Pursuing story on energy prices helps resolve municipal problems

Apr 262010

Business stories can develop in unexpected, almost mysterious ways, I was reminded recently when the business desk at my host organization took a closer at soaring electricity prices in Serbia. Exploring the factors behind the price hikes showed that some of the long standing problems may not be so impossible to solve as people thought.

Serbia’s state-run power company Elektroprivreda Srbije, or EPS, has been a huge monopoly for decades, a remnant of the Communist era that has dodged several privatization attempts. Even as other sectors underwent profound changes since democratic governments took over almost ten years ago, the behemoth with more than 30,000 employees always seemed too big to tackle. And as long as its thermo and hydro plant were providing power to homes and businesses at bearable prices, often below European average, the authorities here felt no urgency to do something about the dilapidated facilities and ageing grid crying for overhaul.

But when the economic crisis began to really bite last year, the problems got worse, aggravated by the austerity measures the government had to adopt in exchange for financial bailout from the International Monetary Fund. Business reporters who almost daily covered ribbon-cutting events with foreign investors during the boom years, suddenly were busy reporting plant closures, entrepreneurs gone bust and liquidity squeeze all over the place. Particularly painful was the decline of the national currency, the dinar, which lost nearly 25 percent against majors within a few months, seriously slashing purchasing power in a country that imports far more than it exports.

So when the government announced a freeze on all salaries in the public sector, the EPS employees thought it would not affect them because, although the company is state-owned, it has own revenue and does not directly depend on the state budget.

Things began to change late last year when the EPS got government approval to increase electricity prices by 10 percent, after which the news leaked that it would also increase monthly wages for its employees by 9,000 dinars (120 USD), apparently counting on higher revenues. Beta had a scoop on this thanks to a citizen journalist who provided the tip. Other media had the same a few hours later, triggering public outrage because it looked like the EPS workers were unfairly privileged while others in the public sector had to follow the freeze (and struggle to pay their utility bills).

The next twist came just days later when the union representing EPS workers threatened with a strike unless the government signs off the salary increase.

For the government it was essential to give the impression that the austerity measures applied to everyone, so the energy minister Petar Skundric ruled out the salary increase while trying to justify the price hike with ``higher production costs.’’

Days later, also thanks to (multiple) leaks, we had the report that there was a behind-the-scene deal between the government and the union, under which the extra cash would be disbursed to the EPS workers in the form of `bonuses’ rather than salary increase.

The government was embarrassed but it stood by the EPS when the company soon sought a loan in London, negotiating combined 80 million euros from the European Bank for Reconstruction and Development and the European Investment Bank (40 millions from each), to upgrade the grid in order to reduce the so-called system losses (losses that naturally occur in the transmission system due to resistance, heating, etc).

We took a closer look at the numbers - kilowatts produced, actual revenue, percentages, etc. in order to shed more light on EPS operations. Company officials were suddenly forthcoming when Beta asked for these. Blame games are never productive, fact checking is.

Soon we had the details that surprised many: out of 32 billion kilowatt hours produced in 2009, EPS failed to monetize 4.86 billion kWh, or 15.19 percent of the output. About a quarter of that, 1.26 billion kWh (equaling 60 million euros) was lost to illegal consumption as thousands of homes across Serbia are illegally connected to the grid.

Which opened another question: why the authorities fail to prosecute those linked to the network without permission? We talked to an attorney who said the reluctance comes from the fear of possible unrest – never mind the fact that such policy means higher bills for those who pay their utility bills.

We continued to dig deeper and established that a vast number of those illegally linked to the grid built their homes without construction permits and consequently could not register with the EPS as normal users, even when they tried to! 

The suburbs mushroomed in the 1990s when hundreds of thousands of war refugees came to Serbia from other parts of former Yugoslavia, resettling in the areas that lacked zoning plans or urban development concept. The surge in demand for homes, or lots where homes can be built, was overwhelming for the notoriously slow municipal authorities who turned a blind eye to illegal construction. Thousands of new houses were made (solid brick-and-mortar structures, not shanty towns) and many of the owners would pay their electricity bills if they could legalize their homes.

On the other hand, many of the ``electricity poachers’’ are just thieves, but the authorities apparently lack resolve to deal with them. We found and published the statistics that showed that local inspectors reported as many as 25,000 cases of illegal power consumption in Serbia over the past four years, but the courts made only 8,000 verdicts in such cases, mostly suspended sentences.

Top EPS managers acknowledged that the price hikes were indeed part of their efforts to compensate for the losses incurred due to the non-paying users.  On April 9, the company announced it would turn 250 illegally built homes in the Grmovac suburb north of Belgrade, into legal, paying customers, regardless of their still problematic status as houses built without permits The suburb was chosen as a starting point for solving the widespread problem.

The EPS even organized a ceremony in Grmovac for the official signing of contracts with the residents. The head of the EPS Managing board, Aca Markovic, showed up announcing that the company was ready for the breakthrough to try to apply the solution in other suburbs, without waiting for urban planners to make up their mind about the sprawls that became reality long ago. 

``When there’s good will and cooperation, Elektroprivreda and the local authorities can and will solve the problem of illegal connections in any suburb,’’ Markovic said.