Electricity reform in Bosnia and Herzegovina

Utilities Policy 17 (2009) 49–64

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Electricity reform in Bosnia and Herzegovinaq Brian Scholl Department of Economics, University of California, Berkeley, 549 Evans Hall, Berkeley, CA 3880, USA

a r t i c l e i n f o

a b s t r a c t

Article history: Received 4 December 2007 Received in revised form 3 March 2008 Accepted 3 March 2008

Bosnia and Herzegovina suffered greatly during an intense war that resulted in human catastrophe, economic collapse, and the destruction of the electricity sector. The Dayton Agreement that brought a close to fighting helped to win peace, but it created a government system that is inefficient, is largely duplicated along ethnic lines and has a largely ineffective central state. This pattern of duplication carries over to the electricity sector and creates incentives that hinder its development. In this context, sectoral reform has proved difficult, with almost all effort devoted to the sector since 1996 channeled towards restoration to pre-war operational conditions and overcoming opposition to reform. Nevertheless, Bosnia and Herzegovina’s efforts at reforming the electricity sector are underway and substantial progress has been made. Lingering questions about the success of reforms essentially reduce to questions about the future of Bosnia and Herzegovina itself and the ability of the central state to consolidate power while preserving the rights and interests of all ethnic groups. Ó 2008 Elsevier Ltd. All rights reserved.

Keywords: Bosnia and Herzegovina Conflict Damage Assessment Distribution Economic Transition Electricity Ethnic Divisions Generation Post-War Recovery Reform Southeastern Europe Transmission War Damage

1. Introduction This paper surveys Bosnia and Herzegovina’s historical and recent performance in the electricity sector and its progress towards sector reform. Like many countries under consideration in the present volume, Bosnia and Herzegovina (BiH) has initiated the process of liberalization and reform of the electricity sector. The country has an electricity policy in place that shares much of the same vision as the Athens negotiations. It is a signatory of the Treaty Establishing the Energy Community. Electricity reform laws have been adopted and steps have been taken to reform regulatory structures. Firms operating in the sector have been slowly moving towards corporatization and unbundling, with transmission already divested from vertically integrated utility companies. Conditions exist for third party access, and market opening has

q This work greatly benefitted from contributions, discussions and/or support by the following individuals: Ana Djapovic´, Sean Moffatt, Russell Pittman, Gerard Roland, Lindsay Stirton, Eric Spasoje, Catherine Waddams, Kathryn Wright, Edin Zametica and an anonymous referee. All opinions, errors and omissions are the author’s. For a more detailed and comprehensive review of Bosnian political economy, and electricity sector performance and reform, the reader is referred to the author’s: ‘‘A Survey of Bosnia and Herzegovina’s Electricity Sector and its Reform’’. E-mail address: [email protected] 0957-1787/$ – see front matter Ó 2008 Elsevier Ltd. All rights reserved. doi:10.1016/j.jup.2008.03.003

launched. Not unlike much of the region, Bosnia and Herzegovina suffers from many problems typical of transition economies: weak investment incentives, corruption, weak bureaucratic accountability, still unsolidified democratic structures and so on. Much progress towards reforming the sector has been made, and much work remains to be achieved. Much like BiH, other countries in this volume have a long-run vision of electricity reform and are making progress towards that vision. There is much, however, that distinguishes BiH from the rest of the pack. On the positive side, BiH is one of the few net exporters of electricity in the region with annual exports reaching a height of 2103 GWh during the past decade. As much as half of its nearly 14,000 GWh generated annually comes from hydroelectric power. The country’s development and poverty reduction strategies consider electricity generation a key strategic sector that additional investments can help to retain as a vibrant export industry for years to come. The near doubling of electricity generation over the past decade along with improvements in service delivery have to some degree facilitated economic growth in recent years. On the negative side, the brutal conflicts that besieged the former Yugoslavia from 1991 to 1995 were by far the most intense in Bosnia and Herzegovina. The war that followed the March 3, 1992 declaration of independence from the Socialist Federal Republic of Yugoslavia not only represented a huge developmental setback, but also produced lingering problems for which there is no easy

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resolution. The immediate effects were staggering for a country that had about 4.4 million people and USD 9 billion in GDP before the conflict started: some 250,000 people were dead or missing, about 1.5 million people were displaced, and GDP shrank to about USD 2 billion. Vast electricity generation, transmission and distribution infrastructure had been destroyed or inadequately maintained resulting in production at a fraction of pre-war levels, and damages likely well over USD 1 Billion. International financing has since helped to restore capacity and service delivery, but incentives for new investment remain weak. The Dayton Peace Accord brokered by the international community in December 1995 helped to establish the conditions for peace, but created enduring problems. With no ethnic majority,1 and radically differing views on governance and policy between the three main groups, the peace deal created a weak state, with virtually all domestic powers held by sub-state government structures that allowed each group considerable policy discretion. The state was divided along ethnic lines into two ‘‘entities’’ – the Federation of Bosnia and Herzegovina (FBiH), and the Republika Srpska (RS) – and further divided into regional cantons (in FBiH) and local municipalities. For nearly every institution of governance, each entity has an independent parallel structure. And for many practical issues the two entities effectively continue to operate as two or three separate countries. Even the reform of the electricity sector, though it has included measures to consolidate structures across entity bounds, has created parallel regulatory structures at both the entity and state level to preside over generation, distribution and electricity trading. State bodies represent Bosnia and Herzegovina in international energy forums, but their overall role would seem to be somewhat less significant than those at the entity-level. Further complicating the structure is the existence of the Dayton-arbitrated High Representative (HR). Initially, the HR was envisioned to be something of an interim oversight body, helping to monitor implementation of the Dayton agreement, but it was later transformed into the ultimate arbitrator of political affairs in BiH.2 This power has been wielded to dismiss the highest level of political leaders and impose legislative changes. While helping at times to provide quick action and dampen nationalistic tendencies, it is often suggested (c.f. Cox, 2001; USAID, 2005) that the HR’s interventions have undermined the democratic process, slowed the maturation of democratic self-governance, and stunted the development of local leadership capacity. Still, the international community has been reluctant to close the Office of the High Representitive3 as concerns remain about stability and selfgovernance without its continued presence. In recent years Bosnia and Herzegovina has come under increasing pressure from the international community to reform the Dayton structures, consolidate power at the state level and for political leaders to outgrow their reliance on the HR to make the politically unpalatable reforms that will facilitate Bosnian development.4 Former HR Paddy Ashdown called the Dayton Agreement ‘‘a superb agreement to end a war, but a very bad agreement

1 Ethnic Bosniacs (i.e. Muslims) are the largest ethnic group, but remain less than half of the overall population. The latest 1991 census indicates a population that is 43% Bonsniac, 33% Serb and 17% Croat, which is likely fairly indicative of the current structure. See Scholl (2007a, b) for additional detail. 2 Via the December 1997 imposition of the ‘‘Bonn Powers’’. 3 In February 2007, the Peace Implementation Council Steering Board extended its original deadline for closure of the HR to June 30, 2008, apparently realizing that its original 2007 deadline was premature. 4 A recent US Congressional Research Service report (Kim, 2006, p. 2), for example, suggested that a stronger central state ‘‘could contribute to greater self-sufficiency in Bosnia’s peaceful and democratic development, an improved ability to address pressing political and economic concerns.and improved prospects for Euro-Atlantic integration.’’

