Energy regulation Energy regulation and quality of serviceand quality of service

-Macedonian Experience--Macedonian Experience-

Slave IvanovskiSlave IvanovskiEnergy Regulatory commission of the Energy Regulatory commission of the

Republic of MacedoniaRepublic of Macedonia

44thth Poverty Reduction Strategy Forum Poverty Reduction Strategy ForumAthens, June 26-27 2007Athens, June 26-27 2007

Facts About ERCFacts About ERC In accordance with the Energy Law, ERC is authorized to In accordance with the Energy Law, ERC is authorized to

regulated the energy activities related to the:regulated the energy activities related to the:electricity;electricity;natural gas;natural gas;oil and oil derivates;oil and oil derivates;heat; and heat; and geothermal energy.geothermal energy.

ERC is an independent state authority and has capacity of a ERC is an independent state authority and has capacity of a legal entitylegal entity

ERC is composed of five members, with the ERC is composed of five members, with the mandate of five mandate of five years and none of theyears and none of themm can be on this function more than can be on this function more than two mandatestwo mandates

Criteria for assessment the independency of the ERC:Criteria for assessment the independency of the ERC:Appointment and dismissalAppointment and dismissal of the ERC members of the ERC membersoperation and decision making processoperation and decision making process (no previous or posterior (no previous or posterior approval is needed)approval is needed)Reporting Reporting (to the Parliament, and to the Government when it is (to the Parliament, and to the Government when it is necessary)necessary)Financing Financing (from own sources provided through collection of the license (from own sources provided through collection of the license fees and through collection of a fee from the total income of the fees and through collection of a fee from the total income of the license holders for pursuing of energy activities license holders for pursuing of energy activities

Responsibilities of the ERCResponsibilities of the ERC monitors the energy market operations and proposes monitors the energy market operations and proposes

measures for its promotion due to ensuring non-measures for its promotion due to ensuring non-discrimination, efficient competition and efficient functioning discrimination, efficient competition and efficient functioning of the marketof the market

ensures promotion of the protection of the rights of the ensures promotion of the protection of the rights of the energy usersenergy users

delivers regulations on price formation delivers regulations on price formation and prescribes Tariff and prescribes Tariff systems systems of certain types of energy and servicesof certain types of energy and services

adopts decisions for the prices of specific types of energy;adopts decisions for the prices of specific types of energy; issues, amends and revokes the licenses and monitors the issues, amends and revokes the licenses and monitors the

compliance of the licensees in the pursuit of certain activities compliance of the licensees in the pursuit of certain activities within the energy sectorwithin the energy sector

participates in the resolution or resolves disputes that may participates in the resolution or resolves disputes that may arise among the participants on the energy marketarise among the participants on the energy market

proposes to the relevant authorities undertaking of proposes to the relevant authorities undertaking of measures, within the scope of their competencies, against measures, within the scope of their competencies, against the entities that pursue the activity contrary to the the entities that pursue the activity contrary to the provisions of this lawprovisions of this law

ERC – Price RegulationERC – Price Regulation ERC Price regulation shall taking into ERC Price regulation shall taking into

account:account:Balancing the interests of energy providers and energy Balancing the interests of energy providers and energy

customerscustomersProtecting consumers against monopolistic pricesProtecting consumers against monopolistic pricesCreating incentives for efficient operation of regulated energy Creating incentives for efficient operation of regulated energy

entitiesentitiesCreating incentives for development of a competitive energy Creating incentives for development of a competitive energy

marketmarketAvoidance of cross-subsidization between individual group of Avoidance of cross-subsidization between individual group of

customerscustomersEnsuring non-discriminatory treatment Ensuring non-discriminatory treatment Using objective criteria and transparent methodsUsing objective criteria and transparent methodsAllowing recovery of costs for providing energy and energy Allowing recovery of costs for providing energy and energy

servicesservices

ERC Tariff systemsERC Tariff systems The The Tariff systemsTariff systems, stipulated and adopted by the ERC, , stipulated and adopted by the ERC,

shall address:shall address: the criteria and standards for classification of the categories of the criteria and standards for classification of the categories of

utilization and categories, groups and subgroups of consumers;utilization and categories, groups and subgroups of consumers; calculation elements requisite for determination of the fee for calculation elements requisite for determination of the fee for

the dispatched energy and power; andthe dispatched energy and power; andbases and manner of creation of tariff levels and their bases and manner of creation of tariff levels and their

implementation in the calculation elements.implementation in the calculation elements.

