For as long as it can keep Czech Coal and EPH divided, CEZ rules.


The customer is always correct -like my wristwatch

In his response to my post, Konečná pro Daniela Křetínského? in which I attempt to explain why EPH is so desperate to prevent CEZ from reaching an agreement with Czech Coal on a new fuel supply contract for the Pocerady power plant, the firm’s head of communications makes four substantive points, and all are formally correct though very far from persuasive -see Konečná pro spotřebitele tepla

The first is that the rise in lignite prices will increase household heating prices. This is correct –but so do increases in DPH and more onerous environmental regulation. Is EPH suggesting that it is willing to produce heat and electricity at no profit? How on earth would he pay for that wristwatch, which readers tell might be worth anything between CZK 300.000 and CZK 3.000.000?

Daniel Kretinsky does not strike me as the ‘not-for-profit’ type. Nor does he strike Petr Bayer of the SPDT civic union in this way either. Mr Bayer represents heating customers of EPH’s Elektrarny Opatovice. He points out in a letter (click here) in today's HN that EPH’s success is not dependent on taking risks on the open market but rather on its economic and political power in dealing with the state sector. The rules for regulating energy prices are set for the prosperity of the suppliers, he said. Indeed! What else would attract a financial group such as EP Holding to invest in the energy sector?

EPH’s second point is that German and Czech lignite prices are similar. This is correct. Most mining companies in Germany are owned by electricity generators –like CEZ here. But whereas Germany is an oligopolistic market, the Czech Republic is dominated by CEZ –so the scope for abuse is very much greater.

Like CEZ, German power companies seek to control the prices of their most important fuel source – lignite. Like CEZ, they keep lignite prices low in order to make money on their main business, which is generating electricity.

Both EPH and Czech Coal want to do the same. EPH has a lignite mine in Germany and is seeking to acquire generation capacity there as well. But it does not own a Czech lignite mine, so is exposed in the way CEZ is not. And Czech Coal makes money on mining and selling lignite, not generating electricity.

Just as EPH would like to reduce its dependence upon lignite owned by Czech Coal, so Czech Coal would like to reduce its exposure to CEZ’s buying power, by acquiring a power plant. In this way it could earn the handsome margins at the generation level that CEZ earns, and that EPH hopes to earn by acquiring generation capacity in Germany –and that EPH hopes to continue to earn at home by free-riding on lignite prices held down by CEZ.

In essence, then, the strategies of EPH and Czech Coal for the lignite sector are almost identical, which explains the robust rivalry between them. The problem here is CEZ’s dominant market power. Both EPH and Czech Coal are fighting over the crumbs that CEZ leaves them.

EPH’s third point is that delivering lignite at a higher price to CEZ’s Pocerady plant will harm independent producers, and will increase the market power of CEZ. This is correct.

An agreement between CEZ and Czech Coal over lignite supplies for Pocerady is in the interest of both sides, provided the increase in price is reasonable. CEZ will secure lignite supplies and will accept the lower margins this causes to its generation business. And Czech Coal will sell it lignite for more money, which seems fair enough considering it is being prevented from making those handsome margins enjoyed by CEZ (and EPH) on power generation.

As for the independent producers, yes, they will be hurt if lignite prices increase -just as they are hurt by having to comply with new regulations. But it would be counter-productive for Czech Coal to increase lignite prices to a level that would kill off its customers. Producers threatened by such prices will convert to gas. And then Czech Coal would be even more exposed to CEZ’s monopsonic power.

EPH’s fourth point is that Czech Coal has high profits. This is correct. And so does EPH –and above all, CEZ. And all sides are trying to protect these profits.

At one level, the dispute is about how to divide these profits up between them. At another level, it is about CEZ working to preserve its dominant market power by keeping EPH and Czech Coal at each others’ throat.

It is obvious that if the two smaller players would work together to force CEZ to give up more of its lignite and generation capacity, they might both benefit –and so might the Czech consumer.

The news that CEZ is considering selling the Chvaletice plant with a three-year contract for supplies of lignite from CEZ’s Severoceske doly, combined with news that CEZ has apparently reached an agreement with Czech Coal on a new lignite contract for Pocerady should be understood as CEZ’s attempt to keep both firms content –and so discourage them from joining forces against it.

In short, the problem is CEZ’s dominant market power –as we have been saying for four years now.

PS. I forgot to mention one last point raised by EPH in its ‘rebuttal’, which was that our company’s business “is largely based upon their activist support for the financier Pavel Tykac.“. (…že podnikání jeho agentury je převážně založeno na aktivistické podpoře finančníka Pavla Tykače...)

This is incorrect. Indeed, it is intentionally incorrect. And as an argument, it is irrelevant.