AD MISLEADING ON PRICE AND MARGINS
Are the media claims of high margins (19-26%) of secondary distribution operators based on the truth?
Not true. Our profit is at 4%. The difference in the price of heat (19-26%), which is also not precise, is mainly made up of operating costs, which must be borne by each heating operator. These are the costs of buying gas for the boiler houses, electricity, investments in network development and security, the costs of repairing, maintaining and operating the heat-technology equipment, and so on. Even MH Teplárenská holding (MH TH – former Bratislavská teplárenská, so-called BAT-ka), which declares that it wants to supply heat throughout the whole of Bratislava, would see its operating costs rise if it were to operate in several Bratislava municipalities, as is the case here. But we say – let the best offer win the competition. A public tender can generate an even better price, conditions for cooperation or investment, even in other ways of heat production than we are used to. Prices are unlikely to change by the end of the year – the municipalities will not lose anything if they announce a competition, which will be evaluated at the beginning of next year and the best offer will emerge, so why be afraid of the competition? And we don’t have to imagine the competition as some ossified process. Let the potential suppliers sit down and, through dialogue under the auspices of experts, generate the optimal solution for the future. And there is no need to be afraid of objections either; these will be resolved during the dialogue.
Is it true that your competitor offered a significantly better price in the Staré Mesto municipality?
The value of the service we provide to customers in Old Town is a combination of several factors, not just price. The amount for the lease of thermal energy facilities (TEZ), investments in infrastructure or technology, as well as other parameters must also be taken into account. The published information about the difference in the offered price is not correct. The Old Town receives a discount of EUR 120 000 per year. The Old Town would also lose rental income of EUR 11 000 per year, which could be used for development projects. Nobody can guarantee the same price for 20 years on top of that. Today, it is not possible to estimate the price even for a much shorter period.
It is important that the state-owned MH Teplárenský Holding (MH TH – former state-owned Bratislavská teplárenská, so-called BAT-ka) offered the same price of heat for all. But what that price will be and how the costs will be budgeted with the new plants is not clear. That is, our competitor has not offered the price at which it will operate the technologies in question. It has only indicated what the price is now, without the costs associated with the operation of the technologies and the impact on customers.
If the Staré Mesto and Ružinov municipalities organised public tenders, would you be willing to reduce the price of heat for citizens?
We are ready to provide the best possible price respecting the conditions of the tender and the requirements of the contracting authority. For our part, we will offer the best possible combination of heat price, investment and rent. The tender conditions may be the subject of a competitive dialogue between the contracting authority and the tenderers, which will help the contracting authority to obtain the best possible offer and consequently to conclude the most advantageous possible contract. The criteria may include, for example, requirements to adjust the fuel mix in the near term, as the reasons for this already exist, both geopolitical and climatic. As a leader in the energy transformation, the global ENGIE Group has both a clear vision and advanced know-how for increasing the share of green energy. Naturally, this should also have an impact on the offer if it is to be responsible and take into account a number of relevant criteria.
AD FALSE CLAIMS: IT IS ONLY INTERMEDIARIES WHO DO NOT INVEST HERE
Do you agree that you are just an intermediary in the chain of heat suppliers who brings no value but offers an overpriced heat price in return?
We are not an intermediary. This is an unfair and untruthful labelling. We are a member of the French ENGIE Group, one of the largest global groups in the energy sector. Within our operations in Slovakia, we provide heat production, operate heat exchange stations and heat distribution systems in Ružinov and Stary Mesto. For example, heat production from boiler plants in Stary Mesto accounts for more than 50%. According to available information, MH TH in the Bratislava East district produces about 20% from its own sources. This is comparable to the share produced by PRS for Ružinov. So are we also going to call MH TH (former BAT) an intermediary?
Do you buy all your heat from MHTH (former Bratislava Heating Company)?
No. Of all heat supplies to the Staré Mesto Municipal District, own production accounts for 53% and purchased heat accounts for 47%. By the way, the largest heat producer in Bratislava is not MH TH (former BAT), but another private company. Heat production is a market sector and its structure can naturally change over time not only in Bratislava but in Slovakia as a whole.
What changes do you think today’s system of heat production and distribution can undergo in terms of geopolitics and the climate commitments of individual countries in a timeframe of, say, five, 10 or 20 years??
A change in the fuel mix is very likely due to the planned embargo on Russian gas and oil. In addition, we must not forget the inevitable environmental aspect – that is, the increasing share of green energy production, including heat, year after year. This will require investment, innovation and know-how. As a leader in the transformation of the energy sector, ENGIE Group has both a clear vision and advanced know-how for increasing the share of green energy. Naturally, this should also have an impact on the criteria on which a modern and responsible contracting authority should base its decision when selecting a heat supplier.
Both the state-owned company MH TH (former BAT) and the mayors claim in their statements that the distribution systems in the aforementioned municipalities have not been upgraded for more than 50 years. Is this really the case?