The The decision for price settingdecision for price setting, adopted by the ERC shall , adopted by the ERC shall lay down the prices of different types of energy in lay down the prices of different types of energy in compliance with the price setting methodology and compliance with the price setting methodology and tariff systems for certain types of energy and regulated tariff systems for certain types of energy and regulated services.services.

ERC-Supply ConditionERC-Supply Condition The conditions for supply of different types of energy The conditions for supply of different types of energy

from the energy systems, determine, in further details, from the energy systems, determine, in further details, the requirements and the manner for supply and the the requirements and the manner for supply and the mutual rights, obligations and liabilities of the supplier mutual rights, obligations and liabilities of the supplier and consumer of certain types of energy, and and consumer of certain types of energy, and particularly:particularly: the conditions and manner of issuing energy consent for the conditions and manner of issuing energy consent for

connection of the user to the energy system;connection of the user to the energy system; requirements, manner and terms for conclusion of the contract requirements, manner and terms for conclusion of the contract

for dispatch of the relevant type of energy;for dispatch of the relevant type of energy;manner of calculation and charge of the delivered energy;manner of calculation and charge of the delivered energy; conditions and manner of reimbursement of the energy user in conditions and manner of reimbursement of the energy user in

case of reduced dispatch or discontinuation andcase of reduced dispatch or discontinuation andusers to which the supply of energy must not be discontinued users to which the supply of energy must not be discontinued

for national security reasonsfor national security reasons and the manner of providing and the manner of providing guaranties for settlement of the expenses for consumed energy guaranties for settlement of the expenses for consumed energy by these users.by these users.

The conditions for supply, in cooperation with the The conditions for supply, in cooperation with the enterprises pursuing different energy activities, shall be enterprises pursuing different energy activities, shall be stipulated and adopted by the ERC.stipulated and adopted by the ERC.

ELECTRICITY SUPPLY FOR TARIFF ELECTRICITY SUPPLY FOR TARIFF CUSTOMERSCUSTOMERS

Tariff customer of electricityTariff customer of electricity is a consumer who is a consumer who purchases electricity pursuant to set tariff rates.purchases electricity pursuant to set tariff rates.

Wholesale Tariff CustomersWholesale Tariff Customers Electricity Supplier Electricity Supplier is a legal entity that supplies the requirements of the Retail Tariff is a legal entity that supplies the requirements of the Retail Tariff Customer Electricity Supplier and tariff customers of electricity Customer Electricity Supplier and tariff customers of electricity directly connected to the transmission network. directly connected to the transmission network.

Retail Tariff CustomerRetail Tariff Customer Electricity Supplier Electricity Supplier is a is a legal entity that supplies the requirements of tariff customers of legal entity that supplies the requirements of tariff customers of electricity connected to the distribution network.electricity connected to the distribution network.

In accordance with the licenses issued by ERC In accordance with the licenses issued by ERC electricity supply for tariff customer is performed by:electricity supply for tariff customer is performed by:

1.1. MEPSOMEPSO - - Wholesale Tariff CustomersWholesale Tariff Customers Electricity Electricity Supplier Supplier

2.2. ESMESM - - Retail Tariff CustomerRetail Tariff Customer Electricity Supplier Electricity Supplier

MACEDONIA’S EXPERIENCEMACEDONIA’S EXPERIENCEFIGURES & NUMBERSFIGURES & NUMBERS/2006/2006

kWhkWh %of total%of total1. 1. DomesticDomestic 6.653.453.6036.653.453.603 77,2777,271.1. TPP1.1. TPP 4.946.103.0644.946.103.064 57,2757,271.2. HPP1.2. HPP 1.563.816.6651.563.816.665 18,1618,161.3. SHPP1.3. SHPP 143.533.874143.533.874 1,681,682. Import2. Import 1.958.345.1741.958.345.174 22,7322,733. total3. total 8.611.798.7778.611.798.777 100100

