Hungary cuts household energy prices by 10 pct

Wed Dec 12, 2012 9:34am EST

Related Topics

* Gas, electricity, heating prices to fall by 10 pct from Jan-govt

* Mostly foreign utilities to pay costs of measure

* Price cuts could hit investment in sector, distort market-analyst

* Energy prices politically hot issue ahead of 2014 elections

By Krisztina Than

BUDAPEST, Dec 12 (Reuters) - Hungary's government approved a 10 percent cut in household energy prices from January and said the country's mostly foreign-owned utility companies would have to pay the cost.

"The government discussed and approved today a 10 percent reduction in household gas, electricity, and district heating prices, which ... will take a very significant burden off Hungarian families," government spokesman Andras Giro-Szasz told a news conference on Wednesday.

"Service providers have to bear the burden (of the measure)," he added.

The price cuts are the latest in a series of interventionist measures and unorthodox policies by the Hungarian government in the past three years, including Europe's biggest tax on banks and windfall taxes on energy, retail and telecommunications firms.

Hungary's utility sector is mostly foreign owned, with the biggest players including Germany's RWE and E.ON AG and France's GDF and EDF.

"A further burden on the already loss-making segment could make its operation practically untenable," the communications chief of GDF Suez's Hungarian unit, Andrea Panczel said in an emailed reply to Reuters questions last week.

Earlier this year, Prime Minister Viktor Orban, whose public support has suffered from domestic austerity and high unemployment, said he wanted to transform household energy distribution into a "non-profit activity".

Orban faces elections in 2014, and gas and electricity prices are a politically sensitive issue.

Giro-Szasz said the price cut would affect close to 4 million households in the central European country of 10 million people.

He also said the foreign companies that bought Hungary's energy sector from the government in 1995 have made 350 percent profit on their investments since then, generating annual average profits of 20 percent over the past 17 years.

"Those making profits in the utility sector will have to make do with lower profits," the prime minister said last month.

His government, which is struggling to keep the budget deficit low while the economy is in recession, has already raised the tax on power companies' profits to 50 percent effective next year, though allowing companies to reduce that rate by making investments.

DISTORTING THE MARKET

Analysts said the energy price cuts would curb inflation next year but could hit investments in the energy sector.

Attila Vago, an analyst at Concorde Securities said the price cuts would affect about one-third of the total market and the question was whether utilities could offset the cuts in the rest of the market.

"They won't be able to, which means their losses will rise, their capital will decrease and they will not invest in this kind of regulatory environment, which could lead to supply security problems in the longer term," Vago said.

"By intervening, the state distorts the market, seriously distorts the allocation of resources, and these kinds of games do not end well."

As part of the government's attempts to take control over energy prices, Hungary agreed at the end of last month to buy the local gas storage and trading units of E.ON AG. (editing by Jane Baird)

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