STANDARD TWINNING PROJECT FICHE

1. Basic Information 1.1 Programme: ENPI 2010 1.2 Twinning Number: E10/ENP-PCA/EY/111.3 Title: Strengthening capacities of the Georgian National Energy and Water

Supply Regulatory Commission (GNERC) in updating incentive based electricity tariff methodology

1.4 Sector: Energy1.5 Beneficiary country: Georgia

2 Objectives 2.1 Overall Objective:

Improved Georgian Electricity Regulation that promotes long term investments and functions in line with European Union standards and best practices.

2.2 Project purpose:

The purpose of this Project will be as follows: ‘To update the incentive based electricity tariff regulation and prepare conditions for its initial implementation’.

GNERC has started working on a new, incentive-based tariff methodology some time ago and a draft methodology has been prepared. However, it is considered as incomplete and GNERC decided to bring it up to date and complete it with the support of knowledge and experience of European Regulators. Considerable capacity building will accompany the main aim.

2.3 Contribution to National Development Plan / Cooperation Agreement / Association Agreement / Action Plan

In the last few years the Georgian Government has introduced several reforms which have ensured the overall macro-economic stability, fiscal consolidation and continuous growth. The reform efforts, particularly in economic liberalisation and to fight corruption, have been recognised internationally.

The planned Twinning project is line with the Georgian Government’s policy in the Energy Sector and in particular with the provision of the main policy document: ‘Main Directions of State Policy in the Power Sector of Georgia’ which was adopted by the Georgian Parliament in 2006.

The EU-Georgia Partnership and Cooperation Agreement (PCA), adopted in April 1996 and entered into force in July 1999, promotes cooperation between the contracting parties in the field of development of regional energy cooperation, transit of electricity and energy resources and Georgia’s integration in the Caspian, Black Sea and EU energy markets (see priority area 8 of PCA)

In the framework of the European Neighbourhood Programme, an Action Plan was adopted for Georgia in November 2006. The Twinning Project will be particularly relevant for Chapter 4.6.2. of the Action Plan ‘Energy policy convergence towards EU energy policy objectives’ and ‘Gradual convergence towards the principles of the EU internal electricity and gas markets’, which require for gradual legal and regulatory convergence towards the

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principles of the EU internal electricity and gas markets; work towards the progressive elimination of energy price distortions; improve bill collection rates; further develop the National Energy Regulatory Commission in line with the principles of the EU Electricity and Gas Directives; complete restructuring the electricity (including hydropower), gas and heat sectors and ensure their financial viability.

The ENPI Regional East Programme Strategy Paper and Indicative Programme 2010-2013 also states that the Eastern partners (and their neighbours) and the EU have a common interest in strengthening energy security. The Eastern Partnership is aimed at deepening of cooperation with regard to long-term, stable and secure energy supply and transit, including through better policies, legislation, regulation, transparency, energy efficiency, greater use of renewable energy sources. The Baku Initiative, and the corresponding EU-funded INOGATE programme, provides an umbrella for regional energy cooperation between the EU and its Eastern partners (and their neighbours).

The ENPI Georgia National Indicative Programme 2011-2013 states that ‘Energy is also a core area of the Eastern Partnership, where the EU and Georgia have a mutual interest in developing a robust regulatory framework, in line with the EU acquis’. It also underlines that the planned accession of Georgia to the Energy Community requires substantial work on the alignment of legislation with the EU energy and environmental acquis. To support this work, emphasis should be placed on strengthening institutional and administrative capacity in all relevant areas to ensure effective implementation and enforcement of the aligned laws and standards. Also, increased regulatory convergence of Georgia’s legislation and procedures with the EU in selected key sectors, increased competitiveness and improved environment for businesses in Georgia, alignment and reforms in the area of technical regulations and standards in selected sectors, including transport, energy and the environment is a specific objective under Sub-priority 2.2 (Sector-specific regulatory alignment and reforms in line with PCA/ENP AP priorities) of this document.

The planned Twinning Project is aiming to support implementation of the above cited aims and practical measures in the field of energy and electricity regulation.

3 Description 3.1 Background and justification:

Development of the sector

Georgia has very well developed electricity network. Actually 100% of populated area of the country has access to the electricity network.