MACEDONIA’S EXPERIENCEMACEDONIA’S EXPERIENCEFIGURESFIGURES & NUMBERS & NUMBERS/2006/2006

AVERAGE PARTICIPATION IN TOTAL AVERAGE PARTICIPATION IN TOTAL CONSUMTIONCONSUMTION

110110kV consumers……………………………kV consumers……………………………31,55%31,55%35 35 kVkV consumers………………………………consumers………………………………0,93%0,93%35 35 kVkV consumers directly connected….consumers directly connected….0,13%0,13%10 10 kVkV consumers…………………………….consumers…………………………….10,03%10,03%Households…………………………………….Households…………………………………….45,08%45,08%I tariff degree(small industry -0.I tariff degree(small industry -0.4kV)…..4kV)…..2,42%2,42%IIII tariff degree(small industry -0. tariff degree(small industry -0.4kV)….4kV)….8,32%8,32%Public lightening……………………………….Public lightening……………………………….1,41%1,41%

ESMESM

Energy activities performed by the ESM, on the basis of licenses

issued by the ERC

The electricity distributor

The electricity distribution

system operator

The retail tariff

customer electricity supplier

ESM- ESM- THE ELECTRICITY DISTRIBUTOR

The electricity distributor is liable to: The electricity distributor is liable to: connect to its distribution network all consumers on the territory of connect to its distribution network all consumers on the territory of

the Republic of Macedonia upon their request, pursuant to the the Republic of Macedonia upon their request, pursuant to the distribution grid codedistribution grid code

manage, maintain, upgrade and expand the distribution networkmanage, maintain, upgrade and expand the distribution network install and maintain the equipment necessary for the functioning of install and maintain the equipment necessary for the functioning of

the distribution system, pursuant to the distribution grid code the distribution system, pursuant to the distribution grid code provide secure, safe and quality electricity distribution and provide secure, safe and quality electricity distribution and

delivery through the electricity distribution network delivery through the electricity distribution network provide distribution network development and maintenance for provide distribution network development and maintenance for

secure and efficient functioning of the distribution networksecure and efficient functioning of the distribution network submit annually to the ERC: submit annually to the ERC:

network development and expansion plan for a period of 5 network development and expansion plan for a period of 5 years, years,

annual program for realization of the plan, and annual program for realization of the plan, and report regarding the previous year program realizationreport regarding the previous year program realization

ESM - DISTRIBUTION SYSTEM ESM - DISTRIBUTION SYSTEM OPERATOROPERATOR

In order to provide safety, reliability and security of the In order to provide safety, reliability and security of the national distribution system, the DSO is responsible for national distribution system, the DSO is responsible for long-term planning of the distribution network.long-term planning of the distribution network.

The DSO is liable to provide:The DSO is liable to provide: operational management of the national distribution systemoperational management of the national distribution system distribution on a non-discriminatory and transparent basis;distribution on a non-discriminatory and transparent basis; reliable and secure functioning of the distribution system; reliable and secure functioning of the distribution system; technical and technological development, maintenance supervision technical and technological development, maintenance supervision

and management of the distribution systemand management of the distribution system confidentiality of the commercial and business data of the system confidentiality of the commercial and business data of the system

service users.service users. The DSO is liable to submit to the ERC: The DSO is liable to submit to the ERC:

plans, studies and other information regarding the distribution network plans, studies and other information regarding the distribution network expansion and upgrade, including the corresponding expenses expansion and upgrade, including the corresponding expenses financial plan.financial plan.

report for the financial and physical range of realized services, in a report for the financial and physical range of realized services, in a manner and under the terms and conditions determined in the license. manner and under the terms and conditions determined in the license.