to make a state.’’5 The Council of Europe’s Venice Commission has urged a more effective state institution as a precursor to greater EU integration (Kim, 2006) and it would seem all but impossible for BiH to enter the EU as a divided state. Given BiH’s small size, the duplication of government and regulatory structures at the entity level would appear inefficient. In addition, the system has helped corruption and political rent-seeking to prosper, and has entrenched vested interests. However, the fact that Dayton ended the war and has allowed a highly divided society to achieve peace and ethnic coexistence following an extremely polarized war should not be ignored. Especially in light of recent developments in the region, it remains unclear whether the country or its people are yet emotionally and politically ready to unite under a single Bosnian state; moreover, is the prospect of progressive EU accession sufficient to sustain continued progress without the strong intervention of the international community? Nearly 10 years after Dayton, Bosnia and Herzegovina remains a complex state with an uncertain vision of the future, a complexity and uncertainty that is mirrored in the electricity sector. The political economy structure that has evolved from the Dayton process has only helped to slow sector reforms and is likely to continue to provide an impediment to progress going forward, with almost all progress to date attributable to international pressure and direction. An electricity policy statement has been in place since 2000, but navigating its proposals through complex structures and conflicting interests has been a persistent challenge. Like the country itself, the single vertically integrated Elektroprivreda BiH electric utility company was split at the close of the war into three vertically integrated firms serving incongruous, ethnically-defined service territories, each with differing interests in relation to either consolidation and reform or maintenance of the status quo. In this article we will survey the electricity sector and its reform within this complex context. Section 2 describes the electricity sector before and during the war. In the third section we review the recent performance of the electricity sector. Section 4 provides a sketch of the reform vision and a review of the steps taken in the electricity sector reform process to date in the context of the elements of reform outlined by Jamasb et al. (2004).

2. The electricity sector 2.1. Pre-war electricity generation as part of SFRY Prior to the dissolution of the former Yugoslavia (SFRY), the Bosnian republic was a key component of the energy supply for ‘‘Yugoslavia and the region’’ the transmission and generation makeup of the system in 1991 was largely the same as it is currently (Fig. 1). Large thermo and hydro potential allowed Bosnia to contribute almost 50% of SFRY electric power (Office of the BiH Coordinator for PRSP, 2004, p. 197).6 The Yugoslav Electric Power Industry’s JUGEL dispatch center in Belgrade controlled the 400 kV power grid and external exchanges. Virtually all other generation, transmission and distribution activities in the electricity sector in BiH were managed by the single vertically integrated power company, Elektroprivreda Bosnia and Herzegovina (EPBiH). The firm served the needs of industrial users and nearly 4.4 million consumers in the republic through the

5 From ‘‘Farewell, Sarajevo,’’ The Guardian (UK), November 2, 2005, as quoted in Kim (2006). 6 The material in this section draws heavily on the historical overview and technical damage assessments made to support the World Bank’s power restoration projects: The World Bank (2000, 2003, 2006), and especially The World Bank (1996).

B. Scholl / Utilities Policy 17 (2009) 49–64

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Fig. 1. Electricity sector in Bosnia 2006. Source: ISO BiH.

operation of 13 hydroelectric facilities (Jablanica, Grabovica,  Salakovac, Mostar, Rama, Capljina, Jajce 1, Jajce 2, Trebinje and Dubrovnik, Bocˇac, and Visˇegrad) and thermal cogeneration plants located in Tuzla, Kakanj, Gacko, and Ugljevik.7 Hydro plants had a total capacity of 2034 MW and provided about 6900 GWh in an average year. Thermal plants had a combined capacity of 1957 MW and produced 9252 GWh in 1990, largely fueled by domestically produced coal and lignite provided by mines owned by EPBiH. In 1990, hydro facilities produced 3040 GWh and thermal produced 9252 GWh for a total net production of 12,613 GWh, though it should be noted that extremely poor hydrological conditions in 1991 resulted in low production by the hydro facilities that comprised a large fraction of BiH installed capacity. EPBiH maintained approximately 5400 km of transmission lines transmitting at voltages of 110 kV and higher, and 92,000 km of distribution lines transmitting at voltages of 35 kV and lower. The key component of the transmission system was an 800 km, eight-substation, 400 kV transmission line connected with Croatia, Montenegro and Serbia. BiH was a key connection point for (SUDEL) and (UCTE) linking other parts of Southeastern and Eastern Europe to Western Europe. In 1990, BiH exported some 1078 GWh.

7 Note that Tuzla’s G1 and G2, and Kakanj’s G1–G4 have been out of commission for the past few years, a fact that has only recently been recognized in formal documents (c.f. BiHSERC, 2004–2007).

2.2. Wartime damage Though incomparable to the human costs of the war, during the conflict, most energy sector infrastructure was either damaged or neglected. Generation facilities and transmission infrastructure were directly targeted by competing forces. The war not only stalled new investments, but infrastructure was also inadequately maintained further accelerating capital deterioration. Compounding these infrastructure problems, tariff rates were set too low, bill collection rates fell to as low as 25% (The World Bank, 1996), and at least some of the sector’s experts had left the country or had been killed. In less than four years, a well developed power sector, a linchpin of the SEE electricity market, was in shambles. By 1996, many generation facilities were damaged, destroyed or off-line. Total net production in 1996 was about 7340 GWh (Fig. 2). The majority of thermal facilities were either non-functional or operating at only a small fraction of their 1990 levels. At least some portion of this decline in thermal production may be attributed to the slow recovery of coal production, which by 1990 had fallen to less than 10% of its pre-war level (The World Bank, 1996). Hydrological conditions enabled 1996 hydro generation to actually exceed 1990 levels, but significant damage was sustained in those facilities as well. In total, in 1996, 16 generation facilities operated below their 1990 levels. About half of generation capacity had been rendered inoperative. Transmission and distribution infrastructure was also severely impacted. Early estimates suggested that 60% of the transmission network and control system were ‘‘seriously damaged’’ (The World

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a 14,000 Total production NX Total Demand

12,000

10,000

8,000

6,000

4,000

2,000

0 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 Note: Estimates for 1991-1992 based on EPBiH data only; 1993-1995 based on EPBiH+EPRS data.

b 30.00% NX/demand

25.00%

20.00%

15.00%

10.00%

5.00%

0.00% 1

2

3

4

5

6

7

8

9

10

11

12

13

14

15

16

Note: Estimates for 1991-1992 based on EPBiH data only; 1993-1995 based on EPBiH+EPRS data. Fig. 2. (a) BiH aggregate supply and demand; (b) BiH net exports as a fraction of total demand.

