Georgian National Energy and Water Supply Regulatory Commission

1. Georgian National Energy and Water Supply Regulatory Commission Tariff Regulation GiorgiIosebashvili Tariff and Pricing Department September 10-14, 2012 Kutaisim Georgia

2. Legal Framework and Basic Principles The Tariff authorities of the Commission are determined by the Law of Georgia on Electric Power and Natural Gas. The Commission is also obliged to take into consideration the main direction of state policies in the energy sector; The tariffs in power, natural gas and water supply sectors are set in accordance with the methodology approved by the Commission and other standard acts; The tariff regulation in power sector is effective since 1998, and the existing methodology has been approved in 2011; In Natural gas sector – since 1999; In water supply sector – since 2008; The tariff methodology in natural gas and water supply sectors is based on full cost principle, or includes costs and profit. The old power methodology was based on the same principle, while the new one is incentive based. It is based on the internationally approved marginal cost principles. Currently, the Commission is currently is developing the similar methodologies for the natural gas and water supply sectors.

3. Methodological Base • The methodology allows the utility recovering reasonable costs; • Supports growth of the financial outcomes of the utilities; • Protects customers from the monopolistic prices, especially in the segments, where there is no competitive market in place; • Reflects the differentiated costs of providing services to various types of the consumers; • The Commission is authorised to set both fixed and capped tariffs.

4. Types of the Tariffs In power sector the Commission sets and regulates generation, transmission, dispatch, transit-distribution, import and consumption, as well as CSO service and system capacity reserve tariffs. Released from regulation are small hydros (up to 13 MWt), exporters and newly built projects (since 2008); In natural gas sector the Commission sets transportation, distribution-transit an consumption tariffs; The ministerial ordinance of September 25, 2007 deregulated and partially deregulated the natural gas supply activities, i.e. according to the this ordinance, the natural gas supply is released from Tariff regulation, save the residential customers not using the natural gas for commercial purposes, and existing before the ordinance entered into the force. For this category, the natural gas supply has been partiallyu deregulated, and the capped tariffs were introduced; In the water sector the Commission sets drinking water supply and sewage tariffs.

5. Tariff Systems: Power Generation Tariffs In power generation sector the fised tariffs are set for regulating hydros (Enguri HPP, Vardnili HPP Cascade), all the other generation licensees are subject to capped tariffs; For the reserve sources the Commission sets two-rate tariffs. Price is set for the period of the source preparedness and provides for the compensation of the permanent costs; The guaranteed capacity sources, periods of providing the guaranteed capacities and the amounts of the capacities are approved by the Government of Georgia; The period of the guaranteed capacity source preperadness is defined by the “market rules”.

6. Power Genration Tariffs (tetris/KWtH)

7. Transmission, Dispatch, Distribution, Transit and Consumers’ Tariffs There are two transmission and three distributioon licensees in Georgia; Transmission tariffs are fixed, while the distribution/transit tariffs are capped and differentiated by the voltage levels; the tariff for two distribution companies are set fro the long-term regulation period, with the respective mechanisms for revision and adjustment; In calculation of the transmission tariffs, the revenues received from the transit services are taken into account; The cost of normal losses in both, the transmission and distribution networks are taken into account in accordance with the existing legislation; In the process of tariff calculation, the obligation of presenting cost allocation lies upon transmission and distribution licensees; in case such allocation is not submitted, the Commission itself determines the allocation conditions in accordance with the voltages; The dispatch tariffs are set on basis energy volumes received by the eligible utilities at the receiving points; The consumers tariffs are set on basis of distribution utilities’ voltage levels and consumed volumes.

8. Transmission and Dispatch Tariffs (Tetris/KWtH)

9. Import and CSO Tariffs Import tariffs are set on basis of the import agreements; CSO purchases and sells balance energy and guaranteed capacity, for which it enters into the direct contracts; CSO is importing and exporting power; In order to ensure these services, the Commission sets the fixed tariffs for CSO, which should be paid by all elligible utilities.

