Cabinet's new memorandum: Utility tariffs not to decrease, often breakage in heating networks

Author : Olena Holubeva

Source : 112 Ukraine

By signing a memorandum on freezing heat tariffs until the end of the season, the government shifted the problem and financial responsibility to the heating companies and municipalities
21:32, 16 February 2021

112 Agency

By signing a memorandum on freezing heat tariffs until the end of the season, the government shifted the problem and financial responsibility to the heating companies and municipalities. This means that the base tariffs for heat and hot water will not increase until the end of the heating season, but they will not decrease either. It does not guarantee, however, that there would be no growth in payments. So, in January they have already increased by an average of 10% due to a sharp cooling and an increase in heat consumption by houses.

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Taking into account the gas price for heat production, which Naftogaz set for January much more than the government's 6.99 hryvnyas / cubic meter (0,25 USD), the bills could have been at least 20 USD higher. However, the heating companies agreed to artificially restrain tariffs, accumulating debts. In exchange for this, the authorities should in the future compensate them for losses in the amount of 1 billion USD. If they do not, the municipalities will be forced to pay compensation, which will deal a fatal blow to most social programs.

Worst of all, in an attempt to maintain tariffs and its political rating, the president's team turns a blind eye to the main problem - in the current conditions, unprofitable enterprises do not have funds to invest in infrastructure that is 70-80% worn out. Meanwhile, the lump of problems continues to grow rapidly. Already in the fall, people will feel its critical mass not only in significantly increased payments but also through accidents and breakthroughs in heating networks, of which there will be much more.

Signing without a desire

A memorandum on the settlement of problematic issues in the field of district heating and hot water supply was signed on February 9. This document was prepared at the initiative of President Zelensky, according to a statement on the website of the President's Office. The memorandum was supposed to be prepared as soon as possible – until January 25, but the signing was delayed not only because of disagreements over the content of the document but also disputes over whose signatures would be on it.

The memorandum was to be signed and not signed by the deputy head of the President's Office, Kyrylo Tymoshenko. He has been involved in the tariff story since January, when, in the midst of protests across the country, he was instructed by Volodymyr Zelensky to audit tariffs in Ukraine and "obtain comprehensive clarifications from relevant local leaders on the inflated tariffs and on tariff policy in general." Tymoshenko took part in the Cabinet meeting, which was held after the Association of Cities declared in full voice that cities could no longer restrain the rise in heat prices on their own. At this meeting, it was decided to conclude a memorandum that would become a roadmap for overcoming a critical situation.

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The head of the Servant of the People party, Oleksandr Kornienko, was also supposed to sign a memorandum as a representative of the mono-majority in parliament. It is impossible to settle the problems accumulated in the heat sector without changes at the level of laws. On behalf of the Servant of the People, he was supposed to guarantee the thermal workers and representatives of municipalities that the necessary norms would be voted on in the Rada.

As a result, the final version of the document was signed by the first deputy minister of energy Yuriy Vitrenko, authorized by the Cabinet. Not even Vitrenko himself, who is now considered the main anti-crisis manager on the tariff issue in the Ze-team, but his deputy. Also the Minister of Community and Territory Development Oleksiy Chernyshov. A memorandum was signed by the head of the National Commission for State Regulation of Energy and Public Utilities Valeriy Tarasyuk and Naftogaz of Ukraine Andriy Kobolev. On behalf of the cities, Mayor of Kyiv Vitaliy Klitschko, as well as the mayors of Odesa, Zhytomyr, Bucha, put their signatures. Dnipro Mayor Boris Filatov, Lviv Mayor Andriy Sadovy, and Mariupol Mayor Vadym Boychenko did not attend the event, explaining their absence by bad weather conditions. They participated in the signing ceremony via video link.

The official "ceremony" was also attended by Prime Minister Denys Shmygal, who stood behind the back of the officials who signed the document.

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Hold the tariff at any cost

The final version of the memorandum is written in such a way that it solves only one problem and only for two months. The current tariffs for heat and hot water will not increase until the end of the heating season, but they will not decrease either. True, it is not completely clear why it was necessary to sign a separate document to implement this item. The Covid law of March 30, 2020, No. 540-IX explicitly prohibits the revision of tariffs until the end of the heating period 2020/2021.

The heat tariffs, which are in force in the current heating season, include the gas price (80% of the service cost) in the amount of 145 USD / thousand cubic m (excluding VAT). In December, the only gas supplier to the thermal workers, the state-owned Naftogaz, sold gas to the thermal workers at UAH 220 / thousand cub. m (excluding VAT). As you know, Naftogaz reports its price to the heating companies retroactively – they produce and sell heat for a month, and only on the 20th of the month they find out how much they must pay the state monopoly for raw materials. According to Resolution No. 217, settlements for gas are a priority and are paid from the accounts to which the tariff proceeds come in the first place. Taking into account the high prices of Naftogaz, up to 90% of the tariff proceeds of district heating utility enterprises are spent on gas payments. Employee salaries and minimal infrastructure repairs are funded by subsidies from city budgets. The money is spent on this, for which municipalities could build new roads, hospitals, kindergartens, and playgrounds.

