VZCZCXRO5814
PP RUEHDBU RUEHFL RUEHKW RUEHLA RUEHROV RUEHSR
DE RUEHVL #0239/01 0951149
ZNY CCCCC ZZH
P 051149Z APR 07
FM AMEMBASSY VILNIUS
TO RUEHC/SECSTATE WASHDC PRIORITY 1152
INFO RUEHZL/EUROPEAN POLITICAL COLLECTIVE
RHMFISS/DEPT OF ENERGY WASHINGTON DC
RUCPDOC/DEPT OF COMMERCE WASHINGTON DC
RHEHNSC/NATIONAL SECURITY COUNCIL WASHINGTON DC

C O N F I D E N T I A L SECTION 01 OF 02 VILNIUS 000239 
 
SIPDIS 
 
SIPDIS 
 
E.O. 12958: DECL: 04/02/2022 
TAGS: ENRG PREL ECON EUN XG LH
SUBJECT: LITHUANIA SEEKS TO CORONATE A NATIONAL ENERGY 
CHAMPION TO REALIZE ITS NUCLEAR AMBITIONS 
 
REF: A. VILNIUS 77 
 
     ¶B. 06 VILNIUS 637 
     ¶C. 06 VILNIUS 549 
 
Classified By: Political/Economic Section Chief Rebecca Dunham for reas 
ons 1.4 (b) and (d) 
 
¶1. (C) Summary:  The GOL has promulgated a draft law that 
outlines Lithuania's participation in the construction and 
operation of a new nuclear power plant.  The legislation, 
which requires parliamentary approval, calls for the merger 
of three energy companies to create a national energy 
champion that will represent Lithuania in this multinational 
project.  The plan may create an entity large enough to 
secure the billions of dollars necessary for Lithuania's 
share of the power plant, but it does little to liberalize 
the electricity market or improve Lithuania's investment 
climate.  Given an opportunity to emphasize private 
investment in a major energy infrastructure project, the GOL 
has opted instead to emphasize state control, once again 
demonstrating its instinctive mistrust of private capital. 
End Summary. 
 
GOL approves draft law 
---------------------- 
 
¶2. (C) Prime Ministerial energy advisor Saulius Specius told 
us on March 27 that the cabinet earlier that day had approved 
a draft law outlining Lithuania's participation in a new 
nuclear power plant (NPP).  He said that he had led the team 
that had designed a "national investor," the legal entity 
that will represent Lithuania's portion of the "implementing 
company" that will issue the tender for, and eventually 
operate, the new NPP.  The Ministry of Economy registered the 
law with the parliament on April 2; the parliament may begin 
deliberation on the law as early as April 5.  A member of the 
parliament's Economic Committee told us that the measure may 
receive fast-track treatment that could allow it to receive 
full parliamentary approval within days. 
 
¶3. (C) Specius said that the draft law requires Lithuania's 
national investor to own at least 34 percent of the shares in 
the new NPP's implementing company.  Specius expects that the 
Polish, Estonian, and Latvian participants will own 22 
percent of the implementing company, but these portions are 
subject to negotiation.  He said that he expects the new NPP 
have a 3200 MW capacity: either two 1600 MW reactors or four 
800 MW reactors.  He emphasized, however, that the draft law 
did not mandate a specific capacity for the new NPP, and that 
the implementing company would ultimately decide how large 
the new NPP would be. 
 
Too small to pay the piper 
-------------------------- 
 
¶4. (C) A 3200 MW NPP, Specius said, would probably cost about 
EUR 6 billion (USD 8 billion).  Lithuania's investor would 
therefore need to come up with about EUR 2 billion (USD 2.7 
billion) to cover its 34 percent of the project.  The size of 
Lithuania's commitment creates a problem, he explained, 
because its most obvious candidate as national investor, the 
GOL-owned energy company Lietuvos Energija (LE -- Lithuanian 
Energy), is too small to secure a EUR 2 billion loan.  Its 
earnings before interest, taxes, depreciation, and 
amortization (EBITDA) last year were only about one-half that 
of its Latvian counterpart, he said, and only about 
one-quarter that of Estonia's national energy company.  (A 
representative of one of the companies likely to be in the 
running to build the new NPP told us that he estimated the 
total price to be closer to EUR 7 billion/USD 9.3 billion.) 
 