ESM - RETAIL TARIFF CUSTOMERS ESM - RETAIL TARIFF CUSTOMERS ELECTRICITY SUPPLIERELECTRICITY SUPPLIER

For the needs of the retail tariff customers, at prices For the needs of the retail tariff customers, at prices approved and published by the ERC, the RTCES purchases approved and published by the ERC, the RTCES purchases electricity: electricity: from the wholesale tariff customer electricity supplier and from the wholesale tariff customer electricity supplier and from distributed electricity generatorsfrom distributed electricity generators

The RTCES: The RTCES: is liable to prepare balances for the needs of the retail tariff is liable to prepare balances for the needs of the retail tariff

customer customer purchases the necessary transmission and distribution capacity purchases the necessary transmission and distribution capacity

and regulated services and regulated services invoices the delivered electricity pursuant to the tariff system invoices the delivered electricity pursuant to the tariff system

based on the meter readingbased on the meter reading The RTCES has the right of access to the meter on every The RTCES has the right of access to the meter on every

property or facility for: property or facility for: control, fitting, supervision, modification and replacement of control, fitting, supervision, modification and replacement of

the meter; the meter; switching the electricity delivery off, in case that the owner or switching the electricity delivery off, in case that the owner or

the tenant breaches the law or has failed to pay for electricitythe tenant breaches the law or has failed to pay for electricity

ESM – NUMBER OF ESM – NUMBER OF CONSUMERSCONSUMERSVoltage levelVoltage level number of number of

consumersconsumers35kV35kV 2020

10kV10kV 13241324

O,4kVO,4kV 763.488763.488

householdshouseholds 678.264678.264

totaltotal 764.850764.850

ESM – THE REGULATED MAXIMUM ESM – THE REGULATED MAXIMUM REVENUEREVENUE

The regulated maximum revenue of the The regulated maximum revenue of the ESMESM shallshall covercover:: distribution costs distribution costs the costs for managing the distribution system the costs for managing the distribution system the costs for supply and deliver of electricity at medium and the costs for supply and deliver of electricity at medium and

low voltage (nominal voltage 35; 20; 10; 6 and 0.4 kV), and low voltage (nominal voltage 35; 20; 10; 6 and 0.4 kV), and ensure a level of regulated return on capitalensure a level of regulated return on capital

The regulated maximum revenue must cover the costs The regulated maximum revenue must cover the costs for:for: the management, operation and maintenance of the distribution the management, operation and maintenance of the distribution

systemsystem the development of the distribution system, enabling long-term the development of the distribution system, enabling long-term

ununinterruptedinterrupted electricity distribution without any restrictions electricity distribution without any restrictions the technical losses in the distribution of electricitythe technical losses in the distribution of electricity ancillary servicesancillary services connection to the distribution systemconnection to the distribution system the reading, recording and the reading, recording and billing ofbilling of distributeddistributed electricity, the electricity, the

maintenance and maintenance and inspectioninspection of measuring devices; and of measuring devices; and environmental protectionenvironmental protection

ESM – ASSETS TO PROVIDE ESM – ASSETS TO PROVIDE QUALITY OF SERVICESQUALITY OF SERVICES

DISTRIBUTION LINESDISTRIBUTION LINES110Kv…………148.3 km110Kv…………148.3 km

35 kV……… 1008,7 km35 kV……… 1008,7 km

20 kV………….719 km20 kV………….719 km

10 kV………..8921,6 km10 kV………..8921,6 km

0.4kV…………11590 km0.4kV…………11590 km

Total …………22388 kmTotal …………22388 km

TRANSFORMERSTRANSFORMERS110Kv………………….51110Kv………………….51

35 kV…………………11735 kV…………………117

10(20) kV………….928110(20) kV………….9281

Total ………………9449Total ………………9449

AVERAGE TARIFF PRICES/2006AVERAGE TARIFF PRICES/2006Category of consumersCategory of consumers Aver. prices Aver. prices

