KOSOVO: ELECTRICITY IN THE NORTH-ONE STEP FORWARD, TWO

UNCLAS SECTION 01 OF 04 PRISTINA 000578 SIPDIS SENSITIVE DEPT FOR EUR/SCE, EUR/PGI, INL, EUR/ACE, PRM, USAID E.O. 12958: N/A TAGS: ECON ENRG PGOV KV SR SUBJECT: KOSOVO: ELECTRICITY IN THE NORTH-ONE STEP FORWARD, TWO STEPS BACK REF: A) PRISTINA 558 B) PRISTINA 465 C) PRISTINA 541 AND PREVIOUS D) BELGRADE 1314 PRISTINA 00000578 001.2 OF 004 SENSITIVE BUT UNCLASSIFIED - PLEASE PROTECT ACCORDINGLY ¶1. (SBU) SUMMARY: Kosovo Energy Corporation (KEK) employees were only partially successful in conducting a December 24 visit to read meters at three substations in the northern part of Kosovo. The limited success of these visits was marred, however, by the Serbian state electrical conglomerate EPS's decision to commence illegal billing for electric power in northern Kosovo, in direct violation of UNMIK regulations, and without a license from Kosovo's Energy Regulatory Office. EPS's latest step underscores the real threat at the heart of the energy dispute in northern Kosovo -- partition -- a threat that could place ten years of coordinated Western policy in Kosovo at risk and upend NATO plans to reduce KFOR's presence in Kosovo over the next year. We must redouble our efforts within the international community and with our EU partners in particular, to underscore the need to assert KEK's ownership rights to power assets throughout Kosovo and highlight the long-term risks associated with inaction. END SUMMARY METER READING A QUALIFIED SUCCESS... -------------- ¶2. (SBU) On December 24, KEK employees, escorted by Kosovo Police (KP),were granted access by EPS employees to Valac substation in northern Kosovo and permitted to read meters there. KEK employees were also granted access to the Zvecan substation, but EPS employees did not permit them to read Zvecan's meters. Instead, KEK employees were promised copies of EPS-prepared meter readings. In spite of weeks of talks that included top-level representatives of the Council of the European Union and ministerial-level officials in Belgrade, KEK meter readers were denied access to the Gazivoda substation, where power from the Ujmani hydropower plant enters Kosovo's electricity transmission and distribution grid. Though EULEX and KFOR had forces in reserve, there was no violence and no arrests were made. Access to all three stations and the reading of their meters, common practice until November 2009, are necessary to balance accounts for power transfers between Serbia and Kosovo. Valac is the most important of the three. JUST AS ILLEGAL BILLING COMMENCES -------------- ¶3. (SBU) The meter reading, which was a qualified success, came just days after news that Serbia's energy conglomerate EPS had commenced illegal billing for power in the northern part of Kosovo. Bills for November 2009 and dated December 14, 2009 were distributed starting December 21 in the three majority-Serb municipalities of Zubin Potok, Zvecan, and Leposavic, and in the northern part of Mitrovica. These bills were issued under the EPS and Elektrokosmet logos, though neither entity has been issued a license to distribute or to bill for power in Kosovo by the UNMIK-established Energy Regulatory Office (ERO). Moreover, according to a copy of an EPS/Elektrokosmet bill we received, energy was billed according to the Republic of Serbia tariff schedule, rather than according to tariff rates established by Kosovo's UNMIK-chartered ERO. The illegal billing is yet another attempt by EPS to cement an illegal seizure of KEK assets and partition Kosovo's electricity sector. COMMENT: FAILURE ON ENERGY WILL CEMENT PARTITION -------------- --- ¶4. (SBU) That it took a month of talks to re-establish an imperfect facsimile of a preexisting regime of meter-reading is emblematic of one of the main problems we face. Time is not on our side. December is done, and if the spring thaw comes before KEK's control of the Valac substation has been reestablished and payment for power in the north has been regularized, we will have witnessed Serbian state entities' newest violation of UNMIK/Kosovo law and UNSCR 1244: PRISTINA 00000578 002.2 OF 004 the creation of an illegal, parallel electrical distribution network on Kosovo territory. It will join illegal, parallel municipal administrations and non-transparent Serbian state financing as the elements of the physical and administrative infrastructure that could support a future breakaway North Kosovo. To