To the surprise of few, including probably CEZ itself, Albania's power regulator on January 21 followed through on its threat to revoke the Czech utility's distribution license in the country.

The move is the latest twist in a long-running saga that has seen CEZ at loggerheads with the Albanian government since it bought, with World Bank backing, the distribution company for EUR102m in 2009 as a way to help improve the sclerotic power sector in the country. Analysts say the issue will almost certainly harm Albania's reputation as a foreign investment destination.

The regulator board voted 5-0 to revoke the license of CEZ's loss-making local subsidiary CEZ Shperndarje, arguing that CEZ had breached its license by failing to limit electricity losses in the distribution system, which led to the company's failure to import the required amount of power under Albanian law.

The regulator did not specify the amount it would seek in damages from CEZ, but the Albanian government has estimated the cost of the company's failures at $1bn. "The main thing is they could not control the power losses and that's the main problem That means they could not control debt and they could not control problems in the industry," Ramadani told Reuters after the hearing.

However, CEZ counters that it has been forced to run the company at a loss due to a hike in wholesale prices from the state-owned generator while not being allowed to raise consumer tariffs. Furthermore, many households and businesses, both state and private sector, simply dont pay their electricity bills. In November, CEZ cut off several of the country's water companies for non-payment of bills, but the authorities went to the politically pliable courts, which forced the company to hook them back up.

CEZ criticized the regulator's decision and said that it would seek international arbitration while it looks to sell the subsidiary, which is putting a drag on the group's earnings. In November, CEZ trimmed its 2012 profit outlook because of the losses at the Albanian unit. "Such a move is in violation of local laws and CEZ will file a formal protest. At the same time, the company will take initial steps toward international arbitration," CEZ said in a statement.

The authorities are blocking any sale by CEZ until it coughs up compensation for the alleged breaches. The regulator also used Albania's energy law to put the CEZ unit in temporary administration and on January 21 appointed a new manager to oversee the business during the dispute with the company.

"We see the news neutral [for CEZ], as it was more or less expected," says Petr Bartek of Ceska Sporitlena, who notes that there is a EUR60m guarantee provided to CEZ from the World bank, which should cover most of the losses later on depending on the result of the arbitration.

Source: bne