Energize & Liberalize
Erin Lynn Root
Independent Study Fall 2007
Babson College
Abstract
This paper looks at the multiple transitions of the Czech Republic economy from the end of the First World War to the present. The Czech Republic provides a historical example of a transition from a centrally planned to a privatized economy. While it has faced difficulties along the way, the transition has largely been a success as it reintroduces itself to Western Europe. This paper concentrates on the energy sector, looking at the development over time from a government regulated utility into a privatized one. One can take this example as a representation of the country’s transition as a whole. While each industry is different, the procedure and thought process allows itself to be applicable in the overall planning of becoming privatized.
I. Historical Introduction
The First Republic
One might think that the history of the Czech Republic is simple, as it is a small and young country. On the contrary, it is filled with telling historical events and is a model country for transitional economies.
The first republic of Czechoslovakia was founded in 1918 with a blend of different ethnic, historic and economic traditions forming a new state. The country was defined after the fall of the Austro-Hungarian Empire at the end of World War I. The provisional National Assembly was formed by the Austrian parliament that included representatives from both Czechia and Slovakia. The assembly elected Tomáš Masaryk as the president of the first republic.
Czechoslovakia consisted of four territorial lands defined by culture and ethnicities: Bohemia, Moravia, Silesia and Carpathian Ruthenia. The territorial mixture that made up Czechoslovakia created some strain for the unity of the new country. Many Sudeten Germans and Hungarians harbored ill feelings, since the national minorities were not properly represented within the National Assembly. To ease the tension from unrepresented ethnic differences, national minorities, including the Sudeten Germans and Hungarians, were given the freedom to use and teach in their native language within ethnically distinguished districts, despite the constitution deeming the official languages as Czech and Slovak in 1920.
As the country developed, five main political parties formed at the start of Czechoslovakia that served as a backbone for the new government. The first five parties were the Republican Party of Farmers and Peasants, Czechoslovak Populist Party, Czechoslovak Social Democratic Party, Czechoslovak National Democratic Party and Czechoslovak National Socialist Party. Acknowledging their differences in political views, this coalition of parties formed a slogan of “We have agreed that we will agree.” Eventually these parties formed, combined, grew, and adopted new names through the first ten years of forming the new republic. Because this country was so young and vulnerable at the time, it was a prime target for an easy take-over.
World War II – The Occupation
Lasting a short life, Czechoslovakia became an objective for Hitler in 1938 with the Treaty of Munich. The treaty was meant to appease Hitler during the brink of World War II. It gave him Sudetenland, and the de facto ruling of the rest of the country, so long as he would stop at that. It was made to settle disputes and prevent war between the UK, France, Italy and Germany, and was signed by Adolf Hitler, Neville Chamberlain, Benito Mussolini and Édouard Daladier. From the Czechoslovakian standpoint, it was considered the Munich Dictate, since the agreement did not consult Czechoslovakia, but rather they were coerced by the other Western European countries involved. Hitler maintained that he wanted the German-speaking land in Czechoslovakia to be returned to Germany. This only fuelled German-Czechs’ secessionist hopes, as they still maintained bitterness towards the new Czechoslovakian government.
On a rumor of German troop movements, Czechoslovakia made an attempt at mobilization for its protection, but was unsuccessful. On March 15th 1939, Germany invaded the rest of Czechoslovakia and broke the signed treaty agreement. In aiding the Germans, the Polish and Hungarians invaded parts of Moravia. The occupation brought on many protests, including historical student demonstrations. After the death of one medical student on November 17th, the Czechoslovakians broke out in a spontaneous demonstration, which was typical of the Czechoslovakians. German troops rounded up a total of 1800 demonstrators, including students and teachers, and on that day, all universities were closed. Teachers and students were sent to work in assistance of the war. From this demonstration, nine student leaders were sent to death.
The autumn of 1941 was the start of aggressive arrests and executions to those who were subversive towards the occupation. The Jews began to be transported to concentration camps, and ghettos were made for those on their way to be deported.
In 1943, the German Reich became even more aggressive, banning all non-war-related industries.
