The national Commission for regulation of energy and communal services in Ukraine introduces a new methodology of tariffs for power companies, the so-called RAB-tariffs, which managed to get a controversial status. Previous attempts to transition to this European model has failed and has been criticized as threatened sharp rise in electricity tariffs for consumers.
In early June, the national Commission exercising the state regulation in the energy and utilities (NKREKU) may adopt a resolution on the transition to the incentive tariff for distribution networks – regional power, the so-called RAB-tariff.
This method of tariff setting is positively proven in the EU and in the last 20 years has been used successfully as an alternative to the outdated formula “cost+”, which still works in Ukraine.
Conversations on necessity of transition of our country to RAB tariffs have been going for the last ten years. The current method does not encourage power companies to the modernization and cost reduction, but on the contrary, leads to their swelling, as the rate of return of power companies is approved at the level of a few percent of the total cost of the enterprise.
Because of this, companies simply do not have the resources for investment and may not attract sufficient for the full development loan funds.
Delaying the transition to a new progressive model has led to the depreciation of fixed assets of Ukrainian energy infrastructure, according to various estimates, ranging from 50 to 70 percent.
Moreover, according to the national Commission, the indicators of reliability of power supply in Ukraine are the lowest among all European countries. Thus, SAIDI (the average duration of interruptions in electricity supply per customer per year) for 2015-2018 was in the range of 620 to 690 min 10-30 times higher than in Western Europe, six times – the Baltic States, three times – Poland.
New RAB regulation
The problem with the tariffs for services on electric power distribution, which provide power companies, is that such utilities are natural monopolies in their regions.
Therefore, despite the market reforms in the energy sector, the government has to continue to regulate their activities. However, how to do it so that the wolves are fed and the sheep were intact? That is, to the energy companies was a necessary resource for development, and that consumers do not overpay?
So, at the end of the last century, first Britain and then other European countries began a gradual transition to RAB-regulation, which was intended to give incentives to companies to upgrade infrastructure and improve the efficiency of spending.
According to this concept, to distribution networks for the long term (three, five or eight years) is a pre-determined level of profitability. Receiving a guaranteed level of income, the company would be interested in reducing their operating costs, and will also have the opportunity to attract financing for investment projects.
In this case, the rate of return on assets that was established prior to the introduction of new techniques and new, can be set different.
Control over the implementation of this mechanism is in the hands of the regulator, which can change the rate of return at the expiration of the regulatory period, and approve the tariff for power companies, and also has the ability to punish companies with fines for not reaching targets.
That is, utilities get both stick and carrot.
The first attempt to introduce stimulating tariff in Ukraine was held in 2013. Then the regulator proposed to set the rate of return on old assets in the amount of zero to two percent, and on new about 14.8 percent, but the reform was delayed.
Once again to the topic of the national Commission returned the head with the controversial Dmitry Vovk in 2018, establishing the same rate of return on revalued assets of the old and new at the level of 12.5 percent.
This decision was criticized as the country’s leadership and the expert community.
According to various estimates from this methodology, the final tariff for consumers would rise by a third, which made reform impossible.
However, to delay this any more. Every year the cost of repairing the aging of the Ukrainian power networks will only increase.
According to Director of “Ukrainian industrial export examination” Vladimir Vlasyuk, over the last fifteen years of under-investment in the Ukrainian power line has reached $ 40 billion.
“Every year we have invested approximately $ 300 per kilometre of grid.
For example, this figure in Eastern Europe is $ 1500. In developed countries, and even more – 3000 – 3500 dollars,” he said.
According to him, the introduction in Ukraine of incentive tariff should address the need for a substantial increase in resource investment from power companies. However, this model has between the interests of the consumer and utility should be a balance.
Today NKREKU such a balance trying to find, based on successful international experience and failed in the past attempts to switch to the incentive tariff.
The regulator in the updated resolution on RAB-tariffs provides for the transition of power companies to incentive regulation from the beginning of next year, and also sets the standards of income on the “old” database of assets – 1 percent, and the “new” – 15 percent.
The national Commission believe that this approach will not lead to a significant increase in end user tariffs, but at the same time, will allow power companies to obtain additional resources for investment. The regulator stressed that the rate of return on the new asset base of 15% calculated on the basis of the average weighted cost of capital (WACC), which corresponds to world practice.
It is worth noting that the share of the electricity distribution services provided by power companies, and which will act stimulating tariff end tariff for electricity is only 15-20 percent. Therefore, it is expected that the proposed NKREKU model will allow for a more gradual increase in tariffs for the electricity distribution and, consequently, on the final electricity tariffs in Ukraine.
