Rates Could Bog Down Electric Company Privatization

On February 1 foreign energy companies bidding for the controlling shares of Ukrainian oblenerho (regional electric) enterprises submitted to the National Electricity Regulation Commission (NERC) their proposals about methods for electric companies to set power transmission and delivery rates. Foreign buyers do not seem overly delighted with how our bureaucrats have sought methods

According to NERC public relations officer Volodymyr Brynziuk, the new draft rate-setting methods suggest, for example, that the tariff include electricity losses in commercial grids. However, Mr. Brynziuk noted, “The new methods provide a flexible system to encourage the power supplier to cut commercial losses.”

Under the proposals of such investors as AES Corporation (USA), Electricite de France (France), and Union Fenosa (Spain), the new rate-setting methods should increase the investment attractiveness of the oblenerho, ensuring a 20% profit (in hard currency) off fixed assets and the oblenerho purchase price. Yet, the NERC is still resisting the investors’ less than modest financial demands. For surrendering the position will substantially boost retail rates for electricity consumers. It is not ruled out that in this case every citizen of Ukraine will have to pay significantly more.

The bidders have agreed to acquire the oblenerho firms provided electricity transmission and supply tariffs are raised to 2-2.5 cents per kWh. As a result, this would mean an almost 80% increase in retail electricity charges for commercial consumers, Interfax-Ukraine reports.

Nevertheless, commenting for The Dayon the current talks with the investors, President of the Economic Development Center Oleksandr Paskhaver said, “No investor, if he wants to work in a legal field, can and will buy a money-losing business unless he intends to make it profitable. The natural demand to raise rates is based on this consideration. It is up to the government and the investors to negotiate the extent and the method of raising. But we should not forget that a losing business just cannot have a price. On the other hand, it could also be made profitable in some other way, for example, by restructuring. But if the government says it will sell the oblenerho to other investors who will not demand rate increases, this will mean we are going to opt for those who (knowing that our oblenerho enterprises rake up losses — Author) are ready to accept shadow schemes. It is common knowledge that an enterprise, which makes losses in the legal economy can yield a profit in the shadow sector, for example, by way of nonpayment.”