No, it’s not. We have invested more than EUR 9 million during the contractual relationship in the modernisation of the heat management in the Ružinov municipality, which, by the way, we took over in a partially catastrophic state years ago. Of course, we are also operating a large part of the distribution systems in their original state. But these still supply heat to the buildings reliably and efficiently. It is important to remember that any investment in modernisation will also be reflected in the price of heat. It is therefore necessary to invest sensitively and not to burden customers with unnecessary investments. After all, MH TH (former BAT) is offering 12 million gradually over 20 years. Calculated at today’s prices, this is comparable to the investments of the First Ružinov Company (PRS), and the even distribution makes it clear that it is not necessary to change everything indiscriminately.
The mayor of the Old Town Municipality, Ms Aufrichtová, claims that the customers in her municipality are dissatisfied with you. What do you know about the dissatisfaction and negative experiences of the residents of the Old Town with the operation of the heat management?
We have no specific information about “negative experiences” communicated by the Old Town Municipality. Every relevant complaint from our subscribers is responsibly addressed. The Old Town Municipality should specify its allegations and be able to prove them. Disconnecting from central heat distribution and providing our own boiler rooms is a certain consumer trend that we observe all over Slovakia and is rather on the decline. The advantages and disadvantages of such a move are also highlighted by the Slovak Association of Heat Producers and should be the subject of a fair discussion.
FACTS CONFIRMING THAT THE BEST SOLUTION FOR HEAT CONSUMERS IN BRATISLAVA IS A PUBLIC TENDER
Why do you think it is not right to conclude the contract without competition (i.e. directly through a case of special consideration, as proposed by Mayors Chren and Aufricht)?
It is obvious that only transparent public procurement and fair competition of competitors can bring the best offer for the residents, and not only the residents of the Old Town and Ružinov. At the same time, it is also possible for the contracting authority to control whether the change in the price of heat in the future will be only due to the increase in energy prices or not.
The Supreme Audit Office also stated in its opinion in connection with the use of special considerations that in many cases municipalities do not look for ways to sell or lease their property in the most advantageous way. The use of a case of special consideration is allowed by law to municipalities, but only exceptionally in cases where it is not possible to organize a competitive, market-based, transparent environment in the form of a public tender.
There is also a methodological guideline of the Ministry of Finance of the Slovak Republic, which says when the special consideration can be used. It only applies to transfers and leases of property for public utility purposes or to transfers and leases of property and land of low value or area. We consider that the public interest is the best conditions and services for the residents, and these can only be obtained by competition and not by excluding competition.
Has a tender or special consideration been used in the past in the municipality of Staré Mesto?
In 2015, a 10-year extension of our contract was approved by the local council. Already at this time, the local council was considering putting the contract out to tender, which we were prepared to participate in.
Isn’t cheaper heat also a public interest worthy of special consideration?
Excluding competition inherently never leads to the best possible choice for residents. Moreover, it exposes the municipality to possible future economic and political risks.
Another fundamental fact is that it is simply unrealistic to guarantee prices for several, let alone 20, years. That is why we have a specialised authority to regulate heat prices – the Office for Regulation of Network Industries (ÚRSO).
As of 1 January 2023, a new regulatory period for the thermal energy business will start, which will determine new rules and the method of calculating the price of heat for end users. As the legislation in question is not yet in force, it is not possible at present to declare what the heat prices from individual suppliers will look like.
Are there any risks for the municipality that could arise in the case of direct procurement, i.e. in the form of exclusion of competition?
Procuring a heat supply service without a tender is not only inefficient and non-market but may also be illegal. Excluding competition therefore exposes the municipality’s budget to possible significant penalties in the future. There is also a very similar precedent in the provision of public lighting, in which the Supreme Court of the Slovak Republic ruled on the basis of an illegal procedure to sanction the City of Bratislava for concluding a contract for public lighting by direct award.
Would you foresee possible sanctions in such a case?
So far, we have filed complaints for investigation with three relevant institutions – the PMU, the ÚVO, the SAO. In the event that the districts actually choose the heat supplier by direct procurement, we are of course ready to defend our legal economic claim. There is a decision of the ÚVO, which was confirmed in 2020 by the Supreme Court – to fine the municipality (the City of Bratislava) almost EUR 80 000 for concluding a contract for the provision of municipal lighting by direct award.
Why do you think the competition will generate the most favourable conditions for the districts?
A public tender is the only transparent form of selection from which the most advantageous offer for the residents will emerge. Naturally, anyone, including MH TH, can take part in the tender with their declared offer. Therefore, if someone is opposed to a tender, they do not really want the best and fair offer.
A concession appears to be a very appropriate form of contractual relationship in our sector. It allows to help orient and set the expectations of the contracting authority by means of a dialogue with the bidders for the supply of the service. The aim of the so-called concession dialogue is to clearly define the criteria on the basis of which the most advantageous offer will then emerge in the competition, taking into account parameters such as rent, investment in infrastructure development, technology or unexpected turbulence caused, for example, by a reduction in dependence on Russian gas.
