On the GC Grapevine - Hungary - Edition 2

Also in this issue:

“The challenge is certainly ahead

of us to make every issue even

better than the previous”

This Issue’s Grapevine Pick:

Dr. Pál Kara - Vice President Legal - Mol Group

Issue 2: Energy

“(leading) is pretty much like love

in this sense, it is simply impossi-

ble to pin it down in words, and

if you manage to describe it, you

know it is not really love.”

“Stronger private investments

and interest is needed. Indeed, a

less fragmented and more

integrated regulatory framework

might help to increase both.”

“I do find it conflicting that there is so much talk about gas reserves depleting within decades yet, across the board, everyone still builds new plants that produce energy by burning gas”

“only one thing seems to be sure:

the industry has to be prepared

for further changes regarding co-

gen regulation.”

“These are exciting times for the

green energy sector both locally

and globally.”

“This will mean a fundamental

change in the operation of the

Hungarian electricity generators,

likely leading to an increase in the

wholesale electricity prices.”

ISSUE 2 VOLUME 1 JULY, 2011

Issue 2: Energy

Letter s from the editor s

Enjoy the read and a heartfelt thank you

to every GCG contributor, follower!

Orsolya Endrefi Associate Director - Emerging Europe and Latin America Legalis

When we started this

project we could not have

imagined we would

receive so much feedback

and so many e-mails from

the legal community

asking how they can get involved.

Although in its infancy, the GCG has

managed to kick-start the creation of a

true GC community in Hungary and we

plan to ensure that this momentum does

not go to waste. We will keep our call to

join us in this community open so I

would like to reiterate the tools at our

readers’ disposal:

The Private Practice Strip will offer

firms the chance to make brief announce-

ments.

The Grapevine Pick will offer all our

subscribers the opportunity to recom-

mend who should be interviewed for the

next edition.

(My) Word On The Grapevine will

offer readers the opportunity to make

their voices heard directly. Feedback,

replies, comments and additional

information that our readers wish to

share with the rest of the community.

We are always happy to hear from our

readers so, please, feel free to write to us

at [email protected] or join the

dedicated group here for more details.

Radu Cotarcea Marketing Manager - Emerging Europe and Latin America Legalis

We are incredibly pleased

with the launching of the

inaugural edition of The

GC Grapevine in May and

the immense market feed-

back we have received in

this short while. The GCG is the result

of a long-held need of a pre-eminent

legal focused publication. For those who

have contributed to this edition and the

previous, WE THANK YOU and so do

the readers, believe me. The response

has been profoundly and overwhelmingly

positive. It is YOU, our reader, who is

making this periodical the most sought

after legal publication in Hungary.

As one avid reader commented, “…

easily digestible up to date legal info

coupled with an amazing human touch”,

while another reader acclaimed “ …nice

to read about leading GC’s who are like

the untouchables, yet you come to

realize they face similar issues as the rest

of us…”.

The challenge is certainly ahead of us to

make every issue even better than the

previous. Our goal is to do just that;

make it better, more interesting and

informative with a spiral of inspiration

coming from each interviewee. We have

a market holding their breath for the

Pharmaceutical edition and our pillars of

the issue have already begun to take

shape.

As always, your suggestions are more

than welcome - actually we look forward

to them - this is your voice. Remember,

the “On the GC Grapevine” was created

for you, the elite in-house Counsel, so

let us know what legal topics you wish to

read about and the GC’s you want us to

feature.

In this issue:

DR. PÁL KARA, VICE PRESIDENT - LEGAL, MOL PLC. …………….……………3

PAGE 2

DR. BÁNFI LÁSZLÓ DEPUTY CEO FOR CORPORATE AFFAIRS AND GENERAL COUNSEL, MVM..………….……………6

DR. NAGY T. KATALIN LEGAL COUNSEL, E.ON….……8

CHANGING REGULATION FOR CO-GENERATION POWER PLANTS – WHERE IS THE END? ....…....12

EXCITING TIMES FOR THE GREEN ENERGY SECTOR BOTH GLOBALLY AND LOCALLY……..13

HOW THE REFORM OF THE EU EMISSION TRADING SCHEME (ETS) WILL CHANGE THE ENERGY LANDSCAPE IN HUNGARY..…..14

DR. ÁKOS SZENTKERESZTY CHIEF LEGAL ADVISOR, GDF SUEZ ….…………………....10


http://www.linkedin.com/groups?about=&gid=3930144&trk=anet_ug_grppro

dr. Pá l Kara, Vice Pres ident - Lega l, Mol Plc.

GCG: We know that you always practiced law in-house. Why did you choose this path and is there any reason for which you envy private practice lawyers?

P.K.: First of all, I especially like the industry MOL Group deals with, mostly because of its complexity and its role in the business and social life. This complexity provides challenging and interesting work. Let me give you an example: the defense of the OMV hostile attack was one of the most incredible tasks you can imagine. You need to think day and night how to connect the dots: business knowledge meets political sensitivities meets legally speaking highest challenges.

At the same time, I, somehow, never liked the idea of being an external lawyer. First of all, the life style seemed more hectic and unpredictable comparing with working in-house. I am not saying that working in-house cannot get crazy at times. Simply think of the example I gave earlier, but I think you can somehow better control your time.

Also, when working in private practice, your clients expect the absolute highest level of legal proficiency in any field they use your services for. This means that external lawyers need an intense specialization as one lawyer cannot really be a labor lawyer one week and an M&A one the next. In my position, though, I benefit from flexibility. I enjoy the idea of working on dozens of different cases from different practices area as well as different jurisdictions.

GCG: So what would be the characteristics of a good GC?

P.K.: First of all, you need to know your industry very well. For MOL Group, we are talking about gas, electricity, petrochemicals. You need to understand the whole supply chain from crude oil to the gas stations. For that matter, supply itself can be quite varied. If you extract oil from the sea or buy it from the Russians via the pipelines makes a world of a difference. Later you need to worry about the refining process and even the end goal, selling, depends on whether you are planning to do so retail or wholesale. Connecting this to my previous answer, as you can see, talking about oil alone, you would require at least three specialized lawyers.

Secondly, energy has always been one of the focal points of interest of politicians, economists. Because of this interest, and the scrutiny it brings with it, you always need to be very well prepared when it comes to the regulat ions surrounding the industry both at EU and national level.

Thirdly, any General Counsel is, other than a lawyer, a manager, who is expected to put together a strong team. This is why I am always heavily involved in the recruitment of my team members, whether for Hungary or anywhere else in the region, rather than relying solely on our HR department.

GCG: I imagine that having this extra hat must be rather challenging...

P.K.: Not really, we do not have that much of a fluctuation, and the one that we do register is to some extent beneficial as it brings fresh blood to the team. This allows for more room for innovation. As you

can imagine, there is actually a strong need for this in an industry that moves so fast and this small staff turnover simply provides a way for it to occur naturally.

GCG: Out of all the GC responsibilities, which do you find to be the most challenging?

P.K.: Different times require a different focus. Sometimes I am required to concentrate the bulk of my efforts on managing people. For instance, there were periods when two or three of my colleagues were having babies which meant I had to pick up their responsibilities and relocate them within the team. Other times we may get hit by a new regulation and we need to focus a lot of our attention to adapting our policies and implementing what is required of us.

