VZCZCXRO6960
PP RUEHIK
DE RUEHPS #0023/01 0131343
ZNR UUUUU ZZH
P 131343Z JAN 10
FM AMEMBASSY PRISTINA
TO RUEHC/SECSTATE WASHDC PRIORITY 9615
INFO RUEHZL/EUROPEAN POLITICAL COLLECTIVE
RUEHNO/USMISSION USNATO 1321
RUFOADA/JAC MOLESWORTH RAF MOLESWORTH UK
RUCNDT/USMISSION USUN NEW YORK 1858
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 WASHINGTON DC
RUEHC/DEPT OF LABOR WASHDC
RUEATRS/DEPT OF TREASURY WASHDC
RUZEJAA/USNIC PRISTINA SR

UNCLAS SECTION 01 OF 02 PRISTINA 000023 
 
SIPDIS 
SENSITIVE 
 
DEPT FOR EUR (SCE, ACE), DRL, USAID 
USEU FOR HAUGEN 
 
E.O. 12958: N/A 
TAGS: PGOV PREL ENRG KV
SUBJECT: KOSOVO:  THE MYTH OF "THE AGREEMENT" FOR A SERBIAN POWER 
DISTRIBUTOR 
 
PRISTINA 00000023  001.2 OF 002 
 
 
SENSITIVE BUT UNCLASSIFIED - PLEASE PROTECT ACCORDINGLY 
 
REF:  A) Pristina 0012 and previous 
      B) Belgrade 0048 
 
¶1. (SBU) SUMMARY: A new myth has crept into discussions on 
electrical power in northern Kosovo: there was an offer to, or an 
agreement with, Serbia to establish a "second provider" of 
electricity for Serb areas in Kosovo.  This is false.  Kosovo's sole 
registered, legal energy distributor, Kosovo Energy Corporation 
(KEK), has offered its Serbian interlocutors an energy services 
contract, or ESCO agreement.  This would allow a Serbian company, 
registered in Kosovo, to provide energy services -- including buying 
electricity from KEK, delivering it to customers, and billing for it 
-- as a subcontractor to KEK.  This offer remains on the table for 
the north, and it remains the key to regularizing payment for power 
in the north.  However, Serbian interlocutors have consistently 
refused it.  That said, as previous cases demonstrate, the GoS (and 
Serbian state-owned energy firms) will deal only when no other 
options exist.  To achieve this goal, KEK must regain control of the 
Valac substation.  END SUMMARY 
 
THE NEW MYTH: AGREEMENT FOR A SERBIAN POWER PROVIDER 
--------------------------------------------- ------- 
 
¶2. (SBU) We understand that several European interlocutors have 
begun to peddle a new myth in discussions about Belgrade's illegal 
effort to take control of the electrical power grid in northern 
Kosovo.  The latest assertion is that KEK -- in the context of its 
discussions with Serbian interlocutors over the regularization of 
KEK's non-paying Kosovo Serbian customers -- tabled an offer that 
Serbia could form a "second power provider" in Kosovo.  Some 
proponents of this myth go so far as to claim that KEK actually 
agreed to the establishment of second Serbian power provider in 
Kosovo.  In roughly a year of talks between KEK, the Serbian 
Ministry for Kosovo and the Serbian state-owned energy conglomerate 
EPS about the regularization of payment for power, KEK never made 
such an offer, let alone agreed to the establishment of a 
Serbia-based second power provider.  USAID advisors (U.S. citizen 
contractors), who have been involved at every stage of this process 
and have attended every discussion between KEK and EPS confirm that 
no such offer was ever made or contemplated. 
 
THE CONSTANT REALITY: AN ESCO REMAINS ON THE TABLE 
--------------------------------------------- ----- 
 
¶3. (SBU) Over the last year, KEK has consistently offered its 
Serbian interlocutors essentially the same deal: a Serbian company, 
registered in Kosovo, could establish a subcontractor relationship 
with KEK to provide energy services in exchange for assistance with 
regularization in majority Kosovo-Serb areas.  KEK's assumption has 
been that EPS or its Kosovo Serb employees would form a 
Kosovo-based, Kosovo-registered entity that would enter into an 
energy services contract (ESCO) with KEK.  This firm could then 
perform a multitude of services for KEK on a commercial basis, 
including buying power from KEK, delivering it to customers, and 
billing those customers.  According to the logic of such an 
agreement, the participation of a Kosovo Serb entity would ease 
regularization (helping KEK), and would have a chance to earn 
profits and fees in the process. 
 
THE OTHER CONSTANT: A SERBIAN REFUSAL TO ENGAGE 
--------------------------------------------- -- 
 
¶4. (SBU) KEK first offered such a deal in May, 2009, and proposed 
that it cover all majority Kosovo-Serb areas in the country, both 
north and south of the Ibar.  The Serbian side never agreed, and, in 
fact, never seriously negotiated on the proposal.  As a consequence, 
KEK was forced to regularize relations with Kosovo Serb customers 
without the assistance of a Kosovo Serb subcontractor.  While it was 
difficult, KEK succeeded, signing up Kosovo Serb customers in 
settlements large and small south of the Ibar River.  Since KEK 
 
PRISTINA 00000023  002.2 OF 002 
 
 
regularized customers in the south by itself, without concrete 
assistance from a Serbian subcontractor, it now contemplates an ESCO 
relationship only for those areas (the north), that remain to be 
regularized.  As we have noted previously, KEK's Serbian 
interlocutors have repeatedly rebuffed KEK's efforts over the last 
several months to conclude an ESCO for northern Kosovo. 
 
VARIATIONS ON A THEME: BUZZWORD BINGO 
------------------------------------- 
 
¶5. (SBU) There is a distinct possibility that some in Brussels, in 
Belgrade, or in Quint capitals might attempt to wrap the myth of a 
need for a Serbian power provider for Kosovo in language of European 
energy market liberalization or the "Acquis Communautaire."  Market 
liberalization is mandated, by 2015, according to the Treaty 
Establishing the Energy Community of Southeast Europe.  As early as 
2005, Serbian energy companies appealed to UNMIK to use this treaty 
as a basis for the establishment of a second (Serbian) power 
distributor for Kosovo.  UNMIK did not accede to the request then, 
and there is no need to accede to the request now.  Liberalization 
will come, for Kosovo and for Serbia, by the 2015 EU deadline, long 
after privatization of KEK's distribution company, and its unique 
nationwide license.  We should not allow anyone to disingenuously 
cloak an action aimed at driving another wedge between northern and 
southern Kosovo in misleading language about being a responsible 
Europeans. 
 
COMMENT: THE ROAD TO AN AGREEMENT GOES THROUGH VALAC 
--------------------------------------------- ------- 
 
¶6. (SBU) A commercial agreement, like the ESCO agreement KEK has 
offered to EPS, remains the best way to regularize customer 
relations in north Kosovo.  Serbia's state-owned electric power 
conglomerate EPS and the Serbian Ministry for Kosovo are unlikely to 
agree to an ESCO arrangement while vague discussions of second 
providers permit their control of electrical transmission and 
distribution equipment and territory in north Kosovo to solidify 
(Ref B).  No matter how the issue is couched, the debate is about 
control of the north.  Because of the way the physical 
infrastructure is built, reasserting KEK's rightful control of its 
property at the Valac substation is the only vehicle for bringing 
Belgrade to the table for serious discussions.  Absent that, and in 
view of continued passivity in the face of an increasingly obvious 
effort to alter the infrastructure to allow EPS to act unilaterally 
in the north, we have little expectation that the issue can be 
resolved satisfactorily or without an unwanted confrontation. 
 
DELL