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Energy Policy 38 (2010) 3820–3829

Contents lists available at ScienceDirect

Energy Policy

0301-42

doi:10.1

n Corr

E-m

buzars@1 St

Geograp

Alberto

Departm

Gdansk

journal homepage: www.elsevier.com/locate/enpol

Regulating district heating in Romania: Legislative challenges and energyefficiency barriers

Diana Poputoaia a, Stefan Bouzarovski b,n,1

a Environmental Change Institute, School of Geography and the Environment, University of Oxford, South Parks Road, Oxford OX1 3QY, UKb School of Geography, Earth and Environmental Sciences, University of Birmingham, Edgbaston, Birmingham B15 2TT, UK

a r t i c l e i n f o

Article history:

Received 24 August 2009

Accepted 1 March 2010Available online 23 March 2010

Keywords:

District heating

Energy regulation

Energy efficiency

15/$ - see front matter & 2010 Elsevier Ltd. A

016/j.enpol.2010.03.002

esponding author.

ail addresses: diana.poputoaia@gmail.com (D

adf.bham.ac.uk (S. Bouzarovski).

efan Bouzarovski is a Visiting Professor a

hy and Regional Development, Faculty of

v 6, 128 43 Prague 2, Czech Republic, and

ent of Economic Geography, University of Gd

, Poland.

a b s t r a c t

Many states in Eastern and Central Europe (ECE) possess extensive district heating (DH) networks that

were constructed during the days of communist rule in order to provide a universally accessible energy

service that supported Soviet development policies. But the post-communist transition was marked by

the exacerbation of the sector’s numerous technical, economic, regulatory and environmental problems,

accompanied by its abandonment in favour of alternative methods of domestic heating. Recent efforts

to increase the use of DH in ECE as a result of environmental and energy security concerns have taken

place in an absence of critical, context-sensitive research.

The purpose of this paper is to explore the legal aspects of post-communist DH reforms in Romania,

with the aim of identifying some of the governance challenges faced by state authorities in managing

the sector. In broader terms, we seek to explore the extent to which the Romanian legislative

framework is in a position to promote energy efficiency in DH. This has been achieved via an analysis of

formal policy documents, government decrees, strategic documents and laws pertaining to this sector,

as published and subsequently amended in the Official Gazette. The conclusions of the paper identify

the key regulatory issues in the sector—especially with respect to the tariff setting process and the

division of competences among different organisations in it—while suggesting a set of policy steps and

general restructuring approaches that could help overcome the current situation.

& 2010 Elsevier Ltd. All rights reserved.

1. Introduction

The considerable extent of district heating (DH) networks inthe post-communist states of Eastern and Central Europe (ECE) isa clear legacy of government policies dating back to thecommunist era. Under the centrally planned economy, DHsystems provided subsidised energy services to large parts ofthe population using standardised designs and building materials,while serving as an infrastructural base for the expansion of,inter alia, prefabricated panel housing estates. Complete stateownership and regulation meant that DH acted as an implemen-tation tool for the political ideologies and development policies ofcommunist states. However, energy-inefficient technologies, poormaintenance, inadequate management, the chronic lack of

ll rights reserved.

. Poputoaia),

t the Department of Social

Science, Charles University,

an External Professor at the

ansk, Bazynskiego 4, 80-952

investment and the technical rigidity of the distribution networksled to such systems being constantly plagued by numerouseconomic, environmental and technical problems. Low produc-tion, transmission and distribution efficiencies were accompaniedby the lack of consumer choice and flexibility at the householdlevel. The proverbial lines of melted snow in post-communistcities—corresponding to the routes of the underground hot waterpipes beneath them—as well as the use of open windows in orderto regulate room temperatures due to the lack of thermostats areanecdotal examples of this situation (Brendow, 2002; OECD/IEA,2004; Rezessy et al., 2006).

It therefore comes as little surprise that the initial years of thepost-communist transition in many ECE states saw the abandon-ment of DH in favour of alternative methods of domestic heating.Aside from the technical deficiencies of the networks, this switchwas prompted by rising energy prices and the lack of improve-ments to the service. The marketing campaigns carried out byimporters of individual household heating devices, accompaniedby continued subsidies for gas and electricity prices, furthercontributed to the loss of DH’s market share. Adding to theproblem was the slow institutional restructuring of the sectoritself, as a result of the lack of reform initiative and clarity over thefuture transformation paths, as well as ownership transfer

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problems (UNICHAL, 1992; Lund et al., 1999; OECD/IEA, 2004;ASE, 2007).However, there is evidence to suggest that DH may be returningto the energy policy agendas of many ECE states, partly as a resultof increasing concerns over security of supply and climate change.Despite its inherent technical and infrastructural rigidities, it isbeing claimed that, with some improvements, DH can open thepath towards more locally sourced, equitable and efficient energyservices (Munster and Lund, 1999; Lund et al., 1999; French,2000; WEC, 2004).

Efforts to upgrade and expand DH networks in ECE are takingplace against the backdrop of an almost complete void ofacademic research of the technical, political, and economicaspects of state policies in this domain. Despite the publicationof a significant body of work on energy reforms in post-communist states—especially with respect to the restructuringof oil, gas and electricity operations—there has been very littlefine-grained expert analysis focussing on the DH sector (but seeLund et al., 2000; Lund et al., 2005; Rasburskis et al., 2007;Andersen and Lund, 2007). As a result, policy-makers and othersocial actors in the region have paid insufficient attention to themanner in which legislative and policy reforms have governedeconomic, social and political activities in this domain.In light of such circumstances, then, this paper aims to examinethe reform of DH regulation in Romania, with the aim ofidentifying some of the legislative challenges faced by stateauthorities in managing the sector. In particular, it focuses on thegap between policy formulation and implementation, by explor-ing the de jure problems with the legal framework, and issueswith its de facto practical application. In broader terms, thepaper seeks to explore the extent to which the Romanianlegislative framework is sufficiently and properly developed topromote energy efficiency in DH. This has been achieved via ananalysis of formal policy documents, government decrees,strategic documents and laws pertaining to this sector, aspublished and subsequently amended in the Official Gazette.The coherence of the legislation has been assessed by reference tothe rights and obligations incumbent upon stakeholders, exerciseconditions, monitoring procedures and sanctions applicable incase of non-compliance. We have also explored the real-lifeco-ordination between various actors in the domain, via semi-structured interviews with officials in government ministries,regulatory offices and district heating companies.2

