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ScienceDirect Procedia Economics and Finance 6 (2013) 242 – 251

International Economic Conference of Sibiu 2013 Post Crisis Economy: Challenges and Opportunities, IECS 2013

Transition, Concentration and Labor Productivity within the Electricity Industry in Romania Monica Dudiana, Anca Ghermana* a

Department of Economics and Economic Policies, The Bucharest University of economic Studies, Bucharest, Romania

Abstract The electricity industry from Romania, similarly to all the EU27 countries, is in a continuous process of transformation along three axes: liberalization, disintegration (unbundling) and privatization. The objective of this article is to study the effects generated by the reform into the electricity industry from Romania upon the market concentration and labor productivity into the sector. The main conclusions of this paper are the following: (1) reform reduced the degree of concentration in all segments of the value chain, followed by a consolidation process, emphasized after 2011; (2) labor productivity increased and the number of employees decreased due to electricity industry restructuring. © 2013 2013 The The Authors. Authors. Published Publishedby byElsevier ElsevierB.V. B.V. © Selection and peer-review under responsibility FacultyofofEconomic EconomicSciences, Sciences,Lucian LucianBlaga BlagaUniversity University Sibiu. Selection and peer-review under responsibility ofofFaculty ofof Sibiu. Keywords: electricity industry; concentration; labor productivity

1. Introduction The electricity market has known over the last three decades deep transformations all over continents in the direction of privatization, vertically disintegration and liberalization. The stated goal of these reforms in all countries was to increase economic efficiency and to lower the prices for the final consumers. The objective of this article is to study the effects generated by the reform into the sector of electricity industry from Romania upon the market concentration rate and labor productivity within the sector. Romania signed in 2005 The Treaty establishing the Energy Community, through which our country took upon itself to implement the acquis communautaire on electricity, gas, environment, competition and renewables and to participate in the creation of a

*Corresponding author. E-mail address: [email protected]

2212-5671 © 2013 The Authors. Published by Elsevier B.V. Selection and peer-review under responsibility of Faculty of Economic Sciences, Lucian Blaga University of Sibiu. doi:10.1016/S2212-5671(13)00137-8

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regional gas and electricity market within South East Europe. But the reform had started fifteen years ago at the same time with the transition from the centralized economy to the market economy. The beginning of the present paper synthetizes the transformation process of the electricity industry from Romania during the period of 1990 - 2011. Hereinafter the paper is structured in the following manner: the third part is an overview of the reference literature; the fourth part is the methodology description; the fifth part analyzes the concentration upon the energy market along the value chain, and the last part is analyzing the productivity. The conclusions synthetize the effects of reform upon concentration and labor productivity. 2. The Electricity Market in Romania: An Overview The transition from a centralized economy towards a market economy has taken shape in Romania through wide reforms, among which the reform of the energy sector has taken up a major place. The reform started in 1990, the year when the Ministry of the Energy was restructured and the Autonomous Regia of Electricity (RENEL) was set up, vertically integrated, carrying out production, transport, distribution and supply of electrical power. In 1998 RENEL was restructured by setting up the National Company of Electricity (CONEL), operator of transport, system and of the energy market holding at the same time 100% of Termoelectrica and Hidroelectrica producers and 100% of Electrica exclusive distributor. Nuclear Electrica was also divided as an independent entity, property of the Ministry of Industry and Commerce. In the same year, the National Authority of Regulation into the Field of Energy (ANRE) was set up. In 2000 CONEL was restructured by being broken up into four entities: (1) Transelectrica - transport, dispatcher and system operator; (2, 3) Termoelectrica, Hidroelectrica - production; (4) Electrica - distribution. Then, in 2001, Electrica SA had its turn to be reorganized by dividing it into eight commercial societies of distribution and supply of electrical energy: Electrica Moldova, Electrica Dobrogea, Electrica Muntenia Nord, Electrica Oltenia, Electrica Banat, Electrica Transilvania Nord, Electrica Transilvania Sud, Electrica Muntenia Sud. During 2004-2007 there were passed into private hands Electrica Banat, Electrica Dobrogea (2004) and Electrica Muntenia Sud through the absorption of the equity stake (51%) by Enel. Approximately at the same period, more exactly during the years 2005 - 2009, Electrica Oltenia was undertaken by CEZ Group, property of the Czech state. The company was divided according to the new Romanian regulations (result of the compliance of the laws with the UE ones) into CEZ Distribution and CEZ Sale (supplier). Paralleled, in the year 2005, Electrica Moldova was taken over by E.ON Energie and it became E.ON Moldova. From legal reasons, in 2007 E.ON Moldova was broken down into E.ON Moldova Distribution and E.ON Moldova Supply. In the year 2007 Enel Electrica Banat and Enel Electrica Dobrogea merged, becoming Enel Energie, but the distribution activities were separated in accordance with the law, by starting up Enel Distribution Banat and Enel Distribution Dobrogea. In 2009, Enel Electrica Muntenia Sud was also divided into Enel Energie Muntenia (supply) and Enel Distribution Muntenia. Similarly, in 2007 Electrica SA was reorganized into 3 distribution entities Electrica Distribution Muntenia Nord, Electrica Distribution Transilvania Nord, Electrica Distribution Transilvania Sud and 3 supply entities - Electrica Supply Muntenia Nord, Electrica Supply Transilvania Nord, Electrica Supply Transilvania Sud. In 2011 the autonomous energy supply entities of Electrica merged and set up SC Electrica Supply SA, held by Electrica SA. Also in 2011 E.ON Gas Romania and E.ON Moldova Supply also merged and they set up E.ON Energy Romania. Also, on the market of energy production, in 2011 the energy plants from Turceni, Craiova and Rovinari, together with the National Society of Charcoal Oltenia Tg.Jiu S.A merged and set up the Oltenia Energetic Complex, which held in 2012 approximately 30% of the electricity production (ANRE, 2012). In the same year 2011, Electrocentrale Deva merged with Electrocentrale Paroseni SA, and the merge shall continue by integrating a raw material supplier: the CNH Petrosani mines (the existing ones or those which could be made performant). The short description of the transformations has not included ancillary services due to the fact that the present paper is focused only upon production, transport, distribution and supply of energy.

