Power Firm's Insolvency Takes Romania by Surprise

A court in Bucharest on Wednesday is to start hearings on the request of energy producer Hidroelectrica to start insolvency procedures.

The request of the state-owned company took many by surprise, as it has been considered one of the crown jewels of the Romanian economy.

But Hidroelectrica ended last year with a net profit of 3.8 million euro, 18 times lower than the profit recorded in 2010.

“It is not normal for such a big company to have such a small profit. Poor management and prolonged drought are the main factors that have affected our activity in recent years, and in such a context, insolvency is a solution,” the head of Hidroelectrica's administration board, Remus Vulpescu, said on Tuesday.

"Filing for insolvency has the purpose of correctly identifying the problems, and some solutions and enforcing them," he added.

Analysts say there are other possible reasons for Hidroelectrica's unexpected decision.

“Insolvency could be a way of canceling contracts with so called ‘smart guys’, contracts that were signed at low energy prices, and which were used by them to get cheap electricity while the consumer was supporting the price difference,” energy analyst Otilia Nutu from the think tank Expert Forum said.

Media reports have said that most of Hidroelectrica's output has become locked into these much criticised contracts with a handful of companies at below-market prices.

The International Monetary Fund, IMF, has asked for the renegotiation of these contracts, a process that started late last year and should have ended in March.

The European Commission in April opened five in-depth investigations to assess whether Hidroelectrica bought or sold electricity at preferential tariffs to several electricity traders, industrial clients and electricity producers.

The Commission wants to determine whether the country’s biggest energy producer has thus indirectly subsidised clients, either by selling them electricity at prices below market levels or by buying from them at prices above market levels.

Romania could be fined or face other penalties if it is judged that the company breached EU rules on state aid.

The first effect of Hidroelectrica’s decision to file for insolvency is already visible. “The company’s planned listing of a 10 per cent stake on the Bucharest bourse is no longer possible this year,” Hidroelectrica’s boss, Vulpescu, confirmed.