The government postponed the review of the proposed merger of Latvenergo with Eesti Energia to before the meeting of Latvian and Estonian economics ministers, set for July 26, according to Economics Minister Aigars Kalvitis.
The proposal did not satisfy the Economics Ministry, as it contradicted the government resolution on Latvenergo's restructuring and privatization.
According to the task force proposal, the newly created Baltic Power Group is to be divided into four units: generation, transmission, distribution, and other entrepreneurial activities. The merger would be considered privatization under Latvian law and all the units private entities, a contradiction of Latvian energy law.
The law states that both hydropower plants - generation - and high-voltage transmission networks - transmission - are to remain state property.
However, the question of privatization will be moot should Parliament adopt the amendments to the energy law, which would require leaving Latvenergo in state ownership.
A binding decision about the Latvenergo and Eesti Energia pact will be adopted until issues surrounding the energy law are resolved, said Prime Minister Andris Berzins.
Another barrier to the merger, Berzins pointed out, is that Eesti Energia privatization procedures are not clear. Should the company be privatized in any way, no cooperation would be possible, Berzins believes. And such an opportunity exists, as Eesti Energia received an offer to sell 49 percent of its power plants to the American NRG.
Latvenergo, though, has too many worries at home to set the potential merger with Eesti Energia as its highest priority. Latvenergo president Karlis Mikelsons said that the main tasks lying now before the company are carrying out restructuring and renovation activities, increasing efficiency, and achieving greater transparency.
The latter is particularly important, according to Mikelsons.
"Latvenergo is primarily a service company," he said. "We have, of course, to deal with the technical issues, but at the end of the day it's our clients who decide whether we did well."
To compound problems, 2000 Latvenergo clients lost power last month due to a severe storm that damaged the company's eastern electricity network. The accident cost Latvenergo 400,000 lats ($667,000).
In general, Latvenergo's financial situation had been damaged by the warm winter and numerous storms that swept over Latvia damaging the company's distribution networks. Its profits in 1999 were, at 5 million lats ($8.33 million), merely a tenth of the 1998 number. Profits in the first half of 2000 were also 1.3 million lats ($2.17 million) lower than the expected 15 million lats ($25 million).
Fortunately for the customers, this will not lead to an increase in electricity rates, according to the company.
Eighty five percent of last year's profits will be reinvested, the company said. Latvenergo's investment priority is the reconstruction of the thermal power plant known as TEC-1, which is expected to cost 40 million lats and be completed in 2004. The company's vice-president on financial issues, Ivars Liuziniks, said Latvenergo has already started looking for possible credit sources.