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3. Reference Literature Up to the beginning of the 90s, all the EU 27 countries were characterized by vertically-integrated utilities in the electricity industry, mostly state-owned, involving low incitations of efficiency increase and inappropriate use of public funds through overinvestments into additional capacities of production or/and aiming to expensive political objectives (World Energy Council, 2010). The market liberalization, vertical disintegration and optionally privatization were the implemented solutions for increasing incitation and efficiency. The optional character of privatization shows the different views of ideologists: some of them do not consider privatization as necessary by all means, arguing for example that the public enterprise obtains the same welfare like the private enterprise (Sappington and Stiglitz, 1987) or that, by increasing the number of firms, the state is less incited towards an opportunist conduct (Joskow, 2009). Others were in favour of privatization arguing that was necessary to induce an optimal ex-ante investment (Hart, 2003) or that the politicians had private agendas which determined the managers to diverge from profit maximizing (Shapiro and Willig,1990). Liberalization involved the increase of the number of enterprises on the market and thus, the increase of competition. The unbundling of the value chain and separating the network (transmission) have been considered important for the increase of competition both on the generation market, and the distribution and supply markets due to the fact that they were invoving the undiscriminating access of all participants to the network. The predictable result of liberalization and disintegration consisted in increasing the competition pressure, leading to the following effects: higher productivity, lower prices for consumers, increase of investments into research-development, increase of infrastructure quality and strenghtening the sustainability of the energy sector (sustainability measured through the Energy Sustainability Index by the World Energy Council, 2012). The effects listed above have been integrated into the studies of the last three decades as variables depending on the reform process within electricity. Many studies show the positive effects of liberalization into the energetic sector, including that of electrical energy. In terms of the direct relationship between the concentration level and the profit margin of the firms belonging to the energy sector, including the electrical energy one there could be mentioned Wolfram (1999), Bower (2002), Fabra and Toro (2003). In addition, Grecu (2011), citing a study drawn up by London Economics in association with Global onsiderably higher on the concentrated markets (France with the European Commission (2005) analyzes the impact of the market opening in the network industries. According to this report, the unbundling transmission and the market opening have determined the diminution of prices and the productivity increase into the electricity industry. The same report shows a decrease of the occupancy rate within electricity, gas and water and an increase of labor productivity into all network industries during the period 19962002. Azmat, Manning and Van Reenen (2007) studied the impact of privatization of network industries (including share of GDP in OECD countries. Their conclusion is that privatization justifies part of -2001, and the decrease of state ownership is associated with the diminution of the number of jobs. A survey of the European Central Bank (2001), citing Steiner (2000) shows that the reform in electricity shall lead to the decrease of occupancy due to the increase of labor productivity. Fabrizio, Rose and Wolfram (2007) prove according to the example of the electricity generation sector from the USA that liberalization has determined the increase of efficiency by reducing the labor and nonfuel expenses (labor measured by the annual mean number of employees), holding constant output, fact that can be interpreted through a labor productivity increase (expressed as output/employee). Ugur (2009), citing Groningen (2005), states that labor productivity (expressed as production per employee) has increased in the EU 15 over 1.5 times within the sector of electricity, gas and water during the years 1995 - 2003, mainly because of the decrease of the number of employees. Fiorio and Florio (2010), in a survey on the EU15, show that the vertical integration rate is directly correlated with the size of price and back correlated with the satisfaction of consumers in the electricity industries. Davis and Wolfram (2012) prove according to the example of the US nuclear power industry that the disregiment was accompanied by consolidation and it determined the increase of operational performance, measured through net generation as a percent of design capacity. Beside the efficiency revenues proven by the previous studies, there are also works emphasizing the limits and errors of liberalization. Bushnell, Mansur and Saravia (2008), based on the model of Cournot competition, show that the USA electricity reform effects upon prices are fundamentally different according to the vertical commitments