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At the time of negotiations on the memorandum, Naftogaz froze the price for the thermal workers. On February 10, Naftogaz announced that it would be as much as 7.33 UAH or 0,26 USD / cubic m (excluding VAT and transportation via main and regional gas pipelines). Taking into account these costs, the price will exceed UAH 8 / cubic. This is much more than the government's 6.99 UAH of 0.25 USD / cubic meter of gas for the population (VAT and transportation are included in this price). It is important that this is the price of Naftogaz for January only. At what price Naftogaz will consider gas to thermal workers in February, we will find out only on the 20th of this month. Perhaps it will be even higher than UAH 8 (0,29 USD).

According to Kyivteploenergo (district heating utility), in January for heating an apartment (the size of the payment is influenced by the year the house was built, the presence/absence of repair and insulation measures, architectural features, and the area of ​​non-residential premises) consumed 1.14 Gcal (at an average temperature outside the window month -2 ° C). The payment for this apartment was 68 USD. With the price of Gcal 72 USD for heat for the same apartment in January would have to pay 82 USD.

No compensation?

Of course, district heating utility enterprises incur huge losses if they do not raise tariffs to an economically justified level and match the price of gas at which Naftogaz supplies them. We are talking about the amount of almost one billion USD of the difference between the actual and economically justified tariffs for 2016-2020.

Head of the Association of Ukrainian Cities, Kyiv Mayor Vitaliy Klitschko said that compensation for this amount should be paid by October 1, 2021. There is no such date in the text of the memorandum. The document does not set any clear deadlines for fulfilling the obligations of the central government. "If the terms of the memorandum are not met, the difference in the tariff will be compensated by local budgets," Oleksandr Slobozhan, executive director of the Association of Cities of Ukraine, explained.

This would be a devastating blow to cities and take away their last funds for the social sphere and improvement.

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There is no compensation at all for the difference between the price of natural gas at which the heating companies buy it from Naftogaz (above UAH 8 in January) and the price of gas included in the tariffs for heat and hot water, which are valid until the end of the current heating season. Enterprises are only provided with an installment plan until September 30, 2021. At the same time, the boundary price of 6.99 UAH  (0,25 USD) / cubic meter is taken into account as the base price in the tariffs, and not 5 UAH (0,18 USD) / cubic meter, which is actually included in them.

However, even with the registration of installments, problems have already arisen. Naftogaz refuses to sign documents that would document this agreement, says Arseniy Blashchuk. The Association of Cities has issued a clarification on this issue, which states that after the signing of the memorandum, Naftogaz began to send to the thermal workers' drafts of additional agreements to the contract for the supply of natural gas, which does not provide for installments, spelled out in the text of the memorandum.

A chain is no stronger than its weakest link

Worst of all, in trying to maintain their political rating, the authorities turn a blind eye to the main problem - in the current conditions, unprofitable TKE enterprises do not have the means to invest in infrastructure that is 70-80% worn out. “Solving the problem of tariffs, the authorities forgot about the main thing - the investment component (in the state of heating networks). It seems that the most important question is how to pay for gas. No energy savings, no gas savings, nothing is needed. Just consume more gas and pay on time with Naftogaz,” Arseniy Blashchuk notes.

For a long period, NEURC managed to artificially maintain heat tariffs, underestimating the heat loss rate on worn-out networks. With real losses reaching 18% in cities, the commission set losses even below the standard (13%) - at 8%. Because of this, the TKE enterprises suffered losses. “When I argued with the commission on this matter, I always said:“ Listen, in this case, we do not need Europe's help. On the contrary, the Europeans should learn from us: their losses on heating networks are 12% (Denmark, Poland) and ours is 8%," says Blashchuk.

According to him, the situation is being resolved only in those cities where investments in heating networks are made not from unprofitable tariffs, but from funds sought by the mayor's office. As an example, the president of the Ukrteplokomunenergo Association cited Zhytomyr, where the mayor's office provides a lot of money to its heating engineer, and thanks to timely, large-scale repairs, it really was possible to reach the heat loss indicator set by the regulator.

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In other cities, the situation is far from being so good. For this reason, we are witnessing large-scale breakthroughs - boiling water floods the streets, and residents of houses sit in cold houses without hot water. Last week alone, 86 houses remained without heat and hot water in Kyiv in cold weather. This happened due to damage to the pipeline built in 1987 on the street. Lavrskaya, 13. Last year, the Ocean Plaza shopping center floated in boiling water. And these are only large-scale accidents that have received wide publicity.

Hundreds of such accidents occur throughout Ukraine due to lack of investment and the unwillingness of the authorities to solve the problem systematically on various scales. If you do not change anything and get rid of problems with empty memoranda, the number of accidents will only grow. However, as well as payments for the heat of Ukrainians - after all, from May 1, the PSO prices will no longer be, and Naftogaz will be able to set any prices for heat workers, even without reference to a formal formula. And they will not be able to leave the monopolist for other suppliers because of the accumulated debts.

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