1 Georgian National Energy and Water Supply Regulatory Commission Tariff Regulation Gocha Shonia Department of Methodology and informational provision

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Georgian National Energy and Water Supply Regulatory Commission

Tariff Regulation

Gocha ShoniaDepartment of Methodology and informational provision

27 June -3 July, 2008

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As proceeds from the Law of Georgia on Electric Power and Natural As proceeds from the Law of Georgia on Electric Power and Natural Gas, tariffs in the sectors of electric power, natural gas and water Gas, tariffs in the sectors of electric power, natural gas and water supply are specified under the methodology approved by the supply are specified under the methodology approved by the Commission;Commission;

A current methodology in the electric power sector was approved by A current methodology in the electric power sector was approved by the Commission in 1998;the Commission in 1998;

A current methodology in the natural gas sector was approved by A current methodology in the natural gas sector was approved by the Commission in 1999;the Commission in 1999;

A methodology of establishment of tariffs for the water supply A methodology of establishment of tariffs for the water supply sector is currently underway.sector is currently underway.

Main principles of tariff regulationMain principles of tariff regulation

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Main principles of tariff regulation

Methodological basis for establishment of tariffs is a RoR principle;

This methodology enable an enterprise to cover economically sound costs rendered;

Facilitates growth of financial gains of an enterprise;

Protects consumers from monopolistic prices, and in particular in those areas of the sector where there is no competitive market;

Reflects differing costs for various categories of consumer services.

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Tariff shall ensure financial viability of a Tariff shall ensure financial viability of a regulated enterprise;regulated enterprise;

All justified costs shall be compensated;All justified costs shall be compensated; Tariff regulation shall provide incentives for Tariff regulation shall provide incentives for

efficient functioning of an enterprise;efficient functioning of an enterprise; Tariff regulation shall be transparent.Tariff regulation shall be transparent.

Main principle of tariff regulationMain principle of tariff regulation

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Calculation of the revenue requirement (RR)Calculation of the revenue requirement (RR)

Revenue requirement Revenue requirement RRRR consists of the consists of the following elementsfollowing elements::

Operational costs; Operational costs; Amortization;Amortization; Taxes;Taxes; Profit.Profit.

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Calculation of the revenue requirementCalculation of the revenue requirement

Operational costs, of which:Operational costs, of which: -- Fuel to produce electric power; Fuel to produce electric power;- Repair;Repair;- Services to external organizations;Services to external organizations;- Administration costs, of which;Administration costs, of which;- Wage costs;Wage costs;- Miscellaneous;- Miscellaneous;- Normative network costs;Normative network costs;

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Amortization represents non-monetary costs Amortization represents non-monetary costs reflected in a financial statement. It reduces cost reflected in a financial statement. It reduces cost of assets;of assets;

Costs of investment related to the fixed assets Costs of investment related to the fixed assets are distributed as depreciation costs for the are distributed as depreciation costs for the period of effective operation;period of effective operation;

The tariff includes taxes established by the The tariff includes taxes established by the effective legilsation.effective legilsation.


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Rate of profit (WACC) Rate of profit (WACC) –– provides revenues for an provides revenues for an enterprise, which are specified as weighted average cost enterprise, which are specified as weighted average cost of capital, i.e. rate of profit multiplied by added interest of capital, i.e. rate of profit multiplied by added interest on own capital multiplied by cost of debt;on own capital multiplied by cost of debt;

Cost of own capital: share funded through own capital;Cost of own capital: share funded through own capital; Cost of attracted capital: volume of debt through which Cost of attracted capital: volume of debt through which

part of the company activities is financed.part of the company activities is financed.


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Cost of capital is specified also by the model of capital Cost of capital is specified also by the model of capital assets price formation assets price formation (CAPM)(CAPM)..

Rate of profit is specified by own capital;Rate of profit is specified by own capital;

In specifying rate of profit, risk factors are identified;In specifying rate of profit, risk factors are identified;

Regulated tariff base includes only those assets, which are Regulated tariff base includes only those assets, which are directly related to regulated activities.directly related to regulated activities.


