SERBIAN POWER STILL A TURNOFF FOR KOSOVO

UNCLAS SECTION 01 OF 02 BELGRADE 000522

SIPDIS

SENSITIVE

E.O. 12958: N/A
TAGS: PREL PGOV ENRG ECON SR MW YI UNMIK
SUBJECT: SERBIAN POWER STILL A TURNOFF FOR KOSOVO

SUMMARY
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1. (U) Econoffs met with Assistant Minister of Energy
Aleksandar Vlajcic and Head of the International Cooperation
Unit Miroslav Kukobat at the Ministry of Energy on March 1 to
discuss the recent energy crisis in Kosovo and the problems
associated with Serbia's offer to export electricity.
explained that the Serbian offer was "unconditional" because,
as a donation for a humanitarian crisis, it should benefit
those experiencing the greatest electrical outages, but he
acknowledged that EPS did request that the power be targeted
to certain areas. Kukobat also discussed Serbia's goals in
regards to energy for the upcoming Kosovo negotiations. This
discussion usefully summarizes the Serbian view of the Kosovo
power supply issue. END SUMMARY

RECENT ENERGY CRISIS HIGHLIGHTS EXISTING PROBLEMS
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2. (U) Since June 1999, state-owned Electric Power Industry
of Serbia (EPS) has been unable to manage its facilities in
Kosovo; these facilities are under the management of UNMIK
and the Kosovo Energy Corporation (KEK). Customers, for a
variety of reasons, are not paying their electricity bills to
KEK. The collection rate is around 30 percent, and 90
percent of that is coming from international organizations
situated in Kosovo. Recognizing poor collection rates as one
of the main causes of the energy crisis in Kosovo, KEK
introduced the "ABC program" in December 2005 in order to
reward neighborhoods that pay their electricity bills. Under
the program, areas that pay their bills would receive a more
reliable supply of electricity. Non-paying areas would
receive limited amounts of electricity as available.


3. (U) The controversy peaked at the beginning of 2006 when
the president of the Coordination Center for Kosovo (CCK) in
Belgrade, Dr. Sanda Raskovic-Ivic, accused KEK and UNMIK of
distributing electricity on an ethnic basis, with Kosovar
Serbs experiencing the longest blackouts. On the other hand,
Joachim Ruecker, Deputy Special Representative of the
Secretary General (DSRSG) of the United Nations Mission in

SIPDIS
Kosovo, accused Serbia's transmission system and market
operator, EMS, which is controlled by EPS, of non-cooperation
in providing transit for electricity from neighboring
countries for Kosovo.


4. (U) Kosovo's energy problems are longstanding. Issues
include poor collection rates and Kosovo's low generating
capacity. The international community has provided EUR 1
billion to improve the energy system in Kosovo, but problems
persist. After 1999, some 7,500 Serbs lost their jobs in the
power company. Currently, power plants are generating only
500 MW, compared to a total installed capacity of 1,500 MW in
Kosovo, according to EPS.


5. (U) According to Assistant Energy Minister Vlajcic, this
problem was recognized by the British company formerly
engaged by UNMIK to operate generating plants there. The
company had offered jobs to former Serbian employees, but it
could not guarantee their safety. After the British pulled
out, Irish company ESBI was engaged by UNMIK, but believes
that only minor improvements were made.


6. (U) In regards to KEK's accusation of non-cooperation by
EMS in getting electricity through Serbia, Vlajcic attributed
the problem to pre-existing contracts. The transit of
electricity from other countries is planned annually. In the
event of a crisis, such as a lack of electricity due to cold
weather, KEK would not be able to draw a large amount of
electricity from other countries because the transmission
capacity has already been reserved. However, some 300 MW of
the EMS transmission capacity is always reserved for KEK, and
UNMIK need only notify EMS in a timely manner about KEK's
needs. Vlajcic says EPS regularly conveys power for
KEK/UNMIK on a commercial basis.