It should be noted that the scope of this paper is limited to theanalysis of the legislative framework impacting the production,transport and distribution of heat in DH networks in Romania.Notwithstanding the importance of energy efficiency of the builtenvironment and demand-side management in the DH sector,they are not under review for the purpose of this paper. Since ourmain focus is on the regulatory aspect of DH operations, we do notspecifically address the work of commercial actors in thisdomain—such as district heating companies—although the

2 Much of the information presented in this paper is derived from the

interviews, though they are not individually cited within the text. Our

interviewees included: Liviu Pungaru (Head of the Ias-i branch of the National

Authority for Energy Conservation), Mark Velody (a former UNDP Romania

manager of DH projects), Viorica Bostan (Head of the Utilities Department within

the Ias-i local authority), Mihai Constantinescu (a representative Ramboll, a DH

consultancy company), Norela Constantinescu (a former employee of Euroheat),

Bent Ole Gram Mortensen (a Law Professor at University of Southern Denmark),

the decision-makers responsible for tariff management and regulatory issues at

the National Authority for Regulating Public Communal Administration Services,

the Investment Manager of the Ias-i DH company, as well as a number of expert

interviewees who wished to remain anonymous. All interviews took place

between June and August 2008. We wish to thank the interviewees for their kind

co-operation.

challenges that they face as a result of the regulatory reformsare frequently touched upon within the relevant analyses. Also,even though we start from the implicit claim that there is a linkbetween energy efficiency and legislative reforms in post-communism (OECD/IEA, 2004), one should bear in mind thatregulation itself may not represent the main or only reason whyDH in transition economies is less efficient than, for example, inWestern Europe.

The paper commences with a brief review of the general policyunderpinnings of DH restructuring in ECE, as part of the widerpost-communist transition process. We then move onto theRomanian setting, in order to provide basic background informa-tion about the main economic, social and political issues faced byDH networks in that country. This is followed by a review of themain regulatory underpinnings of DH restructuring in Romania,as well as a section that critically scrutinises the regulatory rolesof the main non-commercial institutional actors in the sector.Considering that the post-communist reform process of DHsystems in Romania has been theoretically grounded on threeinstitutional ‘pillars’—DH zones, heat planning, and tariff re-form—the next part of the paper appraises the extent to whichthe legislation in place has managed to deliver on theirimplementation. This is followed by a brief review of the varioussubsidies relating to the sector, such as social safety nets andsupport programmes. Finally, the conclusion outlines the mainregulatory challenges in the sector based on the reviewedevidence, while identifying some of the legal barriers towardsincreased energy efficiency. It suggests a set of policy steps andgeneral restructuring approaches that could help overcome thecurrent situation.

2. Reforming the DH sector in post-communist ECE

In their entirety—and despite being few and far in between—

hitherto-published studies of the legacies and dynamics of DHreforms in ECE have managed to paint a rather comprehensivepicture of the restructuring challenges associated with this part ofthe economy. The exhaustive and systematic nature of research inthe post-communist DH sector (for example, see Holler et al.,1996; Arshakian, 1997; ESMAP, 1999; WEC, 2004; Gatautis, 2004)can be attributed, in part, to the logistical support it has receivedfrom a wide variety of international and national energy agenciesand companies working in ECE, with a vested interest inmaintaining and improving such infrastructures. This may stemfrom the fact that, as reported by the International Energy Agency,up to 60 percent of the population in ‘transition economies’ relieson DH for its domestic heating and hot water needs.

Aside from reiterating the general benefits of locally basedinfrastructures for heat generation and distribution, publishedresearch in this field emphasises the specific economic, political,and social conditions of post-communist states, which, it isargued, contain approximately half of the world’s largest DHsystems (see Karamanos, 1997; OECD/IEA, 2004; Bouzarovski,2009, 2010). They point out that increasing the energy efficiencyof this sector could entail a wide range of benefits, includingreductions in the uptake of fossil fuels for energy genera-tion—thus bringing about subsequent carbon emissions reduc-tions—as well as the promotion of social welfare, economicdevelopment and energy security. It is further emphasised thatthe advantages of DH lie in the versatility of its energy inputs andthe important role that it plays in many post-communist states’national economic outputs and household utility budgets. Thishas prompted some experts to claim that DH represents a positivelegacy of the communist regime that should be preserved as far as

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Fig. 1. The vicious institutional circle in the post-communist restructuring of

Romanian DH networks. Source: UNDP/GEF/RACE (2006).

D. Poputoaia, S. Bouzarovski / Energy Policy 38 (2010) 3820–38293822

possible, instead of copying ‘Western’ templates that may notalways work in the ECE context (Rezessy et al., 2006).

However, a wide range of experts have acknowledged that theDH sector in ECE has faced some serious structural difficulties inpost-communism, including the expansion of energy losses in thegeneration, transportation and distribution of heat, as well as itstransmission through the built fabric (Hughes, 1990; Krug, 1998;Leca, 2004). Other infrastructural problems associated with thissector include outdated equipment, oversized network coverageand irregular peak service. A number of difficulties with DH priceshave also been identified, including the paucity of cost-basedpricing, tariff distortions in favour of gas and electricity, paymentarrears, the presence of illegal consumption among households, aswell as the lack of metering, maintenance and investment capital(OECD/IEA, 2004; WEC, 2004). On the regulatory side, one of thebiggest restructuring challenges has stemmed from the fact thatthe sector has been governed by national tariff and investmentpolicies, despite essentially being a locally embedded service.Also, the competitiveness of DH vs. other means of heat supplyhas been undermined by the proliferation of different regulatoryregimes for different parts of the energy sector. The existence of awide range of local circumstances and conditions with respect toDH systems has complicated the application of general restruc-turing templates to this aspect of post-communist energyoperations (Ronsen, 1997; Rezessy et al., 2006).

