Tag Archives: regulation

Hungary’s Viktator crashes against the new global order

The crash of the Hungarian forint had us all on edge this week. The ripples went out to neighboring countries and the Eurozone as a whole. The Hungarian Prime Minister, Viktor Orban became globally known by his local name, ‘Viktator.’ With these economic waves, the international press woke up to the disappearance of democracy and failed economic policies in Hungary.

The currency collapse and the removal of checks and balances between government institutions, along with the high speed erratic-drunken-like policy making that marks the Orban regime, is nothing new to us locals. But what is so great about Orban taking Hungary over the cliff of rationality is what it exposes for the modern state system: Erratic dictators are controlled by an international regulatory regime that requires stability, predictability and fairness. Orban went against every tenet of this system in his nationalistic power grab. Foreign companies and Hungarians themselves are all paying more for Orban’s ‘rebirth’ as Hungary’s nationalistic savior.

The politicization of key government and regulatory institutions (judiciary, finance, energy, media, etc.) and the removal – or simple lack of professional knowledge, erodes these key tenets and forces the country into a downward spiral of economic and political demise. In short order Orban himself caused the currency to collapse. He failed to restructure the state to meet modern economic challenges – instead restructuring it to meet his vision of a nationalistic ‘independent’ state. He did this through the  politicization of economic and social policy, and the cementing of these failures into the country’s constitutions. Collectively, these changes doom the country for generations to come. Regardless of what international institutions can force Hungary to change under the pressure of complete economic collapse – a collapse Orban may even accept with his North Korean style nationalistic ideology.

Orban drives the Hungarian economy off the road.

Others will point to the Eurozone crisis as playing a part for Hungary’s economic collapse. If a drunk driver hits a person crossing the street, is it the pedestrian’s fault – or the drunk driver’s? A sober driver may be the  most boring person at a party, but at least they will get you safely home. And that is why we need professional regulators sitting in independent regulatory institutions. The key players in the Eurozone are financial regulators and central banks – each a professionally managed and independent institutions buffered in various forms from political interference. These are the ‘guys’ you want to drive you home.

More broadly the European Union and global modern governance is based on independent regulatory institutions. There independence is secured through how directors are removed or term length, there mandate is to serve the people. Because of this mission, their appointment process should be as depoliticized as possible. They should also reflect local characteristics of each country’s political and historical system (appointments by monarchs are possible). But since Orban is not officially yet the King of Hungary, we can view him as a political actor.

Theory

The global regulatory regime, or ‘regulatory capitalism,’ for David Levi-Faur, holds distinctive characteristics separating it from previous regulatory eras:  stronger autonomous agencies, new technologies of regulation, new national and international regulatory layers. The “hegemony of neoliberal ideology” is more discursive, as capital is constrained through a regulatory regime (Levi-Faur 2005, 27). While Levi-Faur looks at the role of capital we can use Hungary to help us make the link to the political actions of the state.

The charts below demonstrate the rise of regulatory institutions in the EU. These were created to provide a professional policy environment in increasing complex fields that require complex understanding of each sector. This also corresponds with the integration of the EU (or previously the European Community). Globally, the rise of regulatory institutions is mirrored – therefore we can can describe the rise of a global regulatory system.

Can Orban go against the rise of the European regulator? (source: Gilardi 2005)

Regulatory regime saves democracy

The Viktator of Hungary has decided to stand up against these international and national regulatory institutions and politicize the depoliticized technocratic regulatory institutions (i.e. serving the bankers alcohol). He is taking the rug out from under global regulatory capitalism, and forcing it to operate within an unpredictable policy and regulatory environment. The leaked conditions that the IMF has proposed Hungary follow to secure a new financial agreement represent not just  good economic practices but re-enforcing and re-institutionalizing a more stable regulatory order.

