Restructuring of electricity sector stepped up

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In 2003, the Polish government adopted plans for the further liberalisation, privatisation and restructuring of the electrical energy sector. The plans have aroused debate among employers and trade unions in the industry, not least - despite government assurances - over the employment consequences. A 'tripartite team' is discussing the restructuring of employment in the energy sector.

The energy market in Poland is to be completely liberalised by 2006. The economic strategy adopted by the government prioritises the attainment of stable energy prices which are attractive domestically and competitive in the European market, as well as efforts to recoup investments in the sector. January 2003 saw the adoption of two documents defining the direction of restructuring and privatisation in the electricity supply sector, which have aroused much debate among trade unions and employers in the sector.

Restructuring from 1990 to 1995

From the very outset of Poland’s market economy reforms, decision makers were in agreement as regards the need for far-reaching changes in the operation and organisation of the electricity supply sector. Reforms began with organisational changes instituted in 1990. The electricity and coal-mining industries were officially separated; as a result, the generation, relay, and distribution of energy became separate spheres and an institutional framework for competition between energy producers was put in place. A single-shareholder company of the State Treasury, Polskie Sieci Elektroenergetyczne SA (PSE SA), was established - a monopoly body charged with the organisation and management of energy relay which controlled the wholesale energy supply market.

In 1991 and 1992 the preparation and implementation of energy sector reforms underwent a considerable deceleration. However, there remained tasks which were clearly viewed as very important by the authorities; these included the fine-tuning of price-definition mechanisms affecting the supply of energy to end-users as well as within the sector, the establishment of new relations among the sector’s entities (based on commercial contracts), the institution of new planning systems, and the fostering of new attitudes towards project finance.

By the end of 1992, the principal areas of energy sector reform had been clearly delineated. These covered: the legal and regulatory framework; the organisational principles governing the market model; the institution of conditions conducive for financing the investments and modernisation needed; and improving the security and stability of the country’s power supply through connection to western European power grids.

1992 and 1993 witnessed major organisational and ownership changes brought about by a legislative Act regarding transformation of business entities of special importance to the economy (promulgated in February 1993). When these changes were completed, the energy sector was comprised of independent entities such as Polskie Sieci Energetyczne, 33 distribution entities, and several dozen power-generation plants feeding the system, along with the coal mines.

Restructuring from 1996 to 2000

The progress of change within the energy sector related to increased competition was significantly accelerated when the government adopted basic documents defining objectives and directions for the sector's transformation, notably the 'Premises of energy policy until 2010' and 'Programme for de-monopolisation and privatisation of the electrical energy sector' adopted in September 1996. A marked increase in competition in the sector came only with the passage of the Energy Act in April 1997. Apart from dividing duties and authority with respect to power generation entities among various administrative bodies, the Energy Act also set forth the basic tenets of the strategy for developing Poland’s energy sector. These included the implementation of 'competition-friendly' legal and pricing mechanisms and a limitation of government involvement in the commercial activity of the sector's firms, so that every such company can make independent decisions affecting its future. The Energy Act also provided for the establishment of a central, independent administrative body responsible for the energy sector. This was duly created in the form of the Energy Regulation Office, whose principal responsibilities include regulating the fuel and energy sectors and promoting competition.

Following the passage of the Energy Act and the appointment of the chair of the Energy Regulation Office, market reforms in the energy sector entered another period of stagnation. The principal reason lay in the long duration of contracts for energy supply, or more specifically in the prevailing conviction that, as long as these remained in force, an operational market for electrical energy could not be created. The accepted wisdom also had it that, in order for such a market to come into being, an electricity supply exchange had to be created

A major turning point for the reforms aimed at establishing an energy market in Poland came in late 1999 with the approval by the economic committee of the cabinet of a framework for such a market. An energy exchange was duly established at the initiative of the Minister of the State Treasury, commencing its operations in July 2000.

The lifting of administrative controls on energy prices comprised a prerequisite for opening Poland’s energy sector to market forces. This became possible with the passage in July 1998 (again by the cabinet's economic committee) of a schedule for the execution of projects relating to the liberalisation of electrical energy prices. On the authority of this document, the Ministry of Finance (Ministerstwo Finansów, MF) was freed of its previous duty to set official power prices for end-users, and the Ministry of the Economy (Ministerstwo Gospodarki, Pracy i Polityki Społecznej, MGPiPS) of its duty to set regulated prices for energy industry entities. In this way, government involvement in the day-to-day administration of commercial transactions in the energy market was terminated.

