VZCZCXRO7322
OO RUEHIK
DE RUEHPS #0578/01 3631532
ZNR UUUUU ZZH
O 291532Z DEC 09
FM AMEMBASSY PRISTINA
TO RUEHC/SECSTATE WASHDC IMMEDIATE 9579
INFO RUEHZL/EUROPEAN POLITICAL COLLECTIVE
RUEHNO/USMISSION USNATO 1306
RUFOADA/JAC MOLESWORTH RAF MOLESWORTH UK
RUCNDT/USMISSION USUN NEW YORK 1843
RHFMIUU/AFSOUTH NAPLES IT
RHMFISS/CDR TF FALCON
RHEFDIA/DIA WASHDC
RUEKJCS/SECDEF WASHINGTON DC
RUEPGEA/CDR650THMIGP SHAPE BE
RHEHNSC/NSC WASHDC
RUEAWJA/DEPT OF JUSTICE WASHDC
RHMFIUU/DEPT OF HOMELAND SECURITY WASHDC
RUEHC/DEPT OF LABOR WASHDC
RUEATRS/DEPT OF TREASURY WASHDC
RUZEJAA/USNIC PRISTINA SR

UNCLAS SECTION 01 OF 04 PRISTINA 000578 
 
SIPDIS 
SENSITIVE 
 
DEPT FOR EUR/SCE, EUR/PGI, INL, EUR/ACE, PRM, USAID 
 
E.O. 12958: N/A 
TAGS: ECON ENRG PGOV KV SR
SUBJECT: KOSOVO: ELECTRICITY IN THE NORTH-ONE STEP FORWARD, TWO 
STEPS BACK 
 
REF:  A) PRISTINA 558 
      B) PRISTINA 465 
      C) PRISTINA 541 AND PREVIOUS 
      D) BELGRADE 1314 
 
PRISTINA 00000578  001.2 OF 004 
 
 
SENSITIVE BUT UNCLASSIFIED - PLEASE PROTECT ACCORDINGLY 
 
¶1. (SBU) SUMMARY: Kosovo Energy Corporation (KEK) employees were 
only partially successful in conducting a December 24 visit to read 
meters at three substations in the northern part of Kosovo.  The 
limited success of these visits was marred, however, by the Serbian 
state electrical conglomerate EPS's decision to commence illegal 
billing for electric power in northern Kosovo, in direct violation 
of UNMIK regulations, and without a license from Kosovo's Energy 
Regulatory Office.  EPS's latest step underscores the real threat at 
the heart of the energy dispute in northern Kosovo -- partition -- a 
threat that could place ten years of coordinated Western policy in 
Kosovo at risk and upend NATO plans to reduce KFOR's presence in 
Kosovo over the next year.  We must redouble our efforts within the 
international community and with our EU partners in particular, to 
underscore the need to assert KEK's ownership rights to power assets 
throughout Kosovo and highlight the long-term risks associated with 
inaction.  END SUMMARY 
 
METER READING A QUALIFIED SUCCESS... 
------------------------------------ 
 
¶2. (SBU) On December 24, KEK employees, escorted by Kosovo Police 
(KP), were granted access by EPS employees to Valac substation in 
northern Kosovo and permitted to read meters there.  KEK employees 
were also granted access to the Zvecan substation, but EPS employees 
did not permit them to read Zvecan's meters.  Instead, KEK employees 
were promised copies of EPS-prepared meter readings.  In spite of 
weeks of talks that included top-level representatives of the 
Council of the European Union and ministerial-level officials in 
Belgrade, KEK meter readers were denied access to the Gazivoda 
substation, where power from the Ujmani hydropower plant enters 
Kosovo's electricity transmission and distribution grid.  Though 
EULEX and KFOR had forces in reserve, there was no violence and no 
arrests were made.  Access to all three stations and the reading of 
their meters, common practice until November 2009, are necessary to 
balance accounts for power transfers between Serbia and Kosovo. 
Valac is the most important of the three. 
 
JUST AS ILLEGAL BILLING COMMENCES 
--------------------------------- 
 
¶3. (SBU) The meter reading, which was a qualified success, came just 
days after news that Serbia's energy conglomerate EPS had commenced 
illegal billing for power in the northern part of Kosovo.  Bills for 
November 2009 and dated December 14, 2009 were distributed starting 
December 21 in the three majority-Serb municipalities of Zubin 
Potok, Zvecan, and Leposavic, and in the northern part of Mitrovica. 
 These bills were issued under the EPS and Elektrokosmet logos, 
though neither entity has been issued a license to distribute or to 
bill for power in Kosovo by the UNMIK-established Energy Regulatory 
Office (ERO).  Moreover, according to a copy of an EPS/Elektrokosmet 
bill we received, energy was billed according to the Republic of 
Serbia tariff schedule, rather than according to tariff rates 
established by Kosovo's UNMIK-chartered ERO.  The illegal billing is 
yet another attempt by EPS to cement an illegal seizure of KEK 
assets and partition Kosovo's electricity sector. 
 
