United States Agency for International Development (USAID)

1. The Illinois Commerce Commission (ICC) and The Energy Regulatory Office of Kosovo (ERO) Partnership ActivityOctober 27 – 30, 2008Prishtina, Republic of Kosovo Sponsored by the United States Agency for International Development (USAID) National Association of Regulatory Utility Commissioners (NARUC) Generation, transmission, distribution and supply tariffs in electricity sector in Kosovo, Rate setting based on specific power sector example in Kosovo Theranda Beqiri Board Member

2. Legislative Hierarchy Tariff Design Criteria Tariff Calculation Basis Tariff Methodology – Revenue Cap Regulatory accounting statements Tariff Modelling Cost allocation procedure Calculation of tariffs Tariff Design Allowed Revenues by ERO for 2007 and 2008 Requested and Allowed Capital Expenditure for 2008 Energy flows summary Billed and Losses Main Indicators and Financial Flows in Electricity Market Building Block Tariff Developments in Energy Tariffs Future Activities Content

3. Legislative Hierarchy

4. Law on EnergyNr. 2004/8- which involves: strategy, programs and balancing; energy efficiency, renewable sources of energy and co-production; investments; economic regulatio of energy activities; competition in energy activites; restrictive measures on energy supply; the right of way and access to private land and supervision. Law on ElectricityNr.2004/10 – include: electricity system; generation of electricity; transmission of electricity; distribution of electricity; third party access; market organization; supply services; cross-border metering and accounting of electricity. Law on the Energy Regulator Nr. 2004/9- includes: organization of the Energy Regulators Office (ERO, ERO competencies; ERO funding, taxes; administrative procedures, licenses; building of new generation capacities; gas networks, direct electricity lines and direct pipelines; regulation of prices; unbundling and transparency of energy companies; mandatory public services; conditions for energy supply; bankruptcy of licensees; supervisions and punitive provisions. Primary Law

5. Based on well-established & understood economic principles; Ensure no discrimination or cross subsidy between customer groups; Minimize complexity & associated costs including cost of metering and billing; Tariffs should provide cost reflective price signals; Enable protection of vulnerable customers Tariff Design Criteria

6. Basis of Tariff Calculation Tariff Constructed as a Building Block • Demand Forecast • Generation Availability • Generation & Mining Costs • Imports • Transmission Costs (Unbundled from KEK) • Distribution Costs • Supply Costs • Loss Costs • Depreciation (for assets past 2005) ***Subsidies + Exports + Costs of unregulated customers are subtracted from allowed costs

7. KEK HQ allowed costs are allocated between other KEK businesses in proportion to their share of employee numbers; An allowance for costs of losses purchases is added for KEK Distribution and KOSTT and for import purchases for KEK Supply Tariff Methodology – Revenue Cap Allowed revenues are built up from ‘building blocks’

8. The specific regulatory accounts items required are: 1. Cover 2. Income statement 3. Balance sheet 4. Cash flow statement 5. Analysis of turnover 6. Analysis of operating and maintenance costs 7. Regulatory asset base (RAB) 8. Capital expenditure 9. Depreciation 10. Additions 11. Major projects summary 12. Provisions Regulatory accounting statements • A copy of the licensee’s most recent statutory accounts and accompanying auditor’s report and • An auditor’s regulatory report on the regulatory accounts

9. TSO Model Supplier Model Output Review Tariff Modelling Standing Data KEK Data Submission KOSTT Data Submission Data Review Data Review DSO Model Output Review Output Review Tariffs

10. Step 1: Definition of Cost Cost Categories (e.g. cost for labour, material) Cost Centres (places where cost occur, e.g. 110 kV network) Products / Services (e.g. transmission services) Step 2: Allocation of costs to cost categories from cost categories to cost centres (intermediate cost centre for common services) from cost centres to customer categories Cost allocation procedure

11. The Revenue and Tariff Model calculates Regulated retail tariffs TUOS, SO and MO charge DUOS charges An internal transfer price from KEK Mining to KEK Generation and from KEK Generation to KEK Supply is calculated Cost-reflective tariffs are calculated for each customer category, broken-down into customer (standing) charges energy charges demand charges reactive power charges Calculation of tariffs

12. Tariff Design

13. Allowed Revenues by ERO for 2007 and 2008 a) Imports + Energy Purchase costs from HPP Ujmani and Distribution-Embedded Generation

14. Requested and Allowed Capital Expenditure for 2008 • Adjustments are applied for: • unpaid subsidies included in allowed revenues in the preceding year • capex underspend relative to allowed levels in the preceding year

15. Energy flows summary

16. Billed and Losses The collection rate is unsatisfactory as last year it reached 75%

17. Main Indicators and Financial Flows in Electricity Market

18. Regulated Tariff review period is set for 3 years from 2007-2009 The first regulated tariffs were approved by the board of ERO on 31.05.2007 The second regulated tariffs were approved by the board of ERO on 27.06.2008 The regulated tariff of 2008 is on average 5% higher than that of 2007. Tariffs were calculated intending the gradual elimination of cross-subsidies between different tariff groups during the tariff review period. ERO is currently in the process of analysis of Feed-In tariffs for small Hydro Power Plants and reviewing the tariffs of district heating for the season 2008-2009. Developments in Tariff Process

19. The district heating tariff for the 2008-2009 season will be approved by the end of October 2008. The Electricity Tariff review for the 2009 season will begin in November 2008. The development of secondary legislation in the PTD, foreseen for 2009: The development of the Tariff Methodology for Electricity produced from Renewable Resources The development of the Tariff Methodology for district heating Future Activities

20. Thank You!