We shall soon discover who really controls CEZ –its majority owner or EPH.


Two weeks ago, I examined the relationship between CEZ and EPH, and their coordinated efforts to frustrate Czech Coal. I attempted to answer the question of why EPH would want, and even help, CEZ to preserve its monopsonic power over lignite, the most important fuel source for both firms.

I need not have bothered. Today, EPH’s CEO Daniel Kretinsky answered the question himself.

In an interview in HN, Kretinsky said that if Czech Coal and CEZ agree on a coal price of Kc 55-60/GJ, "it would wipe out CEZ’s competitors and destroy all independent energy production."

The last time I checked, CEZ had no competitors other than EPH, and EPH, as I have shown elsewhere, is the friendliest competitor anyone might wish for. And this is the point. EPH enjoys a parasitic relationship with CEZ, free riding on CEZ's market dominance.

For as long as CEZ is able to exert its significant buying power over lignite, and to distort access to this critical fuel source, it is able to maintain its dominant position and the abundant economic rents that result.

EPH is granted privileged access to these rents in return for its support of CEZ. By far the most important rent is the artificially low price of lignite. This is the reason for the handsome profits enjoyed by EPH and CEZ.

Should we take Kretinsky at his word when he says that, if Czech Coal and CEZ agree on a coal price of Kc 55-60/GJ, it would wipe out EPH?

Yes. This is because, if CEZ and Czech Coal do reach an agreement on a higher price for the lignite that Czech Coal supplies CEZ’s flagship lignite-fired power plant at Pocerady, it would drive up the price of all local lignite on the open market.

This would indeed ‘wipe out’ EPH’s margins, and quite possibly a heavily leveraged EPH, which is in the middle of an impressive spending spree financed by debt.

But why would CEZ and Czech Coal agree? They would agree because the cost of not agreeing is likely to be higher for both. Of course, CEZ would like to force Czech Coal to sell its lignite at the lowest price. But failing that, an increase in the price is the next best outcome for both.

And this would be a disaster for EPH.

Kretinsky warns that if Czech Coal and CEZ do agree on a higher coal price, EPH will appeal to the competition authorities. Let him. An appeal is unlikely to succeed for the simple reason that such an agreement shows that the market is working at last, not that it is being abused.

It is CEZ's behaviour today that must be considered an abuse of market power. If CEZ's own lignite was freely-traded, then, as its price increases, it would be sold on the market, instead of being delivered only to its owner, CEZ.

But CEZ's Severoceske doly does not sell on the market in response to price increases. And that is the cause of the grievance Czech Coal has against CEZ, and of the fat margins on which Daniel Kretinsky has come to depend.

The next few weeks will show who really controls CEZ. If CEZ reaches an agreement with Czech Coal, we may conclude that the board of CEZ is acting in the interests of its shareholders. Well, miracles do happen!

And if CEZ does not reach an agreement with Czech Coal, we may surmise that the board is acting in the interests of EPH.