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.

 

 

2 thoughts on “Two Approaches to Energy Price Drops: Bulgaria vs. Hungary”

  1. Dear Mr Labelle,

    Being from Bulgaria and following developments here closely I would disagree with your statement “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.”. Probably it is due to not knowing details while on the other side I don’t know details about Hungary where the situation can really be worse. For me it is difficult to see the professionalism in the recent price cut. The recent price cut (1% for peak and 10% off-peak for residential) was the third one in a year. And although lacking so strong anti-foreigner retoric of Hungary, given where the “reserves” for decreases were found, it may be said that the decisions were anti foreign investment as most of the hit was dealt to foreign owned distribution companies, cutting regulatory recognized grid losses from 15-16% to 8-9% in a year. The last decrease of grid losses is based on a scientific report that no one outside the regulator has seen. The decision was announced and taken in a matter of 3 working days around Christmas and has not been consulted with anyone outside a close group around the government. Furthermore it happened days after the Chairman of the “independent” Regulator has resigned and we had the 5th Chairman in a year, raising speculations that the previous Chairman resigned under pressure to sign-off the new lower prices. There is also a big anti renewable talk and regulatory decisions where there is a significant foreign investment. All of this adds to an estimated deficit in the energy system of more than half a billion euro annual deficit. This being at least 20% lower revenue than production costs combined with significant cross subsidies between residential and industrial consumers.
    In any way reading about Hungary and Bulgaria I can conclude that for populists and Russian interests there is no left or right in economy and politics.

  2. Dear Martin,

    Thanks so much for the in-depth review of the situation in Bulgaria. No doubt my analysis needs further revision. In-fact while I tried to walk a fine line between giving too much credit to Bulgaria and assessing the institutional approach compared to the straight out political control in Hungary, I have erred too much on giving credit to another form of political control.

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