– restoring the central bank’s independence;
– reinforcing the Fiscal Council;
– stricter fiscal policy, especially on the expenditure side;
– considerable reduction to crisis taxes and their eventual phasing out;
– putting a stop to implementing ad-hoc economic policy measures;
– seeing through the previously announced reform measures;
– overhaul of the system of social transfers;
– restructuring of public transport companies;
– introducing the institution of consumer bankruptcy

The IMF conditions in blue represent the conditions necessary for global regulatory regime to operate. (As a daily rider of Budapest’s public transport company, BKV, and as such a consumer of carbon monoxide inside the bus, I welcome a long-term vision of financial stability and investment in public transport too.) These conditions lay bare the role that independent financial institutions play in overseeing a country’s economy. They also indicate the areas where the Orban regime has failed to provide professional leadership.

Reinforcing the failure of abiding by the rules of the regulatory regime – in the social sphere is Hungary’s year old media law,  completing Orban’s control over public discourse. Even here, in an in-depth comparative  report on Hungary’s media law done by Central European University, shows the new media regulator fails in every respect to uphold the public good and emerges as a political tool of the Orban regime – and is not an independent regulator.

The former PM Viktor Orban puts out an engine fire on his bus. After being ousted as PM in 2012, Orban became a bus driver at BKV.

In an article that I’m writing on the diffusion of regulatory practices in the energy sector, I emphasize how international best practices that guide regulatory making are localized within social, institutional and political arrangements within each country. This must occur in order for these institutions to be effective and to reflect the needs of citizens. There is a strong debate that these regulatory institutions are anti-democratic and remove democracy from key social and economic actors.

What is clear in the case of Hungary, it is this global regulatory regime, and even international capital, are saving Hungary’s democracy. Or at least attempting to save it. For as much as the IMF can impose financial conditions necessary for Hungary to be bailed out, it is the political support and demands of the EU that will serve the citizens of Hungary in supporting to have democracy partly restored. Maybe the laws on media, judiciary and finance will be amended in the short-term. However, Hungarians will still need to remove the Viktator and his regime from power and re-institute the broader system of checks and balances. Hungarian voters themselves must re-establish democracy in the country. No global or international coalition of institutions and governments can provide the localized and contextualized institutional and social arrangements that a national civil society can develop. So while Orban has given the finger to the international regulatory regime, it is the actors in this regime and the Hungarian people that will have the last word.

 

A picture of Orban running from a BKV Kontroller -Not even the Viktator can ride for free

 

Five ways to destroy your energy sector and your economy – a note to the Hungarian Government

I was aiming low – ‘Five ways to destroy your energy sector and your economy – a note to the Hungarian Government.’ I IM’d the title to my friend in the Hungarian energy sector – he said, “i am sure they know at least ten.” Well, most certainly they do, but I’m not as creative as the current Hungarian government. How could I even imagine that encouraging consumers to not pay their energy bills would become a government policy – and legalized. Nonetheless, I’ve written about creative tax making in the past.

To herald in the New Year and to recognize that the wise men (and women) from the EU and IMF may be gone for a few more months and as the Orban government continues to force the country into a downward economic spiral, and installing a new authoritarianism, I thought I would provide the current government a Christmas package of proposals that could bring the Hungarian energy sector more quickly to its knees. Because, as I will show, once you have destroyed your energy sector, dissuaded manufacturers from investing due to an unstable electricity sector, the only direction to go is up – and this requires foreign investment, an effective regulatory environment and strong political will that corrects the past mistakes of low/subsidized energy prices (as demonstrated in this study).

One: Encourage consumers not to pay their energy bills

The introduction of a new bill in the Hungarian Parliament would allow public institutions like schools to avoid pay their utility bills. This proposal has caused the National Development Ministry State Secretary for Climate and Energy Affairs Janos Bencsik to submit his resignation.