avoid taking another step toward de facto partition, we and our allies must act to confront and roll back this latest challenge by Belgrade to Kosovo's sovereignty. ¶5. (SBU) Failure to convince our allies of the significance of this issue, and soon, will place at risk ten years of coordinated US-EU-NATO-UN policy that Kosovo must not be divided. Moreover, such a failure will undermine USG and IC priorities for Kosovo in practically every sector. Sector-wide reform in energy would be the first casualty. The nascent effort to develop a strategy for dealing with the north -- the success of which is a sine qua non for moving ahead with plans for KFOR's drawdown -- would also falter, including plans to establish the Ahtisaari-mandated North Mitrovica Municipality. Unfortunately as EPS' intentions have become clearer and the risks of its actions to our strategic objectives more tangible our European allies have gone wobbly. We find ourselves forced to counter specious arguments about the current stand-off and to defend facts that were unchallenged just weeks ago. NON-PAPER ON MYTHS ABOUT NORTH KOSOVO POWER -------------- ¶6. (SBU) With this in mind, we recommend engaging our key allies, the European Union, and other key IC actors in capitals and at more senior levels. The goal would be to debunk firmly and finally the myths about the current stand-off and galvanize a serious, concerted effort to reassert KEK control over its assets, and ultimately, regularization of energy payments in the north. A suggested non-paper "Debunking Myths on North Kosovo Power" that might prove useful in this effort follows. ¶7. (SBU) BEGIN TEXT OF DRAFT NON-PAPER: Debunking Myths on North Kosovo Power -- Myth 1: The KEK Shutoff of Power to the North was a Politicization of a Commercial Dispute Fact: The October 2009 shutoff was a result of an act of nature, not a devious KEK plan. While two south/north power lines were down for scheduled maintenance, unseasonably cold weather pushed northern power consumption over 60 MW, placing the substation equipment and lines at risk of catastrophic failure, and months of repair costing millions. When KEK asked EPS employees at Valac to load shed, to bring demand to safe levels, its requests were refused, and so -- for safety reasons, and in the interest of protecting the wider transmission and distribution system -- it stopped providing power to the north through Valac substation. -- Myth 2: KEK is Unwilling to Restore Power to the North Fact: Since late October, when repairs to the south/north lines were completed, KEK has offered to resume supply from its Obilic generation assets to Valac and northern Kosovo, but Serbia's electrical distribution and transmission conglomerates -- EPS and EMS -- have refused these requests. There is a written record of such exchanges, including KEK's unconditional offers to restore power. -- Myth 3: KEK has Taken an Unconstructive Approach to EPS Fact: KEK's actions have been constructive, including not only offers for reconnection, but also continued KEK payment for electricity for the North generated by the Ujmani hydropower plant. It has also, in the main, abstained from public comment. By contrast, Serbian firms have issued letters annexing Kosovo municipalities to their service territory, have issued bills without a license, and have disconnected majority ethnic-Albanian villages PRISTINA 00000578 003.4 OF 004 in Northern municipalities to cut demand. Despite provocations KEK has kept lines of communication open with Serbian entities on commercial issues, including reiterating its long-standing willingness to conclude an electrical services subcontracting arrangement as part of regularizing payment for electricity services in northern Kosovo. -- Myth 4: The Ownership of Northern Kosovo Electricity Assets, Like Valac, is Debatable Fact: Kosovo's ownership of the Valac substation and power lines for the transmission and distribution of power in Kosovo, though unchallenged for years, has recently been questioned. Unless UNSCR 1244 and UNMIK itself are questionable, there are no legal grounds to question Kosovo's ownership of these assets. In December 2005, pursuant to UNMIK Regulations 2002/12 and 2005/18, the Kosovo Trust Agency, an UNMIK organ, implemented a Plan for Transformation for Kosovo's Energy Sector. "Deeds of Transfer" and "Declarations of Subscription and Contribution in Kind" established Valac substation, the buildings