ČEZ initiates international investment arbitration against Albania

ČEZ today notified the Albanian party of its decision to seek compensation for damage incurred due to its non-protected investment in the power distribution company of CEZ Shpërndarje, with the International Arbitration Tribunal according to the Energy Charter Treaty.

The Treaty, negotiated in 1995 and ratified by both the Czech Republic and Albania, governs the protection of international investments in the energy sector. The arbitration proceedings have been formally initiated by sending a “notice of arbitration.” However, this does not prevent a potential out-of-court settlement between the parties.

In early February, ČEZ informed the Government of Albania of its intention to initiate an arbitration procedure following the Albanian regulator’s decision of January 21 to revoke the licence of CEZ Shpërndarje. The regulator subsequently appointed an administrator who has taken control of the company under the regulator’s supervision, including all decision-making powers and responsibility for its operations. The administrator has therefore acquired all rights of the corporate statutory bodies.

The Albanian company has already been excluded from the ČEZ Group’s consolidation entity; therefore, the company’s performance no longer has any effect on the Group’s overall results.

The situation in Albania got more complicated early in 2012 when, due to the drastic drought of last year, KESH, as the Albanian state-owned power producer, had to import power from abroad at much higher prices, which brought it on the verge of bankruptcy; the company would not have survived without receiving aid from the Albanian Government. The local Government tried to resolve the situation with a decision unprecedented in Europe: All costs were placed on the shoulders of ČEZ Shpërndarje. Therefore, as of January 1, 2012, the local regulator ordered that the price charged by KESH to the foreign investor should be 91% higher. Following intensive negotiations, this negative impact could be partially alleviated by the regulator’s new decision to reduce the price of input power supplied by the KESH state-owned power plants from 2,830 to 2,200 ALL/MWh, which lowered the year-on-year price growth from 91% to 49%. Furthermore, a study was approved that determined the initial value of bad debt. However, the Albanian tax authority’s order imposing a penalty of ALL 4 billion (approx. EUR 28 million) for outstanding taxes and penalties and another ALL 430 million (approx EUR 3 million) for failing to meet the agreed electricity import levels has brought yet another turn in the matter. In early October 2012, the ČEZ Group changed the staffing of the Supervisory Board and the Board of Directors of ČEZ Shpërndarje, replacing the original personnel with independent experts in order to calm down the heightened style of negotiations. On Friday, November 16, after a series of unsuccessful negotiations with the Albanian party, ČEZ Shpërndarje decided to discontinue power supply to all Albanian state-owned waterworks that have in the long run failed to settle their bills for power. However, the Albanian Police began to obstruct the steps needed to disconnect the facilities from power and even arrested six employees of ČEZ Shpërndarje based on a crime report filed by the waterworks on the grounds of alleged misuse of authority. On the following day, based on an unprecedented court order, ČEZ Shpërndarje was forced to reconnect again all the waterworks and other governmental institutions. On January 21, 2013, the Albanian regulator revoked the relevant license for CEZ Shpërndarje and appointed an administrator who, under the regulator’s supervision, has taken over the company’s management, including all decision-making powers and responsibility for the company’s operations, thus assuming the rights and powers of the corporate statutory bodies..

Barbora Půlpánová, ČEZ’ Spokesperson

May 2013