High stakes in strategic partnership of PPC with RWE fan controversy

Greece’s Public Power Corporation (PPC) has found itself in the midst of business and political controversy many times over the years. However, the decision by its top management to join forces with Germany’s utility giant RWE has stirred up a controversy unlike any other. This is to be expected: At stake is the future of Greece’s electricity energy sector and billion of euros in investments and profits. The selection of Takis Athanassopoulos, a respected retired senior manager at Toyota, as chairman and CEO of PPC a little more than a year ago was greeted with relief by market participants who had become fed up with seeing good people with little business experience being appointed by successive governments to the held of Greece’s largest power generation company. PPC, which became a societe anonyme company in 2001, the same year the state floated about 15 percent of its share capital, had become an ailing giant. Despite the fact that the state had further reduced its equity stake to just above 50 percent, PPC continued to be a company where the need for the coexistence of powerful trade unions and government appointees in management positions dictated crucial decisions. That prevailing culture fit a monopoly like PPC but not a competitive enterprise in a liberalized sector. Cornered between rising fuel prices and few tariff increases, PPC saw its financials deteriorate and its share price slump. So, Athanassopoulos’s efforts to convince the Development Ministry of the need for tariff increases were expected. The positive response from the Development Ministry to PPC’s request for sizable tariff increases, amounting to 15 percent until July 2008, confirmed earlier market expectations and boosted its shares to a new all-time high, surpassing the -37 mark. It should be noted that these cumulative tariff increases affect low- and medium-voltage customers. High-voltage customers saw their tariffs increase by 10 percent as of December 1, 2007, while they are going to be liberalized from July 1, 2008. These tariff increases may not be the last. Analysts consider it very likely that PPC will get approval for more in 2009 and 2010, bringing them in line with European averages. However, it was not the sizable tariff increases which caused an upheaval, as one would expect based on past experience. It was PPC’s intention to sign a memorandum of understanding with German utility RWE to build new coal-fired plants in which the German side would have the management and a 51 percent stake. Some critics, including the unions, saw behind Athanassopoulos’s move a secret plan to make RWE a strategic investor for PPC in the medium to long run. Others contended that this move was against PPC’s own best interests because it chose a foreign company to jointly build coal-fired plants – something regarded as causing high pollution although clean coal technology claims the opposite – without calling an international tender to ensure the best possible terms. The fact that PPC essentially dropped similar proposals for cooperation from Spanish utility Endesa, which has teamed up with local mining and engineering group Mytilineos, raised eyebrows further. Even PPC’s positive response to Halivourgiki, a Greek industrial company, was greeted with skepticism. Critics thought it was just an attempt to distract attention away from the RWE deal. Some of these arguments have merit, especially the call for international tenders to pick the partner offering the best terms. This is especially true for a company 50 percent plus owned by the Greek state. However, this does not change the fact that the board of a listed company like PPC has the right to choose its partner without calling a general shareholders meeting for approval. Unpleasant reality Still, there is an unpleasant reality. Greece’s electricity production falls far short of demand. That’s why the country imports electricity from neighboring countries at a higher cost. So there are vested business interests in preserving this status quo to earn tens of millions of euros every year from imports. This perhaps explain why a thermal unit which belongs to the Mytilineos Group and has been ready to supply electricity for more than six months has yet to get the green light to do so from the proper authorities. Athanassopoulos wants naturally to ensure that Greece does not face the prospect of a blackout every summer when electricity demand peaks. Moreover, he would like PPC to maintain its dominant position in the fully liberalized market in the years to come. He obviously also knows that PPC’s tenders are generally slow moving and every decision is challenged in Greek and European Union courts before a project is awarded. This means there would be delays in the process of international tenders caused by parties with vested interests. This also holds true with the company’s program for capacity replacements in the order of six new units, joining the system in five years, beginning in 2010. Moreover, he wants to alter the country’s installed capacity by fuel for security reasons, adding coal. Today, PPC relies on lignite for more than 40 percent of its installed capacity and is committed to exploiting all lignite reserves via modern and environmental friendly plants. In its business plan, PPC aims at reducing lignite generation to 34 percent by 2014, while increasing renewables to 6 percent from 1 percent and slightly boosting natural gas capacity to 16 percent from 15 percent at present. But the extraction costs of lignite are increasing along with carbon dioxide (CO2) emission costs, making lignite a less attractive fuel than it used to be. So adding coal provides a greater diversification in the mix with the newest technologies claiming to reduce CO2 emissions. PPC has also announced ambitious targets for energy from renewable sources, such as wind, small hydroelectric, photovoltaic and geothermal units, to reach 950 MW by 2014 from 92 MW at present. This is budgeted at an estimated -1.95 billion. There is no doubt that there are pluses and minuses in PPC’s strategy to build coal-fired plants with RWE and perhaps other companies that are not its competitors at home. However, one should weigh the benefits of the additional capacity coming on line faster with the costs of signing worse deals with prospective partners for coal-fired plants and the effect of PPC dominating the domestic market even after it is fully liberalized. The stakes are high for all.