that house it, the land on which it sits, and the lines that feed it and emanate from it, as the property of Kosovo's energy conglomerate KEK or its energy transmission entity KOSTT. Public notices to this effect were issued in the Serbian and the Kosovo press, and no legal challenges were filed. Kosovo's Energy Regulatory Office, another UNMIK-established organ, gave KEK and KOSTT unique licenses that make them the sole legal distribution and transmission companies for the entire territory of Kosovo. These decisions, deeds and documents not only form the basis of KEK's/KOSTT's claim to Valac, but also for all other substations, lines, generation, and distribution capacity throughout the country. In August 2009, in spite of the fact that the Strpce substation -- like Valac today -- was occupied by employees of Serbia's EPS, they did not claim legal rights to ownership and yielded control of the substation to KEK. Nor did any of our European allies or others within the IC call KEK's ownership rights into question. KEK and KOSTT have the same ownership rights to Valac substation that they have to Strpce substation. To argue anything to the contrary is a dangerous recognition of "Northern Exceptionalism" and partition. -- Myth 5: EPS Control of Valac will Facilitate Commercial Talks Fact: Such an argument is not only wrong but backwards. It is KEK control of Valac that would be conducive to a regularization of commercial relations for power. EPS control of the substation has done anything but that. Rather than facilitate talks, EPS control of Valac -- exercised exclusively since October 2009 -- has led only to illegal modifications to the substation to facilitate unlicensed, illegal provision of electrical services by Serbian entities in the North. Continued, unchallenged EPS control of Valac won't lead to talks, but to the continued retrofitting of the station to permit EPS to provide more power to the North. These efforts will continue to take place without licenses from Kosovo's UNMIK-established Energy Regulatory Office, and in contravention of existing licenses to KEK and KOSTT to provide services to the whole territory of Kosovo. The end result, as in the cases above, would be clear violations of UNMIK law and regulations, Kosovo state firms' loss of property, and the effectual strengthening of the bonds between the northern municipalities and Serbia. -- Myth 6: KEK has not Offered Commercial Solutions Fact: If EPS genuinely seeks a commercial solution, one has been on the table for some time. KEK has advocated since May 2009 for an electrical services company agreement with Serbia's EPS, through which EPS could register a Kosovo firm to serve as a subcontractor for KEK, providing services including billing and meter reading to PRISTINA 00000578 004.2 OF 004 majority Kosovo Serb communities like North Mitrovica, Zvecan, Zubin Potok, and Leposavic (previous versions of the same proposal included Strpce and Gracanica, before KEK regularized payments in these areas without EPS participation). KEK's overtures have never been met with a serious, substantive response and it is hard to see how EPS' control of Valac will change this. (Note: Here, too, a record of these exchanges exists that documents this version of events.) -- Myth 7: A Serbian Power Distributor is the Answer Fact: For a Serbian electricity provider to be established in the North, KEK and KOSTT would essentially be forced to cede control of assets that are theirs by legal right. In addition to annulling Kosovo firms' property rights directly, such a move would have second order negative consequences for these entities, by denigrating the value of the licenses KEK and KOSTT currently hold as sole providers for distribution and transmission for the whole territory of Kosovo. For KEK especially, this loss of assets, service territory and customers would wreck its value in privatization, unraveling years of work by the GOK and donors, and placing in jeopardy comprehensive energy sector reform in Kosovo. If the provider operated only in the North, the scheme would advance partition. If, as some claim, the Serbian provider should operate in Kosovo Serb inhabited areas both north and south of the Ibar, even more damage would be done to the value of KEK's licenses and its privatization prospects, and electricity in Kosovo would officially become an "ethnic" commodity -- a prospect that we certainly should avoid. END TEXT MURPHY