Bank, 1996). All eight 400 kV transformer substations were damaged and hundreds of kilometers of transmission lines were destroyed. Moreover, connections throughout the region were seriously disrupted in 1991, when a severing of transmission lines separated the UCTE into the two separate zones of Western and South Eastern Europe; the reconnection of the two zones would not occur until October 10, 2004. In addition to the disruption of the SUDEL and UCTE connections, Greece’s connection with SUDEL via a 400 kV line through Mostar was disrupted (The World Bank, 1996). By 1996, the distribution network had been ‘‘largely destroyed’’ (The World Bank, 1996, p. 4). Donor funds allocated to

the repair and rehabilitation of generation, transmission and distribution infrastructure give an indication of the extent of the damage, although at least some of the investments made were because of neglect rather than direct exposure to conflict. Coordinating with other donors, the World Bank spearheaded a sequence of emergency repair and reconstruction projects aimed at quickly restoring generating capacity, district heating, and gas and coal production. By 1996 USD 900 million of the WB’s total USD 5.1 billion reconstruction funds for the next three to four years had already been earmarked for energy and energy related sectors (The World Bank, 1996). In one tranche, urgent repairs on seven

B. Scholl / Utilities Policy 17 (2009) 49–64

generation facilities (Jablanica, Grabovica, Mostar, Jajce I, Tuzla, Kakanj and Ugljevik) totaled nearly USD 45 million – well below the cost that would have been incurred by constructing new facilities (Zerriffi et al., 1996). A further USD 45 million was allocated for the  rehabilitation of Rama, Jajce I, Capljina, Trebinje 1, Trebinje 2, Bocˇac, Tuzla, Kakanj, Gacko and Ugljevik. Transmission and distribution also required significant rehabilitation. In a series of projects, the WB and other donors helped to finance some 78 million of transmission restoration and rehabilitation and a further 256 million in distribution repair. Additional funds placed priority on restoring BiH’s power connections with other parts of the region. Such an allocation helped to finance the reconnection of the two UCTE zones, creating the world’s largest internal market for electricity. Several of these projects included components aimed at facilitating the restoration of power for returning refugees and improving supply quality in rural areas, as well as helping to finance much of the sector reform that has taken place to date. Although several hundred million dollars have been invested in the sector since the close of the war, virtually all investments made have been to restore generation and distribution to their pre-war condition. Essentially no investments have been made in the sector since before the war (The World Bank, 2006, p. 23).8

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relatively beneficial hydrology since the war; thermal facilities have yet to achieve 1990 production levels and in some cases still operate at around half their output for that year. Demand growth has kept pace with the expansion of output in the post-war period. This growth remained strong despite increased tariffs and improved bill collection, and possibly reflects an ability of consumers to reengage in productive activity as key input supplies become more reliable. Recent estimates of expected growth in demand through 2020 range from 2.3 to 3.4% per annum, which implies a consumption range between 14,431 and 17506 GWh in 2020 (Pricewaterhouse Coopers LLP, MWH, and Atkins International, 2004, p. 10).11 Despite having about the same generation capacity as it did almost 20 years ago and having lost substantial infrastructure in the war, BiH remains one of the few countries in the region that is a net exporter of electricity. Exports have remained a fairly constant fraction of domestic demand over the post-war period, but were relatively large to begin with at over 25% of domestic demand (although these exports may not have entirely been driven by economic fundamentals, see OHR, 2003c). A recent report anticipated that BiH would continue to be a viable exporter of electricity given an excess of installed capacity (3850 MW) over peak demand (1950 MW) (Kennedy and BesantJones, 2004, p. 9).

3. Recent performance 3.1. Firms and competitive structure In the post-war reconstruction period the electricity sector has been regarded as a key strategic sector for several reasons. First, electricity companies and associated industries such as coal mines provided an immediate source of employment for thousands of people, including returning former combatants. In the immediate post-war period these jobs were sorely needed because the economy had largely evaporated. Second, from the outset, restoring adequate supply and quality was deemed a vital precondition to a reemergence of the private sector. During the early recovery period, electricity outages were common and unpredictable, making productive activities more troublesome and costly. Finally, the sector is seen by many as a potential long run contributor to the economy through exports. Resource potential is considerable with an estimated hydro power potential of 22,050 GWh annually (6126 MW of installed capacity), and coal reserves in excess of 1330 tons of brown coal and 2526 tons of lignite (excluding the reserves at Ugljevik, Gacko and Livno) (Office of the BiH Coordinator for PRSP, 2004).9 Fig. 2 traces estimated aggregate record of electricity production, demand and net exports since 1990.10 During the war, sector output plummeted, reaching a mere fraction of pre-war levels. The damage to generating capacity, transmission lines and other vital features of the network resulted in a severely limited ability of the sector to meet customer needs. Since 1996, reconstruction efforts led by the international community have enabled generation capacity to be slowly brought back online as facilities were repaired and restored. By 2005 total output managed to exceed 1990 levels, with production growing about 75% (from 7340 to 12828 GWh) between 1996 and 2005, though this fact again largely reflects poor hydrological conditions in 1990 and the

8 Energy Financing Team (EFT), one of the few players in the BiH market outside the EP structures, recently announced plans to construct a 420 MW thermal plant next to the EFT-operated Stanari lignite mine. In RS, there are also plans to create two new thermal facilities in Gacko through a joint venture with a foreign partner, though some details of the plan are still unresolved at the time of this publication (c.f. Saida Mustajbegovic´, 2008). 9 Other energy sources such as wind may also augment generation capacity substantially, with one study suggesting that 12 sites in Southern BiH might combine to generate an additional 1440–1950 GWh annually (Begic´ and Kazagic´, 2005). 10 Wartime data are the author’s estimates.

By the close of the war, the single vertically integrated Elektroprivreda Bosnia and Herzegovina (EPBiH) had been divided into three separate vertically integrated firms: a new post-war EPBiH, Elektroprivreda Hrvatske Zajednice Herceg-Bosne (EPHZHB) and Elektroprivreda Republike Srpske (EPRS). Since no new generation investments have been made since before the war, this division is nothing more than a partition of the pre-war EPBiH’s assets into three firms. In translation, the names of the three firms make no attempt to dissemble the true nature of the industrial structure, each EP essentially serving a particular ethnic constituency. For example, HZHB could be translated to read ‘‘for the Croatian Community of the Croatian portion of Bosnia and Herzegovina.’’12 Fig. 3 elucidates this point even further in describing the territorial coverage of each EP – service territories largely coincide with local ethnodemographics.13 No less bizarre is the fact that these are not three contiguous service territories. Sarajevo-based EPBiH’s service territory is essentially divided into a western and central region. Mostarbased EPHZHB serves a south western block of BiH, but also serves six separate and indeed distant ethnic Croat pockets in central BiH and along the northern border with Croatia. Trebinje-based EPRS serves the RS along much of the north and east of the country. Yet EPRS’s continuity is ostensibly interrupted by the municipality of Brcˇko, which is part of both entities, having been legally awarded directly to BiH by a decision of the BiH Constitutional Court; Brcˇko operates a separate distribution company and buys all power from the three EPs (though in practice it appears that only EPRS sells energy to Brcˇko). It is not too difficult to imagine the operational difficulties that might arise from geographically disconnected service territories. With no significant new investment since prior to the war, the three EPs operate generation facilities previously operated by the

