In Western Europe it is standard to interconnect the production and distribution of electricity

The question of the day is: Shall we go West or East?

As the day when the Economic Competition Protection Authority will pronounce its verdict on the planned interconnectionbetween CEZ and the distribution companies is drawing closer, the competitors exert considerable pressure against this merger. CEZ is by no means surprised by this scenario. It is obvious that the interests of our competitors from abroad are not identical with the interests of the Czech government.

The planned merger between CEZ and the distribution companies puts the Czech power industry back among developedWestern European countries. If we have a look at the map of Europe, we may see that mergers between major electricity producers and distribution companies are commonplace in Western Europe, in fact they are the default the standard and predominant structure of this industry. This structure brings considerable benefits to the customers and consumers, and everything seems to indicate that this structure will reduce the prices of electricity in our country as well.

The former Czechoslovakia built up the production and transmission system as one integral unit. If CEZ acquiresmajority in 5 out of 11 distribution companies, it will be pulling a shorter straw than its competitors on this market, which will become even more pronounced after our accession into the EU, when CEZ will only have approx. 1% share of the market. The distribution companies Prazska (Prague), Jihoceska (South Bohemia), Jihomoravska (South Moravia), Zapadoslovenska (West Slovakia), Stredoslovenska (Central Slovakia) and Vychodoslovenska (East Slovakia) are already owned by our competitors from abroad. This means that the situation on the relevant market is already controlled by foreign entities. If someone is invoking the threat of future dominance of CEZ, forgetting to mention the existing dominance of competitors from abroad, we may wonder whose interests he/she is fighting for, said Mr. Jaroslav Mil, the Chairman of the CEZ Board of Directors and the company CEO, and continued: There is also the question of whether the state is able to guarantee the security aspects which have been a hot issue ever since September 11 last year.

The only region where the merger between production and distribution is not the standard procedure is east of ourborder. E.g. in Slovakia they sold the market and now they are trying to sell the production facilities. So far they have had little success in this, despite the fact that they offered to sell he SlovenskĂ© elektrarne, a. s. company to a potential investor, either en bloc or in parts. By selling a market without the production facilities the government inevitably damages its own economy. Austria, Spain, Belgium and others did not choose this path. In fact, Austria is currently experiencing a process whose scenario is similar to ours, but the opponents of the merger do not have as much say in this. Also the Great Britain has recently seen the re-merger of production and distribution systems.

I the Czech Republic, the major electricity producers have already owned equity in distribution companies for aconsiderable period of time. For example, a German company E.ON owns a 45% share in Jihomoravska energetika (South Moravian Power Company), a 42% share in Vychodoceska energetika (East Bohemian Power Company) and a 37% share in Zapadoceska energetika (West Bohemian Power Company). In addition to this, E.ON also has equity participations in SCE (North Bohemian Power Company) a JCE (South Bohemian Power Company. RWE , another giant German power provider, owns 35 % of shares in Stredoceska energeticka (Central Bohemian Power Company).

The new position, which the CEZ will attain through the planned merger with distribution companies, is quite incompliance with the liberalisation principles of electricity market within the European Union. The intended structure corresponds with the current EU standards. The European Union does not prohibit mergers between producers and distributors, neither does it prevent the producers from having an equity participation in the transmission network. This means that the EU does in no way decree? that producers and distributors should be separated in terms of equity ownership. The EU legislation is only aimed at management and accounting departments.

The Czech Republic is, in terms of the energy-related EU sector, quite ahead and ranks among the most liberalisedcountries both in Europe and in the whole world. The transmission network (CEPS) is separated from the producer not only as far as the accounting and management is concerned, but in fact it is a completely independent legal entity. By separating the transmission network from the production in terms of ownership, we shall become one of the most liberalised countries in Europe, as far as this particular market aspect is concerned, added Mr Jaroslav Mil,

The fact that the Czech Republic is ahead even in comparison with the EU can be substantiated by the agenda of the lastEU meeting, which was dealing with power industry. Another topic of the meeting, which was held in November, was also the legal division between the transmission and distribution networks. Germany, France and Luxembourg reject this division in principle, whereas the UK, Belgium, Italy and Netherlands require compulsory separation of these activities. The German expressed willingness to some degree of flexibility, yet he refused to abolish structures whose value had been proven in time, whereas the French minister stated that the compulsory separation should not be imposed until it has been proven that the absence of this division on national level causes problems. The EU council will resume the talks about this issue no later than in January 2006, when they are going to devise and discuss an EK report on the experience with the implementation of EU liberalization guidelines.

Ladislav Kriz, Press Officer

Advantages of the interconnection between CEZ and the distributors:

For households cheaper electricity, more reliable supply

For Czech economy sustaining the domestic supplier sector (mainly coal mining) and thus maintaining the existingemployment, boosting economic growth

For power industry more competitive environment, reduced costs, more effective use of domestic resources, protectionagainst short-term dumping schemes

For the state the transaction is profitable (the state will acquire 21 billion CZK, without losing any property); thestate retains control over the transmission network (the Czech Republic goes further than the EU in this respect), the value and potentially also the acquisition price of CEZ before the privatisation will increase significantly

10. 12. 2002