As a result, I would say it is a very dynamic role and the challenge comes as a result of this. You need to be able to prioritize and focus on the project at hand and not get easily distracted by all the pending tasks from all the different areas.

GCG: When do you outsource work and based on what do you chose the firms you work with?

P.K.: The structure set up is that we outsource, especially in Hungary, those projects that require general or a wider-reaching expertise. For example, a legal proceeding is usually outsourced to a law firm specialized in such cases. For these kinds of issues it would not really make sense to keep ‘talent’ in-house simply because the counsels that we do have as part of our team are experts in the specific

In this issue:

“You need to think day

and night how to

connect the dots:

business knowledge

meets political

sensitivities meets

legally speaking

highest challenges.”

“I would say it is a very

dynamic role and the

challenge comes as a

result of this. You need

to be able to prioritize

and focus on the project

at hand and not get

easily distracted by all

the pending tasks from

all the different areas.”

PAGE 3


P.K.: If we need support on a cross-regional project, it would, in most cases, make sense to go with top international firms. Only these types of firms have the capacity to offer support across multiple jurisdictions at a time.

However, from my experience, if you are talking about projects bounded within one country, I have noticed that, in many cases, although not all the time, local firms’ input can actually prove to be more reliable at a considerably lower price. At the same time you need to consider that in some of the markets that we operate in, some of the big international names are simply not present, or if they are, they have not been there for long enough to have a solid understanding of the market relative to the local firms.

I tend not to tip the balance towards an international firm simply because of its brand name in light of what I mentioned before but also because it has been my experience that a lot of these firms represented locally do not offer the same strong support as their London offices or wherever they have their headquarters.

On the other hand, there have been quite a few big firms that pulled out of Hungary. Naturally, most of the lawyers remained and we still work with them. Just because they do not have a big name on the door does not mean that their level of service is lowered all of a sudden.

GCG: While, ‘energy’ would seem to be the most obvious answer, you mentioned that as a General Counsel you have the opportunity to work on cases from a variety of practices. What area of the law do you find the most interesting?

P.K.: Firstly I believe there is no such thing as ’energy law’. When I

think ‘energy’ I think of renewable energy, gas, oil and these, for me, represent completely different legal fields. I feel this in our company as well. For example, we are relatively young in electricity, but soon after we started working in this direction we learned that it requires completely different skills and knowledge. The bigger the company becomes and the more we outreach into new fields of the ‘energy industry’ I need to work with more and more differently specialized lawyers.

In fact, I believe that being a General Counsel does not mean you need to be an expert in

everything. I quite often tell my colleagues that it would be a huge mistake and completely bad management from my side if I was a better expert in their fields than them. I am the one responsible with managing the legal team and it is up to my colleagues to be the true experts and give the in-depth advice on their fields. I cannot, and no man can, be expected to be an expert in all the areas involved in such a complex industry.

GCG: What side of the energy law gets you buzzing then?

P.K.: Personally I enjoy most the oil side of our business. I would not be able to tell you exactly why

PAGE 4

Th

e P

rivate

Prac

tice

Strip

core functions of our company. In fact, I believe that, as a result of their work here, they are far more ‘in tune’ with the industry regulations and understand the company needs better than most private practice lawyers so I would rarely outsource for these kinds of projects.

If I make the decision to use an external law firm we send out a request for a proposal where we clarify our expectations. At the same time, we do our own homework and try to also search directly for qualified local firms that meet our needs. When we compare between firms we look at expertise primarily and secondly the fee. Equally important to the fee for us are the assumptions made in the proposal, those nice ‘provided that x is done’ or ‘provided that y happens’.

GCG: What do you not like to see in proposals?

P.K.: Too many assumptions usually kill the mood for me and operating a proposal under too many such assumptions risks easily losing a tender in my view. This is primarily due to the fact that it makes it considerably difficult for me to compare the offers. A limited number of reasonable assumptions are, of course, acceptable. For example, if I see ‘provided that the contract is under English law’ I find it perfectly fine.

At the same time, I dislike proposals that put forward unreasonable caps. In my experience, we have had plenty of low caps and firms would later come up and offer many arguments on why they would like to have those removed or changed.

GCG: What would be your inclination towards, a top tier international firm or local firm?

“there have been quite a few

big firms that pulled out of

Hungary. Naturally, most

of the lawyers remained

and we still work with

them. Just because they do

not have a big name on the

door does not mean that

their level of service is

lowered all of a sudden.”

Andrékó Kinstellar

The largest ongoing power plant development project

Kinstellar has been advising the Joint Venture of two major Central European energy holdings since 2009 in relation to the development and construction of two new 880 MW gas-fired CCGT power plants in Hungary and Slovakia, including preparing and negotiating all project agreements and advising on the regulatory implications, with a project value of more than EUR 1.5 billion. The transaction is the largest ongoing power plant project in Hungary.

The largest lignite-based power plant development project in decades

Kinstellar advised Mátrai Erőmű ZRt. between 2008 and the end of 2 0 1 0 o n t h e b r o w n - f i e l d development of a 500 MW lignite and biomass-fired power plant through a joint venture with the MVM group, including preparing and negotiating the project agreements and advising on the regulatory implications of the project, with a project value of EUR 1 billion. Although finally not completed, the project represents the largest power plant development project in decades based on Hungary’s domestic source of fuel and contemplated in a joint venture with the State.

Faludi Wolf Theiss

Faludi Wolf Theiss advises on ERSTE Bank merger

Faludi Wolf Theiss advised ERSTE Bank in relation to the acquisition of direct and indirect control over Magyar Factor Zrt. The mandate also included obtaining approval by the Hungarian Financial Supervisory Authority and the Hungarian Competition Authority.


this is the case. Maybe it has to do with my history with the company.

When I first joined there was no expert on oil regulations whereas we had one for gas and even had one on renewable energy already. Somehow it remained the case that, even in my current role, I like to focus on the oil component more and still have very strong gas experts to cover that side. Naturally, I still have to offer support on gas issues as well but oil remained my personal favorite topic.

Renewable energy law is also an interesting aspect simply because it is one of those areas that we are happy to work on the regulatory side and happy to implement systems to comply with them. We agree with controlling emissions, with the content of sulfur, and so on. I say happy in that we see the need for it and we understand our wider social responsibility to do so. Nevertheless, I enjoy finding the correct balance because I feel we need to be realistic and be aware that it is not feasible to live without conventional energy in the upcoming decades. While I am not an expert on the technical, engineering side, I simply do not see how we will be able to remove our dependency on conventional energy in the very near future.

Take wind power for example. It is still a rather unpredictable energy supply and the cost of this kind of energy is still very high relative to the conventional one. The everyday consumer might not notice it yet, but this technology, setting it up and operating it has yet to reach reasonable cost margins so that consumers would not feel the price pressure if we moved to it more and more. So it is difficult to predict when alternative energy will replace our current primary means of production although I would be

very happy to see that happening. I guess it is up to the engineers really and less up to the lawyers.

GCG: How do you comment on the EU’s target: 20 per cent renewable energy by 2020:?

