ELECTRICITY REFORM STATUS IN ROMANIA AND THE ASSESMENT OF THE DISTRIBUTION PRIVATIZATION REQUIERMENTS Gh. Indre M. Indre I. Conecini Romania Electricity industry is facing in the of a four years restructuring whole world radical changes regarding, the process core activities, generation, transmission, • Analyses of the objectives and the distribution and supply, deployment and general requirements for the organization. privatization of the electricity As an essential part of the electricity distribution sector. Define the industry value chain the electricity basic elements for an efficient distribution activity is organized as a natural privatization strategy. monopoly, its economics pertaining to the • Identify the issues to be considered economy of scale. This very important in the process of creating new feature determine that the investments in distribution companies, taking into distribution to be exposed to a very peculiar account the provision of the commercial risk generated by the fact that Romanian electricity legal and being a natural monopoly structure, it has to regulatory framework. admit a very well defined regulatory process • Presenting the basic elements of for its rates and tariffs. As a consequence the the process of valuation of the distribution investor is facing three major distribution company. They are risk categories: political risk, regulatory and indicated the necessary data and commercial risk. information which has to be used In spite of all this realities the for building a financial model for distribution companies and the distribution the valuation of the distribution business are very attractive for the investor company. They are mentioned a and the last years experience has proved that number of financial synthetic the privatization of the electricity sector in indicators used to asses the value many countries in the world like Brazil, of an electricity distribution Hungary, Argentina, s. o., began through company. privatizing the distribution. Key words: restructuring, economic Starting from these considerations and viability, regulation, privatization, market taking into account the fact that the value, regulatory risk, political risk, and Romanian electricity industry is facing a commercial risk. deep restructuring in order to attract foreign investors in this sector of the Romanian economy the paper performs analyses of the following important aspects: • Presents the actual status of the organization and operation of the Romanian power system as a result ELECTRICITY REFORM STATUS IN ROMANIA AND THE ASSESMENT OF THE DISTRIBUTION PRIVATIZATION REQUIREMENTS Gh. Indre, SC ELECTRICA SA M. Indre, SC ELECTRICA – Bucharest Subsidiary I. Conecini, TRANSELECTRICA Romania 1. INTRODUCTION perform the activity on a contractual basis, running as local natural monopoly. One of the main priority of the Romanian ♦ To establish new commercial companies Government policy in the last four years was the able to perform the electricity supply activities restructuring and the reform of the Romanian for the eligible customers. Power Sector ( RPS). In 1997 it was started the ♦ To create the necessary legal framework by process of transforming the former Romanian issuing an electricity had heat law and legal Electricity Authority RENEL into a commercial acts necessary for the creation of the company and planning the development of the electricity competitive market. process for creating a competitive electricity ♦ To create an independent regulatory body market in Romania. able to produce the secondary legislation and The main purpose of these efforts was the to issue the license and authorizations, to unbundling of the core activities of the RPS, assure the third party access to the generation, transmission, distribution and supply transmission and distribution networks, to of electricity and heat and to establish define and regulate the prices for the natural independent commercial company as legal monopoly activities, and to supervise the person designated to perform this activities on a operation of the electricity market. clear contractual basis. Following the principles ♦ To open to the retail electricity market by included in the EU directive 92/96 for the creation defining the eligible customers of the internal electricity market in Europe the This paper will present the present status of the RPS restructuring process was developed having restructuring and the reform of the RPS and some in mind the following objectives: aspects related to the privatization of the ♦ To reform RENEL which was organized by the distribution activities. time as a vertically integrated business covering the power sector activities and 2. PRESENT STATUS REGISTERED IN THE having a strong monopoly position all the ROMANIAN ELECTRICITY SECTOR electricity customer in the country, having to RESTRUCTURING PROCESS buy electricity from RENEL. As the main significant steps which has been ♦ To attract private investment in the RPS and followed in the process of the restructuring and decrease the state role in performing the the reform of the RPS we can mention: economic activities specific electricity and The promotion in July 1998 The government heat sector. decree 365 created The National Electricity ♦ To create competition in the electricity Company CONEL as a holding structure by generation sector by establishing a number of separation from the former autonomous regie electricity generation companies able to RENEL the nuclear sector, and the study and compete on this market. research activities. CONEL included the following ♦ To create an independent electricity independent commercial companies: transmission which has to remain as a natural Termoelectrica S.A. for the operation of the monopoly organized to provide the thermal power plant; transmission services for the whole sale Hidroelectrica S.A. the operation of the hydro electricity market, and to assure the power plant; dispatching and the operation of the RPS as a Electrica SA for the operation of the distribution system operator; networks formed by all the facilities with the ♦ To define a model and the basic rules for the voltage level 110 kV and less. Electrica had 42 wholesale Romanian electricity market and to subsidiaries, one for each county. Electrica had to create the institutional structure necessary to perform both the distribution activities and the operate this market by establishing an supply for all the electricity customers in the independent company with the role of the country. electricity market administrator. Conel had the mission to provide the operation of ♦ To separate the distribution activity and to the transmission network ( 220 kV, 400kV and 750 organize commercial companies meant to kV substations and lines). In October 1998 was promoted the Emergency On the liberalized market which represent 15% Ordinance 29 which has created the National the accredited eligible customers can buy Electricity Regulatory Authority ( NERA) which electricity on a negotiated base from the started to work in March 1999. producers which holds a supply license or from In December 1998 it was promoted by the other licensed suppliers. Government the Emergency Ordinance 63 for All the captive customers have to buy electricity electricity and heat which as the energy and heat from SC Electrica SA which holds a distribution law. On the base of the provision of this ordinance and a supply license. NERA started in march 2000 to elaborate the secondary legislation for the whole sale electricity 3.OBJECTIVES AND GENERAL market. REQUIERMENTS OF THE DISTRIBUTION During march 1999 and July 2000 NERA issued a PRIVATIZATION great number of electricity market regulations and licenses for generation, transmission, distribution The electricity distribution privatization is a and electricity and heat supply. complex process, which has to be developed on In February 2000 through the Government Decree the base of the Government political decision. 122 it was decided to open the electricity retail There are many parties interested and /or affected market up to the level of 10%. by the distribution privatization. We will try in o In June 2000 the Parliament issued the Law identify this actors and to define their main 99/2000 for the modifications and approval of the objectives. Emergency Ordinance 29/98 regarding the The commercial company SC Electrica SA has its creation of NERA. own priorities but we believe that as a possible In July 2000 through the Government Decree 627 vendor and as an distribution and supply company the National Electricity Company CONEL has the following objectives are likely to be important: been restructured and they have been created the ♦ Creating a successful privatization model for following independent commercial companies: the distribution and supply industry Termoelectrica SA created on the base of the ♦ Improving the quality of services and lowering former subsidiary of CONEL. the real cost for electricity supply industry Hidroelectrica SA created on the base of the ♦ Raising funds for the state budget former subsidiary of CONEL. ♦ Transferring the responsibility for the Electrica SA created on the base of the former investment to the private sector subsidiary of CONEL ♦ Securing public support for privatization and Transelectrica SA a new electricity transmission the economic reform process company which is licensed to perform the ♦ Encouraging foreign investment in the country transmission services and the operation of the ♦ Promoting domestic capital