The Czechs passively obeyed these aggressive policies until the months leading up to their liberation. The spring of 1945, western Bohemia was freed by the United States, with the Soviets liberating the rest of Czechoslovakia. Early that May, the occupants were forced to return to their home countries. In the latter half of 1945, many round-table discussions continued within Europe for the restoration of borders and after-war reconstruction.
The Third Republic
After the liberation, the third republic of Czechoslovakia found itself under Soviet influence from its own after-war reconstruction. In 1946, democratic elections were held. The Czechoslovak Social Democratic Party (KSC), the country’s communist party, won with thirty-eight per cent of the vote and proceeded to form a coalition government. The choosing of communism was largely influenced by negotiations between Eduard Benes, a foreign minister from 1918 to 1935, and the KSC exiles in Moscow. Two years later in February, the Soviets
aid the
Czechoslovakians, initiating a traditional centrally-planned economy, and developed a “people’s democracy.” Stalinism became integrated into the government and overshadowed the Czechoslovak interests. The implementation of Stalinism included five-year plans and a totalitarian view on communism. While there remained other political parties, the communist party had complete control at this point.
The communist era
In starting the country’s progression to socialism in the 1950s, the new government oppressed the resistance by purging of top positions. Many former Czechoslovakian leaders either went into exile or to prison. While the government immediately abolished the private economy, it took ten years to establish the state economy that would preside over for decades. The 1960 constitution “declared the victory of ’socialism’ and proclaimed the Czechoslovak Socialist Republic,” the new recognized name for Czechoslovakia.
Between 1958 and 1962, new films and literature circulated, along with an expanded freedom for the press. Travel across borders became easier as passports were more within the reach of citizens. In 1965, there was a redefinition of democratic centralism, placing to a greater importance on democracy from the government. The 1960s became known as the “liberal 60s”, with Prague Springtime during 1968.
During the first half of 1968, the Czechoslovakian culture became liberalized, with fewer restrictions on censorship and more pressure for reform. That January, Alexander Dubček was elected the leader of the Communist party. He held the real executive power of the country, rather than the elected president, Antonín Novotný. In May of 1968, censorship was completely abolished. The following month, passports were fully liberalized with the ability for citizens to travel to anywhere. The freedom of democratic centralism was a vast opportunity that many took advantage of, but was short lived.
In mid-July, 1968, a televised Warsaw Pact conference was held without the invitation of Czechoslovakia. The conference produced a letter written to the KSC party demanding reformation of communism, including reintroducing censorship and the banning of new political parties. This stemmed from the Soviet Union not liking the democratizing of Czechoslovakia. The KSC rejected the letter, leading to physical retaliation by the Warsaw Pact countries. The reasoning behind this was that the Soviet Union did not approve the liberalizing antics of Alexander Dubček. It wanted Czechoslovakia to return to communism. Since the country rejected the notion to, the USSR invaded to institute normalization. On August 21st of that year, Czechoslovakia was invaded by the five Warsaw Pact armies: Bulgaria, East Germany, Hungary, Poland and the Soviet Union. The process of normalization was also referred to as “salami tactics”, visualizing the actual cutting up the salami, or in this case, the KSC. Western Europe rejected the invasion of Czechoslovakia, leading to the Soviet Union losing the support of fellow western communist parties.
In normalizing Czechoslovakia, in May 1970, an agreement was formed between it and the Soviet Union. The agreement was titled the Treaty of Friendship, Cooperation, and Mutual Assistance, and instilled limited sovereignty for the country. From an outsiders’ point of view, Romania and Yugoslavia mobilized themselves in fear of a Soviet invasion for normalization. They also gave assistance to those seeking asylum from the Soviet sphere of influence.
The country started its revolt against Soviet influence in 1975 with the Helsinki Conference for Security and Organization in Europe. Here, Poland and Czechoslovakia stood on different platforms for the same goal: human rights. For the progression with the dissonance, in 1977, a manifesto called “Charter 77″ was fuelled with nonconformist thinking. It defined itself as “a loose, informal, and open community of people” with concerns of the protection of civil and human rights.
