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RUCNDT/USMISSION USUN NEW YORK 1882
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RUEHC/DEPT OF LABOR WASHDC
RUEATRS/DEPT OF TREASURY WASHDC
RUZEJAA/USNIC PRISTINA SR

UNCLAS SECTION 01 OF 03 PRISTINA 000060 
 
SIPDIS 
SENSITIVE 
 
DEPT FOR EUR/SCE, EUR/PGI, INL, DRL, PRM, USAID 
 
E.O. 12958: N/A 
TAGS: PGOV PREL PINR SR KV
SUBJECT: KOSOVO: NOTHING NEW IN SERBIA'S ENERGY PROPOSAL; SOME 
POSITIVE ELEMENTS IN THE EU'S 
 
REF: A) PRISTINA 23 
     B) 2009 PRISTINA 578 
     C) 2009 PRISTINA 558 
     D) 2009 PRISTINA 541 (AND PREVIOUS) 
 
PRISTINA 00000060  001.2 OF 003 
 
 
SENSITIVE BUT UNCLASSIFIED Q PLEASE PROTECT ACCORDINGLY 
 
¶1. (SBU) SUMMARY: The Serbian Ministry for Kosovo, on January 29, 
submitted a proposal to the Kosovo Energy Company (KEK) to resolve 
the current standoff over assets and the provision of electricity in 
northern Kosovo.  The proposal offers to establish the Serbian 
Electricity Company (EPS) as a second energy provider in Kosovo and 
transfers several Kosovo electricity assets to EPS.  It uses 
ethnicity, rather than commercial considerations, to drive energy 
provision in Kosovo, and it would partition electricity service 
along ethnic lines.  Finally, Serbia's proposal threatens to 
undermine the GOK's ongoing efforts to privatize electricity 
production and distribution and would diminish the value of Kosovo's 
electricity assets ahead of privatization.  Not surprisingly, KEK 
plans to reject it.  That said, we have reviewed an EU proposal, 
elements of which could contribute to resolving the electricity 
situation in the north.  Based on our preliminary assessment, much 
of it is consistent with proposals KEK has already made to its 
Serbian interlocutors, and it is worth exploring further.  The EU 
proposal's chief flaw is that it would force KEK to surrender its 
hard-won commercial position south of the Ibar River, something that 
we do not believe would be wise for the international community to 
force on the GOK and KEK.  END SUMMARY 
 
A SERBIAN "SOLUTION" TO ELECTRICITY IN KOSOVO 
--------------------------------------------- 
 
¶2. (SBU) On January 29, Serbian Assistant Minister for Kosovo Dragan 
Petkovic sent to the Kosovo Energy Company (KEK) a written proposal 
for resolving the standoff over electricity in northern Kosovo.  The 
proposal would position the Serbian Electricity Company (EPS) as a 
second full-service electricity provider throughout Kosovo, 
something rejected by UNMIK and KEK in 2007, and as we have reported 
previously, something that has never been on the table in the 
nine-month negotiation between EPS and KEK over regularizing KEK's 
non-paying Serb electricity customers.  The focus of these talks has 
always been on the establishment of a Kosovo-registered company, or 
ESCO, that would provide energy services on KEK's behalf to Kosovo 
Serb consumers (e.g., meter reading, billing, and bill collection). 
EPS refused to engage on the ESCO proposal.  As a consequence, KEK 
proceeded on its own to regularize Kosovo Serb customers in the 
south, including at Serbian Orthodox monasteries, without the ESCO. 
This arrangement is working well. 
 
MAY I HAVE A HYDRO PLANT WITH MY SUB-STATION, PLEASE 
--------------------------------------------- ------- 
 
¶3. (SBU) The Serbian proposal calls for KEK to give up the hard-won 
commercial gains that it made in the south, gains that were critical 
catalysts to the political progress we made among Kosovo Serbs south 
of the Ibar River over the last six months of 2009. (Note: We 
suspect that concerns about the latter are the driving factor behind 
Belgrade's desire to re-open the ESCO issue in the south. End Note) 
However, Serbia's proposal goes well beyond reversing KEK's progress 
in the south with regularization of non-paying customers.  In 
effect, it seeks an ex post facto sanction for its illegal seizure 
of KEK's electricity assets in the north (i.e., Valac and other 
substations as well as transmission and distribution lines).  The 
proposal also broadens EPS/EMS claims to Kosovo assets to include 
the Ujmani/Gazivoda hydroplant in the north.  Even more boldly, it 
calls for the right to develop small hydro concessions in 
Shterpce/Strpce municipality in Kosovo's south. 
 
