CEZ, electricity price was 80 to 90 euros per megawatt hour, and now it’s dropped to 35 Euros per MWh. Secondly, Brussels still has a policy to fight against the production of electricity from fossil fuels, and we in Serbia produce 70 percent of the electricity from coal. These trends are not going in our favor, “headwinds” are quite strong against but, I repeat, Kostolac B3 is essential for our mechanical and electrical industry, as well as general system stability and our energy security.

And in order to maintain this investment procedure, and to make the investment worthwhile, EPS must operate more efficiently and profitably. After all, the Serbian Government has told us that thay expected EPS to make money for their owners. And our owner is the state of Serbia.

Will you make money?

According to the latest information, big flood damage has cost us half a billion Euros. This has already affected the operations in the past, and will affect the business this year, so I do not expect a positive business outcome this year.
However, when the effect subsides and when we go with the first effects of the increase efficiency I expect us to become a profitable company.

Once we have the Plan of financial consolidation, we will know exactly what I as a director and the management of EPS should do.

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