Would utility checks increase in Ukraine?

Author : Olena Holubeva

Source : 112 Ukraine

Verkhovna Rada published the text of the government bill, which stipulates that local authorities would set tariffs for heating and water
10:00, 21 October 2020

Open source

The Cabinet of Ministers has found a way to increase tariffs for utilities without losing the popularity of the electorate. Last Friday, Verkhovna Rada published the text of the government bill No. 4215, which stipulates that local authorities, not the National energy and utilities regulatory commission (NEURC; the body that consists of members appointed by the president), will set tariffs for heating and water.

The need to raise tariffs was long overdue, but in order not to spoil the rating of Servant of the People in the elections, the authorities did not dare to take such an unpopular step. Now local governments will have to take on the people's anger.

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What would the law change?

According to the government bill No. 4215, the function of forming and approving tariffs for heat energy and hot/cold water is transferred from NEURC to local authorities. The exception is the prices for heat produced by combined heat and power plants, thermal power plants, nuclear power plants, and cogeneration plants - they will continue to be formed and set by NEURC.

Even now, the National Commission is not a monopolist: the powers to set tariffs are divided between it and local councils. NEURC sets tariffs only for those enterprises whose activities it licenses. The process of transferring authority to the field began in 2017. New licensing conditions were approved by NEURC Resolutions No. 307 and 308. Until that time, NEURC regulated the activities of 97% of the public services market.

Currently, 1,421 heat supply companies (98%) are regulated locally. Combined heat and power plants, thermal power plants, nuclear power plants and cogeneration plants remain under the control of NEURC. 2,495 enterprises of water supply and sewerage facilities (98% of the total) have already been transferred to the sites.

Starting from 2021, regulation of all heat and water supply enterprises should be carried out at the local level, according to the explanatory note of the government bill.

"Bill No. 4215 is quite complex and voluminous, it was being developed back in 2018. The previous version was submitted to parliament on December 19, 2018, but the Rada of the last convocation did not get hands on it. Now the government has submitted a new version of the bill," MP, member of the Committee on Energy, Housing and Utilities Serhiy Nagornyak, noted.

The initiative in its current version was refused to be approved by the Ministry of Energy and Environmental Protection, the Antimonopoly Committee, NEURC. The Ministry of Finance, the Ministry of Economic Development and Trade, and the Ministry of Justice had comments on it. Despite this, the bill was approved at a government meeting on October 9. Four days later, he was registered in the Rada.

The initiative has been supported by the Association of Ukrainian Cities since 2018. This suggests that the majority of local governments advocate the idea of ​​transferring the maximum number of powers to set tariffs to the localities, Nagornyak notes.

The government wants to bring thermal generation and water supply/sewerage enterprises out of the current state of colossal debts to self-sufficiency. To this end, the project contains the rules according to which local authorities will work with enterprises.

The local authorities will not set the rate for heat at their own discretion but in accordance with the procedure approved by the Cabinet. Until now, this has been done in accordance with the NEURC methodology.

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It is not a secret that in order to maintain the political ratings of the authorities, NEURC, as a regulator acting on its behalf, sets tariffs for enterprises at an unreasonably low level. Tariffs are set at such a level that the funds received by enterprises are not enough to pay off their activities. In this regard, 80% of Ukrainian cities have to subsidize them, Tetiana Boyko, the coordinator of energy programs of the Opora Civil Network, told.

The explanatory note to the draft law notes that "the untimely revision of tariffs for heat energy and utilities by the authorized body of the NEURC drives public utilities at losses. significant growth: if in 2011 losses of heat supply enterprises amounted to 36 million USD, water supply, and sanitation – 32 million USD, then in 2020 they increased to 210 million USD for heat supply enterprises and 92 million USD for water supply. Total accounts payable increased from 458 million USD to 2 billion USD.

The NEURC powers on coordinating investment programs of heat producers are transferred to the local authorities (except for those that remain under the jurisdiction of the National Commission: combined heat and power plants, thermal power plants, nuclear power plants, and cogeneration plants). This is a serious step since the size of the investments envisaged by the programs has a direct impact on the level of tariffs.

The conditions and procedure for attracting loans from foreign states, banks, and international financial organizations for the implementation of investment projects by heat producers and enterprises specializing in the supply of water, according to the norms of the bill, will be developed by the Cabinet.

Related: Ukrainian govt wants to abandon state regulation of tariffs for heating, hot water, - PM

Why does the government disengage?

A reasonable question: why is the government promoting an initiative that does not solve the problems that have accumulated in the housing sector?

The answer is obvious: so as not to solve them and not be held responsible for it. According to Tetyana Boyko, one of the requirements of the IMF is to establish fair tariffs in the housing and communal services sector already this heating season. This did not happen.