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horizontal structures can reform, shows that liberalization of the generation market (entry of wholesale competition) has been materialized in

In his speech, Kroes (2007) reviews the issues the electricity industry continues to deal with: the high concentration rate, the vertical foreclosure, the discrimination in access to infrastructure low levels of cross-border trade, lack of transparency, and lack of confidence. Starting with the conclusions of the surveys summarized in this chapter, hereinafter there have been analyzed the reform effects on concentration and labor output on the electrical energy market from Romania. 4. Methodology The pronounced dynamics of the energy market during the last ten years makes difficult its analysis because the divisions and merges between the companies are accompanied by the unavailability and lack of comparison of the financial results. Therefore, this scientific research has taken into account three periods for which the comparable data have been quasi-complete: the year 1999 as the last year characterized by an integrated market of the electrical energy, 2000 (the first year of segmentation), and the year 2011, the latest year with available data. AMADEUS was the used database. For the Turceni Energetic Complex, Rovinari Energetic Complex and Transelectrica for the year 2011, there have been used the data available on the website of the Romanian Ministry of Finance, processed similarly to the methodology of the Amadeus database, fact that has allowed the comparison. For E.ON Moldova Supply, the latest available data were those for the year 2009. Therefore, these data were processed in order to obtain the amount which would have been collected in 2011 if the merge with E.ON Gas had not occured, thus: the operational revenues from 2009 were expressed in the 2011 prices, then they have been indexed by the real average growth in turnover (simple arithmetic mean) for the companies with available data for the period 2009 - 2011 (fact that has meant a diminution of approximately 5%). Moreover, the number of employees was adjusted to the average evolution within the field, which has meant a diminution of approximately 12.5%. This approximation has been chosen instead of the exclusion of E.ON Moldova from the analysis, due to the fact that the total market share of E.ON Moldova is an important one, of approximately 18% . Due to the fact that there has been aimed to compare the energy sector productivity of the year 2011 with that of CONEL before disintegration (year 1999), respectively with that of the 4 entities generated by the breakdown of CONEL, Nuclearelectrica has been eliminated from the analysis because it was not a CONEL component. The productivity of labor (WL) within each electricity field (codes NACE 3511, 3512, 3513 and 3514) in 2011 was determined through the ratio of the total operating revenue (OR, close to net turnover) and the total number of employees (L): n

ORi WL

i 1 n

where n is the number of firms.