P.K.: I personally think that this is, what would be a nice word for it.. challenging.

GCG: How do you expect this will be reflected Governmen-tal policies?

P.K. Well, I can tell you what happened with MOL Group and the sulfur emissions rules adopted by the EU. In order to achieve the EU targets, MOL was required to make huge investments in its refineries to be able to produce at the required quality. This is what we also have to do now in Croatia to be able to meet the EU targets when Croatia joins the EU. Personally I do not have a problem

“the Government cannot realistically expect all the market players all of a sudden to have the resources to make such investments .”

with this kind of an approach and it is no secret that this may even bring us some benefits since, in the whole Balkan area, we are probably one of the few ones who have the economies of scale to upgrade to this level.

On the other hand, the EU or the Government ca nnot realistically expect all the market players all of a sudden to have the resources to make such investments and it is not like the Government at the moment is overflowing with money to consider further costly subsidies. But I expect that even if the targets are missed, the issue of renewable energy and CO2 reduction will not go away.

GCG: Your role is a regional one. Which market has proven to be the most

challenging for you?

P.K.: Well this is one of the aspects I actually love most about my job. I already got used to the size of the company and the sheer volume involved and this idea can really get your adrenalin pumping at times. I guess it depends on the day really, with a great variety of issues popping up everywhere. In Slovakia there were times when we had issues with their competition agency as they thought that we leveraged our dominant position that we had in the country. Romania has its own challenges. There, we have a much smaller market segment, pretty much like in Austria, where we focus primarily on wholesale and that involves a completely different approach.

However I think the regional perspective in itself is one of the biggest challenges as today, more and more, regulators and agencies are in touch with their counterparts

in other countries. This means that we need to pay extra attention to consistency. This is beneficial to some extent as it ensures a discipline across the group which is so important with regulators, both at national and EU levels, becoming more and more integrated. This helps us to be prepared as we know that if we have a certain problem in one country we can definitely expect to be investigated on the same issue in other jurisdictions.

GCG: What about ‘home’? What do you find to be the biggest regulatory challenge in Hungary?

P.K.: The regulations are rapidly changing these days not to deeply explained, this could mean regulatory risk for the business - it is quite a challenging continuous task to keep track of regulatory

PAGE 5

developments. Of course, we are close to the regulatory body and have a dedicated group, separate from the legal department, which focuses on liaising with the Government and offering feedback to regulatory drafts in the official collation phase.

GCG: Will we achieve a truly integrated energy market in the EU? What are the barriers towards this goal?

I think this is first of all a historical heritage. During the socialist rules there was one pipeline from the Soviet Union to each country and there was no need to worry over energy supply. The problem is that over the last few decades only a few Governments realized the problem of over-dependency on one-sided Russian supply, although this is changing fast. MOL Group was one of the first to launch a regional gas network project because it is crucial to build a large network to be able to leverage it either in negotiations with the Russian suppliers or the regulatory bodies here. Small steps are already taken in this direction.

EU, for example agreed on several competition exceptions to facili-tate the Nabucco project. However, while the regulatory side has been improving, I think the EU should be more involved both in financing these kinds of projects as well as in negotiating the supply of the network.

Join our General

Counsel dedicated

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PAGE 6

dr. László Bánf i Deputy CEO for Cor porate Af fa ir s and Genera l Counsel, MVM

“I do not consider

myself special or

extraordinary in any

way, just as a guy

who works hard every

day to do the best he

can.”

“I am a lawyer and,

as I mentioned, after

practicing law for

over 18 years, this is

where my heart will

always be.”

GCG: Your role or, rather I

should say roles, certainly

must provide a great deal of

challenges. How does one

learn to cope with the two

hat concept – Deputy CEO

for Corporate Affairs and

General Counsel?

L.B.: Personally I simply see it as a

matter of constantly doing my

best.

Despite the dual role, I still see

myself as a lawyer first and

foremost. It is the side I enjoy

most but now I am put in a

position where I need to cover so

much more. As Deputy CEO of

the Hungarian Power Companies

Ltd, for example, I also need to

handle environmental and quality

management issues which I feel

simply add to the value of my

work.

GCG: We have seen a growing

number of General Counsels

being a part of Boards, but

few acting as Deputy CEOs.

Why do you think you, as a

lawyer, were chosen for this

role?

L.B.: To be completely honest,

you would have to ask my CEO

that. I do not consider myself

special or extraordinary in any

way, just as a guy who works hard

every day to do the best he can.

Indeed, the role of the General

Counsel carries more and more

weight in Companies’ Boards

decision making process and the

fact that MVM’s CEO chose to

have me, a lawyer, as a Deputy

CEO shows that MVM fully

acknowledges the strategic role

that a general counsel has

nowadays, especially in regulated

markets such as energy.

GCG: What is the most

difficult aspect of this dual

role?

L.B.: I do not think I could point

to one thing being more difficult

than the rest simply because of the

completely different natures of my

responsibilities. On one side I am a

lawyer and, as I mentioned, after

practicing law for over 18 years,

this is where my heart will always

be.

On the other hand, now I am in a

position where I need to manage

and lead a whole team. As you can

imagine, this is completely new to

me. I was never really educated or

trained in this direction. But I do

not think this is all that important

at the end of the day. From my

perspective, leading a team is

something that needs to be done

by nature; it has to come from

inside and not only from a

university book.

GCG: So, according to you,

what is the secret to manag-

ing, leading, developing an

effective team?

L.B.: Again, leadership is some-

thing that one needs to “feel”, not

merely “know”. I think we could

talk for days about how to be a

good leader and would still not

find the right way to put it into

words. It is pretty much like love

in this sense, it is simply impossi-

ble to pin it down in words, and if

you manage to describe it, you

know it is not really love.

GCG: Why did you decide to

practice law in-house?

L.B.: I worked in private practice

until last year. The reason I

decided to move was that, after a

while the work becomes slightly

flat and you need a new inspiration

and challenge. There is also a

strong tendency to develop this

tunnel vision that, as a private

practice lawyer, you are the best

lawyer in the world, especially

compared to those practicing in-

house.

Yes, it might sound weird to say

the work becomes flat in light of

the numerous clients you work

with but after a while you need

something that truly inspires you.

For me, this was the opportunity

to dedicate myself to one team and

have the responsibility that comes

with understanding and working

with one company in-depth.

GCG: And why did you

choose the energy sector

specifically?

L.B.: First of all, while in private

practice I was working in energy

and trade. At the same time, this

role found me, not the other way

around, and I was honoured by the

invitation to work for MVM in my

current role.

I must admit, there is, of course, a

practical consideration as well.

During the recent years’ recession,

pretty much every industry has

been struggling. Energy, however,

is one of the core industries that

any recovery needs and it was

exciting to be a part of a growing

company.


PAGE 7

GCG: We have been told that

there is no such thing as

‘energy law’ with oil, gas,

electricity and renewable

energy, all varying greatly.

Which one do you find the

most challenging and why?

