Power rates up but not enough, says Eesti Energia

Estonia's state-owned electricity monopoly Eesti Energia increased electricity prices between 20 percent and 30 percent as of April 1. But the rate hike will not be enough to save its bottom line or fund long-awaited renovations, according to the company.

Eesti Energia wanted to increase prices more to help renovate power stations and meet environmental standards, but regulators disallowed the move.

"Since the transportation of oil shale has become cheaper after the new oil shale railroad was built, we demand that these changes be taken into account in the new price list," said Margus Kasepalu, deputy director of the Energy Market Inspectorate, the government electricity market watchdog.

The inspectorate started supervising the oil shale business in January.

Eesti Energia planned to increase the highest residential price from 0.91 kroons ($0.05) per kilowatt-hour to 1.10 kroons and include a 20 kroon monthly distribution fee. But regulators intervened, and the price hike was cut to 1.05 kroons per kwh and the monthly fee to 5 kroons.

Eesti Energia has nine different price packages that vary according to how much electricity is consumed. Most customers choose the package that offers the lowest fixed costs. But those plans also carry the highest kilowatt-hour rates.

Eesti Energia spokesman Erki Peegel said clients with electrical heating systems would suffer the most from the inspectorate's ruling.

The average per kwh rate is still cheaper, but it has increased the most.

Peegel said that the cut in the proposed tariffs would decrease revenues by 200 million kroons.

"In our opinion the inspectorate's ruling is economically unjustified," said Peegel. "Legally every company is allowed to make a reasonable profit. Currently we lack this opportunity in the transmission business."

Kasepalu said that the company would have to postpone profits in its transmission and distribution operations.

But, he added, it was necessary to earn money at the power plants, which require large investments the company thought might come from the sale of the Narva power plants to the American company NRG Energy, which was canceled earlier this year.

"They (Eesti Energia) applied for 4.7 percent profitability in transmission operations, which would have resulted in a high increase in prices," said Kasepalu. "Considering that the whole economy is based on electric power, we can't make such a decision in one year and bring an unprofitable company out of the red so fast.

"We need at least two to five years to gain optimal productivity, otherwise we may end up with high inflation and other problems."

The company has operated at a loss for the last three years. Last year it posted losses of 4.56 billion kroons on a turnover of 4.56 billion kroons, which it attributed mostly to the depreciation of assets.

Maris Lauri, chief analyst at Hansabank Markets, said the rise in electricity prices might have a modest affect on inflation.

"(Consumer) prices may rise by about half a percent in April and a little bit more in the coming months, a total up to 1 percent," she said. "I've analyzed the previous situations when electricity prices increased. "Producers may talk about a price hike, and some of them may actually do it, but since the competition on our market is tough, they'll have to bring the price level down again."

Eesti Energia complained to the inspectorate on March 26, saying that a price increase was necessary for the company to be able to finance the renovation of Narva power plants' generating blocks, implement environmental protection programs, renovate outdated distribution grids and develop the electric power system."To meet the requirements of existing and additional future loans, the price rise in 2003 should average 10 percent," a company statement issued March 26 read. "The bigger the price cuts today, the bigger the necessary hike will have to be next year."

The company says its credit rating and ability to secure loans will suffer from the lower rates.

"We hope that with these new prices we'll still receive loans from international commercial banks," said Peegel. "We need to borrow over 5 billion kroons in the coming three years."

The Energy Market Inspectorate says the price plan it approved was not designed to hurt Eesti Energia.

"They'll manage," said Kasepalu. "We only cut the part where expenses had decreased. It won't influence their investment plans."

Peegel said that Eesti Energia might file a lawsuit against the inspectorate.

"We'll decide it after we've received their answer to our complaint." The inspectorate promised to respond this week.