Fortum reports good result in areas where it holds monopoly

District heating and electricity transfer very profitable

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Most of the result of the energy concern Fortum is comprised of activities in which the company enjoys a total monopoly. These include transmission in the electricity network, and the sale of district heating.
      In its interim report for January-September 2005, which was published on Thursday, Fortum reported that it derived most of its profit from electricity generation, but that areas in which it has a monopoly also performed very well.
      A Fortum press release states that in the first nine months of this year the company made a business profit of EUR 168 million from the transfer of electricity, accounting for some 33% of the company's turnover in this sector.
      At the same time, district heating yielded a profit of EUR 156 million, showing a margin of 21% of turnover.
     
Electricity production and wholesale sales brought EUR 557 million in profit for the nine months to the end of September, and 38% of turnover. The figure is high, and reflects the high wholesale price of electricity. Such a high profit margin can rarely be achieved in fields where there is real competition.
      The prices of electricity transfers and district heating could come under pressure from officials and politicians soon in both Finland and Sweden.
      In Sweden, some politicians are becoming increasingly angry at the constantly rising prices of district heating - an area where Fortum has a monopoly. Prices there have risen by 40% in the past four years.
      Stockholms Värme, the district heating company in Stockholm, is owned 50-50 by Fortum and the City of Stockholm.
     
In Finland, Asta Sihvonen-Punkka, head of the Energy Market Authority, has said that district heating should be brought within the realm of price controls, because there is a potential for significant overpricing.
      The company is in a position to pass the costs of electricity production onto district heating customers in order to be more competitive in the electricity market.
      Officials in Sweden and Finland are also hoping to tighten their monitoring of the lucrative business of electricity transmission; in Finland new rules on fees came into force at the beginning of the year. The Energy Market Authority has determined that a return of about five percent on invested income is reasonable in electricity transmission.
     
Fortum sells more district heat in Finland than it does in Sweden, whereas in Sweden, electricity transmission is the larger of the two.
      Fortum's electricity generation and wholesale sales showed good profits, which was not unexpected under present conditions.
      A company in Fortum's position is able to get a positive return on electricity, because much of its production is based on nuclear power and hydroelectric power, but customers are charged according to the production costs at coal-fired power plants.
      Other Nordic producers, Sweden's Vattenfall and Norway's Statkraft, do the same. There is no real price competition on the wholesale market, and profits have been boosted by the trade in emissions.
      In the first nine months of last year Fortum produced approximately as much electricity in Finland and in Sweden, but now the focus is shifting to Sweden, where the company has more hydroelectric generating capacity.
     
Fortum CEO Mikael Lilius noted when he announced the result that the state budget proposals in both Finland and Sweden include calls for new electricity production taxes. He said that if they are enacted, Fortum predicts that its production costs would grow by about EUR 60 million next year.


Previously in HS International Edition:
  Fortum Board has powers to alter stock options procedures (20.10.2005)
  Fortum management to keep stock options; no action in Parliament (14.10.2005)

Links:
  Fortum Interim Report January-September 2005

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