L.B.: Common concepts and

regulatory challenges affect all

sectors linked to the notion of

energy law. First of all, the regula-

tory approach is based on the value

chain (upstream, midstream and

downstream). All sectors are

dominated by the core problems of

network industries: access to

network elements, security of

supply, asymmetric regulatory

obligations of incumbents,

competitiveness of services and

infrastructure investments,

sustainability and protection of

consumers. Energy law as such

therefore inevitably established an

art of skill to be understood

comprehensively. The most of the

challenge is common in each part

of energy law: to reach an optimal

consensus between the diverging

interests of all stakeholders

(government, market players,

consumers, European Union).

GCG: What do you think is

the biggest regulatory issue

in the Energy industry in

Hungary?

L.B.: In my view, currently the

biggest regulatory challenge in the

energy sector in Hungary is the

creation of an efficient and well-

functioning regulation concerning

the mandatory off-take of electricity

generated from renewable sources

and the combined heat and power

generation. The establishment of a

mandatory off-take regime always

poses a risk of over-financing or

under-financing. It should also be

noted that the establishment of such

regimes may distort competition

and may have a negative effect on

the so called „traditional” power

generation.

EU member states implemented

significantly different renewable

energy regimes. Thus, a market-

conform, unified EU legislation

would be essential in this respect.

GCG: Since most of these

targets related to renewable

energy are national in nature,

how do you expect them to be

reflected in governmental

policies?

L.B.: The Hungarian Government

outlined many far-reaching goals

both in the national renewable

energy action plan and in the new

national energy strategy they are

currently finalizing. With regards to

putting them into practice much

depends on the cooperation of

every market player so I am most

curious if steps will be taken to

incentivise this.

GCG: Do you expect sustaina-

ble energy regulations to

differ considerably from

current energy regulations in

the future?

L.B.: In my opinion, an ideal

regulation concerning renewable

energy regimes would result in

either having minimum impact on

the market or in not distorting the

market at all. Also, it would not

increase the burden on the popula-

tion of EU member states to an

intolerable level and it would

ensure reaching the established

mandatory renewable energy

targets. In this sense I trust there

will be changes to the current

energy regulations in the future

since the current ‘package’ has yet

to achieve all three objectives.

GCG: There has been consid-

erable push towards creating

a strong North-South energy

network between EU coun-

tries to reduce dependency

on the East-West line. What

are the biggest hurdles in

your mind in connecting

differently regulated mar-

kets?

L.B.: Political goals may be more

ambitious than business goals. This

means that strategic goals are not

necessarily feasible for purely

business purposes.

In this case market players can go

along with the aim of creating a

strong North-South energy

network between EU countries to

reduce dependency on the East-

West line. Moreover, they would

even participate in the execution

of the project. However, they

expect a certain portion of the

financial resources necessary for

feasibility purposes to be provided

from EU or national public funds.

GCG: As a General Counsel

for a major player in the

energy sector, you must

receive countless proposals

from law firms. What do you

look for when you chose

“It (leading) is pretty

much like love in this

sense, it is simply

impossible to pin it

down in words, and

if you manage to

describe it, you know

it is not really love.”

what law firm to outsource

work to?

L.B.: If the decision to outsource

is made, I usually look at the

professionalism and reliability that

the proposal conveys. For me a

proposal should not be about the

quantity of information presented.

I value proposals that focus strictly

on the core of the problem. I like

to see a drive towards the

identified problem and clear-cut

solutions to address them and not

a lengthy proposal explaining the

barriers and obstacles towards

solving it.

Personally I don’t care too much if

I work with a small local law firm

or a Magic Circle firm. Indeed, the

latter has a strong infrastructure

and the capabilities required for

some of the projects, but really, at

the end of the day, it is profession-

alism, best portrayed in their focus

on the problem and not on the

barriers, that is the winner for me.

GCG: What advice would you

give any lawyer considering

moving in-house?

L.B.: It is quite hard considering

the completely different systems of

work between private practice and

in-house. I think it is important to

understand the difference between

the two and to understand that

when you move in-house, you

automatically become part of a

team.

Most private practice lawyers that

join my team are excellently

prepared lawyers, but they tend to

be individualistic. The more aware

you are of this difference, the

faster the transition will be from a

lonely wolf to enjoying the

benefits and social security that

working in a team offers.


GCG: What would you say

are the key characteristics

that make a good General

Counsel?

K.N.: I think it takes a bundle of

characteristics as well as attitudes

to meet the specific requirements

of the role as well those of the

company. I include the company

because I do think the role of the

General Counsel does vary consid-

erably based on the nature of the

company and the industry it

operates in.

Being a good lawyer is obviously

not enough. A good General

Counsel needs to consider

himself/herself a part of an

organism and be directly involved

with the day to day undertakings

of the company. One has to be

constantly proactive with regards

to threats and opportunities and in

order to best do this, the General

Counsel must immerse himself/

herself and identify with the

company in order to best identify

and focus on its specific needs.

dr. Katal in T. Nagy Legal Counsel, E.ON

GCG: What do you find to be

the most difficult part of your

role? How do you overcome

it?

K.N.: Differences management is

one of the key aspects I try to keep

in mind at all times. It is crucial to

understand that, unlike in a big

law firm, when working in-house,

you deal with people coming from

different backgrounds, with

different education and different

cultures. Because of these

differences you are expected to

express yourself not as a lawyer,

but clear and concise. In order to

get your point across you need to

be able to understand the way

someone who does not have a legal

background thinks and adapt your

message accordingly.

I believe the key to success in this

regard is listening to colleagues.

When in-house, you are surround-

ed by a wealth of knowledge

readily accessible to anyone willing

to listen. I am surrounded every-

day by great professionals, great

engineers who have this strong

passion for what they do and are

always proud to speak about their

work. Anyone willing to listen

carefully easily learns how the

industry works and how their

mind works, what their priorities

are and, implicitly, how to adapt

your message to something they

can relate to.

There is of course a price you pay

for this. You cannot be distant or

neutral anymore. You become

emotionally involved and care to a

deeper level about the decisions

you make. The risk analysis you

apply is always so much more

in-depth because of this.

GCG: Having worked both as

lawyer at an international

law firm as well as General

Counsel, would you go back

in private practice?

K.N.: I am not sure. I enjoyed the

first six years of my legal career

when I worked at the law office

simply because I was constantly

surrounded by a big professional

group of my peers. However,

while at the time I felt I had a good

understanding of our clients, I was

always an outsider. It was always a

purely artificial relationship that

did not really provide a real feeling

of the organisation the same way

that working in-house does.

GCG: Why energy?

K.N.: Energy is a top focus in each

country. As a result, it is, at the

present time the most complex,

challenging and changing industry.

Lawyers love challenges and the

energy industry has plenty of it.

Firstly, it develops at an amazing

pace and simply staying in tune

with what the newest technologies

and practices are is a challenge.

Secondly, it is a complex exercise

with up-stream, mid-stream,

down-stream, all having their own

regulatory challenges: storage is

unique; trading is a completely

different game; and so on. Third-

ly, it is a regulated industry and we

need to do more than simply be up

to speed with policy changes but

PAGE 8

“Anyone willing to listen

carefully easily learns

how the industry works”

Gide Loyrette Nouel - D’Ornano Iroda

Hydro Power Plant at Békésszentandrás

Gide Loyrette Nouel is advising OTP Bank Nyrt. in relation to the financing of the building and maintenance of a hydro power plant at Békésszentandrás. The hydro power plant at Békésszentandrás r e p r e s e n t s a s u c c e s s f u l implementation of Hungary's new energy policy identifying the priority of low CO2 intensity power generation by using renewable energy.