(€/MWh)(€/MWh)1. 1. WTCESWTCESRTCESRTCES 27,3427,342. 2. CONSUMERS CONNECTED TO THE CONSUMERS CONNECTED TO THE

DISTRIBUTION NETWORKDISTRIBUTION NETWORK 46,7846,782.1.2.1. 35 kV CONSUMERS35 kV CONSUMERS 43,4643,462.2.2.2. 10 kV CONSUMERS10 kV CONSUMERS 48,9648,962.3. 2.3. HOUSEHOLDSHOUSEHOLDS 38,5238,522.4.2.4. I TARIFF DEGREE (sme-0,4 kV)I TARIFF DEGREE (sme-0,4 kV) 55,4455,442.5.2.5. II TARIFF DEGREE (sme-0,4 kV)II TARIFF DEGREE (sme-0,4 kV) 84,8984,892.6.2.6. PUBLIC LIGHTENINGPUBLIC LIGHTENING 53.8953.89

LEVEL OF PAYMENTLEVEL OF PAYMENT1. Commercial losses (technical losses included) 1. Commercial losses (technical losses included) of electricity:of electricity:30,3 % (January-March, 2006)30,3 % (January-March, 2006)21% (April-December, 2006)21% (April-December, 2006)2. Level of payment:2. Level of payment:2005-Approximately 72%2005-Approximately 72%2006-Approximately 85%2006-Approximately 85%3. Steps to increase the level of payment: 3. Steps to increase the level of payment: 3.1. incentives to consumers:3.1. incentives to consumers:Giving opportunities to consumers for settlement of old debts in Giving opportunities to consumers for settlement of old debts in 10 equal installments10 equal installmentsAwarding prizes to those consumers that regularly pay their Awarding prizes to those consumers that regularly pay their electricity billselectricity bills3.2. Law suits against non payers (≈400.000)3.2. Law suits against non payers (≈400.000)Against Government for the debts of 10.000.000.€Against Government for the debts of 10.000.000.€Against municipalitiesAgainst municipalities

CURENT SITUATIONCURENT SITUATIONMACEDONIA’S ELECTRIC SECTOR IS IN A MACEDONIA’S ELECTRIC SECTOR IS IN A

PRECARIOUS FINANCIAL POSITIONPRECARIOUS FINANCIAL POSITION

1.1. HIGHER THAN FORECAST ELECTRICITY IMPORT COSTS.HIGHER THAN FORECAST ELECTRICITY IMPORT COSTS. 2. COSTS ARE NOT BEING PASSED THROUGH TO CUSTOMERS DUE TO 2. COSTS ARE NOT BEING PASSED THROUGH TO CUSTOMERS DUE TO

THE:THE: ADDITIONAL POLITICAL CONSTRAINTSADDITIONAL POLITICAL CONSTRAINTS DESIGN OF TARIFF SYSTEMDESIGN OF TARIFF SYSTEM

3. EXISTING AGREEMENTS WITH THE LARGE INDUSTRIAL CONSUMERS 3. EXISTING AGREEMENTS WITH THE LARGE INDUSTRIAL CONSUMERS THAT ENTAIL: THAT ENTAIL:

LOW TARIFF PRICES andLOW TARIFF PRICES and NO CONSEQUENCE FOR OVER – ESTIMATING CONSUMPTION NO CONSEQUENCE FOR OVER – ESTIMATING CONSUMPTION

(exacerbating MEPSO’s financial crisis).(exacerbating MEPSO’s financial crisis).4. POLITICALY-SET MANAGEMENT GOALS LEFT THE SECTOR 4. POLITICALY-SET MANAGEMENT GOALS LEFT THE SECTOR

UNDERINVESTMENT AND FINANCIALY UNSTABLE. UNDERINVESTMENT AND FINANCIALY UNSTABLE. 5. POOR LEVEL OF RATE COLLECTION 5. POOR LEVEL OF RATE COLLECTION ((theft and non-invoicingtheft and non-invoicing) ) 6. TARIFF SCHEMES UNAPROPRIATE TO THE ELECTRICITY MARKET 6. TARIFF SCHEMES UNAPROPRIATE TO THE ELECTRICITY MARKET

