In one sense the headline that E.ON chose for its own press release says it all:

E.ON disposes of E.ON Bulgaria

The reason given in the press release is due to the corporate strategy of divesting “15 billion euros in assets by the end of 2013. So far more than 9 billion euros have already been realized.” Couching the disposal of a corporate unit as wrapped up in the shifting corporate strategy is as polite as a corporations gets to admitting that maybe after seven years of this relationship (the seven year itch?) things didn’t work out well. How much things didn’t work out can be seen in the original purchase price and the proposed sale price of the unit to the Czech based Energy Pro. E.ON paid EUR 140 million in 2004 and is now selling it for EUR 133 million!! A EUR 7 million loss after 7 years of continued investment in the company.

View from trash can in Bulgaria

The first notable reason for the difference in buying and selling price can be seen that E.ON overpaid in 2004. During this expansionist period of German, French and Italian utilities there was firm bidding on the different companies throughout the South East of Europe. The expected long-term time horizons, perceived favorable regulatory environments and the economic growth of the countries all led investors to see self sustaining units that could provide profitable revenue streams. However, soon after privatization and the sale of the unit to E.ON by the Bulgarian state, the regulatory and political environment were not as rosy as they first appeared.

My analysis here is based on a 2009 study Vidmantas Jankauskas (former regulatory of Lithuania) and I wrote about in a report funded by USAID and NARUC. This examines the privatization process and the post-privatization issues arising from the sale of the distribution companies in Bulgaria, Macedonia and Romania. The research is based on a series of interviews, mainly in-person, that we conducted in the summer of 2008 with company representatives, regulators and other professionals connected to the privatization process.

The dedication to the privatization process of the essentially bankrupt country of Bulgaria in the post-communist era can be seen in the significant rate increases. In 2002 rates were increased 20%, then 15% in 2003 and finally 10% in 2004. A regulatory agency was established and the tariff methodology was established so all potential investors could see this before bidding. However, after privatization the sand quickly shifted under E.ON’s feet (and other investors, EVN and CEZ).

At the time of writing the report in 2008, the Bulgarian energy regulator and the privately owned distribution companies, seemed to have enough of each other. Loses were now seen being forced on the companies due to the decision by the regulator not to increase electricity rates.

Utility executives view recent action by SEWRC [the regulator] as impacting their ability to conduct and recoup investments. An example of this complaint is the announcement made by SEWRC on July 1, 2008 that electricity rates would increase by an average of 14%. The distribution of the rate increase would go to the largely state owned firm NEK. Because of this the three private firms in Bulgaria are now filing suit in Bulgarian courts and at the European Union level. For E.ON Bulgaria the price increase would yield a 1% increase for the company out of a total price increase of 17% in their distribution region. According to a company official this would mean that “E.ON would not be able to cover its investment commitments toward maintenance and improving the quality of services it offers, while operational costs would decrease by 80 million leva.” Figure 2 (below), presented by E.ON Bulgaria shows the difference between the company’s applied Opex and Capex and those granted by SEWRC on June 26, 2008.

Applied and Granted OPEX andCAPEXCosts for E.ON Bulgaria

Source:  E.ON, “Tariff Decision 2008, 2nd regulatory period.” in, “Power distribution firms to sue utilities regulator over electricity price hikes – Business news.” July 9, 2008.

In the world of boring electric distribution companies, the above case demonstrates the state is ready to force losses, onto the distribution companies, while also cutting the overall service quality that these companies can provide for consumers. This article, describing the terrible service of E.ON Bulgaria and bidding it farewell, may be more representative of the unwillingness of the state owned transmission system operator to invest and the inability of all companies to invest sufficient amounts into the overall Bulgarian electric system. Low prices for consumers may also translate into poor service.

In a telling interview, with a key individual involved in the privatization of the Bulgarian distribution companies, he stated that these fights between the companies and government don’t tell the whole story. Rather the companies were viewed as having made out rather well, and were profitable along with buying the companies at a low value. This perspective has always informed my analysis of the situation in the country. There may be fights, but maybe these investors are better off than they let on. I think the final sale price demonstrates that this is not the case. The actions of the Bulgarian government and even the independent regulator have not served the people of Bulgaria or the investors since privatization. The rate increases before privatization demonstrate the willingness to open up and allow market forces, but the actions of the state since then demonstrate the great distrust of private capital and somehow energy prices should be kept low at all costs – even if this means damaging the service quality, investor expectations and overall economic growth of the country.

The actions in Bulgaria should serve as a warning sign to other investors and governments. It is true that E.ON sold the unit to another private company, thus demonstrating that investors remain interested in the country. However, the long term growth and the operations under such a tight and awkward regulatory environment demonstrates that even after 7 years of investments the value of the company has dropped, service quality has not improved, and South East Europe is no longer the place for large investors. Other countries, like Hungary, Macedonia and even Romania should take note. Investors will not hang on forever to wait for economic and political policies to see profits or at least a stable operating environment to materialize. Private investors seek to modernize the national energy infrastructure, failure here results in wider economic, environmental and societal failures – caused by government actions.

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