Review of the Serbian operation of a TOTAL affiliate

Gide Loyrette Nouel received a new mandate from the affiliate of the French petrochemicals company TOTAL, for the full review of its operations in the Serbian market and recommendations of the possible structuring of the future activities. The mandate required the full co-operation of GLN lawyers in Budapest and its affiliate firm in Belgrade.

Horváth & Partners DLA Piper

DLA Piper in Hungary advising on the purchase of a 21,2% shareholding in MOL Plc.

DLA Piper has advised the Hungarian government on the purchase of a 21,2% shareholding in MOL Plc., the Hungarian industrial company and one of the largest companies in the CEE (approximately EUR 10 billion market capitalisation). The advice also covered complex issues related to takeover bids, voting right reporting, as well as potential financing structures.

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PAGE 9

also try to be proactive about

adapting to them.

GCG: Where do you see

yourself five years down the

line?

K.N.: I see myself richer with

industry specific knowledge,

hopefully working for the same

group, In this industry, challenges

are just around the corner so I

cannot imagine at this point ever

getting bored.

GCG: What do you look for

when choosing a law firm to

work with?

K.N.: We have 20 lawyers in our

legal team at the moment so the

first step is to see if there really is a

need. We might turn to private

practices in case of skill shortages,

capacity shortages or where there

is a high degree of risk involved.

Of course, if we need to choose

one, I look at the professional

credentials in the first instance. I

also care deeply for firms that

understand the business need

behind a project, thus going a step

beyond simple legal advice.

GCG: Did you ever consider

an engineering degree?

K.N.: Oh no. Admittedly, it

might be useful to actually

understand the ratio of exchange

of the cubic meter to God knows

what. But in reality, all the

information I would need I can

learn from my colleagues.

GCG: What do you see as the

main regulatory challenges in

your industry in Hungary in

the next few years?

K.N.: I think drafting a clear and

sustainable direction is very much

needed at the moment. A lot of

questions are still left unanswered at

the moment: how to replace the

current mandatory takeover of

power plants?; there is a lot of talk

about smart grids but the concept is

far from being clarified – are just

some of the pending issues at the

moment.

The implication for us is obvious. It

is simply difficult to take any action

without knowing the form of the

final Regulation. Working on draft-

ing regulations is also particularly

difficult. We are often faced with

considerably tight deadlines in

providing feedback. This allows for

very little time to fully consider the

companies as well as the markets

interest in offering advice on the

regulations drafted.

GCG: ’Renewable energy’ is

surely one of the buzz words

in the industry. How is this

concept reflected by the Hun-

garian regulatory bodies?

K.N.: There is a strong commit-

ment from the Hungarian Govern-

ment towards renewable energy.

However, this still needs to be

reflected in a transparent, consistent

and predictable regulatory package.

I say consistent because there are a

multitude of factors that need to be

considered: subsidies, tax systems

and infrastructure to name just a

few.

At the moment it is difficult to

consider all of the above primarily

as a result of how fragmented the

regulations and regulatory bodies

involved are. As a market player, it

is then hard to see the big picture

and to identify a clear direction in

which to act.

GCG: In light of recent

events, I need to ask, how do

you see the future of nuclear

energy in the EU? Do you

think more countries might

follow suit after Germany

announcing it is withdrawing

from the nuclear programme?

K.N.: It is of course difficult to

predict but I believe this would

give rise to considerable questions

of energy supply. It obviously will

depend on local regulatory bodies

ultimately but my personal view is

that nuclear energy, in today’s

world is unavoidable.

GCG: There have also been

talks about SE countries

seeing this as a potential

opportunity to expand their

own nuclear programs and

take advantage of the gap

created. Do you find it likely?

K.N.: Not really. Other than the

infrastructure build-up needed to

ramp up these programs it is clear

that recent events re-ignited the

debate over nuclear power and

regardless of a gap in the market

or not, those local regulators will

face the same concerns that the

German ones did.

GCG: Will we ever have an

integrated energy market in

the EU?

K.N.: I think from a regulatory

point of view this is a very compli-

cated matter. Security of supplies

and limiting dependency and the

idea of a single European Energy

Market are obviously goals pushing

in this direction. Both the EU and

individual member states have

made considerable progress. We

already have wholesale initiatives

and quite a few regional projects.

However, I think that regulatory

support is not enough. Stronger

private investments and interest is

needed. Indeed, a less fragmented

and more integrated regulatory

framework might help to increase

both factors.

“I also care deeply for firms

that understand the business

need behind a project, thus

going a step beyond a

simple legal advice.”

“it is clear that recent events

re-ignited the debate over

nuclear power and regardless

of a gap in the market or

not, those local regulators

will face the same concerns

that the German ones did.”

Who do you see as a

leading expert in the

pharmaceutical indus-

try?

Who would you love to

read about?

Tell us at

[email protected]


PAGE 10

(My) Word On The Grapevine

GCG: According to many,

comparing the work of

in-house lawyers and that of

private practice ones is like

comparing apples and

oranges. What are the main

differences from your

perspective?

A.S.: I think that in-house

lawyers, as opposed to private

practice ones, focus less on

‘troubleshooting’. Our primary

role is to facilitate managerial

decisions and support the

organizational goals. Also, when

looking at problem-solving,

in-house lawyers do not only focus

on coming up with a solution but

also work alongside other

managers to implement them.

Because of this proximity, when

identifying solutions in-house

lawyers also have a different

approach to legal matters. Private

practice lawyers tend to think in

terms of best practices, fast

solutions to a specific problem.

In-house lawyers have a more long

-term perspective and always

dr. Ákos Szentkereszty Chief Legal Advisor, GDF SUEZ

consider how these practices can

be applied, if at all, to the organi-

zational context and what will be

the ramifications to the other

functions of the business.

This long-term orientation is also

the main push towards our effort

to keep communication channels

open with the regulating bodies to

provide input on how legislation

should be passed and implement-

ed. In this sense, again, we always

have to think in a more strategic

manner than a simple ‘this is the

law, this is the solution’ equation.

Don’t get me wrong, I appreciate

private practice lawyers as excel-

lent professionals that provide you

with an accurate set of options

based on the law but you need to

understand that in most cases, they

stop at presenting one, two, three

possible solutions or opportuni-

ties. It is up to the general counsel

to assess them and chose the

option that is best suited to the

context of the company. I think

this makes perfect sense as I will

be the one stuck with making sure

the solution I chose is applied in

practice by all the stakeholders.

GCG: Which of the two sides

do you believe is the most

challenging one: to come up

with a solution to a legal

matter or the follow-up or

implementation of it?

A.S.: Both. The first is difficult as

a creative process if you want to

think of it in this way. The second

involves a lot of responsibility as

we are usually talking about a lot

of money which is especially true

in the energy sector.

At the same time, you need to

understand that implementing

such decisions is made particularly

difficult by the regulatory environ-

ment in Hungary which is

constantly changing. This often

leads to cases where one day you

think you came up with a good

solution and you realize the

following one, when you are

trying to implement it, that it no

longer applies.

