Foreign investors demand higher electricity rates
The autumnal lowering of temperatures has inspired melancholy in the new owners of privatized oblenerho regional power distribution companies. Entering the crucial stage of preparations for the heating and peak energy consumption season, Western companies suddenly discovered that they could never get the revenues they planned, because the National Electricity Regulatory Commission has neglected to comply with one of the major clauses of the purchase contract: higher electricity rates.
In April, prior to selling six energy companies, NERC worked out special procedures to determine electricity transfer and delivery costs, providing for higher consumer tariffs (an average of 10-11%). The document also sets the oblenerho’s minimum rate of return at 17%. To further ensure Ukraine’s promises, Premier Yushchenko set forth these statistics in a special directive. One thing missing in the privatization clauses (including a declaration of forthcoming energy cost increment) was the deadline for raising the rates.
In accordance with set procedures, NERC decides on cost increases after being duly approached by the oblenerho. The first such request was received from Zhytomyroblenerho, where 77% of the stock is held by the Slovak Vychodoslovenske Energeticke Zavody S.P. After weighing the pros and cons, NERC decided the Slovak arguments were inadequate. In fact, the commission lowered electricity wholesale rates by 1.8% in August, compared to July. Now electricity is sold at 11.16 kopiykas per kWh (less VAT). In other words, the difference between the wholesale and retail costs (the source of oblenerho income) has increased. The state, however, made the overall pricing trend perfectly clear. After that, retail rate increase requests from Sevastopolenerho and Kyivoblenerho were simply disregarded. NERC decided to wait for the cabinet to declare its official stand. New Premier Anatoly Kinakh does not seem overly enthusiastic about higher electricity costs, fearing their negative effect on the industrial growth rate.
Electricity tariffs are usually increased in Ukraine in summer, when the consumption rate is relatively low. This fall, investors realized that Ukraine might chose to ignore its commitments, given their kid-gloves methods. Hence they turned to those whose opinion the government could not afford to overlook. On Monday September 3 it was announced that Ukraine’s foreign donors, including USAID, the World Bank, and EBRD had forwarded a joint letter to the cabinet, demanding that the government keep the promises given foreign companies as they purchased the first six privatized oblenerhos, and reminding it that higher electricity costs had also been promised. The letter contains sharply worded statements concerning the Ukrainian cabinet’s actual practices, and one such statement smacks of blackmail. It reads that the strategic partners will do no business with a country whose government does honor its commitments. AES Silk Road (US), holding the controlling interest in Kyivoblenerho and Rivneoblenerho, has threatened to curtail investment unless the cabinet agrees to increase electricity rates (the Americans undertook to invest $60 million in Kyivoblenerho and $50 million in Rivneoblenerho within five years).
In view of this, the term of complying with the foreign investors’ ultimatum is likely to depend largely on the cabinet’s privatization plans in the power industry. State Property Fund Chairman Oleksandr Bondar said at a recent press conference that it is impossible to sell the oblenerho companies at a profit before the parliamentary elections scheduled for the end of March 2002. “The political factor has a very significant effect on the price,” he pointed out. At the same time, there is information from the Presidential Administration to the effect that Leonid Kuchma intends to unblock privatization in the energy sector, so that tenders can be held even this year.
Oblenerho sale terms are being coordinated with the cabinet and Credit Suisse First Boston as the auction consultant. A month ago, the cabinet set up a task force to prepare the sales and assist with the development of the power industry. First Vice Premier Oleh Dubyna was placed in command and the man must still have the foreign investors’ letter on his desk. Among members is Henri Gesier, senior permanent representative of IMF in Ukraine. The fund is likely to support the World Bank’s higher electricity rate requirement, meaning that the talks between Ukraine and IMF on further loans will be even more complicated. The fund’s Board of Governors will convene to discuss the Ukrainian issue September 20, and if electricity rates are not increased by that date, the likelihood of renewed IMF cooperation will be even lower.
However, the decision-making process might also depend on a number of domestic and Russian investors prepared to take part in the privatization. Mr. Bondar has said as much, although in April he showed no special enthusiasm about Premier Yushchenko’s off-the-record decision to sell the oblenerhos only to Western investors. “Russian and Ukrainian investors are more self- possessed and pragmatic, while their Western counterparts are regrettably more fastidious. We have taken a plethora of steps to meet them halfway, yet I regret to say that they did not accept this,” said the SPF chairman at the time.
Formally, NERC’s refusal to increase the electricity costs can be explained by the privatized companies’ insufficient cost-effectiveness. Premier Anatoly Kinakh, as an acknowledge spokesman of the industrial managers, is not likely to single-handedly raise rates. In all probability, the decision will have to be made at a higher level.
INCIDENTALLY
The Ukrainian government will decide on an increase in electricity rates in those regions where the oblenerho companies are privatized, but not before it is satisfied that such increases will not be followed by negative economic and social consequences, Premier Kinakh said on September 3 in Kyiv, when asked by journalists to comment on the NERC statement that such increases are possible. “The final decision will be made primarily proceeding from the inadmissibility of lowering the output of competitive goods made in those regions, or of lowering the living standard there; of course, we will also bear in mind the need to keep such costs balanced with budget expenses, because increasing electricity rates will affect spending units,” declared the premier, adding that the decision would be “coordinated with investors,” reports Interfax Ukraine.
Mr. Kinakh stated that the ministries of finance and the economy, as well as NERC, are preparing a forecast concerning the social and economic consequences of increased electricity rates. He assured everyone that the final decision would be made in September. “That’s the deadline,” he stressed. When asked whether electricity rates could go up even this year, Premier Kinakh replied, “I can’t answer that, although I have my doubts about the balance of such approaches.”
Ukraine sold six oblenerhos to foreign companies in April, promising among other things to increase electricity rates to secure cost-effectiveness.