A proposal submitted to Parliament by Fidesz parliamentary caucus leader János Lázár last week seeks to prevent utility companies from shutting off power to certain customers who fail to pay their bills…. Industry insiders said that the proposal would allow public institutions, many of them notorious late-payers, to ignore their utility bills with no consequences, leaving power companies no recourse but lengthy and costly legal suits.

Macedonia, provides a good example as to what can happen when no penalities are imposed on late or non-payment of electricity bills. Essentially, the Hungarian proposal reverts back to the Socialist era, when non-payment was rampant in some countries.

Hungary's new energy slogan

 

In a study on the privatization process of the Macedonian electricity company (with the distribution entity being sold to EVN) I wrote, “Unpaid consumer bills, mainly from the period before privatization, are a significant issue. EVN is pursuing lawsuits against 400,000 customers for non-payment, 80% to 90% of these cases stem from the pre-privatization period. This is down from a high of 450,000.”  The draft report was read by reviewers and they came back to say that this 400,000 number must be an error. ‘Didn’t I mean 4,000?’ No – 400,000 court cases for non-payment.

The huge number of non-payment from consumers were causing significant losses to the company at the time of privatization, around 30% of the electricity transmitted in 2006 was unpaid. Of course, these losses affected the selling price at the time of privatization, as well as an indirect impact on investments and the price of electricity – and certainly a very acrimonious relationship between the government, regulatory and EVN. At the end of the day, it is the rate payer and tax payer (usually the same) who has to pay for this.

Lesson 1: to devalue a company, lower investment and create system instability encourage consumers to NOT pay their energy bills. If the company is already foreign owned, this method will be sure to create losses for the company and may encourage their withdrawal.

Two: Regulate the price of energy below the cost of providers

The case of Bulgaria’s privatization of its power plant in Varna, to the Czech power company CEZ,  demonstrates that it doesn’t have to be just the distribution companies that can be forced to eat the losses. In the same study, the decision by the Bulgarian regulator to decide on the price of electricity that would be allowed for power production from the privately owned power plant demonstrate that  it is also the generators that sell to the distribution companies in the regulated market, that must contend with the low prices.

“In the case of CEZ’s Varna Power plant the complaint centers on two issues – regulated segment market quota and the price on the regulated segment, which, according to CEZ, is set lower than production costs. CEZ Varna states that it needs over Lev 77/MWh, to be at cost, while the approved rate from SEWRC is under Lev 72/MWh.”

The development of energy regulators is something special, however, the Hungarian government views the current regulator as not knowing better than Parliament. Since June 2010, the Hungarian Energy Office lost the power to effectively and professionally regulate the price of electricity and gas.  The justification: “it is intolerable that a significant part of families’ budgets consist of utility bills.” Therefore, the regulator is the wrong unit to ensure that families can pay their bills.

The recent ‘forced’ sale of E.ON’s gas unit to the Hungarian government, and the dumping of E.ON Bulgaria by the mother company, both demonstrate what squeezing by governments does. It is still not clear how consumers benefit from government political decision making or ownership. In the case of Bulgaria, one of the main reasons, that I was able to extract from a key participant in the privatization of the distribution companies, was the fact that the government could not be trusted to ensure investments were done due to the desire to keep prices low. The same case certainly applies to Hungary – in the medium and long term, the energy sector will begin to fail if investment levels are not maintained or even increased. It takes reflective pricing of the actual costs of the energy system to ensure proper levels of investments are done to maintain and improve security of supply.

Lesson 2: to ensure that the energy system does not improve, or begins to deteriorate, make sure that companies do not have sufficient funds to cover operating and capital expenses (CAPEX and OPEX). Either removing the regulator from the decision making process or placing political pressure on the regulator can result in lower energy prices. The result can be the company is sold back to the government at a low cost. Great strategy if forced nationalization is the objective.

Three: Create a regional hegemonic energy company!