GCG: How do you manage

communicating a decision

across your company as part

of implementing legal

decisions?

A.S.: I believe that legal matters

in-house do not exist in a void.

Rather, they impact a wide variety

of functions in our company so

whenever we have a decision to

make we create cross-functional

committees with members from

all relevant departments. The

same team later ensures the imple-

mentation across the organization

in all the relevant areas of work.

GCG: What led you to the

energy field?

A.S.: I have been working in

energy since 1998, primarily on

the electricity side, not so much

on gas. Early in my career I

worked with DÉMÁSZ in Szeged

and later moved to E.ON. Having

started off on this road I stuck with

the energy sector because I believe

it is the direct experience in a field

that truly prepares you as opposed

to books.

GCG: Why electricity in

particular?

PAGE 10

Kajtár Takács Hegymegi-B a r a k o n y i B a k e r & Mckenzie

Baker Mckenzie advises on Jones Lang LaSalle merger.

Baker & McKenzie advised global real estate firm Jones Lang LaSalle on its GBP 197 million multi country merger with international property consultancy King Sturge. The combination - involving 9 CEE countries, 6 Western European countries and Hong Kong - creates the clear leader in the UK and Continental Europe in real estate s e r v i c e s a n d i n v e s t m e n t management.

Réczicza White & Case

Réczciza White & Case advised

MVM subsidiary Vértesi Erőmű Zrt. on arbitration proceedings related to power purchase agreements

We represented Vértesi Erőmű Zrt. in several arbitration proceedings launched by or against it in relation to non-compliance with certain power purchase agreements by its contracting parties. Among these proceedings, with amounts claimed

of €130 million in total, were the very first cases before the newly established Hungarian Energy Arbitration Court.

Réczciza White & Case is advising E.ON Tiszántúli Áramhálózati Zrt. in a GVH investigation

We are representing E.ON Tiszántúli Áramhálózati Zrt. in connection with an investigation related to public lighting initiated by the Hungarian Competition Authority (GVH), now before the courts.

Th

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(My) Word On The Grapevine

RE: On The GC Grapevine

Congratulations on the first issue

of the GC Grapevine, which is an

excellent platform for the

exchange of ideas among GCs and

private practitioners in Hungary.

The first issue, devoted to TMT

and GCs in TMT, also covered

many interesting topics facing the

sector, including Internet

protection, “net neutrality” and

the potential impact of the EU’s

new regulatory framework on the

telecoms industry.

Other TMT issues that I believe

would be useful to explore include

the potential attitude of the

Hungarian regulatory authority

(NMHH) toward market players

in light of the new EU regulatory

framework to be implemented in

Hungary and the implications of

the delayed switchover from

analogue to digital transmissions

for TV broadcasting in Hungary,

which is now expected to be slated

for 2015.

There are, of course, other sector

specific features facing the TMT

sector in Hungary. These include,

for instance, the tendency among

local subsidiaries to use UK law as

the governing law for interconnec-

tion and other network agree-

ments, instead of Hungarian law.

While this practice stems from the

understandable desire to have one

unifying law governing such agree-

A.S.: I guess it has to do with the

town. Electricity was a given in

the town of Szeged. In the field of

electricity DÉMÁSZ is the biggest

company in the south region of the

country. I guess it played a role in

my perspective at the time that

electricity represents the future.

At the same time, I like to think of

it in terms of the basic needs of

people: food, water, medicine and

electricity (energy). I could not

imagine myself as a doctor and

there was not much I felt I could

do with the first two either.

Electricity on the other hand, I

felt, would allow me to make an

impact. But that was it really. It

was just a feeling or a calling if you

will.

When compared to the rest of the

energy field, electricity also sets

itself apart in that it cannot be

stored. I guess oil would have been

an interesting side of the energy

sector to explore but we simply

never ‘met’.

GCG: How does a regular day

at the office look for you?

A.S.: Hectic, primarily because we

are a relatively small team. At

E.ON we had a bigger team.

Nowadays I work with four others,

which as you can imagine is less

than little for a company operating

in a regulated industry. But I believe

in quality over quantity and, as a

manager, I can be very proud of my

team.

One of the main preoccupations of

our lawyers at the moment is

actually outstanding debts that we

need to collect with more than

5000 open cases. As you can

imagine, for a team so small, this is

quite a challenge to manage.

GCG: You mentioned at the

beginning how the general

counsel role is very strategic

in nature, and we see more

and more general counsels in

the Boards. With such a small

team and such a time consum-

ing task at hand, how do you

manage to maintain a strategic

vision throughout the day?

A.S.: We have to outsource many

of these activities and simply

manage and oversee them. Debt

collection is one of them for

example. The labour law side is

another one that we leave in the

hands of external lawyers. Not

only does it allow us to focus more

on the strategic side but is also

used as a cost-cutting tool.

GCG: Cost-cutting? I would

have imagined using external

lawyers would be considera-

bly more expensive on the

long-run rather than in-

house staff.

A.S.: Yes, at the end of the day it

is a surprise for me as well but

with the right contractual set-up

we only end up spending money

on these outsourced tasks strictly

on a need basis. It offers us a lot

more flexibility, on one side, but

also provides these external

lawyers with the same flexibility to

work on the rest of the market. I

would say it makes for a win-win

situation.

GCG: Talking about external

counsel, what are the criteria

you look at when choosing a

law firm to work with?

A.S.: Assuming no conflict of

interest exists, I find the track

record, specifically in the sector,

speaks the most when it comes to

choosing one. Of course, cost is a

factor we consider but that is

negligible since we work with caps

most of the times. However, I

only make the proposal on who to

work with, I need to confirm this

with the Paris office but it would

be very rare that a different

decision would be made than my

recommendation.

GCG: Renewable energy is

one of the buzz words in the

industry. One other general

counsel featured in this edi-

tion made a valid comment in

that at this point, how it pro-

gresses depends more on the

engineers than on the lawyers

at this point. What is your

take on this?

A.S.: It is indeed a hot topic, and

rightfully so. I do find it conflicting

that there is so much talk about gas

reserves depleting within decades

yet, across the board, everyone

still builds new plants that produce

energy by burning gas. I do agree,

however, with the fact that, with

the current technological tools at

our disposal, there are not a lot of

viable alternatives.

I do see a role that lawyers can

play in all of this though. Progress

can only be ensured through a

consistent regulatory package and

lawyers definitely have a say in the

matter. If we do our part and

provide for the right regulatory

context, I am sure engineers will

do theirs.

“I do find it conflicting that there is

so much talk about gas reserves

depleting within decades yet, across

the board, everyone still builds new

plants that produce energy by

burning gas.”

ments for group entities, this

might entail a degree of risk vis-à-

vis local mandatory rules and the

Hungarian regulatory authority’s

reactions.

Ákos Nagy, Andrékó Kinstellar

If you would like to comment,

reply or add your viewpoint on

any of the articles or the publica-

tion overall, write to us at

[email protected] to share

your views with the GC communi-

ty.