It had eight hundred signatures by the end of the year, and twelve hundred signatures by 1985. While it never got officially published, this developed the path for the Velvet Revolution in 1989.
The end of the Communist Era and the Democratization of Czechoslovakia
During all of 1989, every Central and Eastern European country broke away from communism. Communist parties dissolved, with economic reforms starting and justice repaid to almost everyone. There were weeks of round-table discussions, including the Soviet Union, USA and Czechoslovakia, leading to compromises about definitions of borders, restoration of justice and restitution owed that made no one happy. Late that same year, Václav Havel was voted president, the only candidate that ran. His support was influenced by his leadership with Charter 77 in the years leading up to the revolution. During these transitions and communist breakaways, political justice was demanded by those affected by the impositions implicated from the Soviets. In order to reply to the demands, money was regularly given back to families in the form of pensions. In addition, restitution claims came up, insisting on returning once-privately-owned land. For the new government to be just was impossible, so in order to pacify these families, it offered land elsewhere or monetary compensation.
The final development in progressing from former Soviet rule was December 31st, 1992, the last day of the Czechoslovak Republic. January 1st, 1993 was the “Velvet Divorce”, where Czechoslovakia divided itself into the Czech Republic and the Slovak Republic. This divorce was considered peaceful because of a clear ethnic border and the ease of agreement between the two territories to the division. That year, Havel was elected as the first president of the Czech Republic.
At the same time, a lot of economic changes commenced, gearing away from the centrally-planned economy to the previously-demanded private economy.
The development of the Czech Republic
A few years later in 1996, the Czech government formally applied for accession to the European Union. To aide in the approval of the application, the Czech Republic joined NATO in 1999. The Czechs made an effort to “return to Europe” with a different democratic view of normalization than that of the command economy. The decision to pursue integration into the west soured the relationship between it and Russia. This was because it led to feelings of the Former Soviet Union being ostracized from its close historical ties. Through the rhetoric between countries, it was seen that the Czechs wanted to steer clear of the Russians and disassociate from it’s controlling past, considering them barbarians. The move to NATO “othered” Russia, stemming from the sense of returning to Europe and striving for a better future for the Czechs. This only further ostracized their former communist alliance. The Czechs believed they had a right to return to Western Europe, while Russia felt that joining NATO broke norms and principles of an Eastern European community. Their relationship remained strained until the early 2000s with political leaders making efforts to strengthen bonds.
In 2003, Havel left his presidency after serving the maximum time limit of two five-year terms in office. He was followed by Václav Klaus, who remains president of the Czech Republic. In May of 2004, the Czech Republic joined the EU along with seven other post-communist countries. Presently, while it is a part of the EU, the Czech Republic has not adopted the monetary policy, including the use of the Euro, nor is it included in the Schengen Agreement, where border agreements are made and movement between countries for citizens of the EU are easier.
II. Economic Development
The backbone of Czechoslovakia
After the collapse of the Hapsburg Empire in 1918, Czechoslovakia inherited about seventy per cent of the empire’s industrial capability. This included china and glass industries, sugar refineries, breweries and distilleries, as well as the country’s well known company: Škoda. Škoda started off producing machinery, automobiles, armaments, and locomotives, and progressed into a popular automotive producer, later to be acquired by Volkswagen. At this time of good economic fortune, Czechoslovakia was considered one of the top ten industrialized countries.
In looking at the two main regions, the Czech lands were considered more industrialized than the Slovak’s. For the Czechs, industry was dominated by coal mining and consumption industries like textiles, glass, sugar and brewing. Coal mining proved throughout the young country’s history to be one of its staple industries. Part of the reason was because most light and heavy industry was found in Sudetenland, which were both owned by Germans and controlled by German-owned banks. In total, the Czechs only owned and controlled about twenty to thirty per cent of the industries on its land, with Slovaks only five per cent. Despite the lack of ownership, thirty-nine per cent of the Czech population was employed in industry, with thirty-one in forestry and agriculture. For the Slovaks, seventeen per cent worked in industry, with sixty per cent in forestry and agriculture. Agriculture was a difficult topic of economic development once country borders were re-established.
