On the other hand, utility companies that have a more diversified revenue and funds from operations (FFO) stream, including their own hydrocarbon exploration and production, like Poland's Polskie Gornictwo Naftowe i Gazownictwo S.A. (PGNiG), or gas transmission business like Slovakia's Slovensky plynarensky priemysel, a.s. (SPP, rated 'A'/Stable), are more likely to be able to absorb the impact of the challenging regulatory environment from the credit perspective.
Power generators in some CE countries, like Slovakia's Slovenske Elektrarne, a.s. ('BBB-' (BBB minus)/Positive), are also indirectly impacted by retail price regulations as lower tariffs for household customers charged by power suppliers are partially reflected in the determination of the electricity price paid in bilateral contracts between generators and suppliers. As a result, the increasing cost of generation due to higher coal and gas prices and/or tighter power supply/demand balances may not fully pass through to the suppliers under the bilateral contract. This reduces the generators' FFO at a time when considerable investment needs to replace and/or to modernise ageing generation capacity are appearing throughout the region.
The regulatory environment, and hence impact of changes, varies considerably among CE countries. For example, the Czech Republic has one of the most transparent regulatory systems, which is reflected in the rating for the country's dominant utility CEZ, a.s. ('A-' (A minus)/Stable). The regulatory regime in Slovakia, which improved substantially between 2000 and 2005, has recently seen increased political pressure since the 2006 elections - the Slovak government has become more influential in setting gas and electricity prices for social protection reasons by changing the law and increasing its influence on the Slovak regulatory office. Under the regulatory system in Romania, some gas suppliers have reported losses as gas tariffs for retail customers fail to fully reflect costs. In Bulgaria, retail electricity prices approved by the regulator do not fully cover the cost of power suppliers. In Poland, the regulatory office is considering full liberalisation of electricity prices for households from 2009 so that prices will be set on a cost-plus basis. This would improve the financial position of power suppliers, distributors and generators ahead of the anticipated spike in capital expenditure over the next five years.
Retail customers in CE have seen utility prices soar in the past several years as tariffs started to increase to reflect increasing costs, following a period of artificially low electricity and gas retail prices in the 1990s. Tariffs for consumers have also been raised to remove cross-subsidies from other segments, especially the corporate and industrial clients segment. A spike in wholesale electricity prices as well as crude oil and natural gas prices since 2005 has made this process even harder for households. Fitch notes that record crude oil prices in June and July this year will only be reflected in higher prices of gas imported from Russia in Q408 and Q109, due to a time lag embedded in the price-setting formula in supply contracts with OAO Gazprom (rated 'BBB'/Stable).
