VZCZCXRO8815
PP RUEHAG RUEHAST RUEHDA RUEHDBU RUEHDF RUEHFL RUEHIK RUEHKW RUEHLA
RUEHLN RUEHLZ RUEHNP RUEHPOD RUEHROV RUEHSK RUEHSL RUEHSR RUEHVK
RUEHYG
DE RUEHBM #0497/01 1970845
ZNR UUUUU ZZH
P 160845Z JUL 09
FM AMEMBASSY BUCHAREST
TO RUEHC/SECSTATE WASHDC PRIORITY 9733
INFO RUEHZL/EUROPEAN POLITICAL COLLECTIVE PRIORITY
RHMCSUU/DEPT OF ENERGY WASHDC PRIORITY
RUCPDOC/DEPT OF COMMERCE WASHDC PRIORITY

UNCLAS SECTION 01 OF 02 BUCHAREST 000497 
 
SENSITIVE 
 
STATE FOR EUR/CE ASCHEIBE 
 
SIPDIS 
 
E.O. 12958: N/A 
TAGS: ENRG ECON EINV PGOV KGHG RO
SUBJECT: ROMANIA: A 'EUROPEAN' MODEL FOR THE ENERGY SECTOR 
 
REF: A) Bucharest 440 
 
Sensitive but Unclassified, not for Internet distribution. 
 
¶1.  (SBU) Summary: The Government of Romania (GOR) is considering 
the creation of two vertically integrated energy companies formed 
out of existing state-owned assets, reversing a decentralization 
process that the GOR now sees as having been flawed.  Instead, two 
"national champions" able to compete on the wider European energy 
market will be fostered.  If approved, the entities will each 
include enough production, generation, and distribution assets to 
account for 90 percent of the Romanian energy market.  U.S. and 
other multinational companies have raised competition concerns with 
regard to this proposal, which seems to be have been driven by 
political, not economic, considerations.  End Summary. 
 
¶2.  (SBU) The proposal to develop two "national champions" was first 
mooted for post in a meeting between the Charge d'Affaires and the 
Minister of Economy (reftel).  Conversations with lower level 
interlocutors have revealed additional details of the Ministry of 
Economy's (MoE) plans.  Under the Ministry's proposal, the first 
entity would bundle the two operational nuclear reactors with two 
hydro power stations, several coal-fired power plants, and the 
national hard-coal mining company.  The seQnd entity would bundle 
natural gas producer Romgaz with the remaining hydro power stations, 
all natural gas fired power plants, the lignite fired power plants, 
and the lignite mining companies.  Both companies would also include 
distribution.  Notably absent from this mix is any renewable or 
alternative energy generation component, with the exception of a 
legal mandate to purchase "green certificates" on the market.  Since 
neither of the integrated companies will include renewable 
generation, continued growth will depend entirely on the private 
sector, which in the absence of feed-in tariffs or mandated 
renewable production quotas, may struggle to sell power to the 
integrated companies' distributors.  This, coupled with the 
perpetually delayed implementing regulations for Romania's renewable 
energy law, could slow-down expansion plans in this booming sector. 
 
¶3.  (SBU) The American Chamber of Commerce (AmCham) recently hosted 
a meeting with Alexandru Sandulescu, Director General of the Energy 
Policy Directorate in the MoE, to discuss energy policy, focusing on 
the proposal to "integrate" the state-owned companies.  The meeting 
was revealing in that Sandulescu repeatedly referred to the proposal 
as a "political" one that was made without the involvement of 
professional Ministry staff.  Speaking candidly, Sandulescu shared 
his concerns about possible flaws in the bundling proposal.  In his 
opinion, the inclusion of reactors 1 and 2 of the Cernavoda nuclear 
power plant in one of the new entities would make it harder for the 
nuclear power company Nuclearelectrica to finance reactors 3 and 4, 
which are currently under construction.  Another concern is with the 
integration of energy distribution, raising the possibility of an EC 
infringement procedure unless distribution is somehow cordoned off 
from the rest of the business. 
 
¶3. (SBU) The cost assumptions underlying the MoE's proposal are also 
questionable.  The MoE has publicly stated that the companies will 
have an average cost of 44 to 45 euro per MWh.  However, these 
estimates are based on 2006 data and do not factor in the mining 
industry coal subsidies that will be included in the price of 
electricity as of 2010, nor do they include the cost of CO2 
allowances, which will be required starting in 2013. 
 
¶4.  (SBU) Potential private sector competitors to the new companies 
are worried about the market implications of having two state-owned 
and operated companies controlling 90 percent of the energy market. 
These concerns have spurred Romania's Competition Council (RCC), to 
announce that it will scrutinize the plan closely.  EU Energy 
Commissioner Piebalgs has also publicly advised Romania against 
taking measures that would reduce competition on the power market. 
Still, the plan appears to have legs, with the MoE issuing a string 
of press releases over the last month making the case for the plan. 
As the MoE sees it, Romania's energy sector was wrongly 
decentralized according to generation type.  This has left the 
market fragmented and unable to make needed investments in the 
future.  It has also contributed to a situation where very little 
energy is traded over the energy exchange, as both the energy 
producers and major consumers have an incentive to lock in 
non-transparent long-term bilateral contracts.  The MoE also admits 
to wanting to build companies big enough to compete throughout 
Europe, like many of the "national champions" in neighboring states. 
 Left unsaid are the underlying goals of reasserting stronger state 
control over a strategic sector and protecting employment by 
allowing cheap hydro-power to subsidize the jobs of coal miners and 
inefficient thermal power plants. 
 
¶5. (SBU) Comment:  The final shape of the MoE's proposal is still 
under discussion and the jury is still out as to the ultimate 
 
BUCHAREST 00000497  002 OF 002 
 
 
impact.  Particular points of concern are the integration of 
distribution and the lack of a well thought-out plan for encouraging 
the new companies to develop renewable generation capacities.  The 
non-transparent way that the plan has been drafted and the MoE's 
unwillingness to engage with a broad range of stakeholders bode ill 
for the proposal.  Another worrying factor is the top-down manner in 
which the proposal was developed, with little input from career 
technical staff at the MoE.  That being said, if distribution can be 
firewalled off from production and if integration is a prelude to 
privatization then the proposal may yet end up positively. 
Unfortunately, given the way this proposal has developed so far, its 
overall impact will likely be negative, both for the private sector 
and for Romania's commitment to reduce greenhouse gas emissions. 
End comment. 
GUTHRIE-CORN