Power companies hint at possible merger

TALLINN/RIGA - The state-owned Estonian and Latvian power companies,
with their respective governments' blessings, have said they will
create closer economic ties in the near future that may result in a
merger of the two Baltic utilities.

Estonian Economics Minister Mihkel Parnoja and his Latvian counterpart,
Aigars Kalvitis, were given the go-ahead on May 16 by their governments
to sign a letter of intent outlining future economic cooperation and a
prospective merger of Eesti Energia and Latvenergo.

By June 30, the two utilities will prepare detailed proposals on how to
move forward with their plans, according to a joint press release.

Currently, the power utilities claim that together their international
value will increase, electricity prices will decline and power supply -
generated by Estonia's oil shale and Latvia's hydro-power - will
increase and be independent of the fluctuation of world energy prices.

"Our objective is to create conditions under which energy prices can be
kept stable," said Ojars Kehris, chairman of the supervisory board of
Latvenergo.

Chairman of the management board at Eesti Energia, Gunnar Okk, added:
"The planned large scale economic cooperation is a logical continuation
of the well-functioning technical cooperation. Given the free
electricity market, this is practically the only way the utilities can
continue their successful operations."

The large power companies already work together on a technical level.

Estonian Prime Minister Mart Laar, during the annual EBRD meeting in
Riga last weekend, said the joint company would make the region more
competitive, especially in the open electricity markets of Europe.

Laar has been a strong supporter of a pan-Baltic energy market to
increase this region's competitiveness in Europe. At the Baltic Council
of Ministers last winter, Laar emphasized the importance of the common
market of Lithuania, Latvia and Estonia. He says the Latvenergo and
Eesti Energia cooperation is a step in the right direction to bring
down prices and raise credibility abroad.

Prime Minister Andrius Kublius of Lithuania told Reuters that the
merger plans of Eesti Energia and Latvenergo may halt efforts to create
a common Baltic market.

"I don't think [the merger] would have a very favorable effect on
forming an open energy market in the Baltic region," he said.

Kublius added, however, that currently the aim and the method of the
possible merger is unclear to him.

Laar's spokesman, Priit Poiklik, would not comment on where the deal
between Latvia and Estonia leaves Lithuania at present.

Kalvitis said on May 20 at the EBRD meeting that he hoped Lithuania
would also join the club in the future.

At least one group has expressed concerns over the companies'
speculated consolidation. Peteris Vilks, head of the Latvian
Competition Council, told BNS that a merger would lead to the formation
of a dominating company in the Baltic energy market and decrease
competition in the region.

Eesti Energia spokeswoman, Kaie Saar, said the planned cooperation
would have no negative effects on the market, but rather, expand the
possibilities of large clients to buy electricity from different
producers.

The utilities' power production units are independent companies that
are to be privatized soon.

"The electric energy distribution grid is a natural monopoly," she told
BNS. "Estonia has a single network and so does Latvia, and nobody would
start building a second grid beside it."

Tariff reductions for two of the Baltic state countries could be the
result of a merger, said Latvia's new minister of economics, Aigars
Kalvitis.

"The merger is a positive step towards the joint Baltic power market.
The signing of the agreement will provide consumers with more
stabilized tariffs," said Kalvitis.

Latvenergo currently supplies Latvia with 40 percent of its
electricity demand. The other 60 percent is imported. Kalvitis said
with the differing energy resources that Latvia and Estonia have, the
benefit would be in less energy being bought from countries such as
Russia.

There have been recent developments in Latvenergo plans. Legislation
in March was passed by the Latvian Parliament stating that Latvenergo
will be restructured and 49 percent of its thermoelectric power
resources be privatized. The energy union Energija
has not agreed with the legislation and has collected, with the help of
some government opposition parties, signatures from the citizens of
Latvia to start the process of a referendum to annul the bill.

Kalvitis assures the possible outcome of a referendum or Latvenergo's
privatization will not hinder the merger. The bill that was passed by
Parliament will not stop the efforts of privatizing Latvenergo. There
are no contradictions to the energy law to affect a merger, said
Kalvitis.

"Latvenergo will benefit from not only the privatization of its
thermoelectric power resources but also from the capital invested by
the Estonian government in the project. Eesti Energija will also
benefit from the investments Latvenergo will make in the joint
venture," said Kalvitis.

The proposed merger has not been greeted happily by some government
bodies, both in Latvia and Estonia.

The president of the Latvian Council of Competition, Peteris Vilks,
said there could be a threat to natural supply and demand in the power
market if the merger of Latvenergo and Eesti Energija goes ahead.

"Competition between the two companies would no longer occur,
especially if a joint Baltic power market is set up," said Vilks. "A
beneficial relationship would be eliminated in the Baltics. Competition
in supply and demand would be eradicated by not having competitors
allowed in the market.

"The consumers could be the losers if the protocol proceeds. Both
companies are monoplies and when the Baltic power market is introduced,
there will be one less competitor involved. Further research needs to
be done to see what the goals of the two governments are in the merging
of the two power companies," he said.

The news agency LETA reported that the Estonian Energy Market is
against the idea of the protocol signed by the Latvian and Estonian
governments. A complicated organization would be created and differing
tariffs would be the result, they said.

Spokesman for the Ministry of Economics, Kaspars Paupe, said the
merger will give Latvia a better chance to compete in the European
market.

"Our two countries do not have energy supply companies as large as in
Europe but the integration of Latvenergo and Eesti Energija will give
both a better opportunity to compete in the European power market,"
said Paupe. "Closer cooperation, especially when we join the EU, will
give consumers a more balanced power supplier."

The Latvian Power Regulation Committee chairman, Janis Dauskans, said
the merger of Latvenergo and Eesti Energija is a positive move by both
governments. Dauskans agrees the steps taken to unite the energy
companies will lead to beneficial results for power consumers.

"Power supplies would be coordinated and will lead to stable tariffs
for consumers. Stability in the power market will be the result," said
Dauskans. "The joined forces of the two companies will give maximum
results in taking advantage of one anothers resources. In the long term
cheaper tariffs for consumers will be the benefit."

First steps to start the merger of Latvenergo and Eesti Energija were
implemented from the Latvian side by the former Minister of Economics
Vladimirs Makarovs and former Prime Minister Andris Skele. Kalvitis
said the protocol is the culmination of month long talks between
Latvian and Estonian economics ministers.

"Even if the merger fails, closer cooperation will result from the
Parliament's decision to explore the possibilities of a merger," said
Kalvitis.