(1)

Li

i 1

The productivity for the year 2011 thus calculated, in real terms, has been compared with the CONEL productivity in 1999 (expressed in the 2011 prices) and with the productivity related to the four entities resulted from CONEL in 2000 (expressed in the 2011 prices). HIPC of the Euro area (17 countries) has been used for updating as all figures were expressed in Euro. To determine the market concentration, the Hirschman-Herfindahl (HHI) indicator has been used, being determined as: n

HHI

2 i

(2)

i 1

where n is the number of firms on the market, and yi the individual market share. Moreover, the concentration has

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been also measured through the aggregated market share of the dominant firms on the market (the first 4 firms on the market), determined as: m

Rm

i

(3)

i 1

5. Concentration on the Energy Market in Romania. The value chain into the electricity sector from Romania comprises four interconnected segments: production, transport, distribution and supply.

Fig. 1. The structure of the Romanian Electricity Market and Main Market Players, Source:http://www.kpmg.com/RO/en/IssuesAndInsights/ArticlesPublications/Factsheets/Audit/Documents/Romanian_energy_market _factsheet_EN_.pdf

The diagram above shows the main actors for each segment along the value chain. For the concentration analysis in 2011 there has been taken into account the net turnover achieved by each organization. On the production market of electrical energy (the generators), according to the net turnover, if the small players are not taken into consideration, the market shares are the following:

Monica Dudian and Anca Gherman / Procedia Economics and Finance 6 (2013) 242 – 251 OTHERS (approximate figures) 23% ELECTROCEENTRALE GA GALATI SA 2%

"HIDROELECTRICA" SA 18% ELECTROCENTRA ALE BUCURESTI SA A 13%

TOMIS TEAM SRL 3% COMPLEXUL ENERGETIC OLTENIA 24%

"TER RMOELECTRICA" - SA 3%

"NUCLEARELECTRICA" SA 9%

ELEECTROCENTRALE DEVA SA 5%

Fig. 2. Energy Producers - Market Shares, 2011 Source: AMADEUS database, 2013

The situation corresponds to a HHI index of approximately 1217, meaning that from the net turnover point of view, the market has an average level of concentration (between 1000 and 1800). On the other hand, the four firms on the market hold together a market share of about 65%, which corresponds to a tight oligopoly (Shepherd and Shepherd, 2004). Things are quite different from the view of total national output of electricity (expressed in installed power, MW):

ELECTROCENTRALE GALATI 3%

OTH

TOMIS TEAM SRL 3%

HIDROELECTRICA 34%

TERMOELECTRICA 5% ELECTROCENTRALE DEVA 7%

COMPLEXUL ENERGETIC OLTENIA 19%

NUCLEARELECTRICA 7%

ELECTROCENTRALE BUCURESTI 11%

Fig. 3. Romania - Installed Power, MW, 2011 Source: websites of the electricity producers, March 2013

In respect of physical production, the most important producer is Hidroelectrica, given the fact that HHI is 1759, close to the critical threshold of 1800 that indicates a high concentration, and the first four firms hold together 75% of the market. On the energy transport market, Transelectrica holds a quasi-perfect monopoly, being the sole market operator and administrator. The distribution is dominated by eight firms, organized on geographical regions: Walachia (Muntenia), Transylvania (Transilvania), Banat, Dobruja (Dobrogea), Oltenia and Moldavia (Moldova). If the small operators are not taken into account, the situation is the following:

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E.ON Moldova Distributie 12%

CEZ Distributie

Enel Distributie Dobrogea 9% Enel Distributie Banat 12%

Muntenia Nord 13%

Electrica Distributie Transilvania Sud 12%

Electrica Distributie Transilvania Nord 11%

ENEL Distributie Muntenia 15%

Fig. 4. Electricity Distributors - Market Shares 2011, Source: AMADEUS database, 2013

The first four distributors hold under 60%, but over 40% of the market (56%, close to 60%), fact indicating a situation between effective competition and powerful oligopoly (but closer to the tight oligopoly), conclusion supported also by the HHI value, of approximately 1300. According to World Energy Council (2010), the supply market comprises approximately 117 supply license holders. The data available in AMADEUS point out the fact that the energy supplier market consisted in over 80 firms with positive turnover in 2011. Out of them approximately 50 firms had a turnover of over one million euro. Though the number of firms is high, some of them (mainly the firms coming off from Electrica SA) have an important position on the market. Thus, the five firms generated by the reorganization of the suppliers coming off from Electrica SA in 2001 hold together approximately 60% of the total market. This figure points out the concentration through the weighting of the first four firms as a total, given that the first two players have the same owner (ENEL). The situation of the first 10 electricity distributors is the following:

