Challenges of Electric-Power Industry Reforming

1. Challenges of Electric-Power Industry Reforming Kyrgyzstan, Bishkek June 15th, 2007

2. Current conditions of power industry Power industry is not financially sustainable, does not provide required power supply. Growth of emergency outages: 1999 - 8000, 2000 - 10000 , 2001 - 13000. 2006 – electric power losses in REC-38% (3,8 bln. kWt/h). Whilst energy output - 3,9 bln. Som, received 3 bln. som (79%). Accounts receivable as of 2006 has been increased on 474 million Som (17%). Losses during 4 months of 2007 are equal to 41,5%, including commercial losses - 19% (900 million. kWt/h, 560 million Som). Losses of RECs JSC “Severelectro” – 46%, JSC “Vostokelectro” – 40%, JSC “Oshelectro – 36%, JSC “Zhalalabatelectro” – 38%. RECs have collected 64% of funds. Indebtedness has been increased on 377 million Som (12%) over 4 months. In 1996, indebtedness for RECs were equal to 482 million Som. In 2006, indebtedness was equal to 3 176 million Som. Over 1996-2006,indebtedness has been increased on 2,7 bln Som. RECs run up a bill to electric power suppliers and for transit - 5,9 bln. Som. From 2001, indebtedness was increased on 5 billion Som per year. In 2002-2005, the companies sustained more than 3 bln Som of losses. Reconstruction works are implemented on 20-40%, depreciation is 70% and more.

3. Problems in the sector • Stagnation in conduction of reforms in energy sector; • Imperfect tariff policy on electric, thermal energy and natural gas; • Inefficient state social protection of consumers; • Non-transparency of informational and financial activity of energy companies; • Absence of influence mechanisms on energy monopolists (from side of consumers, court system and Government); • Energy companies got significantly behind of generally agreed standards on technological indicators (specific fuel consumption, effective average of equipment, work capacity of stations, etc.); • Absence of incentives for rational planning of energy production and consumption regimes as well as energy saving and energy efficiency; • Outages of power supply take place in some districts, electric power insufficiency leads to so-called “rotating blackout”, all signs of energetic crisis were observed; • There was a growth of emergency outages, there is a high possibility of major accidents; • Payment discipline is absent, payment defaults are spread; • Access to energy sector is closed for new independent companies.

4. First steps towards the reform • To possess of political will of conduction of the reforms; • Consumers, including community, have to know and support goals of the reforms; • To create required legislative and normative base; • To created required institutional environment; • To introduce market methodology of formation of tariffs; • Gradual decrease of state participation and increase of private sector in development of energy system; • Implementation of tariff policy, creating conditions for widened reproduction of power energy;

5. Change of ownership form and management of energy distributing companies; • Taking technical and administrative measures on rapid decrease of energy loss; • Development (under active attraction of private investors) domestic infrastructure for transportation of electric power and energy carriers, which will allow increase of own energy resources and to decrease their import; • Adjustment of water use issues with neighboring countries and increase of electric power export, as well as transfer to market principles on reciprocal payment; • Thorough analysis and use of possibilities of domestic production of oil products, coal and non-traditional energy resources.

6. Goals of energy industry reforms It is essential to make decisions on the following issues: Gradual decrease of state participation and increase of private sector in development of energy system; Implementation of tariff policy, creating conditions for widened reproduction of power energy; Privatization of energy distributing companies; Making technical and administrative measure on rapid decrease of electric power loss; Development (under active attraction of private investors) domestic infrastructure for transportation of electric power and energy carriers, which will allow increase of own energy resources and to decrease their import; Adjustment of water use issues with neighboring countries and increase of electric power export, as well as transfer to market principles on reciprocal payment; Thorough analysis and use of possibilities of domestic production of oil products, coal and non-traditional energy resources.

7. Figure 1. Restructuring of the sector in 2001 Post-reform conditions Pre-reform conditions Production company JSC “Electric Stations” - JSC “Kyrgyzenergo” Vertical integrated company In electric energy industry - Providing company JSC “National electric networks of Kyrgyzstan Generative capacity Distributing companies National magistral electric networks and dispatcher Operation control JSC “Severelectro” JSC “Vostokelectro” JSC “Oshelectro” Distributing networks and sale JSC “Zhalalabatelectro” - JSC “Bishkekteploset” Restructuring of energy industry

8. Stages of energy industry reforming • Asset assessment of energy sector • Separation of subsidiary production and social objects • Restructuring and creation and new stock companies • Changing of ownership form and management

9. Management models of energy industry • Vertical integrated company • Single buyer – competition between producers • Competition of whole sale market (between producers and distributors) • Competition on retail market –between all market players there is an influence of consumer on all companies of energy sector

10. Background of energy industry reforms • Collapse of the USSR • Choice – democratic community and transition to market economy • Hyperinflation • Price increase on energy resources • Transition to electric power for domestic use • Lack of financial resources • Need in financial borrowings • Negotiations with international financial institutions • Incurrence of liability for international institutions.