As soon as the new republic developed, there was instant reform for redistribution of land. A third of the land belonged to only a few aristocrats, mostly Germans and Hungarians, along with the Roman Catholic Church. In April 1919, the Land Control Act was instated, calling for the expropriation of all estates that owned more than 275 hectares or arable land, or 625 acres of land in general. Redistribution progressed slowly and gradually, so compensation was offered to the new owners.
Despite the Czechoslovakian inheritance and progression with agriculture, the country had to deal with a number of issues. Production levels for agriculture and industry were just shy of half the pre-war levels. Even though industry was prevalent in the country, it was largely dependent on foreign raw materials, which was made more difficult to import after the destruction of Europe from the First World War. The transportation system collapsed, inflation rose, and there was an alarming lack of food.
By 1925, the country finally reached its pre-war production level of volume, and by 1929, it experienced a considerable boom. Moravia began to get some recognition in the development of shoemaking. It became a metropolis for the world because of shoemaker Tomáš Baťa. In the late 1930s, all industry in Czechoslovakia was fully electrified, as well as eighty per cent of households. More recognition came when the country began receiving international acknowledgement for its top quality of production in industry, in particular for the development airplanes, cars, weapons and high-grade steels.
Economy under occupational rule
During the Second World War, the economy evolved under the direction of the German occupants. The Czechs and Slovaks were forced to help with the German war effort, making them work in industries that were vital to helping the Germans. Key industries for the Germans were iron and steel, as well as in coal mines and armaments production. Some Czechs were also sent over to Germany for labor. Largely diminished was the consumer goods production, which only continued for the need in supplying the German armed forces. In the fall of 1941, all non-war-related industry was prohibited. This led to schools and universities to shut down their education programs in order to benefit the war effort. In ending non-war-related industry production, there was a limited amount of consumer goods and foods, and rations were put into place as early as October 1939.
After the war ended, Czechoslovakia took steps toward socialism, and eventually communism. The economy developed under central planning, with private ownership completely eradicated. With a new constitution in place, nationalization of all commercial and industrial enterprises with over fifty employees took place. Nonagricultural private sector was almost completely eliminated, with private land ownership limited to fifty hectares. The new constitution also subjected the Czechoslovakian economy to series of five-year plans, a reflection of Stalinist planning put into place. These five-year plans essentially determined what was going to be manufactures and in what quantities, with regards to population but no actual sales guaranteed.
The beginning of a centrally-planned economy
After World War II, in line with other Soviet countries, there was a strong emphasis on developing heavy industry. Industries that were emphasized were metallurgy, heavy machinery and coal mining. Between 1948 and 1959, industrial output increased two-hundred thirty three per cent. All this growth required a lot of labor. The Czechoslovaks were made to work long hours in order to meet their required production quotas.
In the development of agriculture, the new constitution for the country called for the collectivization. The Unified Agricultural Cooperatives Act was adopted in February of 1949. Despite being on voluntary, this act imposed high compulsory quotas, and forced peasants to collectivize. Eleven years later, the act was near completion, with sixteen per cent of all farmland turned over to the state. Even though the act was intended to promote the use of agricultural land, production declined greatly. In 1953, there was a monetary reform in the government that depreciated nearly all the savings of the population. As time went on, the economic situation remained an issue for improvement.
Reforms of economic policy
By the early 1960s, the industrial growth became the lowest in Eastern Europe. Imports of food put strain on the balance of payments. The country started to feel pressure from USSR and from its own communist party to reform. In 1965, the party brought on the New Economic Model that called upon a second stage of intensive economic development. It emphasized technological and managerial improvements, as opposed to further industrializing the country. This limited the central planning to overall production, investment indexes, and price and wage guidelines. Production would be geared toward profitability, and prices would respond to supply and demand. There also would be an introduction wage differentials for the labor force. A sense of a social market economy developed as central planning democratized.
A full reform was planned for implementation by in January of 1967. This included economists of the country calling for “complete enterprise autonomy and economic responsiveness to the market mechanism.” Novotny, the First Secretary, and his supporters were hesitant for the reform, and responded with repressive measures. Later that year, Dubček challenged him, and the following year was elected to replace Novotny. After Dubček was instated, he carried on with the reform, leading to the New Economic Model, as well as other developments.
