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To the surprise and dismay of foreign investors and proponents of market competition, Poland's outgoing government announced on June 7 changes to its 2003 privatization plan for the power sector which will allow vertical consolidation of power plants with distributors.

The ruling by the leftist SLD-led government took the market by surprise not least because it is set to be voted out of office at parliamentary elections, scheduled for Sep 25, and will thus leave the implementation of the plan to the next government, expected to be a coalition dominated by the opposition center right.

The text outlining the changes that was released by the government office argues that vertical consolidation will help create strong national energy groups capable of competing both domestically and in the wider European market.

The consolidation of producers and distributors should generate more funds for the further development of the Polish power sector, the government said. It also said that sector restructuring would run smoother once long-term power purchase contracts between producers and the state grid company PSE are elimiated though it did not say when this was likely to occur.

The first such mergers are likely to see the BOT power complex comprising the Belchatow, Opole and Turow coal-fired power plants swallow the northern distribution company, Energa, formerly known as G-8, with southern Polish power giant PKE lined up to take Enion.

Opponents of the plan argue that vertical integration will favor only the biggest groups, create new monopolies and result in price increases. Marcin Kolasinski, an official at the anti-monopoly office, says the change will favor large capital groups. "Smaller producers that will not get distributors may have problems with the sale of electricity," he said. "No simulation plan was carried out to find out what impact the consolidation might have on consumers."

Whether the strategy survives in its current form is quite another question and will depend on the outcome of the elections. The two parties leading public opinion polls and widely expected to win the elections -- the more radical Law and Justice (PIS) party and its likely coalition partner Civic Platform (PO)-- significantly do not share the same views in terms of energy sector reform.

Kazimierz Marcinkiewicz, the PIS official in charge of the economy, says his party favors vertical consolidation. Only the largest producers of electricity, PKE and BOT, should control distribution, in his party's view, and the government should retain a majority stake in all assets. The PO in contrast wants to sharply reduce the role of government in the economy and thus favours the sale of majority stakes to investors.

The government, meanwhile, vowed to complete the privatization of power sector assets by 2006. The list of assets to be sold off over the next two years includes four regional distributors -- Enea, Energa, Enion and EnergiaPro -- four large thermal power plants -- Ostroleka, Dolna Odra, Kozienice, the sale of which is already under way, as well as PKE -- and the Tychy, Zabrze, Lodz, Bytom, Bydgoszcz, Legnica, Lancut and Knurow CHP plants.

The new strategy also foresees continuing the sale of remaining state holdings in companies already privatized. Among those mentioned were the Krakow, Bedzin, Bialystok, Zielona Gora and Torun CHP plants, and the Silesian distributor, GZE, majority owned by Vattenfall. "Foreign investors will have priority to purchase remaining parts of stakes in the privatized companies," said the government.

This article was first published in Platts EU Energy Country Supplement on Poland. Request your free trial now to EU Energy.