However, in comparison with 1989 the electricity consumption in the country decreased to 50%. The main reason is that after the breakdown of the Soviet Union size of the economy was significantly reduced, so that share of households and small business in electricity consumption reached 50%. The most difficult period for the electricity sector were the years 1992-1996, when Georgia faced serious energy crisis. This was partly caused by the inherited ineffective and unbalanced electricity system, which was seriously deteriorated and damaged due to the civil war, conflicts in Abkhazia and South Ossetia, political instability and economic crisis. Actually during this period the electricity sector of Georgia was close to a full collapse. The electricity supply was limited to minimum, e.g. in winter periods electricity supply was reduced to 2-3 hours a day, and natural gas supply was completely stopped. The unreliable electricity supply had adverse impact on social economic situation in Georgia.Staring from 1997 serious reforms in Energy Sector of Georgia started with the assistance of the EU, the WB, USAID and other donors. The first step in this direction was the adoption of the Electricity Law and the creation of the Electricity Regulatory Commission. Another

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important step was the completion of deregulation of the State Electricity Company ‘Sakenergo’ and separation of the generation, distribution and transmission functions. The creation of an Electricity Pool (in 2000) and development of Market Rules can be considered also as important milestones in the reform process. However, distribution and generation (except small plants) were still under state ownership. Taking into account that the implementation of fundamental institutional and regulatory reforms takes several years there was no immediate positive impact on the electricity supply situation in the country. The situation was also aggregated by a full dependence of Georgia on energy supply from Russia; slow progress in the privatisation of electricity distribution and generation; low tariffs, low bill collection rate (10-15 %), lacking maintenance of the electricity system, poor technical conditions of generation, transmission and distribution network and corruption in the energy sector. The generation capacity decreased from 3,200 MWT (in 1985) to 700-800 MWT in 1995-2000. Under these circumstances GNERC had rather limited possibilities to change the situation by regulatory means. Demonstration of a strong political will by the Government was necessary to speed up the reform process.

After the ‘Rose Revolution’ the new Government developed and implemented an ambitious plan to ensure uninterrupted electricity supply in the country and diversification of energy supply options. The activities started solving simultaneously several problems: legal and regulatory changes, diversification of energy supply sources, fight with corruption in the energy sector (and elsewhere), improve the market rules and situation, attract investments, improve the energy infrastructure and intensify privatisation of distribution and generation companies, improve bill collection rates, increase electricity tariffs. Several changes were introduced in energy legislation and market rules in order to improve sector management and to create favorable conditions for investments. As a result in 2005 the electricity deficit was eliminated.

During 2006 -2010 the Georgian Government has allocated more than 500 mln GEL (approximately 230 mln EURO) for rehabilitation and development of the electricity sector. In order to ensure effective management and operation of the transmission and dispatch activities - the SCADA (Supervisory Control and Data Acquisition) system was introduced. The high-voltage substations were upgraded and a new control panel in the control center was installed.

Significant progress was achieved in the direction of market liberalization. The presence of foreign energy companies and distributors in the local market has contributed to diversity and sustainability of the sector in general. For improving energy security and enhancing the use of renewable energy, the beginning of the implementation of the Turkey - Georgia - Azerbaijan High Voltage Interconnection Project was a very important step. This is a 500 kv high voltage transmission line project that will connect the Georgian power system to the Azeri and Turkish ones. This project has a great importance for Georgia as well as for the whole region.

The Strategy of the World Bank for Georgia 2010-2013 summarises the main tasks ahead in the energy sector in a nutshell: ‘Now that Georgia has obtained a more stable and reliable energy sector, the next challenge is to continue to increase the production of energy to meet future domestic demand and generate export income, while at the same time increasing the efficiency in domestic energy use. In order to implement its strategy focused on reaching energy security and export oriented production, in the near term the Government is focused on securing private investments for construction of small hydro operations. For the medium to long term, the Government will explore larger hydropower projects. Further hydropower utilization would also require increased power transmission capacity for domestic and export purposes, an issue that is being addressed in parallel. Strong regulatory involvement is also

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needed, within the context of private provision of power.’

Structure of the sectorAs a result of implementation of the mentioned measures in the period 2007-2010 Georgia became one of the biggest exporters of electricity in the South Caucasus region (See table). However, since most of the electricity in Georgia is generated by hydropower stations Georgia still has insufficient electricity supply in winter periods.