The first concrete expression of the government’s awareness of the close interrelation between the privatisation of energy enterprises and the sector’s liberalisation arrived in July 1998 in the form of a programme and prerequisites for privatisation of the energy sector. This document set out a preliminary schedule for liberalising the energy market.

Some practical importance also attached to an integrated schedule for privatisation of the sector, adopted in March 2000 by the cabinet's economic committee, and to the institution of a market for electricity. As a result of these various changes, the nexus of government and the energy market in Poland now comprises:

• the Ministry of the Economy, Labour, and Social Policy, the most important of the government entities involved, charged with formulating the premises of energy policy and with overseeing their implementation in accordance with the Energy Act;

• the Ministry of the Treasury, exercising ownership functions on behalf of the state, a role which is gradually diminishing as privatisation of the sector continues on its course; and

• the Energy Regulation Office, charged with day-to-day oversight and enforcement of the pertinent regulations.

All these changes notwithstanding, assessments of the Polish state’s measures to date are predominantly negative. According to one expert, 'the plans for restructuring and privatisation, while repeatedly announced, were never implemented all the way'. Blame, this expert continues, rests with the consecutive cabinets which neglected reform of the sector.

Latest plans

In January 2003, the cabinet adopted new documents mapping out further plans for liberalisation of the energy sector - an update of the programme for introducing a competitive market for electrical energy in Poland (drawn up by the Ministry of the Economy, Labour, and Social Policy) and a programme for implementation of the ownership policies of the Minister of the State Treasury with regard to the electrical energy sector (produced by the Ministry concerned).

The Ministry of the State Treasury (Ministerstwo Skarbu Państwa, MST) paper sets out a schedule for the privatisation of energy sector enterprises. According to these plans, actual privatisation is to be preceded by consolidation of the various producers and distributors of energy. The authors of these plans state that 'the restructuring and privatisation of the electrical energy sector is not a question of choice, but one of necessity'. The process of transformation of the sector - as set out in the Ministry of the Treasury’s programme - comprises three stages:

• consolidation of individual entities operating within the sector;

• restructuring of the merged entities; and

• privatisation.

Consolidation

Under the Ministry of the Treasury plan, separate consolidation processes will be implemented for the energy generation and the energy distribution companies. The consolidation is to be 'horizontal' in nature. This scenario was chosen on account of the economic transparency which it affords, with the possibility of calculating the operating expenses of each entity involved - it leaves no room for internal cross-subsidising or for spreading funds between profitable and loss-making units. According to the programme’s authors, choosing 'vertical' consolidation - and the resulting combination of energy generation, relay, and distribution functions along with sales on the regional level - would have made the appraisal of economic profitability much more difficult, impeding the entire privatisation process.

The social partners are willing to agree that restructuring of the energy sector is vital. In an interview, Stanisław Narewski, the chair of the Association of Energy Workers' Unions (Zrzeszenie Związków Zawodowych Energetyków), stated that 'in the view of the Association, the best solution is presented in consolidation into self-reliant organisms, as large as possible ... [the government programme for restructuring and privatisation] unfortunately, provides for horizontal consolidation only, to the complete exclusion of vertical consolidation. We, meanwhile, favour the latter; of course, this may be preceded by the creation of horizontal structures but, in the end, they should cooperate with one another.' A representative of the industry’s employers concurs as regards the basic need for consolidation but is less willing to express a view on the preferable method of consolidation: 'The speed of consolidation should be increased ... in this regard, I would avoid thinking in terms of dogmas, barring any means of consolidation in preference over another ... Consolidation should proceed in such a way that the newly established entities are competitive not only vis-à-vis one another, but also vis-à-vis European companies. Then, the exact means of consolidation will assume secondary importance,' states W Dunajewski, chair of the Association of Energy Plant Employers.

Privatisation

The next phase in the overhaul of Poland’s energy sector will be that of privatisation. Its principal objectives have been formulated as improved effectiveness, an influx of new investors, and the realisation of development goals.

