Fear of blackouts ahead while PPC prepares for second part-flotation

As Greece gets ready to sell a third equity stake of about 15.7 percent of state-controlled Public Power Corporation’s (PPC) share capital, expecting to rake in more than 550 million euros, the full liberalization of the local electricity market is still years away, raising concerns about the country’s ability to meet the anticipated high demand for electricity in the next few years. It is therefore necessary that measures be taken to speed up the liberalization process to safeguard sufficient supplies in the future and avoid undermining the country’s medium-term economic growth prospects. Bowing to pressure from various special interest groups, Greece demanded and got the green light from the European Union (EU) to partially liberalize its electricity market later than most other EU countries. Following the enactment of the first liberalization law in February 2001, local industrial corporations that consume over 100 GWh are entitled to select their own supplier, with PPC acting as the supplier of last resort. In the context of the partial liberalization of the local market, PPC was transformed into a societe anonyme and the government first floated about 15 percent of its share capital in December 2001; a second part-flotation came in the following year. The government currently owns 67.22 percent of PPC. It aims to reduce this to just over 50 percent in the near future. There is no doubt that PPC has been one of the few successful stories on the Athens bourse since its debut in December 2001. It has outperformed the general stock index most of the time since then, banking on strong earnings per share (EPS) growth and healthy dividend yields. EPS growth exceeded 140 percent year-on-year in 2002 to reach 0.94 euro and is projected to rise above 50 percent this year before slowing down to about 18 percent in 2004. During the same time, the company distributed dividends, yielding more than 3.0 percent per annum. A combination of modest tariff hikes, a strong increase in demand for electricity on the back of rapid growth of the gross domestic product and low penetration of high-electricity consumption automatic control systems in agriculture, a decrease in the employee headcount and non-payroll expenses coupled with lower capital expenditure and better management of working capital largely explain the company’s good earnings record in the last couple of years or so. Monopoly Although PPC has been a successful investment story so far, critics argue that its success has been due to the long preservation of its monopoly status. Indeed, the partial liberalization of the market has yet to produce tangible results in terms of other companies being close to entering the market. As a result, PPC remains a monopoly, producing and supplying a little less than 100 percent of total electricity in Greece. Although the Regulatory Energy Authority (RAE) has granted seven power generation licenses for large gas-fired plants for a total capacity of 3,000 MW, works are known to have started in just one of them, that is, Hellenic Petroleum’s plant in Thessaloniki. Low tariffs Analysts and others attribute the delays in building power plants both to the lack of a clear third-party access pricing scheme to PPC’s network grid as well as Greece’s low tariffs. They say RAE’s third-party pricing scheme does little to encourage prospective investors to build new capacity, whereas low tariffs discourage them further since they cannot compete at current prices with PPC, which can rely on low-cost fuel, namely lignite, to produce electricity. Given the capital-intensive nature of these investments and the times required for a power plant to become operational, no such power plant is expected to be ready before 2007 at the earliest, with the possible exception of Hellenic Petroleum’s, which is expected in 2006. At the same time, experts estimate that Greece will need some 400 MW per annum in new capacity in the next few years to meet the growing demand for electricity. Indeed, figures in the July 2002 bulletin of the Hellenic and Electrical Engineering Association show Greek electricity consumption grew by an average of about 6.0 percent annually from 1968 through 2000, surpassing the average GDP growth over this period. Since the Greek economy is projected to grow at relatively fast rates in the next few years, it is highly likely that electricity consumption will grow by more than 3.0 percent, raising the specter of major blackouts along the way. Imports In the last few years, Greece has been able to import electricity from neighboring countries such as Bulgaria, Romania and Serbia to help meet demand during peak periods. It is therefore possible that it will continue to do so in the next few years given the fact that no new power plant seems to be in sight before 2006. Depending, however, on other countries to supply electricity does not constitute a permanent solution to the problem. As some may argue, pointing at the relatively recent Italian experience, it can lead to major blackouts if one of the other countries faces problems for whatever reason, i.e., weather conditions. All in all, the full liberalization of the electricity market is the permanent answer to the problem of imbalance between supply and demand in the local electricity market. But this requires that the third-party pricing access scheme is clarified as soon as possible and the State proceeds with the sale of a few PPC power plants to new entrants. Moreover, to avert the potential of a significant hike in tariffs, a move that would be highly unpopular, following full liberalization, these measures should be accompanied by more effective efforts to cut PPC’s operating costs adequately so as to align them with a modestly higher tariff structure.