Electricity Balance in Georgia, 2000-2010, KW/h 1

Indicators 2000 2005 2006 2007 2008 2009 2010Electricity production

7446.50 7100.00 7425.40 8169.50 8279.10 8407.40 10057.70

% 100.00 95.35 104.58 110.02 101.34 101.55 119.63Electricity Consumption

7847.50 8379.20 8107.50 7977.30 8248.60 7913.10 8755.50

% 100.00 106.78 96.76 98.39 103.40 95.93 110.65Export 210.50 121.80 96.10 625.40 679.50 749.40 1524.20% 100.00 57.86 78.90 650.78 108.65 110.29 203.39Import 611.50 1401.00 778.20 433.20 649.00 254.80 222.00% 100.00 229.11 55.55 55.67 149.82 39.26 87.13Balance (+) (-) -401,0 -1279,2 -682,1 +192,2 +305,0 +494,6 +1302,2

In Georgia there are more than 40 generation companies, including three thermal power stations.

There are two companies having transmission licenses: ‘Georgian State Electricity System’ (GSE) and ‘Sakrusenergo’. Sakrusenergo, a joint venture with the Russian RAO, owns and operates 220, 330, 500 kV high voltage line, connecting Georgia with Russia, as well as with Turkey and Azerbaijan and the state owned GSE owns and operates all other high voltage lines, transformers and other related facilities as also the dispatch centre and some system operation function.

The Georgian electricity sector today operates three distribution companies: ‘Telasi’ (owned by Russian State Company Inter-RAO), ‘EnergoPro Georgia’ (owned by Czech company EnergoPro) and ‘Kakheti’ Distribution Company (owned by the Lithuanian company ACHEMAOS Gruppe). They are in charge of energy distribution and supply to the incumbent (domestic, household) customers.

The electricity system commercial operator (ESCO) is responsible for the balancing of the market by selling and buying the balance energy (capacity), providing the system with reserve capacity, providing dispatcher with the information in order to plan the electricity and capacity supply and consumption in the national electricity system, providing platform for the settlements between the buyers and sellers of the reserve capacity and balance energy.

Legal Background

The relevant legal acts for GNERC are the ‘Law of Georgia on Electricity and Natural Gas’ (with later changes and additions regarding water supply regulation as well) of 27 June 1997, the ‘Law of Georgia on Independent National Regulatory Authorities’ (coming into effect from 15 October 2002), the Law on Licensing and Permits of 2005 and the General Administrative Code of Georgia which applies to all state agencies.

1 Yearly Reports of GNERC, 2000-2010

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The first two Laws provide high level of autonomy to GNERC in those issues, where it has authority. The Law on Independent National Regulatory Authorities clearly defines, that ‘independence is the ability of both an independent regulatory authority and the commissioner to carry out activities without improper influence and illegal interference to exercise the authority of a regulatory authority as determined under the applicable law, including discussing, investigating and deciding the matters assigned to its authority; any interference in the activities of an independent regulatory authority, control of the said activities and demanding accounts of such activities on the part of any state authority shall be inadmissible, if this is not explicitly provided for by the applicable law’. The Law on electricity and natural gas defines the main features of independence: Commissioners and a Chairman are appointed by the President of Georgia for a fixed 6 year term, which can be renewed; they may be removed from the office only in the cases stated in the Law; the Commission has an independent budget and is funded from the regulatory fees; regulatory fee is evaluated and set by the Commission for the next year until September 15 of the current year without any interference of the Government; the Commission has sole use of the funds. By March 31 of each year the Commission prepares and publishes a report for the past year; it is available in the Georgian language for the general public.

After 2005 several changes were made to the Law on Electricity and Natural Gas. The changes provided clear definition of rights and duties of subjects participating in wholesale trade with electricity; development of unified effective sector management system; ensuring energy security of the country; liberalization of particular segments of sector up to its full deregulation; among them transfer to bilateral contracts.

In 2006 amendments to the energy laws transferred the authority to the Ministry for the preparation of electricity and natural gas balances, electricity market rules (including backup capacity calculations), and natural gas market rules.

Introduction of a new system for wholesale trade with electricity was significant legislative change. According to the new provisions producers and importers of electricity became free in choosing contract counteragents. Purchasing reserve power became mandatory for players of wholesale trade. This provides holder of dispatching license with an opportunity for minimizing possible damage to participants of trade, in case of emergencies or lack of electricity.

