The Ukrainian parliament approved a new preliminary draft law that obliges electricity distribution companies (oblenergos) to continue supplying electricity for public transport at low subsidized tariffs of USD 41 per MWh while the wholesale price in September reached USD 76 per MWh. The difference is that previously these tariffs were subsidized through surcharges to the wholesale electricity price, whereas now the compensation is laid on oblenergos and not on the wholesale electricity price.
Our view: The controversial statements were made by the Head of the National Electricity Regulatory Commission (NERC) and CEOs of the oblenergos. According to the NERC, the change in the compensation mechanism will hardly affect oblenergos, whereas the CEO of Poltavaoblenergo [POON] assumed that the proposed changes may cause up to USD 1 mln in yearly losses for electricity distribution companies. Considering that the FY2007 net income of POON amounted to USD 3 mln, the expected losses may eat up to one third of a full year’s net income.
In our view, although the compensation mechanism for oblenergos exists, it is indeed very vague. We believe this is another piece of evidence as to the high level of industry regulation by the state, which hinders efficiency improvements in the electricity distribution sector. Therefore, we look forward to see the new market regulations that are currently being elaborated by the NERC, which propose a change in the tariff calculation method to the more economically-sound RAB-based method. This method will, in turn, increase financial margins and reveal the true potential of the sector