There is nothing like nationalism to fuel erratic policy making. Ideology both pro or anti-market can dent and over simplify the complex relationship between the state and private investors in the energy sector. The fact that the energy sector is a fundamental component to economic growth and a direct link to voters (through their utility bills), makes the energy sector a highly politicized (read why politicians find energy as attractive as prostitutes). It would require a book to write about all the different and constantly changing national energy strategies in Central Eastern Europe and the South East of Europe to review how almost EVERY country considers their state owned energy companies strong enough to become a regional player like CEZ. The present result is that these ambitions have only resulted in continued justification for government ownership and a lack of modernization of assets for domestic users. Hungary, Bulgaria and Romania each has these strategies, yet none of them competes regionally.

For Hungary, the government sees that MVM (the state owned former electricity behemoth that is now being used to control everything from gas to telecoms) can fulfill this regional ‘cash cow’ role. Or as Janos Lazar, head of the parliamentary group of the Fidesz party, said in an interview. “I see great potential in MVM, in building it up, on the national and regional level. There’s a lot of money to be made here, a lot of money,” said in a Bloomberg interview. (see previous post on this.)

Hungary's future 'regional' cash cow - maybe a little too fat to make it out of the country

Lesson 3: To help justify why the government is so important in a country’s energy sector, just keep saying that they will be expanding regionally – and there is a lot of money to be made. This expansion still has not occurred, and if it were to occur it must be subsidized by current rate/tax payers. Nonetheless, there is still room for a first mover advantage by one of the large state owned energy companies – like MVM (see photo above to see how fast they can move).

Four: Create an erratic policy and regulatory environment

Maybe this goes without saying. Having an erratic policy and regulatory environment is usually built into the business plans of privately owned energy companies. For rate payers, this means paying more for their energy, because the risks are much greater and therefore energy companies entering and operating in a company are going to seek to have a higher rate of return. The rate of return that the electricity distribution companies received at the time of privatization in Bulgaria was 16% and 12% in Romania. While this may be great for the investors – at least on paper – as the case studies show, the risk that these companies took is partly justified based on the continued price squeeze that the companies are under. They are expected to fulfill their investment commitments, thus incurring losses, thus lowering the rate of return (in a very simple explanation). Whereas, a more predictable and stable regulatory environment can, over a few regulatory cycles can lower the rate of return, the country’s risk level and thus energy prices.

Lesson 4: erratic energy policies and regulations, can keep risk levels high and thus require companies to have a higher rate of return. This will result in higher energy prices, so instead of creating a stable predictable investment environment, keep companies guessing – this will justify the continued political intervention in the energy sector.

Five: Get free energy for government use – expropriate electricity and gas

Hungarian Prime Minister, Viktor Orban speaking in December 2020, at a primary school about the success of the free energy scheme for state institutions

 

Political control over energy prices, means that privately owned companies must accept what the government tells them to charge. The point of having an energy sector regulator is to ensure that there is sufficient incentive for privately owned companies to get a fair rate of return on their investments, while protecting consumers from monopolistic abuses. A professional regulatory staff  assesses the full costs that are incurred by privately owned companies, and ensure the costs are justified and consumers pay for an efficiently run energy system. Removing incentives or not covering the cost of operations and future investments, removes the incentives to invest and threatens security of supply.

The Hungarian government now controls the price of gas and electricity. They are also about to decide that certain consumers (state owned entities) do not have to pay their energy bills. If they allow this, the government in reviewing the costs that should be allowed in the price caps, can decided that the non-payment by these consumers cannot be viewed as losses for the company to write off – or for other consumers to cover. They will force the private electricity and gas providers to pay for the energy costs of the government.

In short, as in the Socialist era, the Hungarian government will decide that government institutions do not need to pay their energy bills, they will either make the Hungarian rate/tax payer pick up the tab through their utility bills – thus higher prices, or they will force the companies to incur losses caused by non-payment from the government.