11

Projections were published at year-end 2004. Literally, this is ‘‘for the Croatian Community of Herceg-Bosne,’’ Herceg-Bosne being the Croatian name for the historically Croatian part of Bosnia and Herzegovina. 13 For a more thorough background and discussion of the BiH ethnodemographic structure and its consequences, the reader is referred to Scholl (2007b). 12

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Fig. 3. Area of responsibility of BiH by EP.

pre-war EPBiH (Table 1). EPHZHB operates only hydro facilities, while EPBiH and EPRS have both hydro and coal/lignite fired thermal generation facilities. In 2006, hydro power accounted for about 43% of generation in BiH, with the remaining 57% from thermal generation. Table 2 provides data on overall energy-related CO2 emissions and per-capita energy-related CO2 emissions. Fig. 4 displays emission concentrations by available plants. Although thermal facilities are highly pollutant, the relatively high composition of renewable sources mitigates the overall impact on air quality, with EPHZHB obviously having the least impact on air quality. The three firms are regulated monopolies that do not compete within their ethnically defined service territories. Until the recent divestiture of certain areas of activity with the creation of the ISO and a separate transmission company, the firms almost completely controlled all operational areas related to the sector. We will now briefly review the activities of each firm in turn. 3.1.1. EPBiH EPBiH is the largest of the three ethno-territorial electricity monopolies with 44% of installed capacity. It is 90% entity owned.

With a total generation capacity in coal-fired thermo and hydro facilities of about 1672 MW, the firm serves some 635,000 customers, with about 90% being households (Austrian Energy Agency). The firm had 5034 employees, and in 2005 operated 2296 km of Transmission lines and 30250 km of distribution lines.14 Table 1 summarizes generating capacity at each plant. Thermal co-generation plants at Tuzla and Kakanj generate both electricity and district heat. Tuzla currently operates four generators with a total installed capacity of about 715 MW (BiHSERC, 2004–2007). Kakanj currently operates three generators ranging in capacity from 110 to 230 MW. Fuel is supplied by a separate mining operation, with fuel prices regulated by the FBiH Ministry of Energy, Mining and Industry. The Hydro facilities at Jablanica (175 MW), Grabovica (114 MW) and Salakovac (210 MW), as well as six small hydro plants (9.6 MW; Austrian Energy Agency) provide

14 Transmission lines and substations for all three EPs were transferred to the transmission company Transco in 2006.

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plants have exceeded 1990 performance levels is merely an artifact of the relatively poor conditions in 1990.

Table 1 Details of generation facilities by firm Firm

Facility

Capacity of power unit (MW)

EPBIH

Jablanica Grabovica Salakovac Small hydro

2  25 þ 4  30 2  58.5 3  70

Available capacity

Tuzla G1 G2 G3 G4 G5 G6

709 29 29 91 182 180 198

779 32 32 100 200 200 215

Kakanj G1 G2 G3 G4 G5 G6 G7

29 29 29 29 100 90 208

32 32 32 32 110 110 230

 Capljina Rama Mostar Jajce I Jajce II Pec´-Mlini

2642.6

2  210 2  80 3  25 2  30 3  10 2  15

420 160 75 60 30 30

Total installed capacity EPRS

Total installed capacity (MW) 170 117 210 9.6

Total installed capacity EPHZHB

Trebinje I Trebinje II Dubrovnik (BiH & Croatia) Bocˇac Visˇegrad Gacko Ugljevik

775

3  60 8 2  105 2  55 3  105

Total installed capacity

276 279

180 8 210 110 315 300 300 1243

some compositional balance, producing a combined 26% of EPBiH’s total generation in 2005 (BiHSERC, 2004–2007). Generation performance for available years is charted in Fig. 5. Since 1996, the firm has been increasing generation and supply, achieving total generation of 6363 GWh in 2006. The driver of this recovery has largely been the rehabilitation of the Tuzla and Kakanj thermal plants. Tuzla produced 2806 GWh and Kakanj produced 2006 GWh in 2006. As depicted in Fig. 6, these thermal facilities have not been able to achieve reported 1990 generation levels, with Tuzla reaching about 80% of 1990 generation levels in 2005 and Kakanj reaching no higher than 72% of pre-war levels in any year. Hydro facilities, naturally, are subject to much more performance variability based on hydrological conditions. The fact that the hydro

Table 2 Emissions data

2003 2002 2001 2000

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Energy related CO2 emissions

Per capita energy CO2 emissions

14.61 Mt of CO2 15.56 Mt of CO2 14.20 Mt of CO2 15.58 Mt of CO2

3.51 t of CO2/capita 3.77 t of CO2/capita 3.49 t of CO2/capita 3.91 t of CO2/capita

3.1.2. EPHZHB EPHZHB operates about 21% of total BiH installed capacity through the hydroelectric facilities at Capijina, Jajce 1, Jajce 2, Mostar, and Rama; a hydropower plant at Pec´-Mlini started operating in 2005. In total, EPHZHB has approximately 792 MW of Generation capacity serving 186663 customers, with 1558 employees. It has operated approximately 1121 km of transmission lines, 2335 MVA of transmission substation capacity, 15500 km of distribution lines and 1500 MVA of Distribution substation capacity (The World Bank, 2006, p. 24). Despite the pollution advantages and the lower input costs of these plants, the firm is particularly vulnerable to hydrological variations (The World Bank, 2006, p. 58). Fig. 7 traces the aggregate production performance of EPHZHB operations and for individual generation plants for available years between 1990 and 2005. A few trends in these data are worth noting. First, total supply has been on an apparent upward trend since 1997, climbing from 1114 GWh in 1997 to 3468 GWh in 2005. Second, while total generation has fluctuated because of hydro conditions it has generally exceeded 1990 levels of 1240 GWh.15 Note that this is largely due to the relatively poor hydrological conditions of 1990. Third, imports have become an increasingly important source of supply since they became feasible in 1998. These trends underlie the fact that the facilities operated by EPHZHB were neither designed nor intended to operate as a separate firm within BiH. Finally, one may note the high extent of fluctuation in plant-level generation, largely due to hydrological conditions. 3.1.3. EPRS EPRS operates as a vertically integrated holding company for 11 independent operating companies (Austrian Energy Agency). The firm operates the Ugljevik and Gacko thermal facilities and several hydro plants, in total 35% (1348 MW) of BiH installed capacity, with hydro and thermal plants legally operating as separate companies under the EPRS holding company. The firm’s service territory reaches approximately 481,000 customers (The World Bank, 2006), of which approximately 91% are household customers (Austrian Energy Agency). The firm operated 2586 km of transmission lines prior to their transfer to TRANSCO and operates 44286 km of distribution lines, making it the largest of the three firms in this regard. Thermal facilities at Ugljevik and Gacko are fueled by domestic brown coal and lignite. Supply mines are part of the vertically integrated structure. This at least partly accounts for the fact that it is the largest employer of the three EPs with about 7000 employees, yet has lower installed capacity than EPBiH. Ugljevik and Gacko each have 300 MW of installed capacity, while the hydro facilities at Trebinje (188 MW), Dubrovnik (210 MW), Bocˇac (110 MW) and Visˇegrad (315 MW) as well as small hydro plants combine for approximately 35% of total BiH installed capacity and provided about 53% of total EPRS generation in 2005 (BiHSERC, 2004–2007). Fig. 8 traces generation performance of EPRS for available years, and Fig. 9 plots generation as a percentage of 1990 levels for EPRS and selected plants.16 The firm has largely been able to keep

15 Since none of the EPs existed as a separate entity pre-war, all references to pre-war data are based on the territory served and facilities operated by the respective EP as of its post-war embodiment. 16 Several facilities have been removed for visual clarity including Trebenje, which has had production over 800% of 1990 levels.