ETHNICITY, ELECTRICTY, AND POWER PROVISION 
------------------------------------------ 
 
¶4. (SBU) The fundamental essence of the Serbian proposal is that all 
aspects the electricity sector -- generation, transmission, 
 
PRISTINA 00000060  002.2 OF 003 
 
 
distribution, and supply -- should be organized along ethnic lines. 
Kosovo Serbs would get power from Serbs; Kosovo Albanians from 
Albanians.  There is a distinction between this notion and the 
proposal made by KEK that a Serbian-based, but Kosovo-registered 
company, could provide electricity services to Kosovo Serbian 
enclaves.  Belgrade's proposal has obvious political shortcomings 
given our long-term objectives in Kosovo.  We cannot integrate 
Kosovo's Serbs into Kosovo society or ensure long-term stability 
here if Serbia is allowed to create hostile, parallel societies and 
structures within Kosovo.  That said, the Serbian proposal also 
violates common sense commercial principles for today's Kosovo. 
Although it may be true that in a liberalized market of the future 
there might be room for multiple service providers, and that 
consumers would be willing to pay more for "ethnically pure power", 
the costs of such a system with today's electrical infrastructure 
would be prohibitively high. 
 
FLUSHING YEARS AND MILLIONS OF DOLLARS DOWN THE DRAIN 
--------------------------------------------- -------- 
 
¶5. (SBU) There are other problems with Serbia's proposed approach. 
Establishing an ethnically-divided power generation, transmission, 
distribution, and supply system (whether north and south of the 
Ibar, or just north of the Ibar) would undermine U.S.-led efforts to 
privatize KEK electricity production and distribution assets.  This 
multi-year effort, in which we and others in the international 
community have invested tens of millions of dollars, is critical to 
Kosovo's long-term economic viability.  Without a rational energy 
sector, economic development and growth will not take place.  We are 
now close to success on the New Kosovo Power Plant and privatization 
of the electricity distribution company.  Serbia's proposal would 
put these efforts at serious risk.  It calls into question the 
ownership of the assets themselves; it would fundamentally undermine 
the profitability of the private businesses. 
 
AN EU PROPOSAL OFFERS OPPORTUNITIES FOR PROGRESS 
--------------------------------------------- --- 
 
¶6. (SBU) We understand that Robert Cooper, Director General External 
and Politico-Military Affairs at the General Secretariat of the 
Council of the European Union, on February 2 passed to EUR Assistant 
Secretary Gordon an EU proposal for breaking the current impasse. 
We have looked closely at it (though we have not shared it with 
anyone), and we believe that it contains elements that could 
contribute to a constructive resolution of the situation.  The EU 
proposal helpfully makes clear that KEK is to be the "exclusive 
supplier and provider of electricity in Kosovo."  In essence, the 
proposal appears to call for the creation of an ESCO, though the EU 
has cast this entity as SECK Q Serbian Electricity Company in 
Kosovo."  It would allow for SECK to act as a billing agent for KEK 
and to provide maintenance at and manage certain facilities "in 
defined areas."  KEK has already made similar offers to Belgrade. 
The major flaw with the EU proposal is that it requires KEK to give 
up its hard-won gains in the south, which the GOK and KEK are not 
likely to accept, absent a reciprocal move by Belgrade to permit KEK 
equal access to the Serbian energy market. 
 
COMMENT 
------- 
 
¶7. (SBU) Public pressure is growing on the GOK and KEK to reassert 
their control over the north.  We should not expect the GOK to 
acquiesce indefinitely and allow Serbia to entrench its position on 
electricity in the north, and from our perspective, reestablishing 
KEK's control over its assets is a critical step in the longer term 
effort to unseat Belgrade's illegal parallel structures there. 
Unsurprisingly, KEK has already indicated to us that Serbia's 
proposal as it stands right now is unacceptable, and KEK plans to 
formally convey this to Serbia by February 5.  Fortunately, the EU 
seems to agree for once.  On the other hand, the EU proposal offers 
a possible way forward.  Much of it is consistent with proposals KEK 
has already made to its Serbian interlocutors, and it is worth 
exploring further.  It would be a mistake, however, for the 
 
PRISTINA 00000060  003.2 OF 003 
 
 
international community to force KEK (or the GOK) to accept an EU 
proposal to re-open discussions on an ESCO-type arrangement for the 
south.  Belgrade lost that argument last year as a result of its 
stonewalling, and rolling it back would be disastrous for the newly 
empowered, legitimate Serb-led municipalities.  The EU has offered 
no good justification for trying to impose this on Pristina other 
than a disingenuous reference to the Athens Treaty and the acquis 
communitaire.  Were this a genuine basis for such a proposal it 
would have to be based on reciprocal arrangements wherein both 
parties had equal rights as service providers on the other's 
territory. 
 
DELL