Lesson 5: If you want to ensure that the government (through whatever entity local or national) does not pay for energy usage, simply make sure the price is set by the government and stipulate in law that there are no penalties for non-payment by government entities. This will dissuade energy efficiency improvements and drive the price of energy up for everyone else – if these losses are included in the price of electricity or gas.

 

Conclusion

The five points reviewed here represent the ways that can lead to decreased investment, less private ownership(which should be more efficient), and higher energy prices for all. The one area that I have not touched on is how creating a stable investment environment, with a well functioning and independent regulator also can create lower energy prices. Erratic policy making, expropriation of energy by the government and increased state ownership all lead to higher energy prices for consumers. In the long term, the trend will only lead to an under invested energy system that has blackouts, lacks system stability and cannot support the requirements of industry. A robust energy system is a requirement for a growing economy. Failure in the energy system represents failing every citizen. The Hungarian government is only too happy to ensure that the private ownership is diminished or eliminated while state owned energy companies with no transparency -(and a history of not justifying their costs, like private utilities), become fatter and fatter. I don’t know if fat cows produce more milk, but they certainly cost more to feed. If the cost of energy is the bottom line, then let’s have some lean beef that is healthier for the consumer.

Why regulation protects utilities from politicians

‘All politics is local,’ is the commonly held phrase. This same phrase can be easily applied to energy. ‘All energy is local.’ The evolution of the energy sector is from the bottom up, from the gasification of street lamps to universal electricity service, the electricity and gas sectors are rooted in community and politics. This relationship is essential to understand in the deployment of low carbon technologies and energy efficiency measures.

To steal a headlining grabbing quote, “Prostitution, horse racing, gambling and electricity are irresistible to politicians, says John Rowe, the CEO of the Chicago-based utility Exelon. The interview in the Wall Street Journal with this practical executive provides an important perspective of how the utility industry balances the constant political demands with the understanding that regulations are the industry’s best friend. Not that regulation just protects the industry from the worse excesses that itself engages in, but also from political meddling that interferes and disrupts the long-term planning horizons necessary in the industry.

 

An effective regulatory environment that accounts for the environmental impact of the utility industry can play an important role in shaping the long term investment strategy of companies.

“What we are trying to do,” Mr. Rowe argues, “partly out of self-interest and partly to avoid sticking our customers with things that are really expensive, is to push for some sort of orderly environmental framework on the markets.” 

An orderly regulatory framework can provide the structure to advance technology (see his quotes against nuclear and carbon capture and storage) to invest in the most economically efficient plants and, presumably, overall technology (grid, smart meters, etc.) that will reduce carbon emissions while meeting the needs of consumers at the least possible costs. Regulations and market efficiency do not have to be separate.

The comparison in how the markets are handled by governments in the US and EU are stark. I won’t go into great detail to highlight their differences, the overall approach, whether federal or multilateral EU-style, does need to be uniform in pushing towards a common direction of low carbon and prompting the investment in new technologies. The EU is better organized in this respect while the US is having to relying on local and state governments to force and incentives the utility sector to change. This is not the most efficient approach when you consider the large multi-state scale of the utility industry and the significant infrastructure investments that need to occur. While small can work, large is can make a significant impact.

I’ve emphasized here the role that regulation, rather than politics, can play to induce change and investments. The politics, as Mr. Rowe points out is intertwined in the types of investments and the types of regulations. While job creation and pandering to votes is the politician’s main job, so should be the longer term vision of an efficient energy system that uses not the most politically favored ‘green’ energy, but technology that costs less and pollutes less. Less is more in the low carbon energy sector.

Energy is as irresistible to politicians as gambling and horse racing

 

Exploring 10 Years of ERRA: My account of the organization’s success

Every piece of writing has its own story. The Energy Regulators Regional Association is celebrating  their 10 year anniversary in 2011. I was asked to write a publication chronicling their history and describing their success. This was an honor. The final product is a small book containing a compilation of interviews, historical research and contributions by leading regulatory thinkers.