COMMENT: FAILURE ON ENERGY WILL CEMENT PARTITION 
--------------------------------------------- --- 
 
¶4. (SBU) That it took a month of talks to re-establish an imperfect 
facsimile of a preexisting regime of meter-reading is emblematic of 
one of the main problems we face.  Time is not on our side. 
December is done, and if the spring thaw comes before KEK's control 
of the Valac substation has been reestablished and payment for power 
in the north has been regularized, we will have witnessed Serbian 
state entities' newest violation of UNMIK/Kosovo law and UNSCR 1244: 
 
PRISTINA 00000578  002.2 OF 004 
 
 
the creation of an illegal, parallel electrical distribution network 
on Kosovo territory.  It will join illegal, parallel municipal 
administrations and non-transparent Serbian state financing as the 
elements of the physical and administrative infrastructure that 
could support a future breakaway North Kosovo.  To avoid taking 
another step toward de facto partition, we and our allies must act 
to confront and roll back this latest challenge by Belgrade to 
Kosovo's sovereignty. 
 
¶5. (SBU) Failure to convince our allies of the significance of this 
issue, and soon, will place at risk ten years of coordinated 
US-EU-NATO-UN policy that Kosovo must not be divided.  Moreover, 
such a failure will undermine USG and IC priorities for Kosovo in 
practically every sector.  Sector-wide reform in energy would be the 
first casualty.  The nascent effort to develop a strategy for 
dealing with the north -- the success of which is a sine qua non for 
moving ahead with plans for KFOR's drawdown -- would also falter, 
including plans to establish the Ahtisaari-mandated North Mitrovica 
Municipality.  Unfortunately as EPS' intentions have become clearer 
and the risks of its actions to our strategic objectives more 
tangible our European allies have gone wobbly.  We find ourselves 
forced to counter specious arguments about the current stand-off and 
to defend facts that were unchallenged just weeks ago. 
 
NON-PAPER ON MYTHS ABOUT NORTH KOSOVO POWER 
------------------------------------------- 
 
¶6. (SBU) With this in mind, we recommend engaging our key allies, 
the European Union, and other key IC actors in capitals and at more 
senior levels.  The goal would be to debunk firmly and finally the 
myths about the current stand-off and galvanize a serious, concerted 
effort to reassert KEK control over its assets, and ultimately, 
regularization of energy payments in the north.  A suggested 
non-paper "Debunking Myths on North Kosovo Power" that might prove 
useful in this effort follows. 
 
¶7. (SBU) BEGIN TEXT OF DRAFT NON-PAPER: 
 
Debunking Myths on North Kosovo Power 
 
-- Myth 1: The KEK Shutoff of Power to the North was a 
Politicization of a Commercial Dispute 
 
Fact: The October 2009 shutoff was a result of an act of nature, not 
a devious KEK plan.  While two south/north power lines were down for 
scheduled maintenance, unseasonably cold weather pushed northern 
power consumption over 60 MW, placing the substation equipment and 
lines at risk of catastrophic failure, and months of repair costing 
millions.  When KEK asked EPS employees at Valac to load shed, to 
bring demand to safe levels, its requests were refused, and so -- 
for safety reasons, and in the interest of protecting the wider 
transmission and distribution system -- it stopped providing power 
to the north through Valac substation. 
 
-- Myth 2: KEK is Unwilling to Restore Power to the North 
 
Fact: Since late October, when repairs to the south/north lines were 
completed, KEK has offered to resume supply from its Obilic 
generation assets to Valac and northern Kosovo, but Serbia's 
electrical distribution and transmission conglomerates -- EPS and 
EMS -- have refused these requests.  There is a written record of 
such exchanges, including KEK's unconditional offers to restore 
power. 
 
-- Myth 3: KEK has Taken an Unconstructive Approach to EPS 
 
Fact: KEK's actions have been constructive, including not only 
offers for reconnection, but also continued KEK payment for 
electricity for the North generated by the Ujmani hydropower plant. 
It has also, in the main, abstained from public comment.  By 
contrast, Serbian firms have issued letters annexing Kosovo 
municipalities to their service territory, have issued bills without 
a license, and have disconnected majority ethnic-Albanian villages 
 
PRISTINA 00000578  003.4 OF 004 
 
 
in Northern municipalities to cut demand.  Despite provocations KEK 
has kept lines of communication open with Serbian entities on 
commercial issues, including reiterating its long-standing 
willingness to conclude an electrical services subcontracting 
arrangement as part of regularizing payment for electricity services 
in northern Kosovo. 
 