10. Average Consumers’ Tariffs by the Distritution Licensees fro 220/380 V. Structure of the Consumers’ Tariffs ss`Tealsi" 14 ss`energo - pro jorjia" 13.5 ss`kaxeTis energo distribucia" 13 12.5 tarifi, T/kvts 12 11.5 11 10.5 13.56 13.56 11.698

11. The capped Consumers’ Tariffs (non-residential), excluding VAT

12. Power Consumers’ Tariffs for 220/380 V, by the consumed energy, excluding VAT

13. New Tariff Regulation in Power SectorBasic Principles, Strengths and Weaknesses The power tariffs are set for the regulation period and the duration of the period is determined by the Commission; The tariff regulation periods are determined individually, based on the utility application or the Commission initiative; During this period or after its expiration, the tariffs can be adjusted in accordance with the conditions set by the Commission; As the regulation period grows, the revision costs become lower; Tariff stability during the regulation period makes this system attractive for the investors. The regulated utilities are given the partial freedom; The new methodology does not include the correction for X factor principle yet; It does not include the strict basic rules of allocation and does not reflect the interdependence between the tariffs and quality of service indicators.

14. Tariff Systems in Natural Gas Sector Transportation Tariff Transportation tariff is mainly the same for all customers and is set at GEL 16.32/1,000 cubic meters, including VAT; Transit The transit tariffs are not set by the Commission; The revenues received for the provided transit services are reflected in transportation taririff calculation; Distribution Tariffs The distribution tariffs are set by the pressure levels (high, medium, low); The distribution tariffs are set individually for each distribution utility and make (including VAT): - high pressure _ from 0.6 T/cub.m - to 3.9 T/cub.m, - medium pressure _ from 2.0 T/cub.m – to 12.0 T/cub.m, - dabal wnevaze _ from 10.0 T/cub.m - to 17.0 T/cub.m; The distribution also includes transit of the natural gas; Transit tariffs are paid to the respective distribution licensee.

15. Retail Tariffs for Natural Gas in the Large Cities

16. Tariff Systems in Natural Gas Sector The Structure of consumers’ tariff is as follows: Capped supply tariff (including import), Fixed transportation tariff, Fixed distribution or transit tariff; The consumers’ tariffs are also individually set for the high, medium and low level consumers; Direct consumers (consumers supplied by the natural gas directly from the transportation network), for which the supply tariff are deregulated: the consumers’ tariff basket includes only supply and transportation tariffs.

17. Tariff Systems in Water Supply Sector According to the methodology, the Commission sets capped water supply tariffs, including the drinking water supply and sewage tariffs; According to the law, the process of the water supply sector regulation allows for the cross-subsidies (which are temporary); accordingly, the tariffs are differentiated according to the consumer types (residential, non-residential); The water supply tariff for residential consumers are also diferentiated for metered and non-metered consumers; For the non-metered consumers, the tariffs are set on basis of the drinking water consumption norms per person per day; At this stage, the capped tariffs are set for two water supply companies in the country (GWP, GUWC) and make (including VAT): GWP GUWC - metered resid. _ 27 T/cub.m 50 T/cub.m - non-metered resid. _ 3.15 l/person/day 2.04 l/person/day - non-residential _ 4.40 GEL/cub.m 4,30 GEL/cub.m

18. Tariff Setting Procedures The Commission studies tariff application submitted by the licensee. The application forms are developed by the Commission; The tariff application shall be accompanied by the audited information on financial accounting and actual cost of the fixed assets, as well as by the additional information requested by the Commission; Within the three days from submission of te tariff application by the licensee, the staff of the Commission checks for the completeness and correctness of the documentation. If the documentation is complete, the administrative proceedings for consideration of the application are announced open. In case it is lacking some information, the licensee is sent the request for submission of the missing documentation. The Commission shall come up with the decision maximum in 150 days; The draft prepared by the staff is considered at the Commission Meeting; Tariff enters into the force after fifteen days of its publication.

19. Monitoring of the Financial Reports for the Purposes of Tariff Setting The utilities are obliged to submit the respective information with the predetermined frequency by the quarterly operational-statistical and annual financial froms approved by the Commission for power, natural gas and water supply sectors (the financial report shall be audit approved); Used for pricing and control. Represent the basis for seting the just tariffs that provide for economic efficiency of the utility and protect consumers; The reporting system of the utilities shall be understandible for the regulators, in order to make them able to assess the financial status of the utility and collect the information necessary for tariff setting. They should take into consideration the BASS principle and be in compliance with the laws on accounting policies; Since the Commission is to protect the consumers’ rights, it is important that the utilities submit the financial reports separately for each type of regulated activity.

20. Thank You for Your Attention george.iosebashvili@gnerc.org