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Our View: EAC’s arguments against privatisation are disingenuous

A demo against electricity prices earlier this year

DATA released by Eurostat this week show that electricity prices for Cypriot households during the first half of 2013 dropped by a paltry 0.76 per cent compared to the same period last year. Yet the Electricity Authority of Cyprus (EAC) maintains that, due to a combination of the scrapping of the dreaded ‘Mari surcharge’ and a downward revision of the fuel cost formula, prices have fallen 13 per cent since the beginning of the year. Clearly there’s a disconnect.

According to Eurostat, Cyprus had the third highest household electricity prices during the first semester of 2013, trailing only Germany and Denmark. But in terms of purchasing power standard, Cypriots paid the most expensive electricity in the EU-27 area, forking out 31.4 cents per kilowatt-hour. And it almost goes without saying that, again, the price of electricity for industrial consumers in Cyprus was a chartbuster.

Hardly breaking news, but it comes just as the electricity utility’s trade unions are gearing up for industrial action. It’s a warning shot to the government not to press ahead with the entity’s denationalisation as per the troika’s demands.

EAC unions dismiss as myth that the cost of electricity will drop once the utility is privatised. The syndicates have dredged up the bogeyman, citing examples both in the UK and California, where privatisation has arguably led to an increase in electricity bills and deteriorating service. They warn, too, of the risk of a private monopoly arising, one that would have no qualms about fleecing its customers.

Whereas these may be valid points, the EAC should be one to talk: it ‘boasts’ the highest electricity prices in the EU. Its contention that electricity is so costly here because of the island’s isolated grid and the consequent need to import expensive fuel oil, is getting a bit old. What about efficiency? It’s been documented that the EAC’s machines are not exactly cutting-edge technology, and meantime the newer Combined Cycle Gas Turbines – which cost the taxpayer some €500m – are sitting idle.

Although in theory the market is open to competition, to all intents and purposes the EAC holds a monopoly. The EAC claims there have been no new entrants because the return on equity (ROE) is artificially low to keep prices down. But this is telling only half the story, because the energy regulator, who sets the ROE, may decide to amend those rates once the market is de facto liberalised.

Moreover, the EAC has owed its privileged status to the state, which has cushioned it from outside competition. Protectionist legislation passed in 2007 effectively bars private players from the natural gas market. But with the troika at the gates, the rules of the game are about to change. The memorandum of understanding calls on authorities to “formulate a comprehensive strategy for the rearrangement of the Cypriot energy sector” and to “provide clarity on the intended use of the available ‘isolated market’ and ‘emergent market’ derogations and indicate their intended duration of the latter derogations.”

The reaction by state-owned enterprises to the coming sea change under the bailout deal was predictable. But in the EAC’s case, in particular, the arguments put forth against privatisation are somewhat disingenuous. Beyond the rhetoric, developments will largely be decided by the government’s resolve in dealing with the trade unions.

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