Why does it bother you that the Staré Mesto and Ružinov municipalities conclude contracts with whoever they want?
The conclusion of a 20-year contract, which also includes the supply of heat worth a total of more than EUR 250 million, by direct award (its approval as a case of special consideration) without a transparent tender procedure appears to be a fundamental circumvention and violation of the law.
What did you do against it?
First and foremost, we want to have a transparent, multi-candidate competition. We will therefore use all legal possibilities to defend the interests of our customers. We have submitted complaints to the relevant authorities such as the Antimonopoly Office (PMU), the Public Procurement Office (ÚVO) and the Supreme Audit Office (SAO) to review the procedure of the Municipality. We believe that the practice of both MCs is contrary to how a case of special consideration should be applied according to both the SAO and the MoF.
You propose to organise a public tender for the purpose of procuring a concession. Is the reason for this the fact that you have a concession in Novo Mesto?
In Novo mesto we won the tender, which involved 5 bidders. We would recommend that any municipality or municipality that chooses to follow a transparent procedure should create space for the preparation and implementation of public procurement in order to obtain the best conditions that individual bidders are able to offer.
At the same time, all technical, operational, legislative and development/environmental information can be incorporated into the tender conditions. The public procurement of a concession for the operation of thermal energy installations for the production of heat and hot water appears to be a good step that takes all these attributes into account. The signing of concession contracts with suppliers on the basis of a public tender is a proven example of good practice, which is also used by Slovak municipalities.
Will the companies Prvá ružinovská and Termming participate in the tenders, if they are announced by the municipality?
Yes, of course. Both companies are ready to participate in the tender. We have declared from the outset that only a transparent tender process can generate the best conditions for end users.
If a competition was announced, are there any other potential players on the market that would enter the competition besides you and MH TH?
It certainly does. In a recent tender in another Bratislava municipality, in which we were involved, there were a total of 5 bidders. The Nové Mesto municipality procured the concession in the form of a so-called concession dialogue, which helped it to transparently and qualitatively set the criteria and expectations for heat supply in advance, and then to select the most advantageous offer that also took into account the development of infrastructure or investment in modern technologies.
What if you don’t succeed in the competition?
Following the evaluation of a transparent tender, we are prepared to terminate our current contractual relationship by agreement, even before its expiry date, in the event that we are not the successful bidder. In this case, we will also provide maximum assistance to the future operator in the handover of the lease object in order to ensure the continuous and safe production and supply of heat to the end customers.
AD PUBLICIZED INCORRECT STATEMENTS ABOUT PRICE GOUGING. ACT AND CHANGE THE LEGISLATION TO MAKE THE CONDITIONS CLEAR AND FAIR
How do you perceive the statements of the MPs of the National Assembly of the Slovak Republic and the head of ÚRSO about unnecessarily expensive heat due to supply chaining? (“It is often not clear what their added value actually is. This also leads to charging the end pricebecause instead of two or three players in a chain, there are suddenly five or more,” said Andrej Juris, chairman of the Office for Regulation of Network Industries. “If efficiency is increased throughout the chain, it is the customer who will benefit the most.” )
It’s a misnomer in the first place. If, correctly, we can only talk about profit chaining, which is an item of approximately 4% of the total price, and, moreover, this can be resolved by agreement between the manufacturer or distributor. The problem lies in something else. Prior to 2009, pricing had this in mind and prices were set for the different stages of the system. That way, one link in the system was not favoured. Since that year, one price has been introduced, regardless of whether you buy heat straight from the boiler house with your own pipe or whether you are the end customer at the end of the secondary distribution system. The TSO can fix this, not us. And as for the profit, it is regulated and Prvá ružinovská does not apply a maximum amount in the calculation. Whether MHTH takes the same approach, we don’t know. A tender for a supplier with clear criteria would show this.
“The amendment to the Act creates the basis for such price gouging to end and the relevant legislation will be issued by the Office for Regulation of Network Industries,” M. Vetrák stressed, adding that the regulator should issue a regulation that “caps” commercial margins.
We wouldn’t call it price gouging. It isn’t. There are costs associated with operating any part of the system, which are not only regulated but also retrospectively controlled with the risk of significant penalisation. However, the regulator does have options to adjust pricing so that, for example, our customer on the secondary output does not also bear the cost of operating MH TH’s (former BAT’s) secondary distribution lines. In this way, the debate on “charging” would not exist.
So, if energy prices are regulated by the Office of Energy Regulatory Services, why is MH TH (former BAT) able to have better prices for end consumers than its competitors?
In our view, this is something of a historical systemic anomaly in the OTSO’s rules. It should be reconsidered from the point of view of establishing a fair market environment. In the period when prices were determined according to the point of supply to the customer (boiler house, primary distribution, heat transfer station, secondary distribution), our end prices were fully competitive with BAT prices. The price calculation is far from being only about the price of the heat input itself, investments, repairs, additional services are also included. Not to mention the fact that, from a geopolitical and climatic point of view, experts expect fundamental changes in heat production. This will place high demands on innovation and specific know-how.