In response to some of these problems, international organisa-tions have suggested a sequence of policy steps, involving theestablishment of independent regulatory bodies and socialsupport programmes that could help eliminate indirect heatproduction subsidies, the enforcement of a good paymentdiscipline accompanied by the instalment of meters at theinterface with all buildings and large consumers, as well as thedevelopment of policies to promote demand-side energy effi-ciency. Further recommendations have entailed the establishmentof conditions that allow for full cost recovery, the removal ofbarriers to unregulated wholesale competition, and the involve-ment of the private sector through the creation or public–privatepartnerships in the DH sector (ESMAP, 1999; OECD/IEA, 2004;WEC, 2004). It has also been suggested that DH tariffs shouldcover the full current costs of the heat supply company, includereplacement costs and returns on investment, allow for the propermanagement of DH systems, be competitive with prices forother heat sources, incentivise DH companies and households toreduce costs and save energy, be transparent and easily under-standable, and protect consumers from unjustifiably high prices(Nuorkivi, 2002). Considering how difficult—if almost impossible—

it is for all of these objectives to be addressed at once, internationalagencies have pointed out that a prioritisation of policy goalswould be warranted when designing tariff reform strategies(OECD/IEA, 2004).

Disappointingly, however, the reorganisation of the heatsupply industry in ECE—and Europe more widely—has not beensubject to any sector-specific European Community legislation todate (Roggenkamp et al., 2001). The local character of heatmarkets, as well as the low political visibility of DH at theinternational level, may have contributed to this situation. As aresult of increased concerns about fuel security and climatechange, however, a directive on the promotion of cogenerationwas adopted in 2004; this sector has also received some attentionin the process of creating a single internal market for electricity.But the ‘single energy carrier’ directives have not supported thedevelopment and expansion of DH infrastructures equally well(Grohnheit and Gram Mortensen, 2003), as the harmonisation ofvarious methodologies for cost allocation between electricity andheat production has not been on the EU institutions’ agenda. Thelack of such policy initiatives is particularly relevant for ECE

states, where cost-allocation methodologies may have made asignificant contribution to the poor state of cogeneration-basedDH schemes (OECD/IEA, 2004).

3. DH in the Romanian context: key legacies and trends

Just like other ECE states, Romania inherited all the typicallegacies of communist central planning in the energy sector,where DH networks were designed at a large scale with the aimof delivering cheap, universally available energy to residentialand industrial customers alike. The entire service was centrallyregulated and owned by the state, within a single publiccompany—S.C. Termoelectrica S.A—being in charge of runningit. After the regime change in 1989, however, many largeindustrial enterprises either terminated or substantially down-sized their activities, therefore requiring fewer or no heatservices; also, some of the companies that continued to functionmanaged to develop their own power facilities (Ionita and Kajtar,2004). In 2004, only an approximate 15 percent of the outputof DH plants was being used by non-residential consumers(OECD/IEA, 2004).

The decline of industrial DH use was soon mirrored in theresidential sector. Although ca. 250 settlements in Romania hadDH networks in 1990, approximately one fifth of the householdsinitially connected to the DH networks in these areas had chosento disconnect by 2004, with disconnection rates reaching 90percent in some areas (OECD/IEA, 2004). The lack of serviceimprovement and adequate metering (in 2004, only 55 percent ofthe apartment buildings connected to DH networks had metersinstalled, although they were compulsory under the legislation inplace) meant that customers were being charged ever higherprices for an increasingly poorer service (Government of Romania,2004a). As a result of the decrease in the population’s solvency,the rising rates of disconnection put extra pressure on the statebudgets. This meant that DH companies were forced to imposehigher charges on their remaining customers, thus creating avicious institutional trap (Fig. 1).

The movement away from DH meant that enterprises in thissector had to manage an oversized energy supply system in theface of rapidly declining demand; as a result, some of the largestconsumers now have the capacity to produce more than twicethe amount of required heat (Government of Romania, 2004a).The decrease in demand also affected the energy efficiency of heatgeneration facilities, especially in the case of cogeneration. This isbecause the reduction in outputs could not be technicallymatched by a corresponding reduction in inputs, leading todecreased yields due to the partial use of generation facilities.Overcapacity also made it more difficult for DH companies to

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respond to demand changes, since fixed costs represented ahigher share of total costs. Adding to the DH operators’ woes wasthe problem of overemployment—as a result of the legacies ofcommunism, the companies’ workforces far exceeded theirrequirements, as a result of which 70 percent of their productioncosts was represented by fuel, salaries and pay-offs (Governmentof Romania, 2004a).

The lack of coherency in Romania’s energy policy—thanks towhich, for example, gas prices for residential consumers wereconsistently lower than those charged by DH companies—

coupled with the country’s poorly designed and implementedregulation, as well as inadequate financial management andmarketing in the DH sector (Nuorkivi, 2005) meant thatresidential customers became increasingly difficult to satisfyand manage. This created a situation in which individual gas-firedheating appliances became more competitive than DH networks.The suppliers of such devices exploited the shortcomings of DHthrough marketing campaigns that emphasised customer comfortand lower running costs. The fact that the acquisition andinstallation of gas-fired heating is a capital-intensive and timeconsuming process (OECD/IEA, 2004), however, means thatdisconnections from DH are difficult to reverse in the short tomedium term, even in the context of a coherent energy policy andcomprehensive legal framework (also see World Bank, 1999). Inorder to slow down the disconnection wave, DH companiescreated a genuine bureaucratic chaos, imposing additionalrequirements for the disconnection to be approved. This onlycontributed to the perpetuation of the negative image of DH as anexpensive, top-down and poor-quality service.

4. The legislative framework for DH restructuring in Romania

The Romanian authorities developed a range of policyresponses to address the wide range of post-communist restruc-turing challenges in the DH sector, mainly with the aid of aregulatory framework established under the policy sequencingguidelines recommended by international energy institutionsoperating in the country. As pointed out earlier, it was suggestedthat the restructuring and reorganisation of the sector should begrounded on three pillars: (i) DH ‘zones’, (ii) heat plans, and(iii) tariff reform, with local authorities being expected to play akey role in the revival of the sector (OECD/IEA, 2004).