Privatisation will first be carried out in the production field. It will involve the sale of shares in the power generation companies which have not so far been privatised, as well as divestment of the remaining State Treasury shares in those entities which already have private sector investors. The generation companies are slated for privatisation first because, in the view of the programme’s authors, they are of key significance in the creation of a competitive energy market.

While various groups with interests in the energy sector are essentially in agreement as to this stage, some remain sceptical. Several issues arise in this respect. According to the director of one power generation plant: 'whether privatisation of the entities will succeed or not, we shall see. In my opinion, it will be difficult. The Polish power plants will either be sold cheaply, or they won’t be sold at all.' The chair of the Association of Energy Plant Employers adds that: 'I would be very careful as regards privatisation of the energy sector at the worst moment in terms of the overall economic situation. We presently have a recession, all of Europe has a surplus of installed power. There is no stable system of law in Poland, the decision makers spring surprises on us time and time again, for instance by instituting an excise tax. All of this, sadly, is leading to a reduction in the value of power generation enterprises.'

Privatisation is then scheduled to proceed to the distribution field. In this area, privatisation will be geared first and foremost at securing the capital needed for network investments (so as to increase the availability of energy and the possibilities for its sale and to gain access to specialised knowledge concerning effective competition in the energy market). Public tender is to be the preferred means of privatisation. However, emotions are running high with regard to this particular aspect of the sector’s overhaul, with the majority of employers' organisations, trade unions and economic associations remaining decidedly opposed to this idea. 'Of course, the relay networks, being a strategic asset ... should be an independent entity, with a large stake - or certainly influence - held by the state', says the chair of the Association of Energy Plant Employers, 'If we are talking about a cohesive energy policy, let us not sell the networks. Why are we selling STOEN, why are we selling the G-8 group? Where will the distribution companies buy their energy from after Poland enters the EU if they will not be owned by Polish business entities?'

The question of employment, while not necessarily foremost on the protagonists’ minds, also overshadows the ongoing debate about restructuring and privatisation of the sector.

Employment

Naturally enough, the protection of existing jobs and the preservation of 'social privileges' in the context of the industry’s restructuring are priorities for the trade unions. According to the chair of the national energy section of the Engineers’ and Technicians’ Union (Związek Zawodowy Inżynierów i Techników): 'The union side has expressed its opinions concerning the government programme in our joint 'Bełchatów Position'. We do not address economic issues in it, for this is not a matter for trade unions, but first and foremost [we address] employee aspects because this is our area of operation.' In reply to the question of which is more important, modernisation or jobs, the chair of the national power plant section of the Independent and Self-Governing Trade Union Solidarity (Niezależny Samorządny Zwiazek Zawodowy Solidarność, NSZZ Solidarność) replied: 'Jobs, of course. At the same time, however, we need modernisation so as to not lose those jobs. These two things cannot be separated.'

As it prepared its reform programme, the government declared that it does not expect any major changes as regards employment. Government spokespeople offered words of comfort: 'we do not anticipate large redundancies. All processes affecting the companies will be subject to consultation with their workers, and we will create new jobs for all those who do not find work in the new structures ... One of our principal objectives is to create such conditions for the restructuring and privatisation of the energy sector that no social tensions arise in connection with it.'

These statements, however, have not dispelled the fears of the unions, as illustrated by the following quote from the Association of Energy Workers' Unions: 'It may be true that the government programme does not provide for group redundancies, but I find it impossible to believe that, after buying an enterprise, a strategic investor will not implement a programme of voluntary departures. And this is nothing other than production of jobless people. Employees will collect their severance payment and immediately register as unemployed, because they are still of working age and would like to find a job ... As it sells an operation to a strategic investor, the government should make sure that it receives assurances that there will be no redundancies, at least for a while. We cannot have a state of affairs where a strategic investor, in buying a company, agrees to a social package and then does not abide by its provisions, and unfortunately we have ve seen that happen as well.'

'Sweetening' the negative effects of voluntary departures with severance packages has also been elaborated upon by the Minister of the Economy, Labour, and Social Policy, Jerzy Hausner. He maintains that the 'social packages' used to date sweep the problem of unemployment 'under the carpet' rather than addressing it in any constructive fashion. He decries such measures as being harmful to employers, to employees and to local government bodies. At the same time, Minister Hausner states that 'we want to augment the schedule for restructuring and privatisation with a programme for creating new jobs'.