UNCONDITIONAL DONATION OR CONDITIONAL OFFER?
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7. (U) The GOS offered various solutions for what it called a
"humanitarian catastrophe" in Kosovo. According to Vlajcic,
in 2005 it offered to pay some debts and future electricity
bills for the Serbian population. In addition, it offered to
dispatch electricity in advance for Kosovo, with repayment to
EPS later as collection improved. Since the electrical
system previously was part of EPS' system, EPS workers from
Kosovo would know how to maintain it, opening the possibility
of re-employing Serbian workers, he argued. Nevertheless,
Vlajcic said that UNMIK and KEK rejected these offers.


8. (U) At the beginning of 2006, the same "unconditional"
offer to provide 50 million KWh daily for the most vulnerable
areas (meaning those primarily inhabited by Serbs) was still
valid. Only after the Sitnica River flooded key power plants
in Kosovo in late February and rendered some generating units
inoperable, UNMIK accepted the GOS offer to deliver 50
million KWh per day free of charge. Taking into
consideration the needs of the Serbian market, the offer was
valid from February 24 until March 24.


9. (U) Radomir Naumov, Minister of Energy and Mining, spoke
with Ruecker on February 2 about the GoS's January 27 offer
of "humanitarian aid", but Ruecker rejected it and insisted
that the Kosovar Serbs sign contracts with KEK. After the
flooding, however, Ruecker accepted the offer on February 24.
However, not a single KWh was dispatched to Kosovo. Vlajcic
contended that, because the situation is a humanitarian
crisis, Serbia should be able to control how its "donation"
of electricity is used, as would any other donor. The GOS
insisted that UNMIK guarantee that electricity would be sent
to the most vulnerable areas. Even though such areas are
primarily Serbian, the GOS asserted that Albanians in such
areas would benefit, as well.


10. (U) However, UNMIK would accept only an unconditional
offer, without providing a guarantee as to where the
electricity would be used. UNMIK insisted on a commercial
solution that would require Serbs in Kosovo to sign
commercial contracts with KEK and apply for subsidies or
other forms of relief. For Serbs in Kosovo, that solution
was not acceptable for political and economic reasons,
Vlajcic said. Signing a contract with KEK would mean that
they were accepting KEK as the only legal supplier of
electricity in Kosovo, Vlajcic said.

SERBIAN GOALS FOR KOSOVO NEGOTIATIONS IN REGARDS TO ENERGY
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11. (SBU) Miroslav Kukobat informed Econ FSN on March 20 that
he was named Serbia's chief negotiator for energy issues in
the Kosovo talks. Kukobat said that the GOS will insist on
stabilization of the system and supply for all consumers in
Kosovo. EPS has offered to pay for electricity to the Serbs
there while these issues are being resolved. Specifically,
the GOS will demand an uninterrupted (24 hours/day) 70 MW
supply of electricity for Serb enclaves during the winter
months. For reasons mentioned above, EMS still considers the
capacities in Kosovo as a part of its own system and
therefore owned by Serbia. In addition, Serbia paid 135
million dinars (about USD 1.9 million) in 2005 to
international financial institutions to service loans to EPS
companies in Kosovo. Kukobat indicated the Serbia was not
inclined to push its previous proposal for a separate, Serb-
controlled power distributor in Northern Kosovo.


12. (SBU) The GOS will also demand that a solution be found
for the 7,500 former EPS workers. Some 6,000 of these
workers are still on the EPS payroll. Meaningful employment
should be found for these workers, with guarantees of their
safety, Kukobat said.


13. comment. EPS managers make the point the Kosovo grid
was designed and built as an integral part of the Serbian
transmission network; therefore, the integrity of the Kosovo
system has a direct impact on its operations through many
interconnection points. They also are well aware of the
potential for exploiting Kosovo's considerable coal deposits
for power generation and export. At some point, Serbian
negotiators may begin to focus on the conditions that would
be necessary to facilitate EPS's access to the Kosovo market,
regardless of the outcome of status talks. end comment

POLT