Fig. 2. The regulatory structure of the Romania

One of the key measures implemented by the governmentinvolved the development and adoption of a series of legal acts(such as the Public Utility Services Law and the DH Law) that ledto the establishment of an independent regulator for DH: theNational Authority for Regulating Public Communal AdministrationServices (ANRSC). This organisation was entrusted with the role ofissuing licenses for DH operations in the case of heat-only boiler(HOB) plants, supervising the compliance of the operators with therelevant laws, and delivering secondary legislation. Its prerogativeswere to be shared with the previously established NationalAuthority for the Regulation of Energy (ANRE) in the case ofcogenerated heat. ANRE was charged with the licensing, regulationand supervision of this activity, although ANRSC was meant toregulate its transport and distribution (see Fig. 2).

At the same time, the ownership of DH networks was allocatedto local authorities, in an effort to recognise their autonomy in theorganisation and management of the service. The ownershiptransfer saw significant delays and was instituted only in 2002,although it was generally accepted that energy efficiency and themanagement of utilities represent decentralised activities thatlocal authorities are best positioned to administer (Grohnheit andGram Mortensen, 2003; Rezessy et al., 2006). As a result of therestructuring process that followed from the ownership transfer,local authorities were required to draft their own heat strategiesin line with the provisions of relevant national-scale legislation.The Energy Efficiency Law also stipulated that local authoritiescontaining localities with over 20,000 inhabitants should draftspecialised EE programmes in addition to the heat strategies.

Despite its crucial role in the establishment of a functioningDH market, the metering of heat and hot water consumption wasmade compulsory only in 2004. A major problem in this regardwas posed by the existence of ‘vertical distribution’ systems incollective apartment buildings—a typical legacy of communism.This approach had created a situation wherein each radiator in agiven flat was connected to the one in the apartment below orabove it, but not to the remaining radiators in the same flat. Thismeant that heat control at the level of dwellings in collectiveapartment buildings was not economically feasible, since itrequired the technically difficult and capital-intensive instalmentof multiple meters (ASE, 2007). Therefore, the supply and billingof heat and hot water in the case of homes in collective apartmentbuildings with vertical distribution was instituted on the basisof ‘apartment cost allocators’, accompanied by meters that

n DH sector. Source: Authors’ own research.

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measured heat inputs at the level of the each building. Sucharrangements were supported by the establishment of a contrac-tual relationship between the DH operators and the owners’associations that managed the buildings. The relevant legislationrequired DH operators and apartment owners to install buildingmeters and cost allocators by, respectively, the 30th of June 2006and the 30th of September 2009. To support them and the DHcompanies, a local reference price was introduced, accompaniedby the payment of production subsidies and social assistance.

The EU’s promotion of cogeneration and demand-side energyefficiency also influenced the policy agenda of the Romanianauthorities, in light of the country’s anticipated accession to theEU. In 2004, a national strategy for DH services was adopted forthe first time, acknowledging the need for coherent state action inthese domains. The strategy prioritised social and environmentalprotection, the decentralisation of public utility services, theintroduction of market mechanisms, and the establishment ofprivate financing for the rehabilitation of the DH infrastructure(Government of Romania, 2004a).

Despite the promise of further investment and financialsupport, however, there is a danger that the EU accession processmay undermine the DH sector’s competitive advantage if environ-mental investment remains inadequate. The lack of compliancewith EU standards may lead to the closure of some of the mostinefficient and highly polluting generation plants, leading tothe transformation of Romania from a net exporter into a netimporter of energy. Moreover, despite the extensive structuralreforms in the DH domain, a number of regulatory challenges stillpersist. For example, the split attributions between ANRE andANRSC burden the management of relationships between opera-tors, NARSC and ANRE (Leca, 2004). As late as 2004, the twoauthorities still had not managed to work out the conditions fortheir collaboration (Ionita and Kajtar, 2004). Even though therepresentatives of NARSC interviewed for the purposes of thisstudy were quick to point out their ‘flawless’ collaboration withANRE, many of the remaining experts who we approachedunderlined the lack of consistency and coherency in the actionsof the two authorities.

The ability of ANRSC to influence the quality of servicesthrough legal instruments also remains uncertain. Even thoughthe regulator has the prerogative to use the licensing procedure asa means of controlling the quality standards associated with theoperation of DH companies, the extent to which this particulartool can be applied in practice is questionable. ANRSC’s officialrecord of activity to date3 does not refer to any withdrawals oflicenses or refusals to grant new ones, although the quality of theservice is still considered poor. In part, the regulator’s passivitymay be attributed to the fear that interrupting heating servicesmay be socially and politically deleterious in light of the fact thatDH in Romania is still a monopoly. Although the need forinvolving private companies in the operation of the DH sector isemphasised in both the district heating and national energystrategies, no privatisation of medium or large plants has beenundertaken to date; the same applies with respect to the grantingof third party access to the network (ASE, 2008).

As a result of these policy deficiencies, there has been littleinvestment in the rehabilitation and upgrading of DH networks,despite the massive transfer of ownership (Government ofRomania, 2004a). The generation, transmission and distributioncomponents of the system are still using technologies developedand installed prior to the oil crises of the seventies, leading to highproduction costs, low yields, and energy losses ranging between35 and 77 percent (Government of Romania, 2004a). It can thus be

3 This is available on their official website, see http://www.anrsc.ro.

argued that the activities of the Romanian authorities lag behindthe rhetoric employed in the official policy documents adopted bythe state: private sector involvement is minimal, productionsubsidies are still being paid, and competition between heatsources does not really exist. While it has been acknowledged thatthe involvement of private companies is not imperative for therevival of the sector (OECD/IEA, 2004; ASE, 2007), the broaderrestructuring of DH companies under the current circumstances issimply not happening. Moreover, the financing contracted for therehabilitation of the networks does not target the downsizing ofthe system; little has been done to tackle the problem ofoveremployment, mainly for political reasons.