¶5. (C) After weighing several options, Specius said that his 
team concluded that the only viable solution was to re-merge 
LE with the companies that operate Lithuania's two 
electricity grids.  (Lithuania created these companies out of 
LE in 2001.)  The GOL maintains a majority (approximately 71 
percent) holding in the eastern grid; Germany's E.ON has a 20 
percent share.  The western grid, on the other hand, has been 
entirely in private hands since late 2003, owned by a 
subsidiary (NDX Energija) of Lithuania's largest retailer (VP 
Market). 
 
(Re)building a national champion? 
--------------------------------- 
 
¶6. (U) Minister of Economy Vytas Navickas announced on March 
23 the GOL's intention to reorganize these companies. 
Instead of pursuing the GOL's long-stated intention to 
completely privatize the eastern grid, he said that the GOL 
 
VILNIUS 00000239  002 OF 002 
 
 
would do the opposite, merging both grids back into a newly 
reformed LE.  He said that LE will issue new shares that it 
will swap for shares in the electricity grid companies.  The 
new, larger LE will then secure the loans needed to purchase 
at least 34 percent of the NPP's implementing company. 
 
¶7. (C) Specius said that this reorganization would give the 
GOL a majority share in all three companies.  Specius added 
that the larger LE would be able to participate in all three 
of the planned electricity projects: the new NPP, SWINDLIT 
(an undersea electricity cable to Sweden), and the 
Polish-Lithuania power bridge (reftels).  Specius also said 
that the plan would allow the GOL to avoid putting any public 
money into these projects because the companies themselves 
would be responsible for securing the necessary funding. 
 
¶8. (U) Prime Minister Gediminas Kirkilas had sounded a 
somewhat different note in January, saying in a radio 
interview that the NPP project had attracted significant 
international interest and that he envisioned a mix of public 
and private capital in the enterprise.  Lithuania's Free 
Market Institute (LFMI) tried to push the GOL in this 
direction, telling reporters after Kirkilas's interview that 
the involvement of private investors would mitigate risk. 
LFMI also encouraged the GOL to float shares of the new NPP 
on the Vilnius stock market. 
 
Don't call it nationalization 
----------------------------- 
 
¶9. (C) We suggested that some observers might view the 
merging of these companies as the re-nationalization of 
Lithuania's electricity infrastructure, which would send an 
unfortunate signal to possible foreign investors.  Specius 
said that he expected NDX to happily participate in the 
venture because it would make good business sense, but 
admitted that NDX was nervous about the possibility of having 
its assets under the control of management appointed by the 
GOL.  Specius also explained that if NDX refused to go along 
with the plan, the GOL was prepared to nationalize the 
company.  He also insisted that the new arrangement would not 
violate current EU guidelines on having separate companies 
controlling the generation and distribution of electricity, 
but acknowledged that rules being discussed in Brussels that 
would require different ownership of generation and 
distribution companies would, if enacted, complicate the 
government's NPP plans. 
 
¶10. (C) When asked if the GOL had consulted with the Polish, 
Latvian, or Estonian governments while drafting the law, 
Specius explained that they had reached a general 
understanding with their partners that Lithuania should be 
allowed to have a larger stake in the implementing companies 
than the other countries.  He made it clear, however, that 
this law was a GOL creation, not the product of consultation 
with its NPP partners. 
 
Comment 
------- 
 
¶11. (C) Lithuania has many geopoliticians and few economists. 
 Its plans to develop the largest commercial venture ever 
envisioned here reflect that correlation of forces.  The NPP 
project could attract considerable foreign investment, which 
in turn could reduce the GOL's financial exposure for this 
enormous venture with its attendant up-side risk for large 
cost over-runs.  The GOL seems prepared to forego that 
opportunity and rush through the Parliament a hastily 
conceived plan that conflates government control with 
security, with little thought to the economic, competition, 
and investment dimensions of the issue. 
KELLY