MVM:vertical integration better for milking consumers

Pursuing an earlier agreement E.ON confirmed that it is in talks with the government of Hungary and MVM. The state owned electricity company is seeking to gain a minority shareholding in the distribution assets of E.ON. Talks include discussions over asset swaps, with MVM seeking to finalize the deal by the end of 2010.

MVM, just like Romanian and Bulgarian owned counterparts, once had a strategy to become a regional player like CEZ. I’m just wondering if instead of attempting to expand outside of Hungary they have decided to concentrate on consolidating their position within the country. MVM is already in a dominate position in the generation sector.  The Hungarian system gives MVM a near monopoly on generation with it buying and selling a large majority of the power in the country. Even companies like E.ON or RWE that have generation assets have to sell their electricity to MVM then buy it back to sell to their generation company. Needless to say, profits were high once again last year.

The distortion that MVM causes on the Hungarian power market is really nothing short of scandalous. It is a middleman that does not need to exist. In fact (if I can deviate)  it reminds me of the system set up at the Hungarian Academy of Sciences library. If you want to use the library you have to do the following: Go to the coat check, get your coat check number, go to the library, say hello to the ‘library nani’ who, after looking at your library card and taking your coat check tag, gives you a seat number on a green card, then you go to the librarian to give the same number and your card, after which the librarian gives you a red card with the same number on it.  I won’t even get to the point that it all should be electronic and you can sit anywhere…but the existence of the library nani is equivalent to MVM.

While I prefer my tax money going to the library nani who plays solitaire all day, MVM, by acting as the middleman sucks money from my pocket to enrich itself and the state. The profits it makes both in its market dominant position and role as a middleman causes all consumers in Hungary to pay more for a service that does not even exist in surrounding countries. This is one reason why Hungary has the highest electricity rates in the region. In addition, MVM has played an important role in the perpetual underinvestment in generation in the country – leading again to higher electricity rates. Plus with its total control of the transmission system operator MAVIR, thus limiting exports and imports, it strangles the Hungarian market through a state approved monopolist – despite EU efforts foster a competitive electricity market.

Now, that MVM is interested in buying into the distribution assets, whether a swap or not, it will essentially recreate a vertical monopolist on the Hungarian market. Through some of my research in the past I have examined why a government would maintain a vertically integrated monopoly (Michigan has essentially done this). The reason for it is to ensure long term power investments that will result in lower prices. I fail to see how the track record of MVM or its strategy milking consumers for unnecessary services contributes to a competitive Hungarian energy sector.

The alternative to a government owned power milking machine is effective regulation with stipulated rates of return and regulated prices (for providers of last resort). Really, life can be that simple.

But just like consumers don’t think of where their milk or meat comes from, they don’t understand the complex financial transactions involved in the energy sector. This enables governments to use the sector as a taxpayer milking machine – essentially adding another tax layer to utility bills. Maybe it is time for Hungary to become power vegetarians.