500,000.00 450,000.00 400,000.00 350,000.00 300,000.00 250,000.00 200,000.00 150,000.00 100,000.00 50,000.00 0.00

Net Turnover (th Euro)

Fig. 5. Electricity Suppliers - Net Turnover, 2011 Source: AMADEUS database, 2013

Although the HHI value of approximately 1026 indicates a competitive market, the high weighting of the first four firms emphasizes a situation close to the tight oligopoly. The assertion is supprted by four additional arguments: (i) there is a division of firms on geographical regions (even if there is the legal freedom of the consumers to change the

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supplier), (ii) the barriers at the market entry (access to the energy distributors, legal barriers, industry complexity and others), (iii) bilateral contracts and (iv) the lock-in issue (Frontier Economics Europe Report, 2010). The short analysis of the concentration rate leads to the conclusion that the electrical energy markets along the entire value chain (except transmission), are characterized by a tight oligopoly. If this reform is intended to create a competitive market, the progress is not enough. Nevertheless, with reference to the year 1990, progress is important due to the fact that there turned from the state monopoly (lack of competition) to oligopoly and to a private segment that is important on the market. Starting with this last assertion, the question this paper wants to answer is: have demonopolization, liberalization and privatization determined an increase of labor productivity at the enterprise level? 6. Labor Productivity in the Electricity Industry

Labor Productivity (th Euro)

The energy industry has encountered a strong increase in productivity by comparison to the status of the four entities resulted from CONEL in 2000. In 1999, CONEL had an average productivity of labor (calculated in the 2011 prices) of 377.26 thousand Euro/employee, at an average number of employees of 3,584. Unlike CONEL 1999, the industry registered a decrease to less than half of the labor productivity. The low number of CONEL employees in 1999 as compared to the number of employees from the subsidiary firms in the year 2011 (39,821 employees) has risen a question mark upon the statistic data available for the year 1999 (even if they came from the Ministry of Finance of Romania). Therefore, the situation of the electricity industry from 2011 has been compared to that of the mother firms from 2000. In 2000, Hidroelectrica, Transelectrica, Termoelectrica and Electrica (resulting from dividing CONEL), had togethr 52,289 employees. There has been determined the weighted average productivity of labor within industry for the year 2000. The result was an average labor productivity within industry of only 44,67 thousand Euro (at the 2011 prices). Comparatively, in 2011 against 1999 and respectively 2000, the situation is the following:

1000 900 800 700 600 500 400 300 200 100 0

915.9

377. 37 73

331 33 1.8 8 1 1.43 11 Production

163. 16 3 72

99.7 99 .7 Transmission Distribution

44.6 44 67 Supply

Total electricity industry 2011

CONEL 1999

Electrica SA 2000

Industry/Company Fig. 6. Labor Productivity, 1999 - 2000 2011 Source: authors' calculations

In comparison with the year 2000, productivity increased more than 3.5 times. During the period 2000 - 2011, the number of employees decreased with approximately 25%, meaning that the productivity gain resulted both from the diminution of the employees number and the increase of the operational revenues. 7. Conclusions Privatization, vertical disintegration and liberalization have deeply changed the market of electrical energy in Romania. Electricity industry developments followed largely theoretical assumptions: liberalization was initially

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accompanied by fragmentation and privatization, but the consolidation process has recently begun. Along the value chain, transmission is monopoly and the other markets take the shape of the powerful oligopoly, situation similar to that of most of the European countries. In comparison with the year 2000, labor productivity has considerably increased both by reducing the number of laborers, and increasing production. There could be noticed a wide difference of productivity between the industries, with productivity within the segment of monopoly of almost three times higher than into production and distribution and with maximum of productivity within supply, nine times higher than into distribution. The increase of labor productivity within the sector of electricity industry in Romania confirms the evolutions emphasized by other researches, pointed out in chapter 3, such as those of Steiner (2000), Groningen (2005) and Azmat, Manning and Van Reenen (2007). 8. 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