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The Commission establishes tariffs on production, transmission, dispatch, The Commission establishes tariffs on production, transmission, dispatch, distribution, conduct, import, consumption of electric power, services of distribution, conduct, import, consumption of electric power, services of the commercial system operators, compulsory purchase and capacity the commercial system operators, compulsory purchase and capacity system reserve;system reserve;

Tariffs on transportation, distribution and consumption of natural gas;Tariffs on transportation, distribution and consumption of natural gas; Tariffs on delivery in the water supply sector;Tariffs on delivery in the water supply sector; Tariff on import is fixed on the basis of a contract on importation;Tariff on import is fixed on the basis of a contract on importation; For power plants to be newly built, whose production output is subject to For power plants to be newly built, whose production output is subject to

purchase in full or in part under normative acts issued by the Ministry, a purchase in full or in part under normative acts issued by the Ministry, a long-tern tariff of compulsory purchase of a commercial operator is long-tern tariff of compulsory purchase of a commercial operator is established; established;

For a reserve source a two-part tariff rate is established.For a reserve source a two-part tariff rate is established.

Establishment of tariffsEstablishment of tariffs

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Low capacity (13 MW) power plants are Low capacity (13 MW) power plants are deregulated;deregulated;

A low capacity power plant is entitled to sell A low capacity power plant is entitled to sell electric power to retail and qualified consumers;electric power to retail and qualified consumers;

A commercial system operator shall conclude a A commercial system operator shall conclude a contract with a newly built power plant: under contract with a newly built power plant: under the administrative legal act issued by the the administrative legal act issued by the Ministry, the electric power output produced is Ministry, the electric power output produced is subject to sale, either in full or part.subject to sale, either in full or part.

Incentive regulationIncentive regulation

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Who are participants of tariff regulation? Who are participants of tariff regulation?

The Commission, which is responsible for establishment The Commission, which is responsible for establishment of fair, transparent and efficient tariffs;of fair, transparent and efficient tariffs;

Regulated enterprises, which are willing to gain maximal Regulated enterprises, which are willing to gain maximal profits;profits;

Consumers, which wish the tariffs be as low as possible.Consumers, which wish the tariffs be as low as possible. How to take into account these interests so as all parties are How to take into account these interests so as all parties are

satisfied?satisfied?


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This problem may be solved through incentive tariff This problem may be solved through incentive tariff regulation regulation

and currently, the Commission is working on this issueand currently, the Commission is working on this issue Incentive tariff regulation meansIncentive tariff regulation means::

In establishing tariffs, granting of partial freedom to In establishing tariffs, granting of partial freedom to regulated enterprisesregulated enterprises

Incentives for well performed economic activities and Incentives for well performed economic activities and wise versa; wise versa;

Marginal price (incentive regulation) provides for the Marginal price (incentive regulation) provides for the reduction of operational costs and respectively, growth of reduction of operational costs and respectively, growth of revenues, being a strong economic incenti.revenues, being a strong economic incenti.


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Regulated through marginal prices, i.e. Consumer Price Regulated through marginal prices, i.e. Consumer Price Index-Index-ХХ

A basic tariff for a regulation period is established by A basic tariff for a regulation period is established by ROR methodology, which provides for revenue ROR methodology, which provides for revenue requirements for a regulated enterprise (coverage of requirements for a regulated enterprise (coverage of operational costs and fair profit gaining);operational costs and fair profit gaining);

Indexing of basic tariffs against inflation (CPI).Indexing of basic tariffs against inflation (CPI). T=TT=Tsab sab XX(1+CPI)-(1+CPI)-ХХ

Incentive tariffs regulationIncentive tariffs regulation

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Regulation by marginal tariff rates, i.e. Regulation by marginal tariff rates, i.e. consumer price index -consumer price index -ХХ

Costs are mainly controlled by companies;Costs are mainly controlled by companies; The following tariff formation period is a fixed The following tariff formation period is a fixed

period period (3-5 (3-5 yearsyears));; Given the upper margin of tariff rates, Given the upper margin of tariff rates,

companies may establish tariffs on their own.companies may establish tariffs on their own.


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Period of costs revision Period of costs revision Revision of costs is expensive to the companies and so in Revision of costs is expensive to the companies and so in

order to reduce costs, it is possible to extend the period of order to reduce costs, it is possible to extend the period of costs revision; costs revision;

With a view of improving performance, it is expedient to With a view of improving performance, it is expedient to extend a costs revision period from one to several (3-5) extend a costs revision period from one to several (3-5) years.years.


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Reduction of costs and quality of servicesReduction of costs and quality of services Reduction of costs may result to Reduction of costs may result to deteriorationdeterioration

of the quality of services;of the quality of services; It is necessary to specified standards of It is necessary to specified standards of

services and to carry out monitoring.services and to carry out monitoring.


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Thank you for attention

Documents

1 Georgian National Energy and Water Supply Regulatory Commission Tariff Regulation Gocha Shonia Department of Methodology and informational provision