Still, our interviewees pointed out that Romania’s accession tothe EU may create opportunities for improving the state of DHsystems. EU policies might trigger the formulation and imple-mentation of adequate legislation, while the cohesion funds, ifproperly targeted and used, can release the pressure on the stateand local budgets exerted by other sectors such as infrastructureand agriculture. This would leave more finances, time andavailability for local authorities to focus on DH. Therefore, inaddition to a proper legislative framework, the revival of DH inRomania is dependent on the level of priority it is likely to receivewithin the mainstream political agenda.

5. Regulatory actors in the DH sector

5.1. The local authorities’ relationship with government and

operators

As pointed out above, local authorities have acted as owners ofDH networks and statutory bodies in charge of setting up,organising, monitoring and controlling DH services since 2002.Their autonomy to this end is fully acknowledged by the law,which gives them the prerogatives of energy planning, theestablishment of ‘DH zones’, participation in tariff regulation, aswell as the implementation and supervision of metering pro-grammes. These tasks are supposed to be managed by aspecialised energy department that should have been set up ineach local authority from the 1st of October 2006.

However, the poor overall condition of the sector and theunderdeveloped legislative framework (Ionita and Kajtar, 2004)have created a situation in which the transfer of ownership to thelocal level has largely amounted to a transfer of problems. Some ofthe literature on the subject claims that this is mainly due to thefact that the devolution of DH services to this level of governancewas not preceded by the strengthening of the managerial capacityof local authorities, accompanied by an adequate amount offinancial support (PPI, 2001; Leca, 2004). Only in 2006 did thenew Decentralisation Law formally address the transfer ofcompetences, alongside providing an assurance of correspondingfinancial resources.

Despite the transfer of ownership, local authorities still do nothave exclusive power over the management of DH operations.Central government may control them, for example, through theactivities of ‘prefects’: according to the relevant legislation, theseindividuals are meant to act as representatives of the centralgovernment at the local level, supervising the activities ofmunicipal authorities and ensuring that the government’sobjectives are met. Central state influence over local budgetspending also provides a powerful control mechanism, in light ofthe high degree of centralisation in the system of intergovern-mental fiscal relations in Romania (Leonardo et al., 2006), as wellas the significant financial clout of the central state: for example,transfers from the national level constituted almost 70 percent oflocal budgets in 2003 (Government of Romania, 2004b). Beyond

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economic reasons, the influence of the central state on localspending is mostly based on political interests, especiallyin situations where different political parties control the centraland local governments (Bailey, 1999).Following the introduction of compulsory metering, the DH Lawfurther expands the policy framework for this measure byallocating responsibilities for its fulfilment, divided between localauthorities and operators. While the former have to approve theprogrammes for the metering of DH systems and their users, thelatter are in charge of providing data for their formulation andadoption. The installation, maintenance and replacement ofmeters for DH networks falls within the remit of local authorities,while operators are responsible for such activities withinapartment buildings; costs may be passed onto the consumersin the latter case. Our interviewees, however, pointed out that thedrafting of metering programmes based on the data provided byoperators might be insufficiently effective, in light of theinformation asymmetry that characterises the relationshipbetween operators and the local authorities. This is because thetwo entities have fundamentally conflicting interests: whilethe local authorities are interested in speeding up the instalmentof consumption metering for political reasons, the operators mayaim to postpone the whole process and pass the losses ontoconsumers.

The deadlines for the completion of the metering process haveconstantly been extended, partly because the District Heating Lawgave central government the right to determine the timeline andconditions for the installation of meters and cost allocators, aswell as the types of sanctions that would apply in cases of non-compliance. Some of our interviewees argued that the delegationof this prerogative to local authorities could have accelerated theprocess if coupled with appropriate financial incentives. It wouldhave been facilitated by the specificity of local heat marketsthroughout the country, as well as the presumed easier access oflocal authorities to information provided by the DH companies.

However, municipal governments do have the legal authorityto supervise the activity of the operators entrusted with themanagement and infrastructure of DH services. The operators canbe publicly or privately owned companies. Generally, they acquiremanagement rights through concession agreements approved bythe local authorities themselves (ASE, 2007). It is also theoreti-cally possible to grant third party access to the network, as theDistrict Heating Law stipulates that local authorities can allowone or more operators to produce heat. But no clear regulationshave been developed in this respect, as the current legislationonly states that that equal network access of all heat producershas to be ensured within the limits of the available transportationcapacity, and in compliance with the operation schedule. At thesame time, the DH programme assumes that this sector is entirelymonopolistic (Government of Romania, 2004b).

The peculiar relationship of local authorities with publiclyowned operators has put into question the genuine willingness ofthe former to sanction the latter in the case of poor performanceunder the concession agreements. In essence, the shareholdingstructure of DH companies means that the local authorities wouldultimately have to sanction themselves in such instances. ThePublic Utility Services Law has tried to address this potentialconflict of interest by empowering ANRSC to monitor the relevantparties’ compliance with applicable legislation, and to sanctionthem in case of breach. However, our interviewees pointed outthat, to date, ANRSC has exerted its prerogative in this domainmerely in a formal manner, by sanctioning companies ontechnical matters such as failures to prepare energy audits.Furthermore, local authorities would end up in a legal clinch ifthey were to decide to exercise their power, since the DH Lawobliges them to ensure the continuity of DH services, despite the

fact that they are not given any choice between heat producersdue to the de facto lack of third party access.

Our interviewees pointed out that, in its current state, theregulation design aids the emergence of a situation in which DHcompanies are not motivated to perform well, since the localauthorities are not positioned and/or willing to sanction them.Furthermore, placing penalties and/or restrictions on an alreadyailing sector appears to be pointless. The current situation thusallows the vested interests of municipal governments to takecentre stage in the articulation of political priorities. In mediatingbetween the policy goals of natural gas and DH companies, localauthorities may be inclined to tip the balance in favour of theformer, since it is generally believed that the DH sector can neverbe allowed to go bankrupt, irrespective of its performance. In thiscontext, it should be mentioned that the current Romanianlegislation does not comprise specific provisions about thebankruptcy of DH companies, for example by assuring thecontinuity of service.