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8000 Dust 7000

Nox SO2

6000

mg/m3

5000 4000 3000 2000 1000 0 Gacko

Ugljevik

Tuzla 3

Tuzla 4

Tuzla 5

Tuzla 6

Kakanj 5

Kakanj 6

Kakanj 7

Fig. 4. Plant-level emissions concentrations.

generation in excess of 1990 levels, with total generation in 2005 approximately 32% higher than in 1990. Unlike the steady postconflict restoration and recovery of production exhibited by EPBiH, led especially by the recovery in thermal performance, EPRS tends to have more variable production levels.

3.2. Tariff structure Tariffs are set by regulators according to the division of regulatory responsibilities of the various regulating bodies. Currently, the State Electricity Regulatory Commission (SERC) sets tariffs for the Independent System Operator (ISO) and for transmission by the transmission company TRANSCO. The entity regulatory bodies FERK (Regulatory Commission for Electric Energy In FBiH) and REERS (Regulatory Commission for Electricity of Republika Srpska) have jurisdiction over generation and distribution.17 The current method for each of these bodies is generally in accordance with the conventional practice for regulating natural monopolies whereby the relevant regulator sets a revenue requirement sufficient to cover the company’s operational costs (BiHSERC, 2004–2007). However, over the post-war period, low income levels, the social vulnerability of marginalized populations, consumer dependency on electricity as a source of heat, difficulties with metering and other factors have conspired to keep tariffs for all activities related to the sector below operating expenses (including those relating to regulated coal prices in FBiH). These below-cost tariffs were noted in a 2005 assessment as one of the major impediments to private investment throughout the region. In particular, tariff rates for household customers are considered low relative to those for industrial customers (NERA Economic Consulting, 2005). For now, the general approach to pricing is to gradually increment interim tariff rates until sustainable levels are achieved. Fig. 10 plots the time-series evolution of average domestic sales tariffs (in BAM) from 2001 to 2005 (2005 data are estimates). These rates have been relatively flat over the period, with EPHZHB tariffs

17 Prior to the creation of the reform structures FERK and REERS, jurisdiction over pricing was held by entity-level ministries. In FBiH, this was the FBiH Ministry of Energy, Mining and Industry; in RS, this was the RS Ministry of Energy. Although officially under the same regulator, Bechtel International Inc. (1999) notes that EPHZHB operated under a separate regulatory regime from EPBiH.

somewhat declining over that period though this is largely due to the recovery of demand by the relatively massive aluminum company Aluminij that accounts for some 20% of overall BiH consumption. While sufficient neither to cover operational costs nor to encourage investment, the costs are a significant improvement on those BiH-wide immediately after the war. Tariffs vary by voltage usage, season, and whether consumers are commercial or household. Moreover, household and commercial rates are divided into alternate tariff groups. SERC set ISO tariffs at 0.0343 pf/kWh in January 2006, and a month later set transmission tariffs at 1.087 pf/ kWh. Though lower than tariffs of 1.223 and 1.263 pf/kWh in 2004 and 2005, respectively, these transmission tariffs caused some controversy because the January 1, 2006 introduction of the VAT raised concerns of the effect of tariff and VAT shocks on prices for customers. The VAT alone was expected to increase the economic burden on consumers from 10 to 17% (BiHSERC, 2006). As a result, on March 21 of the same year, SERC altered the transmission tariff structure. The new tariffs set rates at 0.980 pf/kWh for domestic transmission, 0.398 pf/kWh (1.99 EUR/MWh) for imports from perimeter countries (Croatia), and 0.578 pf/kWh for exports. In that decision, SERC also announced plans to implement a two-part transmission tariff in 2007 following the installment of appropriate metering equipment by TRANSCO by end-October 2006. The twopart tariff was announced in a December 2007 decision that set transmission tariffs for energy of 0.566 pf/kWh and capacity of 1.454 km/kW.

3.3. Bill collections and financial performance Economic collapse during the war and the dependency of many residents on electricity meant that most billings went unpaid. Collection rates of around 80% in 1991 dropped to as low as 25% of total billings during the war (The World Bank, 2000, p. 2). Fig. 11 details collection ratios for the three EPs for available years of data. Since 1995, the EPs have been steadily making progress towards full collection of billings and by 2002 collections began to exceed billings for certain years due to the collection of arrears (The World Bank, 2006, pp. 58–59). Harsher collection terms are very likely subject to at least some political interference, but recent improvement is a welcome sign. Transmission losses over the postwar period tend to be around 3% of total production since 1998.

B. Scholl / Utilities Policy 17 (2009) 49–64

57

a 8000

7000

Total Supply Total Generation

6000

GWh

5000

4000

3000

2000

1000

0 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005

b 4500

4000

900 800 700

3500 600

GWh

3000 500

Tuzla

2500

400

Kakanj purchases

2000

300

Jablanica Grabovica Salakovac

200

small hydro

1500 100 1000 0 500

-100

-200 0 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 Fig. 5. (a) EPBiH supply and generation available years; (b) EPBiH generation by plant, available years (thermal on left axis, hydro on right).

With bills effectively unpaid, generation in disarray, and tariffs well below recovery costs, wartime financial losses were severe. Estimates of EPBiH performance in 1994 and 1995 suggest losses in the neighborhood of USD 40 million and USD 78 million, respectively (The World Bank, 1996, p. 21).18 More recent performance has been more promising, aided in part by expanded generation and rising local incomes that have made tariff increases and stricter bill collection more feasible.

18

Though these early financial statements are highly suspect.

