Ministry of Finance deconstructs prime minister's Elekrilevi arguments

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Kaja Kallas appearing on an earlier interview with ETV+, ERR's Russian-language TV channel.
Kaja Kallas appearing on an earlier interview with ETV+, ERR's Russian-language TV channel. Source: Margarita Mironova/ERR

The Ministry of Finance conducted a review of the main points Prime Minister Kaja Kallas' (Reform) office has highlighted in justification of a planned separation of electricity grid maintenance form Elektrilevi from state-owned generator Eesti Energia, and found aspects of each point which it criticized, ERR reports.

ETV is to broadcast an interview with Kallas on Tuesday night – postponed from last week due to the prime minister being unwell at that time.

The Prime Minister's Office and the Ministry of Finance have exchanged communiques, in which five possible talking points relating to the Elektrilevi/Eesti Energia situation were brought out, including those relating to EU regulations.

ERR had obtained the communication exchange, at that time made public via the Ministry of Finance document register (see below). However, at around 10 a.m., within an hour of publication of ERR's Estonian news article citing the document, it was removed from the site. A couple of hours later and following ERR's query about the disappearance of the documentation, it reappeared on the ministry's website.

"Please review whether the points below need to be adjusted/completed," government media advisor Piret Tipner had written to the Ministry of Finance on January 2. 

The ideas, about which advice was sought, all concerned the separation of Elektrilevi and Eesti Energia, while the Prime Minister's team had hoped that the Ministry of Finance would add some analysis to them, ERR reports.

First [prime minister's office] discussion point

"I (ie. the prime minister – ed.) have been of the opinion for many years that Elektrilevi must be separated from Eesti Energia."

Ministry of Finance comment:

Based on what argument? If the desire is to resolve an apparent conflict of interest, where the electricity generator would not have a theoretical advantage over other electricity generators and sellers, and so that it does not receive information about consumers or the advantages of network development based on its own production, then this should also be added.

Simultaneously, it would also be true to state that not a single violation has been initiated by any supervisory authority regarding any such theoretical violations. 

In addition, it would be right to mention that in order to ensure Elektrilevi's neutrality, the state has recently made legislative changes whereby no employee or manager from elsewhere in the Eesti Energia group can sit on the Elektrilevi board, while Eesti Energia cannot decide on any Elektrilevi- specific investment.

Second discussion point

"The 2019 EU directive stipulates that a distribution network operator with more than 100,000 consumers must be separated from activities not related to that distribution. At the same time, this company may no longer engage in the provision of free market services."

Ministry of Finance comment:

Indeed, the directive requires the existence of a separate legal body for a distribution network of this type, but allows for an unambiguously integrated group, where the independence of the distribution network from the parent company is guaranteed. 

From a legal and practical point of view, all the conditions are met in Estonia at present, including the structure of the [Eesti Energia] group today; the Competition Authority (Konkurentsiamet) has not officially found any problems which would necessitate its issuing proscriptions to Eesti Energia.

Third discussion point

"According to this [EU] directive, Elektrilevi must have assets independent of Eesti Energia at its disposal."

Ministry of Finance comment:

In order to ensure Elektrilevi's independence of, a model independent council has recently been implemented, via which all decision-making authority over the composition/command of assets lies within Elektrilevi. 

At the same time, Elektrilevi has the powers to decide which of its services will be outsourced and which will be performed in-house; this will include the ability to decide independently which activities Enefit Connect wants to bring back with this reorganization, and which Connect has no right to refuse.

Fourth talking point

"Currently, the situation is one whereby Eesti Energia can take out loans more cheaply [than it could do alone] thanks to Elektrilevi's zero-risk assets. This money, however, is not returned to the electricity grid, but goes towards Eesti Energia's riskier investments. This is also one of the reasons why the necessary investments in power lines have not been made."

Ministry of Finance comment:

Eesti Energia can get cheaper loans due to the fact that the group is stronger together, i.e. the risks are better mitigated this way than they would be by the two companies separately.

The statement that Elektrilevi is a zero-risk business is not right, because the interest rate reflects the risk level of the activity, and when lending within the group, Eesti Energia is obliged to give loans to subsidiaries at market-level interest, based on their risk specificities. 

As a result, interest rates for Elektrilevi's loans are lower than the interest at which Eesti Energia itself has lent money to the entire group.

Elektrilevi's risk-level is lower than the group's other activities thanks to the regulated price mechanism, which should ensure a reasonable return in addition to covering costs. 

At the same time, this tariff methodology is such that it does not automatically guarantee costs are covered.

A "good" example of this came in 2022, when, due to the rise in the cost of electricity, Elektrilevi has incurred approximately €50 million more costs and will end the financial year with a loss; due to the methodology, tariffs can be adjusted with a 12-month reference. However, during this grace period, the group must continue to ensure the financing of Elektrilevi.

In line with the owner's (ie. the state – ed.) expectations, the investment in power lines is set as a goal of continuous quality growth, plus the requirement to reduce failures. At the same time, a parallel expectation is that tariffs remain competitive from the point of view of the Baltic Sea region, in order to ensure the competitiveness of the Estonian business environment.

There have not been any problems with the planning of investments in financing sources – if more had been invested, the transmission tariffs would have increased by the same degree.

It is also important to note that all network companies must prepare network development plans, in which they plan the required investments. These development plans are coordinated by the Competition Authority, which has the right to demand changes to the development plan if they see that it would not guarantee network quality. To date, the Competition Authority has never failed to coordinate the development plans regarding the Elektrilevi network.

Fifth discussion point

"In the summer of 2021, we in the government made a decision to separate Elektrilevi from Eesti Energia. Since then, analysis has also been completed on this, which offers different solutions to this separation process."

Ministry of Finance comment:

It is right to talk about this analysis once the government has had time to discuss it.

The correspondence posted on the Ministry of Finance's document register (subsequently removed from the site). Source: ERR

ERR's online news in Estonian filed a query with the Ministry of Finance following the removal from its website of the online document containing the five discussion points and the ministry's analysis.

Head of the ministry's comms department Elina Kink responded as follows: "The Ministry of Finance is not in opposition to the prime minister in any way, and the information in question constitutes a busy exchange in which, as always regarding important topics, both sides and arguments are outlined. It is the case that normally, this would not be intended for public consumption, and the information was made public due to human oversight. That said, there is nothing mysterious in it either – a news reader would simply lack the context."

As noted the documentation subsequently reappeared on the site unchanged.

Just before Christmas, Kallas had accused Eesti Energia of dragging its heels over the proposed separation of Elektrilevi.

The 2019 EU directive stipulated that a distribution network operator (Elektrilevi in this case) which has more than 100,000 consumers (Elektrilevi has over 533,000 customers) must be separated from all activities not related to distribution, while the company may also no longer engage in providing free market services.

Winter storms in mid-December and again in early January revealed how vulnerable the electricity overhead cable system is in places, not for the first time.

The current Minister of Finance is Annely Akkermann (Reform).

ETV's interview with the prime minister will be broadcast at 9.40 p.m. Estonian time, Tuesday.

Editor's note: This piece was updated to include information on the documentation's appearing, disappearing then reappearing on the finance ministry website.


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Editor: Andrew Whyte, Urmet Kook

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