The subsidy scheme of electricity generated from renewable sources or waste or by the use of the so-called co-generation technology (“co-gen”) was, and partially still is the system of mandatory off-take and feed-in tariffs. The electricity generated with co-gen technology is off-taken by MAVIR, the Hungarian transmission system operator, within the limits and for the duration determined by the Hungarian Energy Office (“HEO”).

Chang ing regulat ion for co -generation power plants – where i s the end? dr. Zol tán Faludi & dr. Lász ló Kenyeres - Faludi Wolf Theiss

The mandatory off-take system for co-gens was originally to expire by the end of 2010. However, since this would have meant a 20-30% increase of district heating prices, affected market players and public bodies lobbied consider-ably for sustaining the mandatory off-take scheme. The Parliament yielded to the pressure and passed Act CLXXXI of 2010 and, thereby, extended mandatory off-take for co-gen electricity for another two years. This was, however only the beginning: a new bill submitted to the Parliament on 21 January 2011 envisaged further price reduc-tions. Industrial stakeholders immediately concentrated fire on the bill, which was subsequently revoked.

Thereafter Act XXIX of 2011 was promulgated on 25 March amending the Electricity Act in a rather comprehensive way. As a result of a swiftly lodged surprise amendment, co-gen power plants were expressly excluded from the subsidy scheme: the Act declared that mandatory off-take of co-gens is terminated from 1 July 2011, including those genera-tors who requested extension of their off-take in line with earlier amendments. Although not declared officially, the motive behind this measure was the plan to support co-gen plants’ heat production instead of electricity.

The change caused considera-ble turmoil on the market, and the administration had to start working an a new three-step

model to remedy the situation. A new Act, reflecting this concept, was promulgated on 10 June 2011, containing new transitional rules for co-gens. According to the new Act, production of co-gens below 50 MW will be subject to a prioritized off-take, balancing, sale and settlement by MAVIR, though the so-called “co-generation balance circle” to be separately established for this purpose.

Two preconditions needed to be fulfilled in order to be eligible for this transitional subsidy: generators either needed to be members of the so-called “green balance circle” on 1 June 2011; or had to have their eligibility for mandatory off-take extended until 30 June 2011 or their eligibility had to be expressly terminated from 1 July 2011 by the relating appropriate Section of the Electricity Act.

The affected generators had 4 days (!) from the date of the promulgation of this new Act to apply for the membership of the co-generation balance cir-cle; currently, no information is available regarding how many of the affected producers were able to comply with the requirement. MAVIR will settle the co-gen balance circle,

PAGE 12

sell the off-taken electricity on the organised electricity market and will pay for the off-taken electricity monthly, in line with the fees of trading on the organised market, the settlement prices, and the costs of the balance circle settle-ment.

A new fee will also be intro-duced in addition to the already existing ones: the “co-generation re-structuring fee” will be payable by traders and other market players to help fund this new type of co-gen subsidy. These fees are payable from 1 July to MAVIR on a monthly basis in the amount of HUF 1.20/kWh.

As it can be seen, regulation for co-gens has seen significant changes recently, and further changes can also be forecast during the forthcoming months. According to recent press information, the above, recently enacted measures will be accompanied by a second period, during which heat suppliers will buy the heat from generators at a price which reflects the reasonable costs of heat, and generators will be able to buy the neces-sary natural gas at a reduced price. Finally, a third, long-term period is planned to start during 2013, under which co-generated energy certificates (a tradable allowance system) will also be introduced. These are, however, the current plans, and hence only one thing seems to be sure: the industry has to be prepared for further changes regarding co-gen regulation.

“only one thing seems to be

sure: the industry has to be

prepared for further changes

regarding co-gen

regulation.”


PAGE 13

These are exciting times for the green energy sector both locally and globally. Although the financing environment is still challenging, capital is freeing up for renewable investments again.

Global trends in the renewable energy industry

For the renewable sector, the credit crunch followed by a deep recession draw attention to the green economy as a means of stimulating growth. Accordingly, countries strive to develop the green economy through stimulus measures and support mechanisms.

1. Governmental policy

More and more governmental bodies worldwide believe strongly in grid-connected electricity generated from renewable sources and are committed to vigorously sup-porting the development of the renewable energy industry, as well as promoting technologi-cal innovation through pay-ments for renewable energy

Excit ing t imes for the g reen energy sector both global ly and local ly dr. Esz ter Kamocsay-Ber ta - Gide Loyrette Nouel -D’Or nano Iroda

fed into the grid adjusted in line with technological pro-gress.

2. Regulatory framework

Due to the regulatory frame-work adopted in many countries with a renewable energy industry, grid connect-ed renewable energy systems present the best growth oppor-tunities, and it is expected that these systems will become more prevalent in coming years.

3. Technological innovation

Technological innovation will make renewable energy production more cost effective and reduce the need for government subsidies. As was the case in Germany, when the industry matures, tariffs will gradually reduce and so will the costs. Thus, investors have the opportunity to capitalize on current market conditions.

Renewable energy trends in Hungary

Investors reinforce the desire for political and regulatory stability in evaluating invest-ment decisions. A well elabo-rated governmental policy is the necessary precondition for a stable regulatory framework. It seems now that, in accord with the global energy trends, Hungary has now made a decisive step ahead to lay down the foundations of a sustainable green economy by elaborating Hungary's Renewable Energy Utilization Action Plan. In this coherent economic model energy saving and energy efficiency, an increased use of

renewable energy resources and the priority of own resources are declared to be of key importance.

1. Contribution to the European undertakings

Being a Member State of the European Union, the adopted common legislation, in particu-lar Directive 28/2009/EC of the European Parliament and of the Council (RED) sets out several tasks for Hungary in this field. The RED specifies an ambitious 20% share of renew-able energy sources, including a 10% share in the transporta-tion sector, as well as a 20% increase in energy efficiency and a reduction of greenhouse gas emission to 20% (of the level of 1990) as targets to be reached by 2020.

The RED also specifies a legally binding obligation for Hungary to ensure 13% minimum share of renewable energy sources in gross final energy consumption by 2020. The NAP acknowl-edges the importance of a green economy and thus, sets the target of a 14,65% share of renewable energy sources in gross final energy consumption by 2020.

2. Strategic goals of the national energy strategy

The strategic goals of the national energy strategy imply that beside the contribution to the community undertakings the following key objectives of Hungarian renewable energy policy are expected to deter-mine growth opportunities in the coming years. These are:

i. Security of supply

Hungary is highly dependent on energy import and satisfies 80% of its domestic crude oil demand and over 83% of its natural gas consumption from imports, primarily from former CIS countries. Through the use of renewable energy sources, the dependency on imports can be reduced, as the use of renewable energy is planned to be realized from domestic sources.

ii. Environmental sustainability and climate protection

The use of renewable energy sources supports the shift to low CO2 intensity power gen-eration. Environmental sustain-ability and climate protection will have high priority, in particular when setting criteria for government subsidies available for investors in the green industry.

iii. Agriculture and rural development

The use of biomass for energy purposes based on the favoura-ble agro-ecological conditions of Hungary primarily causes that workplaces in the agricultural sector can be preserved and new ones can be created. The use of organic by-products from the agricul-ture and forestry industries for local energy purposes and their conversion into end-products will significantly reduce the need of the communities for fossil energy sources. Invest-ments in the agricultural and rural development are declared to obtain preeminent support


A fundamentally new era of CO2 trading coming

Since the end of 2010 and throughout the spring of 2011 the European legislator has been very active in determin-ing the detailed rules of implementation of the funda-mentally revised EU Emission Trading Scheme (EU ETS), which has been operational since 2005. The new enforce-ment rules, spelling out in

How the refor m of the EU Emiss ion Trading Scheme (ETS) wi l l change the energy landscape in Hungary dr. Kr is tóf Ferenczi - Andrékó Kinstel lar

more concrete terms the meaning of the revised EU ETS framework promulgated on 23 April 2009 in the so-called Climate Change and Energy Package of the European Parliament and the Council, will bring fundamental changes to (inter alia) the Hungarian energy sector.

