NEURC’s RAB methodology is criticized by energy experts and electricity market participants

A transition to incentive-based regulation in the electricity distribution segment in the form suggested by the NEURC will not facilitate a tariff-setting reform and is not capable of promoting investments. This opinion is shared by the European Business Association, Energy Club, Ukrainian Smart Power Grid Association, the State Property Fund, the Ministry of Energy, Ernst & Young, the Ukrainian Wind Energy Association, the All-Ukrainian Energy Assembly NGO, and the Federation of Employers of the Fuel and Energy Complex.

Members of the Ukrainian Parliament Liudmyla Buimister, Viktoriia Hryb, Oleksii Kucherenko, Oleksii Honcharenko and the energy market expert Serhii Chekh have also strongly opposed the methodology proposed by the NEURC.

In particular, the Regulator’s suggestion to divide all assets held by the distribution system operations into two groups: new and old base, and repay investments made in the assets at 1% on the old base and 15% on the new base were met with criticism. The decision to repay investments on their third anniversary also appears rather doubtful.

The Ministry of Energy insists that the annual investments of UAH 11 billion are required to upgrade power grids. At the same time, in the past three years UAH 4.0 billion of annual investments have been made in the distribution networks within the scope of investment programs implemented by distribution system operators. The Ministry views a transition to incentive regulation as an ultimate method for boosting investments.

While the members of the European Business Association agree that the RAB tariff has to promote investments, they doubt that the current version would stimulate any interest from investors.

The Energy Club sent the NEURC an official letter stating that the division of asset bases and the application of different investment repayment rates is contrary to European practices. In the opinion of the Energy Club members, this project is not capable of ensuring the attainment of key objectives set for the Methodology that include attracting investments into the upgrade of power grid infrastructure, reducing SAIDI indicators and achieving significant cuts of technological losses.

Members of the Ukrainian Smart Grid Non-Governmental Organization that comprises of 14 distribution system operators (DSO) insist that this approach is not acceptable for foreign investors and poses a threat to the privatization of shares held by the state in DSO: “These parameters do not improve the environment for investments in Ukraine and are not correlated with government bond, loan, and deposit rates.”

Liudmyla Buimister, a member of the Ukrainian Parliament with the People’s Servant faction, a chairperson of the subcommittee on the development of competition and equal opportunities for business of the Economic Development Committee of the Verkhovna Rada of Ukraine, supports oblenergos’ position and insists that the suggested methodology will prevent the investor from investing into the industry and earning profits from the investment.

“In such conditions, investors would rather invest in government bonds than in power grids,” asserts Ms Buimister. Such conditions that are unfavorable to investors can frustrate the privatization of state-operated oblenergos.”

This position is shared by auditors from Ernst & Young. In their opinion, it would be economically viable if the return rate on the new base were equal to the weighted average cost of capital. In such a case these facilities will become attractive and understandable for any investor.

The State Property Fund also commented on the forthcoming introduction of the RAB tariff. The SPF declared its support to a transition to a new tariff setting model and is waiting for a decision in connection with the RAB tariff to launch the privatization of state-operated oblenergos. However, this agency further states that the methodology has to strike a balance between the interests of DSO and that of consumers.

As an alternative to the proposals made by the Regulator, the market participants and energy experts suggest building on European experience: not to divide asset bases of oblenergos, the return on investment rate has to be dependable on WACC, and the profit margin has to be repaid during a current investment year. The relevant proposals have already been sent to the NEURC.

In the opinion of the All-Ukrainian Energy Assembly, a sensitive decision based on the regulation parameters to introduce incentive regulation and put in place efficient controls over the NEURC’s licensees is the only option that will allow solving issues that have been accumulated by distribution companies throughout years and ensure quality and uninterrupted electricity supply to consumers.

The State Regulatory Service notes that the Regulator’s failure to take due regard of the opinions expressed by market participants and submit its methodology to public hearing could become a ground for the annulment of this draft by a court. A decision made behind closed doors is a violation of the procedure.

16:05 / 4 June 2020

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