UPDATE 1-Bulgaria starts process to revoke power distributors' licences
* Dispute over companies' dues to state provider
* Companies have 14 days to respond
* Row could hurt investment climate
* Government faces election in May (Adds quotes, details, background throughout)
SOFIA, March 19 (Reuters) - Bulgaria's energy regulator on Wednesday started a process to revoke the operating licences of three foreign-owned power distributors in an escalating row that could damage investment in the European Union's poorest country.
Austria's EVN, Czech firm CEZ and Energo-Pro were given an ultimatum to pay some 318 million levs ($226.47 million) owed to state power provider NEK by Wednesday or risk losing their licences.
The regulator gave the companies have two weeks to submit written comments on its decision.
The companies have denied any wrongdoing, arguing that NEK - which had debts exceeding 2 billion levs last year - failed to repay them the money owed for wind and solar power installations.
Stripping the companies of their licences would be a blow for a sector already hit by the Socialist-led government's decision to slash electricity bills twice since taking power in May. The cuts have squeezed foreign distributors as well as local power producers and caused NEK's debts to rise.
Cutting prices could shore up the government's popularity ahead of a tight European election race in May. It could also help avoid a new round of street protests against high utility bills, which toppled the previous, centre-right government in February last year. Such bills eat up a large part of household incomes in the country.
Yet the row also threatens to damage investor sentiment at a time when the country's economy is slowly recovering from a deep recession.
"There is no way this move will be welcomed by investors," said Kaloyan Staykov of the Sofia-based Institute for Market Economics. "The problem was created by NEK and I do not understand why NEK blames the power producers."
HISTORY REPEATS ITSELF
The government has had various spats with energy companies recently. In December, it imposed a surprise 20 percent charge on wind and solar plants, squeezing many foreign investors that had earlier poured into the Balkan state to take advantage of generous subsidies.
Companies said the charge, which was pushed through parliament without ever being debated, would cause bankruptcies and scare off foreign investors, at a time when foreign direct investment has fallen sharply.
Staykov said the dispute would likely follow a similar one last year, when the previous government had also threatened to strip CEZ of its licence amid allegations that it had bypassed public procurement laws. It later dropped the move.
"We have 14 days to provide written comments but I can tell you that we categorically deny any wrongdoing that could theoretically lead to the starting of a procedure for revoking our licence," a Sofia-based CEZ spokesman told Reuters.
Energy-Pro said it would send a statement later on Wednesday.
"EVN Bulgaria has nothing to worry about, we strictly observe the Bulgarian laws," EVN Bulgaria's spokesman Ivailo Velkov said.
The government faces European elections in May, where a poor showing could spark renewed calls for a snap general election. The nationalist party Attack, which holds the balance of power in parliament, wants the three companies nationalised.
The energy regulator has fined two of the companies and will fine CEZ by the end of this week. CEZ and EVN paid NEK part of the money they owed as a goodwill gesture on Tuesday.