5.2. Owners’ associations: a problematic intermediary

Owners’ associations play a key role in the management of DHin Romania: as pointed our above, in the case of verticaldistribution, they are in charge of signing framework serviceagreements with the DH companies, which are then attached toindividual service contracts. In practice, this means that a DHcompany bills the relevant OAs for the total DH consumption of agiven apartment building. The OA is then responsible forapportioning the invoiced amount among the respective apart-ment owners, in accordance with their individual consumption.Once the billed amounts have been recovered, the OA transfersthe funds back to the DH company, informing it about anydefaulting individuals. The DH company can then file actionagainst non-payers under the conditions of the civil proceedingscode (see Fig. 3).

Our interviewees pointed out that, in its present form, the billrecovery procedure is ineffective and cumbersome, leading tonon-payment and arrears that may amount to 70 percent of allreceivables in some cases (also see Gochenour, 2001; Kennedy,2005). But the Owners’ Association Law, which regulates thisdomain, does not contain any provisions for simplifying therecovery process. Its effectiveness is further hampered by the factthat DH companies have to rely on OAs for the provision of dataabout the identity and debts of defaulting households. While OAsdo have the legal possibility to file action against such households,in practice their priority appears to be the payment of utilityservices that can be discontinued relatively quickly and easily,such as water and waste. Thus, helping the DH companies torecover their outstanding bills does not represents the mainconcern of the OAs. In this context, it is worth noting that theseorganisations are legally exempted from paying stamp dutiesupon filing action. They also benefit from a privilege over the fixedand mobile assets of the defaulting owners in securing thepayment of receivables. The registration procedure for thisprivilege is expeditious and also exempted from stamp duties.

The lack of apartment-level metering in the case of verticaldistribution further hampers the flow of cash from consumers toDH companies, since it undermines the substance and impact inthe individual agreements annexed to the framework ones. Theslow procedure for the recovery of the owed sums furtherburdens the recovery process. The low payment discipline in theDH sector can thus be directly attributed to the lack ofeffectiveness at the level of individual service agreements. Theintermediary role of the OAs pays a major detrimental role in thisrespect, as it prevents DH companies from receiving their

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Fig. 3. The intermediary role of OAs. Source: Authors’ own research.

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payments in an efficient way, as well as identifying anddisconnecting defaulting consumers (also see Gochenour, 2001).

6. Appraising the three restructuring pillars

6.1. Heat planning and DH zones

The Romanian legislation requires local authorities to draftheat plans and energy efficiency programmes on an annual basis,in line with corresponding national-level programmes foreseen bythe Energy Efficiency and District Heating Laws. The DHProgramme stipulates that heat plans should address, inter alia,the cogeneration potential of local areas, the real heat demand,the production capacity required, and the use of energy sourcessuch as biomass and waste. Aside from promoting alternativesand allocation efficiency by providing a reference framework forinvestment decisions (ESMAP, 1999; Olerup, 2000), it is believedthat heat planning can also help to prioritise and streamline thefuture development and restructuring of the sector (OECD/IEA,2004).

However, the current legislative framework fails to provideclear instructions about the content, implementation and stan-dards associated with the drafting of heat plans, as well as thesanctions that would apply in case of non-compliance. Theconditions for energy efficiency programmes follow the samepattern of vagueness: although the Energy Efficiency Law statesthat these instruments should contribute towards emissionsreductions, the promulgation of state-of-the art technologies,and the promotion of cogeneration, it fails to stipulate anadequate set of mechanisms that could help monitor and assesstheir implementation. Although the law does outline thesanctions applicable in cases where local authorities may fail todraft the programmes, other regulations and penalties are notspecified.In their entirety, these deficiencies have put into question theadded value of heat plans and energy efficiency programmes. Ourinterviewees pointed out that the current legislation does notallow such documents to be sufficiently comprehensive even incases of new investment into the sector, whose attraction is seenas their primary purpose. Furthermore, the objectivity of localauthorities in setting the heat demand projections within the heatplans is disputable, as they might be tempted to develop demandforecasts that will correspond to the current capacity of thesystem (Olerup, 2000). The ability of these instruments to providean effective policy framework is furthermore undermined byextant international experience in this domain, which shows thatmunicipal energy plans tend to follow national energy policies incases where the legal requirements are insufficient (Nilsson andMartensson, 2003). In addition, it has been observed that the paceand nature of energy investment tends to be influenced by thetaxes, charges and subsidies set by central governments, ratherthan local energy planning (Olerup, 2000).

Another regulatory instrument foreseen by the DH Law restson the local authorities’ establishment of ‘DH zones’ in line withthe ‘one area, one heat source’ principle. Feasibility studies for DHzones are meant to designate geographically delimited territorieswhere heat can only be provided through the DH system. Theconcept is based on the suggestion that the development of oneDH network in a single area makes good economic sense; localpolicies are thus meant to identify the territories where DHrepresents the least-cost option. However, neither the DH Law norits associated regulatory documents elaborate the practicalimplementation of this tool, which might explain the reasonsfor its almost complete under-utilisation.

The DH Law also uses the concept of ‘one apartment building,one heat source’ in order to set the ground for a phased, localauthority-approved programme (applicable until the end of 2009)for the connection of collective blocks of flats to the DH network.This means that municipal governments are in a position topromote competition between gas and DH companies through thegranting of licenses for heat provision in particular geographicalareas, since the extension of gas networks in the streets alreadycovered by DH is conditional upon their approval (Grohnheit andGram Mortensen, 2003). However, while ‘one area, one heatsource’ involves ‘one apartment block, one heat source’ bydefinition, the reverse is not always true. Our intervieweespointed out that the legislation’s vague use of two concepts withrelatively different implications can potentially increase the localauthorities’ confusion, while opening the space for gas companiesto challenge their decisions.