The economy after normalization
After the intervention of the Warsaw Pact countries and normalization in 1968, Husak, the party chief, tried to obtain public support to his rule with trying to improve standard of living. The orthodox command economy returned with emphasis on central planning and further developing the country’s industrialization. The government continued economic advancement by encouraging consumerism and materialism. They allowed slack in work ethic, along with a growing black market economy. In the early 1970s there was an increasing level of the standard of living that came from the government’s efforts. Even though this normalization caused positive effects for the public, it did not last more than a few years.
Despite the increase in economic progression, there was an oil crisis in the mid-1970s that affected the economy. The previously encouraged materialism provoked corruption within the government that produced cynicism and a lack of work discipline. Later in the 1970s, the living standards of the country declined. Husak also increased the country’s dependence on the Soviet Union. In the 1980s, fifty per cent of Czechoslovakia’s foreign trade was with the USSR, and eighty per cent with communist countries. Cooperation and integration with Soviet bloc countries was often spoken about, that it would improve industry, science, technology, consumer goods and agriculture.
Economy under revolution
Contrary to belief, after the Velvet Revolution in 1989, things started looking up as another economic reform took place. Resurgence began as shock therapy was put in place: the “big bang” of January 1991, labeled by the International Monetary Fund. Between 1990 and 1995, ninety-five per cent of price controls were liberalized. Czechoslovaks also switched their exports from the former Soviet bloc onto Western Europe in an effort to “return to Europe.” With this drastic economic change, one would imagine some initial instability, but that proved to be untrue. Within the first half of 1990s, there was an annual inflation within the ten per cent range, modest budget deficits, low unemployment, stable exchange rate and a relatively low foreign debt.
In the evolving economy, the government needed to dissolve its hand in the market. In order to do this, it proceeded with two types of privatization: minor privatization, and major privatization. Minor privatization was for the purpose of selling small trade and retail services to private owners. Major privatization was geared towards large corporations, and was done through the use of a voucher system. The voucher privatization system included anyone at least eighteen years of age, and required a small fee in order to gain stake in one or more companies. One would purchase vouchers in order to exchange it for stock in any company desired.
At the same time, there was a large overhaul of industry. The heavy mechanical engineering industry needed to undergo a painful reorientation in order to move toward the more lucrative light production. Slovakia was greatly affected, as that part of the country had an imbalance in its industry structure.
The privatization of the economy did not all go smoothly. Some industries were postponed for years, mainly for political reasons and heavy reliance from the public. After the Velvet Divorce in 1993, the Czech Republic did not have many social disturbances with the privatization.
III. Demonopolization and Privatization of the Power Sector
The power sector is considered to be a laggard in the demonopolization of the Czech economy along with other public sectors. It required a significant amount of time to privatize since it is a utility that the public heavily relies on, and a snap change over could lead to detrimental effects for the country. Other sectors that are the last to privatize are transportation, communications, education, and health care, among others.
Demonopolization process
To start off the process, in 1992, the energy monopoly was divided into a production/transfer company (ČEZ) and eight regional distribution companies (REAS). This led to ČEZ being the only production company and before the turn of the century, two-thirds of ČEZ was still owned by the state through the Fund National Property. About twenty-seven per cent of ČEZ was owned by other legal entities and the rest by individuals, creating a joint-stock company., The state also owned about forty-six per cent of the REAS. Looking at the amount held by the state, the initial division of the energy monopoly had some effect to demonopolize the sector, but was still heavily government-owned. Since 1997, there had been “no regulated process of privatization” yet to be agreed upon by the government. This was understandable, considering the government owned a monopoly. Privatization for the government meant a considerable financial loss, and therefore made the state more reluctant to do so. This also added to the electricity sector being one of the last economic sectors to be privatized.
