April 7 2014 Public utility cost cuts continue, but criticism abounds Nagy és Trócsányi | Energy & Natural Resources - Hungary Energy & Natural Resources First fee cutSecond fee cutThird fee cutCommentLast year saw public utility costs fall in Hungary. Parliament adopted several acts to reduce household gas, electricity and district heating prices by 20% in two steps, and an additional 10% reduction was later introduced for water, sewerage and waste disposal fees, as well as for sewerage, gas and chimney-sweeping costs. The government has stressed that the price cuts will continue in 2014, subject to the success of the incumbent right-wing party in the scheduled April 2014 general election.First fee cutThe fee reductions are intended to improve the financial situation of average households. According to government statistics, the average Hungarian family had to spend one-third of its total income on public utility costs before the reduction. To improve this situation, on December 6 2012 Parliament announced that the price of household gas, district heating and electricity was to be reduced by 10% as of January 1 2013.Energy companies criticised this policy, claiming that the cutback caused a nearly unbearable situation and prompted the postponement of necessary improvements to the public utility infrastructure. Six service providers even challenged the Hungarian Energy Office (HEO) resolution on the reductions before the Budapest Administrative and Labour Court on the grounds that the HEO's calculation of the base for the cut was invalid. The court abolished the resolution at first instance in March 2013.On March 14 2013 Parliament established a new state office to replace the HEO – the Hungarian Energy and Public Utility Regulatory Authority. The new authority has been granted a considerably wider range of powers than its predecessor. The most significant change is that that the authority became a legislative body, entitled to adopt decrees regarding energy prices that can be contested only before the Constitutional Court.Second fee cutOn April 29 2013 Parliament passed a law reducing the household price of water, sewerage and waste disposal fees by 10%, which was followed by another price reduction for sewerage, gas and chimney-sweeping fees. These laws entered into force on July 1 2013. In addition, on November 1 2013 the household price of gas, electricity and district heating was further cut by 11.1%.Third fee cutIn early February 2014 lawmakers approved a third series of cuts to household energy and utility bills. The government referred to this step as another "battle" against profiteering by utility suppliers. Under the law, the price of gas will fall by 6.5% from April 2014, while the price of electricity will be cut by 5.7% from September 2014. District heating will be cut by 3.3% from October 2014.CommentSince the proportion of household expenses devoted to energy costs is unquestionably high – especially for those with below-average incomes – the government has endeavoured to tap into the excess profits of service providers (most of which are foreign owned). The government may consider the economic disadvantages that are brought on by the relevant legal processes and shouldered by the business sector as an acceptable price to pay for the benefits given to households. However, the economic implications of these measures may cause grave problems in the medium term. While these compulsory cuts will most likely benefit poor households to a certain extent, they also raise questions as to their efficacy. First, the probable economic effects of the cuts are unclear, and it has been posited whether a better-targeted reduction in utility costs would have been more desirable. Second, the suitability and sustainability of these provisions as a long-term solution for domestic energy shortages are uncertain, mainly because the two fundamental elements of the problem – the energy inefficiency of Hungary's residential stock and the country's dependency on imported Russian natural gas – are left unresolved. Utility companies may well resist these decisions with arguments stressing the need for legal certainty and a stable regulatory framework for energy infrastructure investments.For further information on this topic please contact Tamás Pásztor at Nagy és Trócsányi by telephone (+36 1 487 8700), fax (+36 1 487 8701) or email ([email protected]). The Nagy és Trócsányi website can be accessed at www.nt.hu.