6.2. Tariff regulation

The setting of DH tariffs in Romania is shared between ANREand local authorities, as there are three types of prices in thisdomain: (i) the heat production, transport, distribution andsupply prices approved by ANRE, also termed ‘heat prices’; (ii)local heat prices applicable only if heat prices are above 107.5RON/Gcal (approximately 29 EUR/Gcal), commonly named‘reference prices’, and (iii) the local prices charged to finalconsumers, also termed ‘population prices’. In determining thetariffs, the Romanian authorities rely on a cost-plus regulation,heat prices are determined by reporting ‘justified costs andrevenues’ in relation the total output of useful heat, according toArticle 22 of the Price Setting Methodology. In line with Article 8of the same document and Article 40 of the DH Law, justified costsand revenues are meant to cover (i) variable costs (fuel costs,costs and/or revenues afferent to the purchase and/or sale ofemissions rights), (ii) fixed costs (operational costs, environmentalcosts, depreciation of assets, new investments approved by ANRE),(iii) a profit share of no more than 5 percent, (iv) heat losses, asapproved by local authorities, and (v) the profitability of exitingassets and new efficient investments approved by ANRE.

The average fuel acquisition price for a given year isdetermined on the basis of the justified quarterly acquisition

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prices for the previous year, although Article 18 of the PriceSetting Methodology stipulates that estimated fuel price increasesshould also be taken into consideration. DH companies have tosubmit the supporting documents required for the approval of theprices for the following year latest by the 25th of October. Oncethe documents have been submitted, ANRE has the authority torequire additional data, clarifications, or supplementary informa-tion. Quite optimistically, the 15th of November is provided as thedeadline by which ANRE revises the documentation and gathersany additional information that might be needed from theoperators, who are obliged to conform in this respect. ANRE isthen supposed to determine and communicate the final heatprices by the 15th of December.

It is worth noting that the DH Law allows local authorities toapprove heat prices in cases where concession agreements exist,but not without the endorsement of ANRE. However, thesimplification intended to be brought about by this provisionbecomes debatable in light of the lack of evidence that it offersadditional expediency in comparison to the usual process, as wellas the fact that ANRE’s administrative endorsement is requiredeven in cases were price setting and/or adjustment formulae arespecified within the concession agreements. The entire process isfurther complicated by the questionable expertise of localauthorities in this domain, as well as the specific ownership andcompetition structure of the DH sector.

The procedure for setting reference prices requires theapproval of both local authorities and ANRE. Having been initiallyproposed by the DH companies, they are preliminarily adopted bythe local authorities and submitted to ANRE for endorsement.Once ANRE issues its consent, local authorities establish popula-tion prices based on the approved reference prices. At the sametime, the authorities grant subsidies that are intended to cover thedifference between the established heat prices and the referenceprices after the payment of any additional compensation meant tocover unpredicted increases in fuel costs, payable from the statebudget. The whole procedure is designed in such a way so as toensure that DH companies accrue a ‘reasonable’ profit.

The use of the previous year’s heat prices in the calculation ofreference prices may burden local budgets. This mainly stemsfrom payment gap created by the timeline mismatch between theapprovals of the heat and reference prices (see Fig. 4). Under thecurrent rules, ANRE has to communicate the reference prices forthe following year to local authorities by the 1st of October, whilethe heat prices for the next year have to be approved by the 15thof December. Article 21 of the Pricing Methodology states that anyincreases in heat prices after the setting of reference prices shouldbe covered by obtaining funds from local budgets until the nextcalculation of heat prices, or by increasing population prices. Thelocal authorities’ and operators budgets are further strained bythe length price approval procedure. Even though the PriceSetting Methodology was only passed in June 2008, hitherto

Fig. 4. Timeline mismatch in the setting of Roman

experience demonstrates that its completion may take up to sixmonths, forcing operators to charge old prices. The chain oftransfers of the relevant amounts from state to local budgets andthereafter to DH companies has also been marked by significantdelays.

As far as population prices are concerned, it is also worthnoting that residential DH customers in Romania have a choicebetween one- and two-tier consumer tariffs. The former have onlyone component which is consumption-based, giving households astrong incentive to save energy and making the installation ofmeters essential. The latter contain a variable (or consumption-based) component and a ‘capacity’ charge in order to allow DHcompanies to cover their significant fixed costs irrespective ofheat consumption. Industrial customers do not appear to havebeen granted a choice between the two tariffs so far, althoughthere is evidence that the two-tier tariff tends to be used byindustrial customers, while the residential ones opt for the one-tier tariff (OECD/IEA, 2004).

The entire price setting approach is based on a cost-plusregulation, which, despite being characterised by a simplicity ofimplementation (OECD/IEA, 2004), has the drawback of failing topromote efficiency. This is because it encourages DH enterprisesto overstate costs: since the companies can only recoveroperational costs, an increase in reported costs translates intoan increase in profit. In essence, the regulation does not allow forfull cost recovery (Kennedy, 2005). Moreover, considering that theprofit calculation is based on total costs rather than investment, italso fails to provide adequate allowances for new capitalinvestment. Current DH prices thus fail to ensure the sector’scompetitiveness with other heat sources. As a whole, the own-ership structure of the sector, the formal supervision exerted bythe regulatory authorities, the general belief that DH networkswill be kept alive irrespective of their performance, as well as thecost-plus tariff regulation all seem to feed a lack of accountabilityon behalf of the management of the DH companies. As pointed outby one of our interviewees: ‘DH companies in Romania tend not tobe operated as businesses are’.

7. Subsidies and support programmes

7.1. Social support

In order to address the social impacts of increasing DH prices, adirect social support scheme has been functioning since 2003. Itseeks to provide financial assistance to low income households bycovering a given percentage of the DH bill (ranging between 10and 90 percent, depending on the level of income), and bygranting a fixed level of income support towards the payment ofgas bills among targeted households. Although DH bills arecalculated by multiplying the amount of individual consumption

ian DH prices. Source: Authors’ own research.

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with population prices, the legislation also specifies that indivi-dual consumption cannot exceed a given maximum determinedby the apartment type and temperature zone.

The social support programme is financed by the state budget,through funds paid by the Ministry of Labour into local authoritybudgets, who subsequently transfer them onto DH companies.The Ministry also supervises the implementation of the pro-gramme, as its regional offices—as well as local mayors—have theright to make queries that would verify the accuracy ofinformation provided by consumers. It is also worth noting thatlocal authorities can supplement the support provided by theMinistry with additional financing from local budgets. Butcovering a percentage of the DH bill rather than a fixed amount—as is the case with household payments for gas—means that thehigher the bills are, the more financing the DH companies willreceive. They are thus disincentivised to increase the energyefficiency of their services through new capital investment. Theeffectiveness of the consumption maximum is also questionable,given the absence of demand-side management and metering(Leonardo et al., 2006).