11. Legislative and institutional base • Laws “On energy”, “On electric energy”, “On licensing”, “On antimonopoly regulation” • Bodies involved in energy management • Parliament, Government, President • Foundation of the State property management • Antimonopoly regulation body • Corruption control agency • State regulator • Ministry of Labor and Social Protection • Ministry of economic development and trade • Ministry of Justice • Ministry of Finance • State organ on technical supervision in energy sector • Water Department

12. Regional cooperation • Decrease of loss - RK 9% 5843HWt/h, KR 11% -1392HWt/h, RT 15% -1988 HWt/h, RU 10%-4064HWt/h, in addition, annually - 13 287 HWt/h • Investments to decrease of loss during transfer and distributions in all four countries – 3 00 million US dollars. • Rehabilitation of producing assets of Syr-Darya, Angren Hydro-Electro Stations, Tashkent Thermal Electric Station would need 1,15 bln US dollars, generation - 32000 Hwt/h. Ekibastuz HES I and II, Aksu and Karaganda HES would need 1,070 million US dollars, will be equal to 17 118 Hwt/h. • New projects on generation – Ekibastuz HES II, Bishkek TESII, Kambarata, KambarataII, Rogunskaya HES, Sangutdinsky HES, Talimardzhanskaya • In four countries it is possible to increase from 139 TWt/h up to 228 TWt/h. 54% of additional electric energy in new stations, 16% of additional electric energy due to decrease of losses, as well as remaining 30% - due to rehabilitation of the old generating aggregates. • Contribution of additional generation of RK -45%, RU, RT- 22% each and KR-9%. • Investments will lead to average additional costs on 1kWt/h on 2,1 cent in RT; 2,3 –KR; 2,8- RK; 3,5 –RU. Total- 13 bln. US dollars for 20 years.

13. Tariff policy in energy electric power industry

14. Goal of tariff policy Goal of tariff policy is remaining on generation, Целью тарифной политики остается разработка, setting up and implementation of economically reasonable price and tariff formation, introduction of more efficient structure of tariffs and bringing them in line with real costs, as well as annual decrease of quasi-fiscal deficit in electric power industry to the level recommended by the International Monetary Fund (goal of the Mid-term tariff policy on electric and thermal energy for 2003-2006 and 2007-2010).

15. Principles of tariff policy Fundamental principle of tariff policy is introduction of self-sufficiency principles of energy sector and lies in taking measures on creation of investment attractive environment in energetic sector of economy.

16. Main principles of tariff policy: • Tariffs have to reflect full cost of production, transmission and distribution of electric and thermal energy, including costs for exploitation and technical services, as well as compensation of invested capital; • Tariffs for each group of consumers have to reflect all costs for electric and thermal supply on that category of consumers; • Existing cross-subsidizing from one group of consumers into the other group should be gradually excluded; • Subsidies should be devoted to the consumers (community) with low level of income through programs of social protection; • Minimal volume of energy consumption for provision with vital needs with taking into consideration of electric food making has to stay in limits up to 150 kWt/h per month and all other benefits should be reconsidered or called off (principle of Basing tariff policy on electric and thermal power energy for 1998-2000).

17. Existing Methods of tariff calculation for final consumers

18. At the moment, there has been implementation only of principles of exclusion of consumptions sills for community due to analysis data: • Separation of consumption on sills and setting up of different prices have led to distortion (manipulation) of companies’ reports and decrease of income of the company (plundering); Деление потребления на пороги и установление различных цен привело к искажению (манипуляции) кампаниями отчетности и снижению дохода кампании (хищение); • Thus, plundering have led to decrease of required funds for repairs and replacement of energy equipment, decreasing efficiency of the industry; • Social groups of community with higher level of income use sufficient benefits. At the moment, that particular group is continuing to use low tariffs due to weakness and insufficiency of social protection.

19. Allegations effecting on price formation in the Kyrgyz Republic MYTH OF ENERGY INDEPENDENCY SOCIAL PROTECTION POLYTICAL WILL TARIFFS FALSE REPRESENTATION INCREASE OF LOSSES DECREASE OF COLLECTION

21. Kyrgyzstan can become energy independent Republic possesses insignificant deposits of hydrocarbon fuel; Demand on energy carriers can be covered by only one energy resource, hydro electric energy, in particular; Republic possesses significant hydro potential, but it is only used on 10%; It is important to take into consideration that water resources are dependant on climate conditions. There is significant time repugnance between demand on electric energy and water regimes. Existing energy capacity in 5-7 years would hardly cover growing demand in domestic market; Further development of hydro potential requires large investments which can not be provided by domestic resources of the country.

23. Commercial losses include: • Unaccounted consumption of electric energy; • Consumers, having wrong bills or not paying fully actually consumed electric energy; • Consumers, having right bills, but being careless towards their payments.

24. Unaccounted consumption of electric energy includes the following: • Plundering of electric energy by consumers through interruption of counter functions of through shift of it; • Malfunctioning counters which do not register consumed electric energy by proper order; • Plundering of electric energy through illegal connection of unregistered consumers; and • Raising of bills and collection of payments on consumed electric energy not based on figures of the counter, but on “rate of consumption” (i.e. estimated usage depending on accommodation area and quantity of residents.)

25. Collection of funds

26. Technical conditions of electric networks 0,4-10 kW, carried on the balance of distributing companies as of 01.01.2000

28. Need in generation of electric energy will be increasing due to stabilization and growth of industrial sectors and agriculture, whilst tariff control for community and agricultural consumers on a low level and retaining of growth trend of energy losses in networks and consumption by the community. Problem of electric energy lack can not be resolved due to resources of existing HES. In that case, if there is no decrease of electric energy loss that it will be required to build new hydro electro-stations of to increase generation on TES. All listed measures require financial investments. Energy companies will have to define what is more profitable, quicker pay back period, ability or willingness of consumer to pay expenses. Lack of capacity of generation can not be considered as an argument for building of new electro stations or increase of generation in TES. It hardly be economically reasoned under existing problems in networks and current tariffs for electric energy. Executive Summary

29. It is important to outline that transfer of tariff reform to later terms will be less painful for the whole community, due to the fact that it will require higher level for increase of tariffs and creation of expensive systems of address social protection.