Power in East Europe 

Issue?57 | 14/05/2001

Poland's SOK in limbo as Belchatow withdraws

Will Poland's long-awaited transition levy scheme to dissolve long-term power 
purchase agreement's (PPAs) - System Oplat Kompensacyjnych (SOK) - see the 
light of day? This has become one of the burning issues in central European 
electricity deregulation ever since the first draft was published in April 
2000. Subject to perennial delays and uncertainties surrounding its 
implementation as well as criticism from generators and banks, SOK has become 
the laughing stock of Polish power reform. This is a pity for it holds the 
key to price and regulatory transparency, as well as the proper functioning 
of the Polish Power Exchange (Gielda Energii) as its head, Jan Buczkowski, 
never ceases to point out.

SOK's credibility has been dented by the decision of Elektrownia Belchatow, 
Poland's largest and most fuel-efficient generator and the linchpin to a 
competitive power market, to exclude itself from the first group of producers 
to be covered by the scheme. Belchatow, along with Elektrownia Opole and 
Elektrownia Jaworzno III, were to start dissolving their PPAs on 15 April. 
But Belchatow, afraid that if it joined SOK its financial condition would 
worsen considerably since it would be paying in to the system instead of 
receiving payments, is not renegotiating its PPA with state grid PSE. Unless 
the plant is able to rid itself of its punitive below-market contract, which 
relieves it of its low-cost advantage, the prospects for a competitive power 
market are dim.
Opole and Jaworzno hope for 1 July
In an article in the daily Puls Biznesu on 2 May, representatives from Opole, 
Jaworzno III and Elektrownia Dolna Odra (which has taken the place of 
Belchatow) are quoted as saying that they are optimistic that they will be 
able to start phasing out their long-term contracts on 1 July. But investors 
have heard it all before. SOK was supposed to be implemented in the 
second-half of last year, then in the first-half of this year, and now it's 
questionable whether the 1 July deadline is realistic. All this creates 
uncertainty. 
"This is what investors hate the most. What's more, it's extremely difficult 
to estimate the effects of SOK given that there isn't any historical 
precedent," Puls quotes Piotr Samojlik, general director of financial 
advisers CAIB in Warsaw, as saying. But even a botched SOK, many believe, is 
better than a dead SOK.
One of the stumbling blocks concerns the ministry of finance's reservations 
regarding the calculation of VAT in the payments. Apparently, this has yet to 
be addressed. But Puls quotes Jozef Pekala, the president of Opole, as saying 
that his plant and PSE have already reached a tentative agreement on the 
model of the annex to the PPA and are now awaiting the final text. All 
Opole's units are under a long-term contract set to expire in 2012 and worth 
an estimated ZL5bn. 
Jan Kurp, meanwhile, the high-powered president of Jaworzno III (who also 
doubles as head of the mammoth Poludniowy Koncern Energetyczny), is also 
upbeat and hopes to close negotiations by the end of this month. The 
following month will be devoted to talks with the banks, Kurp tells Puls. 
Jaworzno has a long-term contract set to expire in 2008 and a smaller 
contract (covering 12-15% of capacity) expiring in 2012.
Juchniewicz ready to free prices
On 10 May, Leszek Juchniewicz, the head of Poland's energy watchdog URE, 
confirmed he would stick to his July plans to exempt generators from the 
obligation to submit tariffs for approval despite the distinct likelihood of 
a continuation of the PPA regime. This is one of the few pieces of good news 
that has come out of the Polish power sector for some time and will be 
greeted positively by investors. In an address to parliamentarians, 
Juchniewicz said that while wholesale prices will be freed, retail prices 
will, for the time being, be capped in order to protect small and 
medium-sized consumers. 
SOK's fate, however, ultimately rests with the banks and the plants who, for 
a variety of reasons, are not particularly enthusiastic about the programme 
and have serious doubts whether the issue of stranded costs can be resolved 
in a fair manner. With parliamentary elections looming, it is vital that SOK 
be implemented as quickly as possible in order for there to be no 
backtracking and/or revisions after the elections.
Power in East Europe - Issue 57 - 14/05/2001 - 717 words