Although—according to the National Energy Strategy at least(Government of Romania, 2007)—the social support scheme hasmanaged to reach a wide range of vulnerable households to date,it does not fully address the affordability of heat, which remains aproblem for low income groups in Romania (Kennedy, 2005).Critics consider the programme a political manoeuvre aimed atcreating the illusion of a social subsidy, in order to avoid the IMF’sopposition to the continued existence of indirect utility subsidies.They insist that the issue of energy affordability will continue toexist, since the scheme does not address demand-side manage-ment and metering.

7.2. Network rehabilitation and CHP

As noted above, Romania also developed a specialised DHProgramme aimed at aiding the rehabilitation of the system. Itwas formulated at the national level, with management activitiesbeing undertaken by a unit within the Ministry of Administrationand Interior entrusted with a variety of tasks, including themonitoring of public procurement procedures, supervising in-vestment implementation and regulating the relationship withfinancial institutions. Local authorities are the sole beneficiaries ofthe programme, which means that they should use it to undertakeinvestment in the network infrastructure itself, rather than theDH operators they own. The funds for the programme are alsomanaged directly by local authorities. However, our intervieweespointed out that the programme is ‘a mega-project difficult tomanage’ which further entrenches the monopolistic nature of DHservices. They maintained that its magnitude would inherently beassociated with management difficulties, a lack of transparency,and a paucity of appropriate administrative structures for itsimplementation. In addition, the programme mostly favoursricher local authorities due to the scale of investment needed(Leonardo et al., 2006).

The National Energy and DH Strategy as well as the ElectricityLaw have firmly placed cogeneration on the agenda of theRomanian authorities. The means employed to this end includestate aid, GHG emissions certificates bonuses, bonus schemes andthe trading of guarantees of origin. The national plan for theallocation of certificates for GHG emissions between 2008 and2012 sets aside a bonus for cogeneration, applicable to bothexisting and new CHP plants. For the former, the main eligibilitycriterion is a global efficiency of at least 65 percent (MMGA,2008). As of 2007, a bonus scheme has been rewardingcogeneration producers with a given amount of funds for each

unit of electricity produced under high efficiency conditions anddestined for internal consumption. Guarantees of origin havealso been issued for the electricity produced in this manner.Nevertheless, policy actions for the promotion of cogeneration arestill limited, because the trading of guarantees of origin is at itsvery inception. Considering that DH in Romania is a monopoly,the eligibility for state aid is rather limited in this sector.

8. Conclusion

Going back to the research questions posed at the beginning ofthis paper, it can be stated that the effective regulation of Romania’sDH sector is hampered by a number of legal barriers, including thefact that tariff regulation is a complicated, messy and lengthyprocess with prerogatives shared between local authorities, ANREand ANRSC in a rather complicated and convoluted manner. At thesame time, the underdeveloped legal framework has not providedclear guidelines for the implementation of DH zones or the contentof the heat plans. The prerogatives attributed to local authorities inthe case of the former appear rather limited, while the latter riskbeing perceived as formal requirements to be fulfilled just for thepurpose of accessing new financing.

The sector’s poor energy efficiency performance is hampered bythe ill-defined intermediary role of owners’ associations, the lowcompetitiveness of heat due to the use of proportional cost-allocation methods, the reliance on cost-plus tariff regulation, thetimeline mismatch between the approvals of heat and referenceprices, as well as the overall structure of subsidies to the sector,which reward production instead of efficiency. At the heart of manysuch problems lies the discrepancy between the de facto activities oflocal authorities in the DH sector, and the formal role ascribed tothem in the relevant laws. This is mainly because local budgetsmainly draw their funds from the central state, which also has arange of tools to control the management of local budgets. Theinadequate functioning of local authorities in the DH domainsupports the general finding that the post-communist devolution ofpower to local authorities in Romania as a process of de-concentration, rather than decentralisation (Leonardo et al., 2006).

In light of these findings, it can be argued that DH regulation inRomania is still undergoing a process of transition. Although thepassing of the DH Law and supporting legislation represents astep forward in the right direction, there is significant room forimproving its regulatory provisions, such as the issuance ofsanctions under the Energy Efficiency Law. Also, various policyaspects—for example, the provision of third party access—requirethe drafting of completely new legislation. Further action needs tobe taken to ensure a better coordination between ANRE andANRSC, the use of the licensing procedure for the control of thequality of the service, as well as the minimisation of the owners’associations role in the cash flow from consumers to DHcompanies.

Amending the tariff regulation in order to eliminate thetimeline mismatch in the pricing procedure might contributetowards easing the burden on local budgets. The phasedelimination of reference prices and the further development ofsocial safety nets might represent a possible way forward forensuring full cost recovery. In addition, the replacement of thecost-plus tariff regulation with benchmarking could stimulatecompetition between DH companies, who would have to striveagainst each other for cost savings even when not operating at thesame local market (OECD/IEA, 2004). The elaboration of guide-lines for the implementation of DH zones, as well as the draftingof heat plans, could stimulate local authorities to act to this end ifaccompanied, for example, by an incentive scheme stimulatingcompetition between local authorities and rewarding their

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progress. Ideally, the implementation of benchmarking should bepreceded by a gradual removal of subsidies. Also, the assignmentof more attributions to local authorities should follow theexpansion and strengthening of their managerial capacity. Clearly,the development of an adequate DH legal framework in theRomanian regulatory setting is a lengthy and gradual process.

Acknowledgements

Diana Poputoaia wishes to thank Tamar Pataridze for makingthe summer spent in the Bodleian a memorable experience. StefanBouzarovski acknowledges the support provided by the Ministryof Education, Youth and Sports of the Czech Republic, project no.MSM0021620831 ‘Geographic Systems and Risk Processes in theContext of Global Change and European Integration’.

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