The essence of the revised EU ETS

Established by way of Directive 2003/87/EC of 13 October 2003, the EU Emission Trading Scheme entails a cap-and-trade system of CO2 allowances (the commonly called ‘CO2 quotas’), each representing the right to emit one tonne of carbon-dioxide by the installa-tions covered by the EU ETS, with the overwhelming majori-ty (currently 90%) of CO2 allowances having been so far allocated free of charge. CO2 allowances have been issued,

held, transferred, surrendered and cancelled via national CO2 registries operated by the Member States. Allowances have been allocated by the Member States to the installa-tions on their territory based on the Member States’ national allocation plans and lists after approval by the EU Commis-sion.

In contrast to the rules applica-ble in the on-going second trading period (between 2008 and 2012), the rules of the game will be substantially different as of the third trading period starting from January 2013. Under the revised EU ETS, generally speaking, all essential rules of CO2 trading will be defined at Community level, putting the EU Commis-sion into the driving seat. On the basis of Directive 2009/29/EC of 23 April 2009, the Commission determined in October 2010 an overall cap of

PAGE 14

2.039 billion CO2 allowances available for the European Union in 2013, to be decreased in a linear manner by 1.74 per cent. each year, leading to a total number of approx. 1.7 billion CO2 allowances in 2020. The national registries will be replaced as of 2013 by a community-wide Union Regis-try, operated by an EU Central Administrator, regarding the detailed rules of which the Commission has just proposed a new draft Regulation in May 2011.

As for obtaining CO2 allow-ances allowing the emitting installations to carry on their business activities, public auctioning of CO2 allowances will become the general rule. In other words, unless a given installation or activity is covered by a specific exemp-tion under the revised EU ETS Directive, the operator of the installation will need to

field will also improve in the long term.

3. Investments in renewable energy in Hungary

A good example for increasing interests of investors in renew-able is the financing of the construction and operation of a hydro power plant at Békésszentandrás. After the credit crunch, equity require-ments set by the banks have increased substantially. The fact that bank financing tends to acknowledge subsidies granted, e.g. under the Envi-

ronmental and Energy Opera-tive Program, as a financial source enabling the investors to comply with these equity requirements, may open the door for Hungarian SMEs provided they have the neces-sary sector specific knowledge and professional experience.

The Békésszentandrás power plant represents a successful implementation of Hungary's new energy policy setting the priority of low CO2 intensity power generation by using renewable energy.

within the framework of the national renewable energy strategy of Hungary.

iv. Development of a green economy

The rational use of renewable energy sources may constitute the basis for the creation of a new (green) sector of the economy. Since the use of renewable energy sources is more effective in terms of operational costs compared to the use of fossil energy sources, the competitiveness of market actors investing in this

Squire, Sanders & Dempsey (US) LLP

Squire, Sanders & Dempsey (US) LLP advises on acquisition of Industrial Union of Donbass

Erős Ügyvédi Iroda Squire, Sanders & Dempsey (US) LLP recently advised Troika Dialog, the largest private investment bank in the CIS on its EUR multibillion leveraged acquisition of Industrial Union of Donbass (ISD), one of Ukraine’s largest steel groups which included the major Hungarian based steel producer ISD Dunaferr. The transaction involved the firm’s London, Moscow, Warsaw and Brussels offices.

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purchase the required quantity of CO2 quotas at public auctions at the prevailing market price. With very few exceptions, power plants will not be eligible for an exemp-tion under the obligation to purchase their CO2 allowances at the public auctions. Howev-er, Member States may allocate free CO2 allowances to installations belonging to other sectors, in particular to those sectors that are exposed to the so-called carbon-leakage risk, i.e. international competition due to the absence of carbon emission restrictions. The Commission has promulgated the Union-wide rules on transi-tional free allocation of CO2 allowances to eligible installa-tions, primarily operating in the sectors exposed to carbon leakage, at the end of April 2011; with the exceptional rules on limited free CO2 quota allocation to certain power plants having been is-sued at the end of March 2011.

As a general rule, CO2 auctions will be centrally held at a Community auction platform, with only Germany, Poland and the UK having opted to establish their own national auctioning platforms. Auction platforms will constitute regulated finan-cial markets, with pre-determined products on sale (two-day spots and five-day futures as of 2013). The Commission has proposed in March 2011 that, in preparation for the third trading period starting in 2013, a total of 120 million allowances be auctioned in 2012 through monthly early auctions.

What will the revised EU ETS mean for the Hungarian energy sector

Unless the Hungarian Govern-ment elects to apply at the EU Commission for the exemption available under Article 10c. of the revised EU ETS Directive, as of 2013 power plants in Hungary will have to buy all of

the CO2 quotas they need in respect of their electricity generation activity at the central EU auction platform at the prevailing market price. Without the Hungarian Government applying for the Article 10c. exemption, power plants may only benefit of free CO2 allocation with respect to heat generation for district heating or cooling purposes or through high-efficiency co-generation for economically justifiable demand. This will mean a fundamental change in the operation of the Hungarian electricity generators, likely leading to an increase in the wholesale electricity prices in Hungary and potentially trig-gering the closure of the less efficient power plants, requir-ing a timely replacement of outgoing electricity generating capacities. Finally, due to the rules of the central EU auctions, mostly the mother companies of the Hungarian power generators will purchase

the CO2 allowances on their subsidiaries’ behalf.

Hence the dilemma facing the Hungarian Government is: whether to apply at the European Commission by 30 September 2011 for the Article 10c. exemption, in the frame-work of which such power plants are eligible for a maximum of 70% free CO2 quota allocation, that were operational or for which the investment process was physi-cally initiated by 31 December 2008 and which have undertak-en a significant modernisation of their power generation assets. However, if the Gov-ernment elects to apply for the exemption, it would thereby denounce a significant portion of its potential CO2 auction revenues, 50% of which must be used to contribute to CO2 reduction goals, whilst 50% may be used for any other, including budgetary purposes, by the Government.

PAGE 15

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We would like to thank those who contributed to this newsletter:

dr. Pál Kara

dr. Bánfi László

dr. Nagy T. Katalin

dr. Ákos Szentkereszty

dr. Zoltán Faludi

dr. László Kenyeres

dr. Eszter Kamocsay-Berta

dr. Kristóf Ferenczi

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On the GC Grapevine - Hungary - Edition 2