Fig. 12 traces recent performance in net income, 2001–2004. While EPBiH and EPHZHB have had more volatile performance, EPRS has made consistent progress since 2001. EPBiH has yet to break-even with its losses of between BAM 55.3 million and BAM 145.2 million over this period. The other two EPs reported positive net income in 2004; EPRS succeeded at whittling away at 2001 losses of BAM 141.2 million, finally achieving a positive balance of BAM 3.3 million in 2004. According to a recent assessment (The World Bank, 2006, p. 58), EPBiH has been struggling to achieve sufficient revenue to cover operating expenses and tariffs were set accordingly excluding depreciation charges. These charges were quite substantial, ranging

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120.00% Tuzla Kakanj 100.00%

80.00%

60.00%

40.00%

20.00%

0.00% 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 Fig. 6. EPBiH thermal generation as a fraction of 1990 levels.

from BAM 175.9 million to BAM 236.1 million between 2001 and 2004. The report also noted the volatility of EPHZHB with respect to hydrological conditions and its need to import substantial electricity when conditions are not conducive to generation. EPHZHB’s net income fluctuated substantially in the range BAM 31.4 million to BAM 19.4 million during this timeframe.19 3.4. Consumer issues 3.4.1. Households Demand growth has kept pace with supply growth since the close of the war. During the war, households were at times rationed and service was persistently interrupted. Since the war, repair of transmission lines and generation, along with internationally funded rural electrification projects, allowed normal service delivery to slowly be resumed. As much of Bosnia and Herzegovina is rural and mountainous, however, customer reach and service issues might be expected even had there not been a war. Nevertheless, the government’s reigning Electricity Policy Statement envisions a universal service obligation for the sector. By 2004, it appeared that only around 0.63%20 of households did not have electricity. Returning refugees are particularly vulnerable given dependency of many on electricity for basic household functions; often returnees cannot sustainably return to their homes unless services are made more available. These are often people that are a minority ethnic group in their home municipality, are unemployed and/or have little or no income.21 Moreover, vulnerable groups’ ability to pay remains low. Integration obligations and European Parliament Directives (c.f. 2003/54/EC; BiHSERC, 2004–2007) obligate BiH to take

19 One should be somewhat cautious in interpreting financial performance data given that depreciation charges have been subject to revision on several occasions, resulting in large alterations in reported performance. In addition, the EPs have been criticized to different degrees for poor accounting practices in the past (c.f. OHR, 2003a–c). 20 Author’s calculation. 21 At the peak in 1999, UNHCR recorded some 2.7 million ‘‘persons of interest’’ for the SEE region as a whole.

action to protect socially vulnerable groups, but progress on this front has been slow (c.f. ERGEG Working Group Inception Report as cited in BiHSERC, 2004–2007 and Energy Sector, 2008). 3.4.2. Effects on local firms Bosnia and Herzegovina’s World Bank-sponsored Poverty Reduction Strategy Paper (PRSP) clearly regards the electricity sector as strategic not only for its own ability to generate employment, but because it ‘‘determines the conditions of the environment in which commercial companies work, and thus this.affects the overall reconstruction of the economy’’ (Office of the BiH Coordinator for PRSP, 2004, p. 219). Immediately following the war, power supply was unreliable and hampered business operations, frustrating the process of resuming business activity with uncertainty and inefficiencies. ‘‘In the early post-war period, firms that relied on electrical power, such as lumber mills, often reported unreliable supplies. Outages might last for days at a time’’ (Davis and Imsirovic, 2000). When electricity supplies are irregular or inefficient, businesses may suffer greatly, especially in BiH when so many firms are already operating so close to failure. Bosnian domestic electricity prices for business customers are considered too high. Key policy reports (e.g. Vrankic´, 2004) cite statistics that rank Bosnian commercial tariff rates among the highest in the region and far above the European Average (c.f. Office of the BiH Coordinator for PRSP, 2004; Vrankic´, 2004). These limitations seem to greatly diminish Bosnian potential to stimulate investment, especially given that tariff increases are foreseen. Table 3 is at least partly suggestive of the costs of power sector service issues for businesses in BiH for the years 2002 and 2005. Between 2002 and 2005 the average number of days of electrical outage reported by all BiH Businesses fell from 3.81 to 1.34 days, with the biggest improvements by medium and large enterprises. Though comparative figures for 2002 are not available, the firms reported average power outages of 3.4 h. The costs of these power outages do not appear inconsequential. Firms reported losing a value equivalent to 2.38% of annual sales on average as a result of power issues; for small firms the rate was 3.35% of sales. A very disappointing sign is the over 10-fold increase in waiting time for a business to establish an electrical connection.

B. Scholl / Utilities Policy 17 (2009) 49–64

59

a 4000 Total Generation Total supply

3500

Imports 3000

2500

2000

1500

1000

500

0 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005

b 800 Mostar Rama Čapljina

700

Jajce 1 600

Jajce 2 Peć-Mlini

500

400

300

200

100

0 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 Fig. 7. (a) EPHZHB total generation and supply, available years; (b) EPHZHB plant-level generation, available years.

4. Electricity reform programme 4.1. International pressure and domestic politics Even in the early post-war emergency period, the need for Bosnian electricity sector reform had been anticipated. In 1996, assessments (The World Bank, 1996) suggested that investment incentives could be improved by unifying transmission activities, unbundling generation, distribution and transmission, and privatizing generation and distribution companies. No one believed that state owned monopoly firms serving dispersed ethno-territorial service areas would be efficient. Further assessments later concluded that ‘‘when electricity supply cannot be organized in a manner that is technically and economically optimal there are high costs to

a country in terms of lost efficiency and economies of scale’’ (The World Bank, 2003, p. 15). Furthermore, high state ownership of the EPs was recognized as a very strong incentive for political interference and an invitation for corruption. As with much of Bosnian progress across sectors in the post-war period, electricity reform was initiated largely as a result of intense international pressure and coordination. The Office of the High Representative (OHR) has played a heavy hand in forcing the process along. Complementing the OHR efforts in this regard, international donors that have funded the post-war rehabilitation of the sector have persistently pushed for reform at each stage (c.f. The World Bank, 1996, 2006), using the threat of financial cut-off. Electricity reform is considered an important precondition for a more concrete Bosnian participation in the European integration

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a 6000 Total Supply Total Generation 5000

GWh

4000

3000

2000

1000

0 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005

b

1800 Trebinje 1600

1400

Dubrovnik small hydros Bočac

1200

GWh

Višegrad 1000

Gacko Ugljevik

800

600

400

200

0 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 Fig. 8. (a) EPRS generation and total supply, available years; (b) EPRS generation and supply by plant.

process, pressed for in every major EU strategic assessment (c.f. European Commission, 2003), and as part of the realization of the energy community, which the EU views as an essential priority for the region. This pressure has slowly pushed the Bosnian political establishment to recognize how incompatible continued reform delays are with the satisfactory performance of the sector in the long-run. Without either private or international investment funds it is widely believed that the sector will find it nearly impossible to make the investments that are necessary to keep pace with demand growth in coming years. Though often influenced by the international community, the text of legislation related to the sector seems to reflect a growing awareness of the need for reform. Yet,

those who would lose out when reforms are implemented, who hope to secure a better position for themselves in the post-reform sector, or politicians who are simply trying to save their own political skin, have all had considerable success in delaying or reshaping reforms. ZEKC was established in March 1999 with the intention of becoming the ISO, but it took until July 2005 for an ISO to become operational. Public support for reforms has been limited (OHR, 2004a), unions have organized protests of the reforms (OHR, 2004b) and the Constitutional Court intervened to declare some reform steps unconstitutional (OHR, 2004a). Although the international community officially has plans to reduce active engagement in BiH with the closure of the OHR, it is likely that continued progress on reform, as well as the ongoing stability of

B. Scholl / Utilities Policy 17 (2009) 49–64

61

250.00%

200.00%

Total Supply Total Generation Bočac Višegrad Gacko Ugljevik

150.00%

100.00%

50.00%

0.00% 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 Fig. 9. EPRS generation as a percentage of 1990 levels.