Difficulties in price liberalization
It is difficult for the state to own a monopoly while at the same time regulating a monopoly. In owning a utility monopoly, the state has a conflict of interest: profit for itself, or the benefit of the consumer. This conflict of interest is evident with the poor pricing model that the government sets. In looking at the prices for electricity for industry versus households in 1996, the wholesale price in US cents/kWh was at 5.9, with household at 3.9. These prices do not reflect “real production costs,” where proper efficiency would be the inverse of higher wholesale electricity prices than household.
This price structure prevents the government from creating competition, a key aspect of a market economy. New participants would enter the wholesale business, and leave the ČEZ to the unprofitable household sector. Because of this, electricity prices are a parliament issue, leaving the government to decide how much and when prices are deregulated. Parliament making pricing decisions for electricity eliminates self-regulation in times of high or low needs. This situation needed to be reconstructed in order to fulfill the requirements of joining the European Union. The Czech Republic also needed to open up its borders to foreign competition, allowing others to supply energy to people. The notion of responsibility for the country to supply to the public had to be let go, going hand-in-hand with a full privatization of the energy sector.
Privatization of the sector
Later in the 1990s, more than twenty joint-stock companies from the REAS left over from the ČEZ were partly privatized even more through voucher privatization, selling to Czech and foreign parties with public tender. In 1999, the government purchased back those shares making it the majority stock holder of these distributing companies. Five of these eight REAS were then transferred to ČEZ in 2003 by the government in exchange for ČEZ’s stock in its transmission system operator, ČEPS. The process of deregulation called for the distribution companies to be reorganized in order for proper deregulation. By 2003, the restructuring of electricity companies finished up, and distribution companies merged. This also helped ease the operating costs of unbundling the sector.
The price of electricity is now set by the Decree of the Ministry of Finance, with regulation applying to households, other end consumers and distribution companies.
Changes in the prices can be proposed by the Ministry of Industry and Trade, with the Ministry of Finance making the final decision. The maximum prices had not corresponded to the actual costs of electricity from production and distribution. This led to a decision to increase the prices on July 1st of every year. The increase started at about fifteen per cent, up to on average twenty-four per cent. For the first time in 2000, the average price for households was higher than the industry by about nine and one half per cent. As of 2001, the regulation of prices switched to the authority of the Energy Regulatory Office.
IV. Present State of Power Sector
There are five sub-sectors of the Czech energy sector. These include coal, oil, gas, electric and district heating, all network utilities. The Czech’s focus is on mining, especially for coal, leading them to be self sufficient with their needs. The majority of the domestic energy sector for the Czech Republic consists of coal production, including both black and brown coal mines. The country also has minor oil fields, but imports most of its needs from Russia.
Looking specifically at the Czech’s electricity market, the suggested supply chain outline of the industry is as follows: Sources (natural gas, oil, coal, nuclear, etc), Producers (changes sources to power), Distributors (distributes to regional, national and international customers on the established grid), Suppliers (wholesale or retail), and last, the end users (industry and households).
On January 1st, 2006, the electricity market was fully liberalized, where ending users can now chose their supplier. Also, a few years in preparation for liberalization, the restructuring of the electricity companies finished up, with the final merging of distribution companies, and outsourcing of certain services and assets related to these services. Currently, the market size of the electricity sector is about 375.8 billion CZK (about US$20.6 billion). Within that, the ČEZ is by far the largest energy company in the Czech Republic, with its market share equaling forty-four and one half per cent. The ČEZ is defined as a company that deals with the generation, distribution and sale of electricity within central and southeastern Europe. Other activities that it is involved in are producing and transmission of heat, as well as mining brown coal and other raw materials. Currently, nearly sixty-eight per cent of outstanding shares of the company are still held by the Czech Republic government, with fourteen per cent held by investment managers. More than twelve per cent of the company’s outstanding shares are held by foreign investors. There are two other main competitors to the ČEZ: E.ON Group and PRE Holding Group. The E.ON Group formerly was Jihomoravská energetika, a.s. and Jihočeská energetika, a.s. E.ON is a power and gas company that services primarily Central Europe, Continental Europe, Nordic, the UK and the US Midwest regions.
