COMMENTARY: Power company Fortum becomes automat for price hikes

MONEY MATTERS

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By Heikki Arola
     
      The Fortum debate initiated by the Commerce Committee of Parliament focused on executive stock options, and hardly any time was spent on a truly interesting topic, namely the functioning of the electricity market in Finland and across the Nordic region.
      This is the issue that the Committee should have concentrated on.
      The developments in the Fortum share price and the subsequent rise in the value of the company’s stock options are, after all, just manifestations of weakly functioning markets. The Fortum management has been fortunate in the sense that no other Nordic countries have as yet decided to list their state-held electrical utilities on the stock exchange. Even municipalities have opted not to do so, with the exception of Espoo.
      Therefore, investors have been able to channel the rising price of electricity in the Nordic region solely through Fortum, as there are no other listed companies from the same field.
     
When inspecting the electricity market from a competitive perspective, the market does not withstand critical analysis in any area. Let us take electricity transmission as an example. This business is a perfect monopoly, which means that the company that owns the regional network can freely decide the prices it charges.
      Transmission prices are admittedly monitored in Finland by the Energy Market Authority, but it has few means of intervention in cases of overpricing.
     
At the end of the last decade, the Nordic region experienced several years with heavy precipitation. These rains lowered the price of electricity and frightened power-generating companies. As compensation for the changing competitive situation, they began to raise their transmission fees and fixed monthly charges. In Finland, Fortum has been particularly active on this front, and smaller electrical utilities have followed suit.
      This fact is evident when one reads Fortum’s annual reports. In 2001, Fortum’s operating profit from electricity transmission totalled 135 million euros, but last year the figure had climbed to EUR 258 million. The net sales in the segment have grown as well, but the operating margin improved from 29% to 37% during the years in question. This figure is astounding, and reflects how profitable the monopoly is.
      How does this practice of announcing one price hike after the next manifest itself in the field, where regular electricity consumers are at the end of the chain of payments?
     
One farmer from Southern Finland called me to explain.
      This farmer has a relatively large, 63-ampere supply to his farm. Fortum announced last summer that it would raise the monthly flat fee from 45 to 71 euros, no less than 58% in one go. On an annual level, the increase amounted to over EUR 300.
      An electrical utility that sells to the masses can get away with such price hikes that are seemingly small, but when the figures are multiplied by tens of thousands, the company enjoys direct additional revenue worth millions of euros.
      The farmer felt that the price hike was preposterous, but what can he do? Sue the company and face its regiment of lawyers in court?
     
The news has reported over the past few days that even the Centre Party is finally leaning toward drafting legislation on class action lawsuits. This is no wonder, given that messages like the one from the farmer are being heard from among their voters.
      In addition to the monthly fixed fee, Fortum has increased the price of transmission itself generously over the past few years. No cost-based reasons can be found behind the price hikes.
      Fortum has also focused on raising the fees on district heating in both Finland and in Sweden. The citizens of Stockholm have grown so upset that there is a campaign in the city to buy back the half of the district heating company that was sold away to Fortum.
     
Fortum published its interim figures just over a week ago. It reported that the operating margin for the entire group over the first three quarters of the year was 32 percent, meaning that the company was left with 32% of its net sales as operating profit. In electricity production, the profitability was even better, at 38%.
      These figures are staggering, and reflect the nature of the business.
      The equivalent figure for Nokia is generally around 15 percent, elevator and escalator company Kone manages less than ten percent, and forest industry giant UPM less than 5%. They operate in fields where competition abounds.
     
Helsingin Sanomat / First published in print 30.10.2005


Previously in HS International Edition:
  Fortum reports good result in areas where it holds monopoly (21.10.2005)

Links:
  Fortum Interim Report January-September 2005

HEIKKI AROLA / Helsingin Sanomat
heikki.arola@hs.fi