Bosnia and Herzegovina itself, may be dependent on continued intervention by the international community.22 Moreover, the Bosnian political structure itself has provided substantial hurdles in pressing for greater reform. The entitycanton structure often requires an inordinately high degree of consensus among different layers of government, with a very weak ability of the state to coordinate and push for reforms. The result is that entities, and entity-level politicians, often determine the pace and extent of reform. These are often the structures and people that stand to loose the most from consolidation of power at the state level or the loss of entity government control of the electrical utilities. Electricity sector and other reform strategies that have been successfully pushed by the international community of late, however, often reflect this desire for greater state-level consolidation.

establishment of a wholesale generation market; privatization; and the elucidation of rules on consumer protection, subsidies and stranded costs. In Bosnia and Herzegovina, however, the success of a number of reforms requires initial consolidation of structures or assets across entity lines. Although the international community clearly provided the skeleton and commitment before and after its signing has been mixed, the Electricity Policy Statement ostensibly outlined the long run vision of BiH, FBiH, and RS governments for the electricity sector in terms of the reform program, transition to a new regulatory framework, pricing policies and privatization. In it, the government envisions a system of enhanced technical efficiency and private investment incentives, economically viable firm operation,

4.2. Reform progress to date

0.12

0.1

BAM/kWh

The overall guiding policies for the implementation of electricity sector reforms in Bosnia and Herzegovina are the Electricity Policy Statement of May 2000, the October 25, 2005 Treaty Establishing the Energy Community that resulted from the Athens Process of 2002–2003, and the reform action plans; however, there is a need for the BiH documents to be reassessed and updated. The Electricity policy statement outlined a number of reforms and market changes that had been anticipated since Dayton, many of which would be needed for increased European integration and for BiH to participate fully and effectively in the Energy Community. The vision is broadly in accord with the elements of reform outlined by Jamasb et al. (2004, p. 7): corporatization of state owned utilities; enactment of an electricity reform law; unbundling of vertically integrated utilities; provision of third party network access; regulatory reform and the establishment of an independent regulator;

0.14

0.08

0.06

0.04 EPBiH Avg domestic sales 0.02

EPHZHB Avg domestic sales EPRS Avg domestic sales (BAM/kWh)

22

Since 2006 the OHR has tried to gear towards closure of the office, but an original mid-2007 deadline was pushed back to mid-2008. In a press conference on February 27, 2008, HR Miroslav Lajca´k indicated that the closure of the OHR would be based on policy milestones rather than set timetables (OHR, 2008).

0 2001

2002

2003

2004

Fig. 10. Average domestic sales tariff rates.

2005

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B. Scholl / Utilities Policy 17 (2009) 49–64

140%

120%

EPBIH EPHZHB EPRS

100%

80%

60%

40%

20%

0% 1991

wartime low

1995

1996

1997

1998

1999

2000

2001

2002

2003

2004

Fig. 11. Collection rates by EP (% of Billings).

and a Universal Service Obligation. It conceives this vision in the context of complying with relevant EU provisions regarding the creation of an internal market and the Energy Charter Treaty. Not surprisingly, it attempts to remain faithful to Dayton structures and envisions an ultimate system where entities continue to play an important role. The vision that has evolved has also called for a number of state-level structures including an Independent System Operator (ISO) and a single transmission company, though these were not articulated in the policy statement. A two-stage process for sector reform was articulated in the Electricity Policy Statement. The first stage would include the passage of electricity laws, tariff reform, a revamp of the regulatory framework, and the separation of business units within the EPs. Along with these concrete measures, the Statement calls for feasibility studies and action plans to examine restructuring and privatization. In the second stage, the market will gradually be opened and EP restructuring, unbundling and privatization would commence. Nearly six years after signing the Statement, the process of market opening commenced on January 1, 2007 according to the slowest possible timeframe allowed under the Treaty Establishing the Energy Community.23 The current timetable for reform is sketched in the Electricity and Gas Road Map and the Electricity Action Plan of November 2006, elaborated as part of the Energy Community Framework. The action plan assures the implementation of the Aquis Communautaire on energy and other reforms as envisioned in the Energy Policy Statement and the Energy Community Treaty. 4.2.1. Electricity reform laws The legislative framework has key elements defined at the state and entity levels. At the state level, the legal context for reform is provided by the 2002 Law on Transmission of Electric Power, Regulator and System Operator of Bosnia and Herzegovina along with a 2003 amendment; the 2004 TRANSCO Law of Bosnia and Herzegovina; and the 2004 ISO Law of Bosnia and Herzegovina.24 The first of these laws provided for the establishment of the state-

level independent regulator SERC and the ISO; the 2003 amendment changed SERC’s headquarters from Sarajevo to Tuzla. The second law established the joint stock company Elektroprenos Bosne i Hercegovine (TRANSCO)-the company for the transmission of electricity. The long-awaited third law transformed ZEKC into the ISO. The ISO is a non-profit entity that manages the transmission system, the main system control center, and management of energy balances. At the entity level, the key pieces of legislation are the FBiH and RS Electric Power Laws, which outline the terms of entity jurisdiction over generation, distribution and trading activities. 4.2.2. Regulation The long run system envisioned in existing policy documents is one in which key regulation structures remain at the entity level though this will continue to have consequences for EU integration. The State Electricity Regulatory Commission (SERC, or DERK in the local language) was created on July 1, 2003 with the appointment of Mirsad Salkic´, Zˇeljko Topic´ and Vladimir Dokic´. The Entity Regulatory Commissions in the Federation (FERK) and RS (REERS) are parallel structures that were created in 2002 at the directive of the

20 0

2001

2002

2003

-40 -60 -80 -100 -120

EPBiH EPHZHB

-140 23

See Energy Sector (2008) for a review of some constraints that limited opening in practice. 24 Official Gazette BiH 35/04.

2004

-20

EPRS

-160 Fig. 12. Net income performance.

