Anger at power plants deal set to explode

  • 2001-07-12
  • Kairi Kurm
TALLINN - Some Estonian academics are protesting against the sale of a 49 percent stake in Narva Elektrijaamad (Narva Power Plants Ltd.) and a 51 percent stake in the oil shale mining operations of Eesti Polevkivi (Estonian Oil Shale) to the U.S. energy firm NRG Energy. They have demanded an extraordinary session of Parliament to be held in August to discuss the power plants deal.

Endel Lippmaa, a representative of the Estonian Academy of Sciences, said the deal is harmful to Estonia and is unconstitutional because it gives away the country's mineral resources virtually for free.

In two public letters to the media, the scientists raised several points about the deal. They also demanded the publication of all the details surrounding the deal and called for a new public tender.

Eight Estonian environmental organizations have also expressed concerns about the sale of the country's largest power plant to NRG, because it would give the environmentally disastrous oil shale-based energy a market advantage over other alternative sources of energy for the next 15 years.

"Power Plants should be privatized the way it is done in Europe," said Lippmaa. "It should be a public tender and there should be no business secrets. Otherwise we would end up with something similar to the shady privatization of Lithuania's Mazeikiai Oil."

He said that Estonia's Ministry of Economics was supposed to estimate the value of the power plants and the government should have given the privatization plan to the Parliament for approval before the deal was started.

Valuable thousandth

"The Parliament demanded on December 16, 1998 preparation of the privatization of the Estonian and Baltic power plants and the presentation of these decisions to Parliament for approval. The government did not do it," said Lippmaa.

"The government gave Minister of Economy Mihkel Parnoja the task on June 8,1999 to estimate the value of 51 percent of the shares of Estonian Oil Shale before it was given over to Narva Power Plants," he explained.

NRG will inherit this stake through Narva Power Plants and will pay an additional 500 million kroons for this, Eesti Energia reported on June 26. According to Gunnar Okk, chairman of the Management Board of Eesti Energia, it seemed an advantageous deal because NRG was getting virtually it free of charge.

Lippmaa said that NRG is paying for only 1/1000 of the value of Estonian Oil Shale. He said that the company's production has reached 1.5 billion tons of oil shale per year.

"If we take 51 percent of the resources and multiply it by 130 kroons ($7), which is the price per ton, and add the value of mines and the value of the company, it would reach hundred billion kroons," said Lippmaa.

Hillar Lauri, NRG's representative in Estonia, said that Eesti Polevkivi does not own oil shale.

"It has a license to mine oil shale, which is state property," said Lauri.

The price of the deal must, according to the terms approved by the government, be more than $54.5 million. The terms of purchase include a commitment by Narva Power to invest approximately $361 million in reconstructing and refurbishing the generation plants and making environmental improvements. NRG Energy will make an initial $65-70 million equity commitment.

Erki Peegel, a spokesman for Eesti Energia, said that the task of Eesti Energia's management is to conclude the best deal for the company and not otherwise evaluate it.

He said that the value of Narva Power Plants has been estimated by various auditors and financial consultants of both parties.

"One of the world's biggest investment banks, Shroeders SSB, consulted us," Peegel said.

Some fear that NRG will sell its favorably acquired stake in Narva Power Plants as soon as it possibly can, because it holds important positions on the company's board.

According to the deal, NRG may sell its stake two years after the reconstruction has been completed. Lauri said that the construction works will not be completed until 2004 and Eesti Energia would have the opportunity to make the first offer if NRG chooses to sell.

"Three out of five board members are from NRG, but the majority in the council are from Eesti Energia," said Lauri. "Eesti Energia will hold its 51 percent stake in Narva Power Plants. Strategic questions will not be made without the council's blessing."

Off the shelf

Lippmaa said Estonia is signing a contract with a shelf company. Lauri confessed that NRG had registered the company NR Generating International B.V. in the Netherlands especially for this deal, in order to cut tax costs.

"NRG Energy is a big American energy company, the fifth largest independent energy company in the world. All the liabilities of the small company would be guaranteed by the parent company," said Lauri.

The State Audit Office, which recently analyzed the deal, also found a number of flaws, most of which deal with environmental and social problems, the division of future liabilities between the two parties and the formation of prices. It also suggested that the government make a plan for opening the energy market as required by the European Union.

Currently, 98 percent of the Estonia's energy is supplied by Narva Power Plants and the production capacities of Eesti Energia are guaranteed by its sales contract. Eesti Energia is interested in opening the market for exports, the State Audit Office reported.

According to Lippmaa, the state has guaranteed an annual 12 percent profit for NRG, which he believes is too high for an energy company. He said that the productivity of energy companies is less than 5 percent and the parent company receives 2 percent.

Lauri said that the two parties have abandoned the plan that guaranteed the 12 percent productivity rate.

"The rating is set for predictions only. If the company works inefficiently, we should put up with a loss," said Lauri.

According to the deal, Narva Elektrijaamad will enter into a 15-year purchase agreement with Eesti Energia.

The producer price of electricity would range according to the amount purchased from 0.43 to 0.495 kroons per kilowatt-hour. Presently the producer price of electricity is about 0.37 kroons per kilowatt-hour. The price of oil shale sold by Eesti Polevkivi may not exceed 131 kroons per ton until the year 2010 and 101 kroons per ton in the following years.

It is against European Union requirements to sign long-term price and volume guarantees, Lippmaa said.

Tough task

NRG is negotiating with banks to find the best finance deal, which will likely be signed in September.

"It is not my business to predict what happens next. The task of scientists is to inform the public and we gave them information," said Lippmaa.

Would Narva Power Plants survive without the privatization deal? Peegel said that the task of the management of Eesti Energia was to cope with all kinds of situations.

"Without NRG we would not be able to finish the reconstruction works by 2004 and the power plants would not be in accordance with environmental requirements by 2005," said Peegel.

"Why should the state take such big loans and give guarantees if the private sector can do it," asserted Lauri.