Many employers and experts appear convinced that the comparative peace prevailing with respect to employment issues in the energy sector is the calm before a major storm. The chair of the Energy Market Agency maintains that, as the process of privatisation and restructuring continues, 'it is impossible to avoid an extraordinarily difficult social problem - measures geared at finding alternative employment for several dozen percent of the people now working in the sector for whom full implementation of the cost-optimisation mechanism will entail the need to leave work. If this issue is not addressed by companies still controlled by the State Treasury, then, in the future, private investors will not have any misgivings about handling the matter in their own way, without doubt to the detriment of the employees.'

This general statement is substantiated with figures cited by the chair of the Association of Energy Workers' Unions: 'our employment levels exceed the European average by approximately 57%, and our expenses by approximately 30% ... Discussions with the trade unions should commence as soon as possible.'

Social dialogue

A 'tripartite sector team'- bodies created to deal with the problems of selected industries facing restructuring, privatisation and reorganisation (PL0308101F) - for the restructuring of the energy sector has been in operation since March 1998, and provides a forum for discussing employment restructuring in the electrical energy sector. The team comprises 30 members representing:

• the Ministries of the Economy, Labour and Social Policy, of Finance, and of the State Treasury;

• the Energy Regulation Office;

• Polskie Sieci Energetyczne;

• the seven trade union organisations active within the industry; and

• six employers' organisations.

The tripartite team has the potential for effective dialogue, according to the mutual assessments of the social partners involved. One of the industry’s trade union leaders had this to say about relations with the Federation of Polish Energy Sector Employer Unions: 'so far, so good. I would not like to put down the representatives of other sectors of the economy, but I believe that our relations can serve as an example for others.'

With regard to social dialogue in the energy sector, the chair of the national energy section of the Engineers’ and Technicians’ Union states: 'Without a doubt, the greatest success of the last two years is presented in the institutionalisation of social dialogue in the sector through the formal establishment of the tripartite team for the energy sector. Several years ago, we succeeded among the unions in devising a formula for cooperation as an element of dialogue, also with the employers' organisations. In this context, I view the cooperation as proceeding on terms of partnership ... in my opinion, we’re all still 'settling in' as regards cooperation in the team. I get the impression that not all the participants fully appreciate its possibilities.'

A representative of NSZZ Solidarność offers a less optimistic assessment of social dialogue in the sector, although his comments are directed principally at the government: 'Unfortunately, many do not regard their function with the attention which it merits. As an employer, you can really achieve great things. In the meantime, I get the impression that, often, they do not meet the European standard - if only with respect to trilateral social dialogue ... They think, for instance, that it is the government which should have it out with the union people and substitute for them in getting things done with the employees ... The truth is that it is the officials who are blocking dialogue. It should rely on mutual respect; in the meantime, not even an ordinary, low-ranking ministry employee sees a union representative as a partner for talks.'

It would appear, however, that this latter opinion may offer too gloomy an assessment - after all, according to commentators, one can hardly expect the government to resolve the problems of individual companies.

Commentary

Observers acclaim the government’s recent adoption of a programme for restructuring of the electrical energy sector as a harbinger of accelerated change. Many of them, however, emphasise that decisions to this effect should have been made years ago and express the fear that it will be difficult to make up for the time lost. All this notwithstanding, the general satisfaction at the programme’s adoption does not dispel the fears concerning its implementation. Many ideas have been criticised at length. Most of the debates going on at present centre on the means of transformation within the sector. Little is being said, meanwhile, about employment issues; the general idea of seeking alternative work for redundant energy sector employees falls short of any real solution. One would hope, however, that the promises will be kept and that redundancies in the energy sector will be less severe than in the mining (PL0309101F) or steel (PL0310105F) industries, and also that restructuring of the sector will not engender a new outbreak of strikes and demonstrations. (Rafał Towalski, Warsaw School of Economics [Szkoła Główna Handlowa, SGH] and Institute of Public Affairs [Instytut Spraw Publicznych, ISP])