"The transfer of powers on tariff setting to the localities will allow the government to absolve itself of responsibility for this failure," Boiko stressed.

According to numerous statements by experts, the likelihood that the country will have elections to the Rada next year is very high. A year ago, the head of state hinted about his dissatisfaction with the current composition of parliament. However, according to the Constitution, the powers of the Verkhovna Rada, elected in early elections, could not be terminated for another year from the day of its election.

And although the chairman of the Servant of the People party, Oleksandr Kornienko, said that there are no grounds for early parliamentary elections now, the reasons continue to accumulate. In particular, for his party. These are numerous scandals that show the discrepancy between the moral and ethical criteria put forward by Zelensky to his team, and the violation of party discipline. Representatives of the mono-coalition are less and less homogeneous in their views, which harms the promotion of the presidential initiatives promised to the people.

And since early elections are just around the corner, now is not the time for the president's team to spoil the ratings. This is a key argument for transferring responsibility to local authorities, who will be elected on October 25 and will actually have the right to make any decisions that are beneficial to them within 5 years.

Kucherenko, a member of the Committee on Energy and Housing and Utilities, also speaks about the transfer of responsibility. “The only one who benefits from the adoption of the bill is Prime Minister Shmygal, who, if the decision is approved in the Rada, will simply “shave off” a bunch of problems,” Kucherenko comments.

Moreover, the increase in tariffs could have been avoided subject to the timely modernization of networks and investments in energy efficiency.

"In addition to objective factors, the cost of services of housing and communal services enterprises is affected by the deterioration of equipment and networks. In general, for the whole year in Ukraine, only 1% of heating networks of the required volume was replaced," Boyko comments.

Related: Heating season in Kyiv begins on October 16, - Klitschko

Nagornyak also speaks about the deterioration of the nets.

“As you might know, the majority of housing and communal services enterprises in Ukraine are unprofitable. It can be agreed that one of the main reasons is the establishment of decades of tariffs that are not economically justified. But no less important reasons for this situation are ineffective management of housing and communal services enterprises, catastrophic deterioration pipes and equipment, failure to take measures to improve the energy efficiency of buildings and prevent losses of water and heat. Due to inefficient, outdated, and worn-out equipment, the services of such companies have a huge cost,” Nagornyak notes.

It turns out that Ukrainians have to pay out of their own pockets for the long-term inaction of the authorities and the populism of politicians who did not want to take unpopular steps in order to maintain their ratings.

Will utility prices rise and what will happen to the quality of services?

The formation of tariffs, with the help of which utility companies will be able to reach self-sufficiency, means nothing more than their increase.

“Whether we like it or not, the tariffs need to be increased. There are many objective reasons that indicate this: the increase in the price of distribution of gas, electricity (for industrial consumers), the minimum wage.”

However, experts cannot predict whether the local authorities will nevertheless take unpopular measures.

"There will be no unequivocal increase in tariffs (to an economically justified level for enterprises) as a result of the transfer of the right to approve them. As a former deputy of the local council, I know how decisions are made locally. Often these processes are influenced by politics no less than the actions of central-local authorities, which depend on elections, are not happy with the need to make unpopular decisions. By raising tariffs, they lose their ratings and followers among voters," Nagornyak adds.

Related: Switzerland allocates $1.5 million for water utility in Donbas

Suppose heat and water utilities will still rise in price. Should Ukrainians expect at least an increase in the quality of services provided?

Ihor Cherkashyn, coordinator of the Expert Platform on Energy Efficiency, emphasizes on Facebook: in parallel with such a decision, the country was not offered a national plan to reduce the energy intensity of the economy and overcome energy poverty. So while the authorities are engaged in "passing the buck," the main problems in the industry will most likely remain behind the scenes.

It would be possible to replace boilers with modern energy-efficient ones, replace emergency pipes, and carry out thermal modernization of buildings. But the financial resources of local authorities are limited.

“First of all, local authorities prefer to spend money on social projects: construction of playgrounds, sidewalks, road sections. At the same time, the companies - providers of housing and communal services remain outside their attention: as a rule, investments in this area are hidden from the eyes of voters. It is impossible to hype on them,” says Nagornyak.

This is one of the major threats in the implementation of the government initiative to delegate the authority to set tariffs on the ground.

"The threat that I see in such a decision is that local authorities will not be interested in modernizing and reducing losses in networks, replacing boilers with more energy-efficient ones, introducing a strict metering system. They can act on a cost-effective basis, and in this case, of course, tariffs will increase! But at the same time, no real steps aimed at reducing the cost of services will be taken," Kucherenko said.


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