KOSOVO: THE MYTH OF "THE AGREEMENT" FOR A SERBIAN POWER

UNCLAS SECTION 01 OF 02 PRISTINA 000023 SIPDIS SENSITIVE DEPT FOR EUR (SCE, ACE),DRL, USAID USEU FOR HAUGEN E.O. 12958: N/A TAGS: PGOV PREL ENRG KV SUBJECT: KOSOVO: THE MYTH OF "THE AGREEMENT" FOR A SERBIAN POWER DISTRIBUTOR PRISTINA 00000023 001.2 OF 002 SENSITIVE BUT UNCLASSIFIED - PLEASE PROTECT ACCORDINGLY REF: A) Pristina 0012 and previous B) Belgrade 0048 ¶1. (SBU) SUMMARY: A new myth has crept into discussions on electrical power in northern Kosovo: there was an offer to, or an agreement with, Serbia to establish a "second provider" of electricity for Serb areas in Kosovo. This is false. Kosovo's sole registered, legal energy distributor, Kosovo Energy Corporation (KEK),has offered its Serbian interlocutors an energy services contract, or ESCO agreement. This would allow a Serbian company, registered in Kosovo, to provide energy services -- including buying electricity from KEK, delivering it to customers, and billing for it -- as a subcontractor to KEK. This offer remains on the table for the north, and it remains the key to regularizing payment for power in the north. However, Serbian interlocutors have consistently refused it. That said, as previous cases demonstrate, the GoS (and Serbian state-owned energy firms) will deal only when no other options exist. To achieve this goal, KEK must regain control of the Valac substation. END SUMMARY THE NEW MYTH: AGREEMENT FOR A SERBIAN POWER PROVIDER -------------- -------------- ¶2. (SBU) We understand that several European interlocutors have begun to peddle a new myth in discussions about Belgrade's illegal effort to take control of the electrical power grid in northern Kosovo. The latest assertion is that KEK -- in the context of its discussions with Serbian interlocutors over the regularization of KEK's non-paying Kosovo Serbian customers -- tabled an offer that Serbia could form a "second power provider" in Kosovo. Some proponents of this myth go so far as to claim that KEK actually agreed to the establishment of second Serbian power provider in Kosovo. In roughly a year of talks between KEK, the Serbian Ministry for Kosovo and the Serbian state-owned energy conglomerate EPS about the regularization of payment for power, KEK never made such an offer, let alone agreed to the establishment of a Serbia-based second power provider. USAID advisors (U.S. citizen contractors),who have been involved at every stage of this process and have attended every discussion between KEK and EPS confirm that no such offer was ever made or contemplated. THE CONSTANT REALITY: AN ESCO REMAINS ON THE TABLE -------------- -------------- ¶3. (SBU) Over the last year, KEK has consistently offered its Serbian interlocutors essentially the same deal: a Serbian company, registered in Kosovo, could establish a subcontractor relationship with KEK to provide energy services in exchange for assistance with regularization in majority Kosovo-Serb areas. KEK's assumption has been that EPS or its Kosovo Serb employees would form a Kosovo-based, Kosovo-registered entity that would enter into an energy services contract (ESCO) with KEK. This firm could then perform a multitude of services for KEK on a commercial basis, including buying power from KEK, delivering it to customers, and billing those customers. According to the logic of such an agreement, the participation of a Kosovo Serb entity would ease regularization (helping KEK),and would have a chance to earn profits and fees in the process. THE OTHER CONSTANT: A SERBIAN REFUSAL TO ENGAGE -------------- -- ¶4. (SBU) KEK first offered such a deal in May, 2009, and proposed that it cover all majority Kosovo-Serb areas in the country, both north and south of the Ibar. The Serbian side never agreed, and, in fact, never seriously negotiated on the proposal. As a consequence, KEK was forced to regularize relations with Kosovo Serb customers without the assistance of a Kosovo Serb subcontractor. While it was difficult, KEK succeeded, signing up Kosovo Serb customers in settlements large and small south of the Ibar River. Since KEK PRISTINA 00000023 002.2 OF 002 regularized customers in the south by itself, without concrete assistance from a Serbian subcontractor, it now contemplates an ESCO relationship only for those areas (the north),that remain to be regularized. As we have noted previously, KEK's Serbian interlocutors have repeatedly rebuffed KEK's efforts over the last several months to conclude an ESCO for northern Kosovo. VARIATIONS ON A THEME: BUZZWORD BINGO -------------- ¶5. (SBU) There is a distinct possibility that some in Brussels, in Belgrade, or in Quint capitals might attempt to wrap the myth of a need for a Serbian power provider for Kosovo in language of European energy market liberalization or the "Acquis Communautaire." Market liberalization is mandated, by 2015, according to the Treaty Establishing the Energy Community of Southeast Europe. As early as 2005, Serbian energy companies appealed to UNMIK to use this treaty as a basis for the establishment of a second (Serbian) power distributor for Kosovo. UNMIK did not accede to the request then, and there is no need to accede to the request now. Liberalization will come, for Kosovo and for Serbia, by the 2015 EU deadline, long after privatization of KEK's distribution company, and its unique nationwide license. We should not allow anyone to disingenuously cloak an action aimed at driving another wedge between northern and southern Kosovo in misleading language about being a responsible Europeans. COMMENT: THE ROAD TO AN AGREEMENT GOES THROUGH VALAC -------------- -------------- ¶6. (SBU) A commercial agreement, like the ESCO agreement KEK has offered to EPS, remains the best way to regularize customer relations in north Kosovo. Serbia's state-owned electric power conglomerate EPS and the Serbian Ministry for Kosovo are unlikely to agree to an ESCO arrangement while vague discussions of second providers permit their control of electrical transmission and distribution equipment and territory in north Kosovo to solidify (Ref B). No matter how the issue is couched, the debate is about control of the north. Because of the way the physical infrastructure is built, reasserting KEK's rightful control of its property at the Valac substation is the only vehicle for bringing Belgrade to the table for serious discussions. Absent that, and in view of continued passivity in the face of an increasingly obvious effort to alter the infrastructure to allow EPS to act unilaterally in the north, we have little expectation that the issue can be resolved satisfactorily or without an unwanted confrontation. DELL