Other companies of significance in the electricity sector include Strediceska energeticka a.s. and International Power Opatovice a.s. Strediceska energeticka is a distribution company serving retail and wholesale consumers in the Bohemian region. As of April 1, 2003, Strediceska energeticka became a subsidiary of ČEZ. International Power Opatovice is a subsidiary of International Power Holdings. It is an independent power company that generates, supplies and sells power and heat to the country. Currently it only holds less than one per cent of market share.
Prices for electricity still have yet to fully reflect proper efficiency for the sector. In 2005, prices for household were still cheaper than low-demand small businesses that used significantly more wattage. Yet with high-demand industry customers, prices do show a ripening sense of an efficient market. , It is clear the government still holds a majority interest in the company as well. While it has progressed in ten years, it is clear that the Czech electricity market still deserves some more time in order to be fully efficient in a market economy.
V. Conclusion
The transition that it took for the power sector to privatize was a bit of an anomaly compared to the rest of the Czech economy, as well as other transitional economies. This was only because of the length and the difficulty that it takes for a public utility to become fully deregulated. In dissecting the steps of the transition of the electric market, it has been a long and grueling process. It began with the overall push for privatization with the system of purchasing vouchers. The government had to slowly leave its interest in the biggest Czech electric company: ČEZ. The main difficulty that it had encountered was how to serve in the best interest for the country, yet make a profit, it being a large shareholder. In order to do this, it needed to bundle up both the production and the distribution companies to start the process of demonopolization. Consolidation saved money, and it also protected both the interest of the government and the consumer. To demonopolize the huge company, it did begin to unravel the supply chain and sell off its shares to the general public. The government then had to begin relinquishing its control over prices. By 2006, the sector became fully privatized with the allowance of end consumers choosing their supplier. This allowed competition between ČEZ and other international companies than harvested and produced electricity, as well as distribute.
In moving forward with the Czech economy, there are still a number of sectors that have yet to be fully privatized. While the specifics of the process of privatization are different for each public sector, the process remains the same. There will be the conflict in interest with the government being the regulator and the stockholder. There will be the issue of the government liberalizing price controls, while maintaining a reasonable level for the public. But in order to become a completely free market economy, these steps eventually will need to be done. Only time will tell if the Czech Republic will be able to fully “return to Europe” and close out the chapter on its communist past.
Exhibit 1
Table: Prices for electricity for Industry and Households in 1996 (US cents/kWh)
|
Country
|
Price in Industry
|
Price for Households
|
Ratio of price for households to that for the industry
|
|
Czech Republic
|
5.9
|
3.9
|
0.6
|
|
Hungary
|
4.9
|
5.6
|
1.1
|
|
Poland
|
4.4
|
7.2
|
1.6
|
|
Slovakia
|
5.0
|
3.2
|
0.6
|
|
Estonia
|
3.9
|
6.0
|
1.5
|
|
Latvia
|
4.5
|
5.1
|
1.1
|
|
Lithuania
|
7.0
|
4.0
|
0.6
|
|
Average in EU
|
7.0
|
15.0
|
2.1
|
|
North America
|
4.0
|
7.0
|
1.8
|
Source: Kočenda, Š.Č.a.E., Liberalization in the Energy Sector: Transition and Growth
Exhibit 2
Chart: Flow process from harvesting resources to the end user
Source: E. Lynn Root, Babson College, 2007.
Exhibit 3
Table: Regulated components of the price of electricity for eligible customers based on the voltage level (without 19% VAT) set for 2006
Source:
The Czech Republic’s National Report on the Electricity and Gas Industries for 2005
Exhibit 4
Table:
Average electricity prices to final customers based on Eurostat categories for 2005
|
Customer
|
Annual electricity consumption (kWh)
|
Electricity price w/o VAT (CZK/kWh)
|
Electricity price with VAT and other charges (CZK/kWh)
|
|
Households
|
3,500
|
2.21 Kč
|
2.63 Kč
|
|
Low-demand business customers
|
50,000
|
2.38 Kč
|
2.83 Kč
|
|
High-demand industrial customers
|
24,000,000
|
1.50 Kč
|
1.78 Kč
|
Source:
The Czech Republic’s National Report on the Electricity and Gas Industries for 2005
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