No. 46, 1997 - Privatisation and Regulation: Restructuring and Conflicts in the Hungarian Electricity Supply Industry

In Hungary, the first steps of the privatisation of public utilities affected telecommunications and the energy (gas and electricity) sector. The first phase of the privatisation of the power industry occurred in 1995-96, and the process may continue in 1997. Political and professional opinions concerning developments so far are highly polarised and divided in many essential respects.
The on-going privatisation of the electricity sector is of special importance owing to several reasons. First, in terms of volume, this has been the largest transaction series in the entire history of Hungarian privatisation beside that of telecommunications. Second, parallel with privatisation, a new regulatory system of power generation and distribution, a strategic branch of the economy, is being established. Other circumstances assigning special importance to the development in question include, most prominently, the inflationary impacts of the novel electricity price regulation system, the positive macro-economic effects of investments expected of investors, the crystallisation of the new non-proprietary regulatory role of the state and of the operating procedures of the branch to suit its new ownership structure. That is to say that privatisation, i.e. the alteration of the ownership structure, and the creation of the new model of the operation, regulation and organisation of power supply are simultaneous processes triggering very substantial changes indeed together.
The first practical experiences relating to transformation date from 1996, the year when foreign investor declared winners of the privatisation tenders in December 1995 started operation under the new regulatory, management and institutional conditions. Consequently, experiences to date are limited to the beginning, the first steps, and do not relate to established practice.
The present analysis sets out to review first experiences and open questions. The paper first investigates changes so far from the perspective of the transformation of the organisational system of Hungarian economy that has led among other things, to the radical alteration of the former pattern of the power industry which used to operate within the organisational framework of a single company (trust). Then it goes on to discuss the novel aspects of the management of the sector, implying a new role for the economic administration, namely administrative authority based on a normative regulatory system. Another issue concerns conflicts arising I everyday managerial practice modelled on the new regulations, i.e. clashes of interest generated by the different strivings of economic policy and state administration foreign investors and companies still in state-ownership. Other conflicts relate to the realisation of commitments made by the government to the new owners at the time of the 1995 privatisation round. Special attention should be paid, within that context, to issues connected to price regulation, because these are of outstanding importance to all concerned (i.e., companies, government, consumers). Moreover, price setting problems are not simply generated by the, often contradictory, positions of the parties involved, but by the internal contradictions of the transformation of the sector, tension that has been building up throughout the past decades and could not be contained any longer.

The paper is available here.