Problems of regulating tariffs for housing and communal services, which create obstacles for developing sub national bor

1. Problems of regulating tariffs for housing and communal services, which create obstacles for developing sub national borrowing March 6, 2007 Alyona Babak, consultant, Municipal Development Institute, Kyiv

2. Rules and Procedures for Tariff setting: legal aspect • Law of Ukraine “On Housing and Communal Services” • Law of Ukraine“On Heat Supply” • Law of Ukraine“On Waste” • Law of Ukraine“On Associations of Owners of Multi-family Buildings” • CMU of UkraineDecree №959 “ “On Approving Tariff Setting Order for Centralized Water and Wastewater Services” 12.07.2006 • CMU of UkraineDecree № 955 “On Approving Tariff Setting Order for Heat Production, Transportation, Supply and Centralized Heat Supply and Hot Water Services” 10.07.2006 р. • CMU of Ukraine Decree № 560 “On Approving Tariff Setting Order for the Services of Housing and Surrounding Territories Maintenanceна and Standard Service Delivery Agreement for Provision of …. Services ” 12.07.2005 • CMU of Ukraine Decree № 1010 “On Approving Tariff Setting Order for Collection of Domestic Waste” 26.07.2006 р.

3. Tariff setting problems • Absence of the defined regulatory body that is authorized to set tariffs for natural monopolists (water, wastewater, centralized heat supply). Mainly, to regulate: • Private companies (operating under concessions or lease agreements): • Utilities that belong to AR of Crimea; • Utilities that are in the ownership of several local governments or oblast (Donoblvodokanal, Luhansk voda, Poltava Vodokanal, Vinnitsa vodokanal, Rovnovodokanal, Luhansk heat, Kyivvodoknal, Vinnytsya heat and many other); • Heat supply utilities that produce heat at Central Heat and Energy Plants (CHPs), Electric Heat Stations, Nuclear electric stations, cogeneration facilities or facilities that use non traditional sources of energy or renewable energy (in the case, when such utilities are supply heat to the end consumers)

4. Tariff setting problems(cont.) • Tariff regulation is exercised on the potentially competitive markets, : • Solid waste management (domestic, commercial, and non-hazardous industrial solid waste collection, composting, transfer, recycling utilization…)). • Multi-family housing maintenance. which discourages private sector from operation in the sector, while communally owned enterprises are inefficient • Legislation on tariff setting by Associations of Multi-family Housing Owners (which are allowed to set their own prices for housing maintenance) is not coordinated with the legislation on provision of targeted subsidies to low income, which should be calculated based on regulated tariffs.

5. Tariff calculation problems • CMU Decreeson tariff setting contain the following methodological problems: • Costs • bad debts are not recovered • depreciation estimation is confusing and conflicts both tax legislation and accounting principles, • key cost items (electricity, fuel, materials, chemicals) should be estimated in current prices • Profit • Can be recovered in tariffs and planned for capital investment, forming of reserve, return on equity; however, the formulae for tariff calculation envisages only calculation of profit for capital investment • It is not clear whether principle can be recovered from profit or should be covered by depreciation only • There is not built in mechanisms for resource saving, since costs are recovers based on norms without any benchmarks • Capital costs can not be recovered in tariffs for housing maintenance, but capital repairs have to be made by local governments from the respective budgets. Such capital costs are a burden for any local budget since most of housing is privatized.

6. Recommendations for problem solving • Clearly define in legislation regulatory bodies for regulating natural monopolists (water, heat supply, wastewater) of all ownership forms • Reduce regulation on the markets, which are potentially competitive, by introducing price caps for a required minimum of services (e.g. multi-family housing maintenance) for the purposes of assigning targeted subsidies • Introduce local tax (fee) for solid waste collectionto create the source of financing solid waste management operations in a planned manner by local governments • Remove methodological problems in tariff setting rules to allow full cost recovery, introduce “incentive regulation” in water, heat supply and wastewater sectors • Consider possibilities for corporatization of communally owned utilities into stock holding companies(with setting limits for minimum share of capital of local governmentswhich would substitute current prohibition for privatization of communally owned infrastructure)? • Establish conditions for borrowing for housing renovation (incl. heat insulation) (by Associations of Multi-Family Housing Owners)

7. Measures • Adopt the law of Ukraine on regulation of natural monopolists in housing and communal services provision sector (draft law is currently on the webb site of Minbud http://minbud.gov.ua/proj/) • Creation of multicultural national regulator that has representative offices in each oblast • Establishing of key tariff setting principles and procedures • Establish conditions for securitizing borrowing (given restrictions for collateralizing fixed assets): • Introduce price cap regulation with defined indexing mechanisms • Develop and adopt law of Ukraine on specifics of corporatization of communally owned water, heat supply and wastewater utilities (under development by Minbud) • Adopt the law of Ukraine on amending some laws of Ukraine on the issues of domestic solid waste collection (draft law is currently on the webb site of Minbud http://minbud.gov.ua/proj/) • Improve legislation on Associations of Multi-family Owners related to establishing mechanisms for borrowing repayment by members and non –members of associations, which are taken by the associations on behalf of its members for investment purposes (renovations, capital repairs etc.)