Ružinov and Staré Mesto want to select a heat supplier without a competition. Price increases and fines are imminent.

On Tuesday, 28 June, the deputies of the Bratislava municipality of Ružinov are to vote on a proposal to change the heat supplier without a public tender. The decision could result in millions of euros in fines and increased heat price costs for many Bratislava residents.

A similar scenario is being prepared for Bratislava’s Old Town district. As a result of the decisions, MH Teplárenský holding will increase the costs by EUR 1.8 million, which will be reflected in the heat prices for residents in other Bratislava districts. In addition, Staré Město and Ružinov would face fines of up to EUR 12.5 million in the event of a breach of the Public Procurement Act.

The aim of the proposal, which is to be voted on by Ružinov deputies next week, is to change the heat supply from the current supplier, the First Ružinov Company (a member of the ENGIE Group), to MH Teplárenský holding (former BAT – Bratislavská teplárenská, a. s.). A similar vote is being prepared in Bratislava’s Old Town. However, making a decision without a public tender seems to be in contradiction with the current methodological guidelines of the Public Procurement Office.

The initiative of the mayor of the Ružinov district Martin Chren and the mayor of the Staré mesto district Zuzana Aufrichtova is based on an unfair price offer of the company MH Teplárenský holding (MH TH). MH TH offered the current price of heat, which does not include the costs of operating boiler rooms and secondary distribution systems that supply heat directly to the end user. This makes the offer appear more advantageous.

Representatives of the municipal districts in the presence of the Minister of Economy recently stated in the media that the operators of the secondary distribution systems are only “intermediaries” who “add” a margin of up to 26% to the price of heat, which makes the heat unnecessarily expensive for the residents. According to this logic, the change to MH Teplárenský holding should bring savings to the citizens. However, according to experts, these claims are not true.

“In order for the hot water to reach the specific point of consumption through the primary MH TH pipelines, heat exchanger stations and secondary heat pipelines are required. The operator of the secondary heat infrastructure has costs with its network, this is no margin, these are real costs that are reflected in the heat prices. If MH TH were also the owner of the secondary pipelines, it would also reflect the cost of these in the heat price, which would automatically be higher than it is today ,” explains Stanislav Janiš, Chairman of the Board of the Slovak Heat Producers Association.

Other city districts will pay for it

The costs for the operation of the secondary distribution systems and boiler rooms in Ružinov and Old Town are estimated at EUR 1.8 million. MH Teplárenský holding is also a supplier of heat in other Bratislava city districts (e.g. Karlova Ves, Dúbravka). The costs of operating secondary distribution systems and boiler plants in one urban district are thus unfairly reflected in the final prices for heat in other urban districts. In the case of approval of direct selection of the state-owned MH TH as a heat supplier, the deputies in Ružinov may also decide to increase the cost of heat supply for example for Karlovešt’enís and Dúbravčany residents by their vote.

“Simply put, all heat consumers from MH Holding outside the Staré Mesto and Ružinov districts will pay in the price of heat also for the operation, rent, and investments in the operation of the secondary heat infrastructure owned by these two districts. It is the same as if they were to pay for the maintenance of pavements, roads, etc. It is necessary to ask the affected Bratislava citizens whether they agree with this,” adds Janiš.

According to Stanislav Janiš, the whole philosophy of MH TH is purposeful, without a transparent competition, without discussion on the issue, with the aim of directly acquiring the operation of two thermal farms for 20 years, which is detrimental to the image of the heating industry as such.

It is not a lease, but a concession

The mayors of the Ružinov and Staré Mesto districts want to bypass the public procurement and conclude contracts for a total of a quarter of a billion euros without a tender in the form of so-called special consideration under the Municipal Property Act. In the case of a simple lease, this allows a change of contractor to be made by a direct decision without a public tender. However, in the case of the lease of secondary distribution lines, according to the available information, it is highly likely that it will not be a lease, but a so-called concession or contract.

Also according to the published methodological guidance of the Public Procurement Office, this may be a concession in this case. The Authority points out that a key aspect in assessing whether a concession is involved is whether the operational risk is transferred to the lessee. Operational risk means that the lessee is not guaranteed a return on its investments or costs and is exposed to market fluctuations (decrease in heat demand due to building insulation, disconnection from district heating, fuel and energy procurement problems, regulation by the Office for the Cooperation of Energy Regulators, etc.). In this case it is a concession.

If, after the vote by special consideration, it is confirmed that this is indeed a concession, which is evident from the above, the Members of both Municipalities would have knowingly circumvented the Public Procurement Act by their actions and would thus face possible consequences.

The contracting authority could face a fine of up to 5% of the contract value. In the case of the 20-year contracts for Ružinov and Staré Mesto, the risk of a fine of approximately EUR 12.5 million (EUR 10 million for Ružinov and EUR 2.5 million for Staré Mesto) is involved.

Although the details of the proposed contract between the affected districts and MH TH are not yet known, the heat supply appears to be a concession and not a lease. Indeed, the lease is not the main object of the contract, but only a means/tool for its fulfilment. The object of the contract is the production and supply of heat, using the operation of the leased heat management system for this purpose. The municipality transfers to the heat supplier its own obligations and risks in connection with the operation of the heat management system (as it does not have a licence for heat production) and also expects to capitalise on its assets in the form of modernisation.

Even if the district will not pay the heat supplier directly for the performance of the subject of the contract (heat production), it does not mean that the district receives it for free. The remuneration for the supplier is the revenue from the sale of heat, which would otherwise belong to the municipality. It follows from these facts that this case is not merely a lease of municipal property but a concession. It is therefore necessary to comply with the Public Procurement Act and not to try to circumvent it by way of special considerations.

Only competition will bring the best conditions

The most transparent and efficient way for customers to obtain the most favourable conditions for heat supply is through public tendering. Given that this is a change from January 2023, there is still enough time to define and implement a quality tender that can be prepared with clear criteria as a concession procurement in a few months. All technical, operational, legislative and development/environmental information can be incorporated into the tender conditions.

We do not see any reason why the tender could not be carried out in this case. MH Teplárenský holding can also take part in the selection and offer the residents more favourable prices than those already declared. Of course, we are also ready to offer the best possible price,” says Roman Doupovec, CEO of ENGIE Services.

The conclusion of a 20-year contract covering the supply of heat worth a total of more than EUR 250 million by direct award appears to be a fundamental circumvention of the law. We therefore call on MEPs, already aware of the view of the Authority, to postpone the vote on the contracts by way of special consideration and instead to organise a public tender, for example for the purpose of procuring a concession ,” adds R. Doupovec.

Heat more important than ever

In the current situation of high inflation and rising energy prices, the price of heat is an extremely sensitive issue for residents. It is therefore more important than ever to deal with the selection of suppliers in the most transparent way possible.

The application of special considerations for the selection of the heat supplier in Ružinov and Old Town brings the threat of high fines and unfairly higher heat prices for other parts of Bratislava. At the same time, it can be a dangerous precedent for exploiting the issue of rising energy prices for populist but ineffective decisions in the run-up to local elections.

Engie