Experts: The formula for calculating fixed gas price should be brought up for discussion 

Experts: The formula for calculating fixed gas price should be brought up for discussion 
May 17, 2016.

Government set new prices for gas without a broad expert discussion based on the examples of long functioning markets. The expert community strongly calls for consultations with civil society.

Kyiv, May 17, 2016. The mechanism of calculating the new gas price requires broad expert discussion, because the formula of the Cabinet [of Ministers’] Decree No.758 of April 27 raises a number of questions. This was stated by representatives of expert community at a press briefing at Ukraine Crisis Media Center. “If the price is fixed [from May 1, 2016 – UCMC note], it should be as transparent and justified as possible. But although the resolution is a regulatory act, in fact, there was no discussion,” said Victor Merkushov, Presidium member, all-Ukrainian NGO “Energy Association of Ukraine”. “It was very difficult to change the approach [laid by the previous government – UCMC note] fundamentally over this short period. However, it is important that the government looks at this model critically,” stated Oleksandr Narbut, President of the Kyiv Energy Research Institute. The expert added that the second paragraph of the resolution provides for revising the new prices over a quarter. This requires organizing an expert discussion involving the authors of the resolution.

The rate on gas for the Ukrainian market was determined on the basis of the market price in the countries where the gas market has long been working. NCG hub served as an example, explained Yuriy Voytovych, Head of the “Naftogaz Ukraine” Energy Saving & Energy Efficiency Department. “The price was estimated for the period from May to December, and in dollar terms it amounts to 145 dollars per 1,000 mᶟ. The cost of bringing this gas to Ukraine and paying the operator for the entrance to the gas transportation system was added and that made another $ 40. Thus, the Cabinet established parity on import price at 185 dollars, and applying the program exchange rate of hryvnia to dollar, established a single gas rate for households and communal heating enterprises – 4,942 UAH,” said Mr. Voytovych. With VAT, the cost of transportation and distribution, the gas price for households amounted to 6,88 UAH / mᶟ, for communal heating enterprises – 6,81 UAH / mᶟ, only for religious organizations – 3,84 UAH due to the fact that their consumption is traditionally low and they are not subject to subsidies.

Commenting on the formula itself, the experts questioned the advisability of taking NCG hub as an example, because Ukraine had more successful examples – such as Central European gas hub. The experts also pointed out that the formula that sets a fixed gas price has important variable components. “Dollar rate and euro rate are of great importance. They change daily, but the price remains unchanged for a long period,” noted Dmytro Grygoriev, Deputy General Director at the Center for Research in Energy Industry. “In addition, says Viktor Merkushov, given the variable components, the retail price should be different for different regions, but it is the same for all.

Complaints are also caused by the fact that the Resolution gives preferences to the national oil and gas company “Naftogaz of Ukraine” and actually helps it remain a monopolist. Due to the fact that special powers have been assigned to this company, the alternative gas suppliers cannot compete with it in the market, said Oleksandr Narbut. According to the experts, although National Commission for Energy and Utilities Regulation (NKREKP) must deal with the regulation of natural monopolies and not with pricing, these powers should be transferred to the regulator for a transitional period, which would ensure greater objectivity. It is also desirable to come to a common rental model for mining companies as soon as possible. This will yield lower public revenue. But in such case, subsidies will also be smaller.

The increase in gas price resulted in increase in the thermal energy rate by 90 percent. Now the weighted average rate is 1,023 hryvnia exclusive of VAT, noted Svitlana Chernykh, Director of NKREKP heat supply tariff policy department. In the rate structure the fuel costs comprise 85 percent, electricity costs – 5 percent, payroll taxes – 7 percent, other costs – 3 percent, which are to be channeled for the installation of meters. The weighted average rate on the service totaled 1,287 UAH inclusive of VAT per 1 gigacalorie, of which 99 percent – costs for heat energy, 1 percent – for bank services and less than 1 percent – for labor remuneration, depreciation, etc. “With this gas price it is almost impossible to influence the rate size. It is possible only to reduce the payment by installing meters so that people pay for actual consumption of the service,” explained Ms. Chernykh. The new rates have been approved, but not upheld yet. After the 20-day period, within which this information should be publicly available for review, the rates will be approved at a public sitting and submitted for adjustment.

The new rates for population will take effect from July 1, 2016. But communal heating enterprises have to buy gas at the new price. “For Kyiv state energy company “Kyivenergo” it means a net loss of 253 million hryvnias for two months – for hot water. Compensation starting from January during the next 12 months is a good thing. But they must purchase gas for hot water at the new price just today,” stated Tetyana Gryaznova, CFO of JSC “Kyivenergo.” Theoretically, the company can open a credit with a bank, but because of the debts its accounts were blocked in February. “We have reached stalemate. We do not understand how we will manage to supply hot water to Kyiv,” she explained. According to her, many enterprises from other cities are in a similar situation. Tetyana Gryaznova also expressed concern that the rate increase will result in disastrous nonpayment level. As of May 1, debt for heat to “Kyivenergo” is already 2.5 billion hryvnias and “Kyivenergo” debt to “Naftogaz” – 544 million hryvnias.

The experts noted that it is also desirable to revise the current subsidy mechanism, because it is inefficient and drives the energy sector reforms into a corner. “Subsidies aimed at energy efficiency should be monetized. People should have access to funds that have been saved. Second, there should be a priority model of using these funds, including energy-saving measures,” noted Oleksandr Narbut. The impetus for the population could be grants and preferential credits.

 

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