Two Approaches to Energy Price Drops: Bulgaria vs. Hungary

The energy price rebellion may have begun with the people of Bulgaria but it was Hungary’s government that first institutionalized the price cuts. Now, with new members on the regulatory board in Bulgaria, the State Energy and Water Regulatory Commission cut day time prices 10% effective January 1, 2014. Other price cuts and a warning shot for the private distribution companies means Bulgaria is headed down the same path as Hungary. Nonetheless, Bulgaria has flipped the title of Mafia State over to Hungary by demonstrating a professionally measured approach to the style of the price cuts (post-script: see the comment section for how wrong I got this post, the title should be split between the two. Also, please read this guest post to see how totally screwed up Bulgaria is, this was done to set the record straight on my mistake here. Fortunately, I’m building on this and looking to do more in comparing the two distinguished countries – it really appears they are merging in their chaotic approach to the energy sector).

Hungary - adding their energy numbers like Enron
Hungary – adding their energy numbers like Enron

Hungary took an anti-judicial and anti-technocratic approach to push through politically motivated price cuts. After forcing a 10% utility price cut on distribution companies, and then having courts overturn the initial effort, the Parliament shook up the regulator and removed an effective appeals processes for the utilities, paving the way for a 20% + utility price cuts. This was after the energy regulator had it authority removed resulting in politically mandated utility prices. And nothing represents ‘stability’ than Fidesz politicians (How many times has the ‘new’ constitution been amended?).

In the initial effort to stick to Hungary’s formula for utility prices, a friend of mine attending the meeting, described the itemization and justification of price reductions in the most inappropriate terms. It was so bad, I can’t even allude to it here. But I’ll just say my four year-old son could do better math – in English or Hungarian.

I’m not saying that the Bulgarian case is much better, as I don’t know at this stage what the effect will have on the system – but the Bulgarian case does demonstrate a respect for the rule of law, respect for state institutions and reliance on outside experts. A process of regulatory review was followed without infringing into the institutional competence of the Bulgarian regulator (OK, even if this independence is traditionally low in the country). I walk a fine line in comparing an sidelining a regulatory institution and politically influenced price cuts. Nonetheless, Bulgaria is left with a price cut that is institutionally justifiable, politically toned-down and not anti-foreigner. Too bad Hungary didn’t do this.

Why are state institutions important? The difference between the Bulgarian case and the Hungarian case, is some of my recent research shows that state institutions, and how they are handled by politicians, directly translates into the perception of people of the trust and respectability in state institutions. In Bulgaria, respect is very low, because historically the state’s scientific capacity was gutted (in relation to shale gas issues). This also influences investors cognitive investment perceptions.

The continual undermining and running foreign investors out of town, by the Hungarian government, translates into a perception of weak institutional capacity. Over the long term, the weakening of these institutions removes the best and brightest administrators contributing to economic growth. Once all the foreigners are run out of Hungary, institutions gutted of their human capital, Hungary will have limited capacity to grow. Once Fidesz is removed, and rebuilding of the country begins, there will be a lack of domestic expertise to re-attract financial capital. Human and financial capital go together. This is what happened in Bulgaria with the near bankruptcy of the country in the 1990s. They had to rely on foreigners to rebuild the country – Hungary has already done this once as well.

Max 1
Children grow up

 

I never state that energy regulators operate in a bubble separated from politics (certainly not in this region). Signals are sent back and forth between politicians and regulators, and an awareness of how far regulatory measures can go is fostered. Observing state institutional order preserves state continuity. In the case of Bulgarian energy prices, it is an orderly direction for the revolutionary zeal for price reforms. In Hungary, it is the revolutionary zeal destroying  state institutions, rule of law, and instilling populace pricing policies. Revolutions are not guided by rationality, but emotional power grabs. The price of energy is not getting cheaper – so there will be a dramatic price rise one day. Fidesz plans to control the country for at least a generation. This means Hungarian children will get the chance to rebuild their energy system, and no doubt their math will need to be correct.

 

 

Nothing says energy independence better than Russian nuclear

Energy independence, energy security and security of supply are all tightly connected concepts. Each is different and represents its own strand of knowledge and impacts. The regime of Orban that runs Hungary is dancing again with the Russians over their nuclear prowess. Back in 1999 I helped organize a conference on nuclear power in Hungary. The question then, as now, ‘Will Hungary choose Russia to build a new bloc for their nuclear power station?’ If the country is serious about energy independence, as the leadership claims, then they should not even be considering Russian nuclear power technology. But they are.

Energy is not a rational field, nor is Hungary run by rational people. This week the headline was to import Israeli gas to Hungary. It’s always good to play out the idea of independence but not actually building true independence from the Russians. The public statements by Hungary’s National Development Minister and Deputy Minister for Energy, supporting South Stream – while slamming the Nabucco consortium as high paid (private) consultants, at a recent conference on South Stream reflect the true thinking of the Government. These true feelings combined with the support of re-nationalization of the energy sector all plays into the cosy hands of Russia and the politicization of energy.

Dependency

We can begin to imagine Hungary will buy into another Russian nuclear plant and rely on Russian sourced gas being pumped through the Russian owned South Stream. Orban has stated his goal is to produce 70% of the country’s electricity from nuclear power. The country’s current reliance on Russian gas is near 80% (although this should drop slightly over time). Current electricity production is around 30% from gas. With South Stream, this dependency can be assumed to grow. Even with other diversification projects, the overall ‘normal’ business scenario is an extremely high dependency ratio. Under this scenario future domestic production from wind, solar or biomass is irrelevant, as it remains at niche production levels. Russian nuclear and Russian gas will continue to rule Hungary’s energy system.

The turn away from the EU and Western European energy companies and the embracement of Mother Russia for ‘energy security, security of supply and energy independence’ is no security at all. Once the Russian pipeline and nuclear bloc are built, Hungary will be embarking on another 50 years of dependency on Russia. By this time it will be a century of Russian dominance and dependency! Is this the ‘energy dependence’ talk that has the Orban regime on their high horse over German and French owned utilities?

Energy is politics: Hungary by accepting the subservient role in this relationship will be politically orientated towards Russia. We are only one step removed from the remark, ‘The groundwork is being laid for Hungary to join the Ukraine-Russia energy-economic alliance.’ If Hungary acceptance almost total domination of Russian in its energy supplies than it must toe the Russian line on economic, social and political matters. The EU is now being infiltrated by strong Russian influences on its Eastern borders. The choice is clear: lower gas prices for political and economic commitment to Russia vs. lost political control over domestic EU energy markets. While the EU sees its current satellites spiral back to Russia, the satellites and their revived European values and contribution to Europe are again being lost. Energy is the tip of the iceberg, it is necessary to look deeper and see what total Russian energy dependency means for Hungary, Eastern Europe and for the EU.