RAB-regulation will cost businesses up to 1.4 billion UAH annually under current tariffs

29-01-2018

On January 10, 2018, the NKREKP’s Resolution #972 of 27/07/2017 entered into force, which allows to introduce the RAB-regulation for oblenergos. The Better Regulation Delivery Office (BRDO) estimated that introducing RAB tariffs on the basis of the existing regulatory framework might lead to worsening of the business environment and additional business expenses starting from 281 million UAH in the Ivano-Frankivsk region and to 1.4 billion UAH in the Kyiv region.

RAB-tariffs/incentive-based regulation is a tariff system for distribution companies-natural monopolies, according to which company’s revenues depend on the quality of services/products it provides and its regulatory asset base. The latter includes oblenergo’s own infrastructure used for electricity distribution.

“An incentive-based approach is the best global practice that stimulates energy service companies to reduce costs and upgrade networks. But, in Ukraine, it should be implemented providing there is an effective energy regulator and a balanced approach. Otherwise, consumers will receive high tariffs without the really improved quality of oblenergo’s services. In our estimates, the burden on entrepreneurs will increase by an average of 10%, and in some regions – up to 25%,” the BRDO’s Energy Sector Head Oleksiy Orzhel said.

Subordinate acts to implement the RAB-regulation in Ukraine were adopted in 2013. However, their provisions have been significantly changed for 5 years, in particular:

  • the NKREKP’s Resolution #2561 of 08/10/2015 reduced the maximum duration of power supply interruptions by 4 times (up to 150 minutes for cities and 300 minutes for villages, although these indicators are 3-6 times higher than the EU average ones);
  • the aforementioned NKREKP’s Resolution #972 increased the rate of return on old assets from 5% to 12.5%, while the new ones were reduced from 14.79% to 12.5%.

Thus, the NKREKP establishes the same guaranteed level of oblenergos’ profitability of 12.5 for both old (already existing) and new (non-established yet) assets. At the same time, the value of assets of energy companies estimated by the SPF’s methodology (Decree #293 of 12/03/2013) significantly exceeds the amount of money actually invested in companies.

For example, an owner of the PJSC “Kirovohradoblenergo” paid $16 million to the state for 51% of shares during its privatization. According to results of asset revaluation, their value increased to $271 million (i.e. by 8.5 times). Now, according to the NKREKP’s decisions, a company owner will receive 12.5% ​​of the revalued amount each year. That is, for the first year of RAB-regulation, the Kirovohradoblenergo owner will receive 2 times more money than he paid for the company.

The proper implementation of RAB-regulation in Ukraine requires:

  1. To revaluate the assets of oblenergos according to their privatization value. In this case, the rate of return can be set at the level of the NBU’s discount rate – 12.53%

OR

If the rate of return is charged on assets, the value of which is estimated in accordance with the current methodology (SPF’s Decree #293 of 12/03/2013), it should be set at the level of 1-5%.

  1. To raise requirements for the quality of services and establish the correlation between the rate of return and their compliance.

More information on the retail electricity market in Ukraine is available in the Green Paper developed by BRDO experts here.

For information: In the United Kingdom, tariffs for services of natural monopolies increased by 28% with inflation of 3% in 2016-2017. But in return, the British do not have problems with power shortages – their average annual duration is 50 minutes, while in Ukraine, it is 690 minutes. In Australia, there is another problem – distribution companies there have increased the value of their assets by 5 times in a few years and now they are one of the biggest in the world.

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