-- Myth 4: The Ownership of Northern Kosovo Electricity Assets, Like 
Valac, is Debatable 
 
Fact: Kosovo's ownership of the Valac substation and power lines for 
the transmission and distribution of power in Kosovo, though 
unchallenged for years, has recently been questioned.  Unless UNSCR 
1244 and UNMIK itself are questionable, there are no legal grounds 
to question Kosovo's ownership of these assets. 
 
In December 2005, pursuant to UNMIK Regulations 2002/12 and 2005/18, 
the Kosovo Trust Agency, an UNMIK organ, implemented a Plan for 
Transformation for Kosovo's Energy Sector.  "Deeds of Transfer" and 
"Declarations of Subscription and Contribution in Kind" established 
Valac substation, the buildings that house it, the land on which it 
sits, and the lines that feed it and emanate from it, as the 
property of Kosovo's energy conglomerate KEK or its energy 
transmission entity KOSTT.  Public notices to this effect were 
issued in the Serbian and the Kosovo press, and no legal challenges 
were filed.  Kosovo's Energy Regulatory Office, another 
UNMIK-established organ, gave KEK and KOSTT unique licenses that 
make them the sole legal distribution and transmission companies for 
the entire territory of Kosovo.  These decisions, deeds and 
documents not only form the basis of KEK's/KOSTT's claim to Valac, 
but also for all other substations, lines, generation, and 
distribution capacity throughout the country. 
 
In August 2009, in spite of the fact that the Strpce substation -- 
like Valac today -- was occupied by employees of Serbia's EPS, they 
did not claim legal rights to ownership and yielded control of the 
substation to KEK.  Nor did any of our European allies or others 
within the IC call KEK's ownership rights into question.  KEK and 
KOSTT have the same ownership rights to Valac substation that they 
have to Strpce substation.  To argue anything to the contrary is a 
dangerous recognition of "Northern Exceptionalism" and partition. 
 
-- Myth 5: EPS Control of Valac will Facilitate Commercial Talks 
 
 
Fact: Such an argument is not only wrong but backwards.  It is KEK 
control of Valac that would be conducive to a regularization of 
commercial relations for power.  EPS control of the substation has 
done anything but that.  Rather than facilitate talks, EPS control 
of Valac -- exercised exclusively since October 2009 -- has led only 
to illegal modifications to the substation to facilitate unlicensed, 
illegal provision of electrical services by Serbian entities in the 
North. 
 
Continued, unchallenged EPS control of Valac won't lead to talks, 
but to the continued retrofitting of the station to permit EPS to 
provide more power to the North.  These efforts will continue to 
take place without licenses from Kosovo's UNMIK-established Energy 
Regulatory Office, and in contravention of existing licenses to KEK 
and KOSTT to provide services to the whole territory of Kosovo. 
 
The end result, as in the cases above, would be clear violations of 
UNMIK law and regulations, Kosovo state firms' loss of property, and 
the effectual strengthening of the bonds between the northern 
municipalities and Serbia. 
 
-- Myth 6: KEK has not Offered Commercial Solutions 
 
Fact: If EPS genuinely seeks a commercial solution, one has been on 
the table for some time.  KEK has advocated since May 2009 for an 
electrical services company agreement with Serbia's EPS, through 
which EPS could register a Kosovo firm to serve as a subcontractor 
for KEK, providing services including billing and meter reading to 
 
PRISTINA 00000578  004.2 OF 004 
 
 
majority Kosovo Serb communities like North Mitrovica, Zvecan, Zubin 
Potok, and Leposavic (previous versions of the same proposal 
included Strpce and Gracanica, before KEK regularized payments in 
these areas without EPS participation).  KEK's overtures have never 
been met with a serious, substantive response and it is hard to see 
how EPS' control of Valac will change this.  (Note: Here, too, a 
record of these exchanges exists that documents this version of 
events.) 
 
-- Myth 7: A Serbian Power Distributor is the Answer 
 
Fact: For a Serbian electricity provider to be established in the 
North, KEK and KOSTT would essentially be forced to cede control of 
assets that are theirs by legal right.  In addition to annulling 
Kosovo firms' property rights directly, such a move would have 
second order negative consequences for these entities, by 
denigrating the value of the licenses KEK and KOSTT currently hold 
as sole providers for distribution and transmission for the whole 
territory of Kosovo. 
 
For KEK especially, this loss of assets, service territory and 
customers would wreck its value in privatization, unraveling years 
of work by the GOK and donors, and placing in jeopardy comprehensive 
energy sector reform in Kosovo.  If the provider operated only in 
the North, the scheme would advance partition.  If, as some claim, 
the Serbian provider should operate in Kosovo Serb inhabited areas 
both north and south of the Ibar, even more damage would be done to 
the value of KEK's licenses and its privatization prospects, and 
electricity in Kosovo would officially become an "ethnic" commodity 
-- a prospect that we certainly should avoid. 
 
END TEXT 
 
MURPHY