10 Year birthdays are great!

The story behind this publication centers around working with a network of dedicated people that believe in the role and importance of independent and professional regulatory institutions.  That easily summarizes ERRA’s mission. Every person we approached for an interview was extremely kind in giving us some thoughtful and original ideas on the history and role of ERRA. As you read the publication, you can understand the difference that ERRA does make, and the support structure that it provides to national energy regulators. This widespread dedication enabled the 10 Year Anniversary publication to be that much more exciting to write. The passion that everyone expressed about ERRA’s purpose and mission, inspired me to match that passion.

This report is also special, because as so often happens when I finish writing an article or report, which can takes months or years to complete, I’m never really sure who – or whether anyone – reads it. Thus, I was pleased to hear that people were engaged with the publication at ERRA’s 10 Year Anniversary celebration. Their annual ERRA Energy Investment and Regulation conference in St. Petersburg, Russia served as the celebratory platform. It was also the location of the launch of this publication. A review of the schedule of speakers demonstrates the importance of ERRA. Just a few of these were:

  • Mr. Tony Clark, President, NARUC, USA
  • Mr. Sergey Novikov, Chairman, Federal Tariff Service of the Russian Federation
  • Mr. Robert Archer, Senior Energy Advisor, USAID, USA
  • Mr. Walter Boltz, Vice President, CEER (Council of European Energy Regulators)
  • Mr. Baohua Liu, Director-General, Power Market Regulation Department, State Electricity Regulatory Commission (SERC) of China
  • Lord John Mogg, CEER President and ACER Board of Regulators Chairman
  • Mr. Hans ten Berge, Secretary General, Eurelectric
  • Mr. Vladimir Knyaginin, Director, North-West Strategic Research Centre, Russian Federation
The geographic reach of ERRA

I conducted 35 interviews for the book. And there are two forewords, one by Tony Clark, the president of the National Association of Regulatory Utility Commissioners (NARUC), and another by Alberto Pototschnig of the Agency for the Cooperation of Energy Regulators (ACER). Some of the people interviewed include the speakers from the St. Petersburg conference, but also notable European energy experts, such as,

  • Jean-Michel Glachant -Director, Florence School of Regulation
  • Turkey representative, President Hasan Köktas: Energy Market Regulatory Authority (EMRA)
  • Konstantin Petrov, Director Markets Regulation of KEMA
  • Director, Romanian Energy Regulatory Authority (ANRE)
  • Ron Eachus -Chair of the Oregon Public Utility Commission/Former Chairman of the NARUC Committee on International Relations
  • Gabor Szorenyi, Director, Hungarian Energy Office
  • Peter Kaderjak, Director of the Regional Center for Energy Policy Research (REKK), at Corvinus University of Budapest

Inside the book, there is a wealth of information about the history and purpose of ERRA along with a description of all its activities. The rapid expansion of the organization in just 10 years, also indicates the growth in the need for regulatory knowledge in developing economies. This is where ERRA’s niche lies. It is successful in transferring the knowledge necessary to encourage professional regulatory decision making to occur.

There is an English version and a Russian version. I also have to thank everyone at ERRA and those connected with it, for working with me closely in revising and improving the drafts. The publication is based on their vision and their ideas for what makes ERRA so unique – and why it has grown so rapidly.

I’ll end this post with a word from ACER Director, Alberto Pototschnig:

The evolution of energy regulation compels regulators to work together even more. The Second Legislative Package, in 2003, required all EU Member States to establish a National Regulatory Authority for the energy sector; the Third Package is now granting these authorities greater powers and stronger independence. These are necessary factors for good regulation, but the enhancing of practices and the sharing of the best ones require much more: on the one hand, training and the dissemination of the regulatory culture and techniques; on the other hand, close cooperation among regulators at the regional level and beyond. This is where ERRA has made a key contribution over its 10 years of operation: it has an established track record of fostering cooperation between regulators and facilitating the process of market liberalisation and integration.