Czech Senator Alerts Prosecution Service of the Varna District Heating Utility

On 21 November 2019, Lukáš Vagenknecht, an engineer and Member of the Senate of the Czech Parliament alerted the Sofia Metropolitan Prosecution Office of a manifestly disadvantageous contract concluded by the Czech State-owned company CEZ in Bulgaria.

The alert concerns suspected economic crimes (knowingly concluding a disadvantageous contract and failing to act diligently in business matters), various misdemeanours (misconduct and abuse of office) and alleged tax fraud for the purpose of evading the payment of tax liabilities in a significant amount.

The doubts have arisen in connection with a series of sale transactions that ultimately led to Sigda OOD — a company without any track record or experience in the energy sector — acquiring the Varna District Heating Utility Company (TPP Varna EAD), which have been brought to the attention to the Prosecution Service of the Czech Republic. Only several months after the sale, the company linked to Danail Papazov, former Minister of Transport and long-standing Director of Port Varna, was acquired by the Honorary Chair of the Movement for Rights and Freedoms (MRF) Ahmed Dogan.

The investigation of the factual circumstances of these transactions by the Prosecution Service ‘is in the interest of rule of law and the common European values we share and serve the interests of both Czech and Bulgarian taxpayers’, Senator Vagenknecht emphasized in his letter to the Prosecution Service.

The Senator’s alert was developed in cooperation with the Anti-Corruption Fund (ACF) and the ACF was indicated as the contact person of the Senator in Bulgaria.

‘As early as June this year, the ACF alerted several competent institutions in Bulgaria of a number of disconcerting circumstances in the curious case of the sale and acquisition of the Varna District Heating Plant’, Boyko Stankushev, ACF Director, said in a statement. ‘Our actions have so far failed to elicit a response from the competent Bulgarian institutions or prompt them to act in order to protect the public interest. The Czech senator’s alert, however, clearly shows that the questions, puzzling solutions and actions taken by the public authorities in Bulgaria following the acquisition of the Varna District Heating Plant remain a priority and continue to await answers’.

More specifically, on 19 June 2019, the ACF notified the State Agency for National Security, the Ministry of Energy and the Commission for Energy and Water Regulation (CEWR) of a decision of the State-owned company to pay millions to the Varna District Heating Utility Company for cold reserve, despite the plant being in a poor state of technical repair, which creates a clear threat to Bulgaria’s energy security and, therefore, national security.

We have also notified the National Revenue Agency (NRA) in connection with suspected tax evasion in the context of the acquisition by SIGDA OOD of the Varna District Heating Utility Company and the subsequent acquisition of SIGDA by the Honorary Chair of the MRF, Ahmed Dogan. On 1 July 2019, the NRA notified us that it would launch a probe and that we would be informed of the results as soon as they become available. By a letter dated 24 October 2019, the State Agency for National Security notified us that the conducted probe did not reveal any threats or risks for Bulgaria’s national security.

We received the most detailed answer from the CEWR, which by a Letter dated 15 August 2019 notified us that information has been requested from the Electricity System Operator (ESO EAD), the company responsible for conducting cold reserve tenders and selecting the companies to which contracts are awarded, including the Varna District Heating Utility Company (TPP Varna EAD). The electricity system operator confirmed the information set out in ACF’s alert that no field checks to verify the operational worthiness of plants are carried out and that operational and performance parameters are monitored remotely, with sanctions imposed when performance parameters fail to meet approved operational requirements. It further confirmed that such sanctions were already imposed on the Varna District Heating Utility Company in 2018.

TPP Varna EAD has also confirmed the information set out in ACF’s alert in respect of the tenders launched for repairs to Unit 6 necessitated by burst pipes and thinning of pipe walls beyond safety parameters. The tenders in question were subsequently cancelled because the three Units (4, 5 and 6) were to be put back in operation during the next regulatory period, despite the fact that the quantities of natural gas necessary for their operation would not be supplied before 20 June 2020. Furthermore, the cancelled tenders for the award of public procurement contracts were to be included in a programme for improving the environmental parameters of the facility to be implemented over the period 2020—2021. In the meantime, the company alleged that critical repairs to Unit 6 had already been performed, relying on in-house capacity and available materials.

On the basis of the information received from the District Heating Utility Company the CERW concluded that three operational units (4, 5 and 6) were currently in operation and that two of the remaining units had sufficient capacity to enable the company to bid for cold reserve contracts in the forthcoming tenders. According to the CEWR this means that the power plant has the necessary technical capacity to ensure cold reserve contract implementation. The regulatory body further concluded that there are no grounds for launching a procedure to revoke or suspend the operational licence of the district utility plant.

The Minister of Energy — the government body responsible for supervision of the state of repair and operational worthiness of energy plants and facilities by law — has chosen to remain silent on the matter.

The following questions arise:

1. If Units 4, 5 and 6 are to be operational during the next programming period, which units does the utility plant intend to use during the current period, given that the other three units are currently not in operation?
2. Which are the three fully repaired and operational units on which the district utility plant currently relies, given that repairs to Units 4, 5 and 6 have been postponed to the period 2020-2021 and that Units 1, 3 and 3 are currently inoperable?
3. What is the factual basis for CEWR’s opinion that the company has the necessary capacity to implement the cold reserve contracts?
4. Is it conceivable that the Varna District Heating Utility has been awarded a cold reserve contract and is therefore responsible for Bulgaria’s energy security whilst relying on a unit which according to the management of the plant is uncontrollable and is being kept in operation by means of occasional in-house repairs for which an assortment of available materials are used?

‘We continue to insist that the competent government institutions in Bulgaria conduct a proper in-depth investigation of the irregularities described in the alerts of the ACF and the Czech senator’, Mr. Stankushev said in conclusion.