DESIGNDESIGN

INVESTMENTSINVESTMENTS1. In accordance with existing Supply Condition the

parameters for quality of supply are:-Approved deviations of the nominal voltage:-Approved deviations of the nominal voltage:For 110 kV, 35 kV, 20 kV, 10 kV and 6 kV: - 10% to +10%For 110 kV, 35 kV, 20 kV, 10 kV and 6 kV: - 10% to +10%For 0,4 kV: -10% to +5%For 0,4 kV: -10% to +5%-Approved deviations of the nominal frequency (50 Hz): -Approved deviations of the nominal frequency (50 Hz):

-0,1% to +0,1%-0,1% to +0,1%

2. Despite the poor collection rate ESM invests in the 2. Despite the poor collection rate ESM invests in the distribution network to improve security and quality of distribution network to improve security and quality of electricity supply, in accordance with the obligation electricity supply, in accordance with the obligation stipulated in the Energy Law and Licenses for stipulated in the Energy Law and Licenses for performing energy activities:performing energy activities:

2005 - 14.160.000€ 2006 - 13.275.000€ 2007 - 42.000.000€ - in announcement

KEY UNDERSTANDINGS/1KEY UNDERSTANDINGS/1 Quality of services depends of investments in the Quality of services depends of investments in the

energy facilitiesenergy facilities Investments depends of the:Investments depends of the:

Electricity prices, andElectricity prices, and Rate collectionRate collection

1. Electricity prices depend of t1. Electricity prices depend of the regulated maximum he regulated maximum revenuerevenue which must which must covercover the cost for: the cost for:

operating maintenance and development of the operating maintenance and development of the distribution system, distribution system, and and

ensure a level of regulated return on capitalensure a level of regulated return on capital1.2. 1.2. Electricity prices should not cover Electricity prices should not cover The commercial losses The commercial losses ((theft and non-invoicingtheft and non-invoicing)) Unnecessary investments, (overinvestment) and Unnecessary investments, (overinvestment) and Other cost not related with the regulated energy activitiesOther cost not related with the regulated energy activities Investment plans must be subject of the regulatory Investment plans must be subject of the regulatory

control/approvalcontrol/approval

KEY UNDERSTANDINGS/2KEY UNDERSTANDINGS/21.1. Rate collection depend on: Rate collection depend on:

Efficient practice of supplierEfficient practice of supplier Supportive legal and regulatory framework Supportive legal and regulatory framework Efficient judicial system and Efficient judicial system and Political understanding Political understanding

1.1. Efficient practice of supplier 1.1. Efficient practice of supplier Fulfillment of public service obligationsFulfillment of public service obligations Fair and non discriminatory treatment of the consumers Fair and non discriminatory treatment of the consumers Incentives for regular payers and appropriate measures against non Incentives for regular payers and appropriate measures against non

payerspayers Satisfactory level of the quality of servicesSatisfactory level of the quality of services

1.2. Supportive legal and regulatory framework 1.2. Supportive legal and regulatory framework Market liberalization Market liberalization Elimination of cross-subsidizationElimination of cross-subsidization Legal treatment of the debts for unpaid electricity like any other debtsLegal treatment of the debts for unpaid electricity like any other debts Legally based incentives for energy efficiency and energy savingsLegally based incentives for energy efficiency and energy savings

KEY UNDERSTANDINGS/3KEY UNDERSTANDINGS/31.3.Efficient judicial system1.3.Efficient judicial system Not to prolong the court procedures against non payersNot to prolong the court procedures against non payers Fast execution of court decisions Fast execution of court decisions Equal treatment of the state owned and private owned suppliers Equal treatment of the state owned and private owned suppliers

1.4. Political understanding1.4. Political understanding Supplier is a profit oriented company, not social protection Supplier is a profit oriented company, not social protection

institutioninstitution Delivered electricity must be paid to the supplier Delivered electricity must be paid to the supplier Adoption of appropriate policy for protection vulnerable customersAdoption of appropriate policy for protection vulnerable customers Activation of social funds in order to protect vulnerable customersActivation of social funds in order to protect vulnerable customers Strategy for promotion of energy efficiencyStrategy for promotion of energy efficiency