B. Scholl / Utilities Policy 17 (2009) 49–64

63

Table 3 Measures of quality of services to businesses Infrastructure issue From 2002 enterprise survey Delay in obtaining an electrical connection (days) Number of electrical outages (days) Duration of electrical outages (hours) Value lost due to electrical outages (% of sales) Web in interaction with clients/suppliers (%) Uses email to interact with clients/suppliers (%) From 2005 enterprise survey Obtaining an electrical connection (days) Number of electrical outages (days) Duration of electrical outages (hours) Value lost due to electrical outages Web in interaction with clients/suppliers (%) Uses email to interact with clients/suppliers (%)

Bosnia and Herzegovina

Small (1–19 employees)

Medium (20–99 employees)

Large (100þ employees)

0.47

0.42

0.9

0.3

3.81

3.68

4.61

3.49

54.95 58.24

41.84 46.94

76.47 76.47

65.31 67.35

5.34 1.34 3.4 2.38 72 74

5.44 1.96 3.21 3.35 56.57 59.6

4 0.77 3.67 1.3 84.21 84.21

8.5 0.67 3.56 1.2 90.91 93.18

Source: WB Enterprise Survey 2002, 2005.

respective entity electricity laws. Each of the three bodies is intended to be an independent non-profit organization, but it remains to be seen how long their independence will persist, especially after the OHR closes. SERC has jurisdiction over transmission, transmission system operations, and international electricity trade, which essentially reduces to jurisdiction over the Banja-Luka-based (in RS) transmission company TRANSCO and the Independent System Operator (ISO) Elektroprijenosa-Elektroprenosa BiH. The entity regulators oversee relationships between generation, distribution, and customers, including electricity traders. Each of these three bodies sets tariffs, issues licences, and provides the normal complement of supervision and regulation activities within its jurisdiction such as quality control and dispute resolution; the entity regulators set retail, generation and distribution tariffs, while SERC sets transmission and ISO tariffs. The creation of parallel structures at the entity level is probably appropriate for political and constitutional reasons, but the overall small size of the market means that they are redundant, and that there is likely to be duplicate procedures and perhaps conflicting requirements for any firm wishing to operate in both markets. The Energy Policy Statement provides no specific guidance regarding tariff setting, in effect leaving it to the respective regulatory bodies to decide on a system. Currently, all tariffs are set using the traditional cost of service method. SERC’s July 2005 Tariff Pricing Methodology for Services of Electricity Transmission, Operation of Independent System Operator and Ancillary Services describes tariff setting policy according to this paradigm. Overall, regulation of all aspects of the sector (generation, distribution, supply, transmission) and the reluctance to allow markets to govern at least some aspects of the sector, provides a further disincentive to investment in the sector. 4.2.3. Restructuring, unbundling, privatization and market opening The process of unbundling sector generation, distribution, trading and transmission functions is underway although the pace of these reforms has been slower than anticipated. ZEKC was finally transformed into the ISO in 2005, much later than originally anticipated, and TRANSCO came online in February 2006. These broadly embody the structures anticipated in the Policy Statement, though a more explicit entity-based decentralization appears to have been originally planned with transmission companies defined along entity-based service territories. Effective unbundling of distribution, governed by Action Plans, was undertaken in 2007, though EPBiH and EPHZHB subsidiaries

share a single license. The vision articulated in the Energy policy statement is for distribution activities to be split up and devolved into separate distribution companies. Non-discriminatory third party access to distribution networks is currently guaranteed under the RS and FBiH electricity laws, but effective implementation of this requires further steps. No explicit plan to create a single wholesale generation market currently exists, and this is an area that requires further elaboration. The vision is for a market where generation firms and qualified customers are free to negotiate bilateral contracts. This may be suggestive of a single market, but it is not clear what the regulatory framework would be in terms of supervision and dispute resolution for cross-entity trades. The ISO will perform a monitoring role, but it is not clear what SERC’s role would be if any. The Federation EPs are 90% state owned and EPRS is 80% state owned (EPBiH). It would seem that EPRS is in the best position to separate and privatize various business segments. EPRS is effectively an M-form holding company for separate operating companies for each of the two thermal and three hydro facilities, and five distribution districts (Austrian Energy Agency). Until the creation of TRANSCO, an additional firm under the EPRS umbrella operated the transmission business. EPBiH and EPHZHB each have separate divisions for generation, distribution and other assets, but it does not appear that they are currently organized to operate as stand-alone business units (Austrian Energy Agency) with the FBiH government and the EPs resisting further unbundling. Regardless of the steps that have been ostensibly undertaken in the process of unbundling, all transactions between the three service territories are controlled and processed via the EP structure so that very little substantive unbundling has taken place (e.g. within EPRS, subsidiary generation companies do not have direct relationships with other firms outside of the EPRS structure). A privatization plan is ostensibly guiding the timetable for restructuring and privatization, but at this point the plan is publicly unavailable (Eurelectric, 2004). The Energy Policy Statement ostensibly leaves decisions regarding if and when to privatize any or all components of the electricity sector up to the discretion of entities themselves. This flexibility would appear to be the most significant departure from the elements articulated by Jamasb et al. (2004), although in reality privatization is on the agenda – it is simply a matter of how and when. Finally, the timetable for market opening was effectively established by the Energy Community Treaty. The treaty provides a ‘‘not-later-than’’ scheduling, and BiH does not appear to be intent

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on accelerating that timeframe. On the other hand, it may be that the Treaty provided yet another international mechanism that helped to resolve local coordination failure. In any event, the introduction of eligible customer status had been anticipated to be implemented earlier (c.f. Eurelectric, 2004). Opening is scheduled to occur in three phases. The first stage, implemented on January 1, 2007, provided eligible customer status to customers with consumption levels exceeding 10 GWh per annum. Stage two extends eligible customer status to all non-household customers as of January 1, 2008, and stage three extends the status to all customers by January 1, 2015. These measures correspond to a market opening of approximately 33, 57.5 and 100%, respectively (BiHSERC, 2004–2007). 4.2.4. Consumer protection, subsidies and other issues Tariff reforms have been an integral part of the changes in the electricity sector to date. These have primarily been in terms of a racheting up of rates to ultimately achieve economically viable pricing. Given the economically vulnerable situation of the majority of the population following the war, the Electricity Policy Statement called for any price changes to be gradual. It is partially for this reason that transmission tariffs originally approved by SERC in early 2006 were quickly reconsidered due to complaints regarding the burden imposed by the simultaneous introduction of the VAT (though the originally announced rates were in fact lower than those for previous years). The Policy Statement suggests that any household subsidy mechanisms should be directly targeted towards the most vulnerable groups, which generally means displaced populations and the extremely poor. To date, no specific scheme has been elaborated.

5. Concluding comments After making a relatively quick recovery from wartime destruction, Bosnia and Herzegovina has lumbered into reform and integration with regional markets, ostensibly led by the international community. Much pressure has been placed on BiH to consolidate structures at the state level, which has largely been resisted by Bosnians themselves. Such reform would weaken the Dayton structure, a structure that while inefficient and cumbersome, does allow competing ethnic groups to determine their own policies, thereby mitigating frictions and easing local tensions. Nevertheless, the international community has persisted with this agenda and managed to secure substantial reform. Though this has been part of a larger strategy to integrate European energy markets, it seems that fairly little consideration has been given to assessing how these reforms will affect peace and stability in BiH, and it is still unclear how appropriate some of these reforms are for Bosnia and Herzegovina. For now, questions remain about the international community’s commitment to BiH and its tolerance for two- or three-way regulatory and other structures. Based on the history of the past 15 years, it may very well be that maintaining ethnically based control over structures may help to avert conflict, and may provide a secure enough environment to allow further restructuring and development at a pace that is deemed appropriate within Bosnia and Herzegovina, rather than one that is paced by external pressures.

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