Another important task of RAB-tariff is the attraction of foreign investors. Today prepare for privatization six regional power: “ternopolyoblenergo”, “Zaporozhyeoblenergo”, “harkovoblenergo”, “nikolaevoblenergo” and “hmelnitskoblenergo” and “Cherkassyoblenergo”.
It is expected that after the transition to the new tariff formation methodology will increase not only their value but also interest from foreign companies.
So, the Deputy Director of the Department of the state property Fund Anton Myagkov said that the Foundation fully supports the introduction of an incentive tariff setting in this sector.
“Because, first and foremost, this increase in efficiency, there are incentives to reduce inefficient spending,” he said softly.
He also noted that the proposed controller yields a 15 percent to a new base assets looks attractive enough for investment in the grid.
He noted that the Foundation will not put oblenergos for sale, while stimulating tariff in the country is finally introduced.
“There has already been two attempts to introduce such a system, but they ended with nothing… We expect that this, by far, more attractive than the current system “costs”, – he said.
His words are supported by the head of Department of support of transactions of international auditing company “Ernst & Young” Bogdan Yarmolenko.
He said that a number of large foreign companies have shown interest in the privatization of Ukrainian power companies subject to the introduction of RAB-tariff.
“We are, incidentally, saw a few very well-known foreign companies were interested in privatization of Ukrainian power companies. For them was interesting, first of all, the rate of return of capital to a new base. They were interested to invest. They understood that if the rate is acceptable to them, they are ready to invest, buy, regional power, and, importantly, to invest in their renovation and reconstruction,” he shallows.
Yarmolenko emphasized that for investors it is important that the rate of return was calculated on the basis of the indicator of WACC.
It is not so simple
MP of Ukraine, member of the parliamentary Committee on economic development Lyudmila Buimister said that the proposed NKREKU methodology devalues the state power companies before privatization.
“We have six state power companies and using the rate of one percent for old assets, you simply depreciate their value. This means that they will be sold on privatization for a zero hryvnia, just under investment obligations”, – she noted.
She also said that the new method from NKREKU will not be able to contribute to the solution of the accumulated problems in the sector, as companies would not be interested in investing.
So, according to her, the division between the old and new base assets have not been applied in countries that have successfully switched to RAB-tariffs.
“Nowhere in the world was not the practice of the separation rates of the assets, except in Russia. Even in Russia, were used rate of 7 percent, not 1 percent, and for multiple regulatory periods it was reduced to a single rate of assets. I don’t even know how to administer this section and how to include assets to one or the other rate,” she said.
The MP also criticized the proposal of the regulator to charge under the new methodology for depreciation and return on assets from the third year of operation.
“By and large, it does not give companies a chance to meet those conditions to reduce operating expenses, which are set by the same regulator according to this methodology. It looks illogical”, she said.
In addition, she noted that the transition to the new methodology for tariffs in different regions will change differently due to regional peculiarities and different patterns of consumption. Therefore, to be taken the alignment coefficients to prevent significant growth rate in certain areas.
In turn, member of the national Commission Ruslan kaydash believes that the application of a single rate will only lead to a substantial increase in the final electricity tariffs for the consumer. At the same time, it will not stimulate investment.
“Incentives to attract investment is the rate of return on a new base. In the current project, we propose to increase it, to stimulate investors, owners of the companies to attract investments,” he said.
However, he noted that the rate for “new” asset base at a rate of 15 percent may be reviewed in making a final decision on the introduction of stimulating peat formation.
“A key factor in determining rates is that it needs to be justified, it must meet the weighted average cost of capital. This is the direct incentives to attract investment, and not to set the same bet on the old database that was created at the expense of consumers, and to receive for it money”, – he said.
He also said that the decision on the depreciation charge and net profit in the third year, was accepted by the regulator, based on the desire to lay a tariff is already implemented investment projects. However, he noted that this decision is not final and may be revised.
“We agree that this is a long period during which the company will be nothing to obtain, and perhaps in this part it will be wise to reconsider. You need to stop for some compromise in order not to lay a tariff have not attracted investment, but not to make the return of these funds was with the big delay”, – he said.
In need of transition of Ukraine on stimulating tariff is little doubt, however, the end result will as always depend on the details. It is hoped that in the coming days, the regulator together with the market players and expert community will be able to come to a balanced document, which will upgrade the national grid.
Yes, in the first stage, the rate of energy supplying companies must rise, but gradually it will be reduced through modernization of infrastructure and reduction of costs.
If once again the transition to the RAB tariff will fail or will be adopted is not a viable model, the consumer will receive only the constant growth of tariffs without improving service quality.
Igor The Eagle