The possibility of definition of long term tariffs was also legislative innovation. This makes possible for the companies to plan financial results in advance, and protects final user from unexpected increase of tariff.

According to the law, power plants became authorized for having direct contracts with distribution license holders and final users; besides to sell electricity to final user connected to the network of distribution license holder.

GNERC has no legislative advising power to propose amendments of laws, but it could have informal suggestion (initiation, preparation of drafts) regarding harmonised definitions of laws.

Regulations

According to the Electricity and Natural gas Law of Georgia GNERC develops and approves methodologies and sets all electricity generation, transmission, dispatch, distribution and final consumer tariffs, except of for small hydro power plants (below 13.5 MW) and newly built generators; in the gas sector – transmission, distribution and final tariffs for the ‘regulated tariff consumers’. The following tariff system is in force: in Georgia: generation tariff, which is deregulated for small hydros, regulated for the two biggest HPPs, and partially deregulated for the remaining (medium sized) generation companies; other tariffs on transmission,

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distribution, and dispatching are fixed and subject of GNERC regulation. The tariff for final consumers is also fixed. Transit tariff is determined by the Ministry of Energy. Since the enactment of the existing tariff methodology the electricity tariffs tend to steadily increase . In comparisons with 1998 year the electricity tariff increased 2.67 times in Tbilisi and 2.3 times in the regions. At present the consumer tariff is set as 16 tetri (6.6 EURO cents) per kwh.

The tariff setting principles are well-known and in general correspond with the international practice: covering of the prudently incurred costs, no discrimination among consumer categories (no cross-subsidies), economic efficiency, implementation of the state energy policy directions, etc. The Law empowers the Commission to set long term tariffs, including the use of incentive pricing schemes, and to differentiate the tariffs in order to reflect the seasonal and diurnal variations of the load. Article 43 of the Law on electricity and natural gas has been amended recently by the requirement to set separate distribution tariffs (in the Law they are called ‘pass through tariffs’) and the GNERC is preparing a methodology for the calculation of those tariffs.

Despite of obvious success of the Georgian Government in improving energy supply and security situation in the Country, there is still many to be done in order to improve and develop Georgia’s energy legislation and regulation as well as technical standards and operational procedures in the electricity sector. One of the important steps in this direction is the revision of the existing tariff methodology, which was developed in 1998, and until lately, has not been updated. Significant disadvantage of the present tariff model (full cost recovery - cost plus), is that it does not create stimulus for electricity companies to reduce costs and operate more efficiently. Another week side of the present tariff methodology is the short tariff regulation period. It requires tariff review on the annual basis, which tends to cause problems both for investors and for the customers. Full scale application of international accountant standards in tariff regulation and the lack of long term marginal cost approach are additional problems. Some elements of the existing regulation, like electricity generation pricing and the ‘not very ambitious’ schedule of direct consumer (eligible consumer) status reduction are not supportive for competition in the electricity market.

Such regulatory environment eventually resulted in prolonged negotiations of the Government of Georgia with potential investors during energy sector privatization deals and prolonged discussions during rate dispute cases. The issue will rise to the agenda in relation to the planned high voltage transmission line between Georgia and Turkey, connecting in the end to European networks, construction of which funded by the EBRD, EIB and KfW, because tariffs for the line must allow long term cost recovery and its effective functioning.

In order to solve the above mentioned issues, GNERC began working on a new, incentive-based tariff methodology more than a year ago. The draft of the methodology has been elaborated. However, because GNEWRC lacks the specific expertise and experience with regard to such methodology, the draft is considered as incomplete. It fails to contain such particular elements as X factor (efficiency factor), adjustments to unforeseen events, explanation regarding how to use service quality indicators, discount rate, etc. Hence, the Twinning project assistance in updating and completing the methodology together with other important elements of regulatory work is fully justified and very much appreciated by the GNERC. It is hoped that it will provide real assistance in enhancing the capacity of GNERC in successful updating and developing the new tariff methodology

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From the above described background the main challenges to be addressed by the Twinning Project can be concluded as follows:Pricing and Tariffs Challenge

The main challenge is to support GNERC in updating of the methodology of multi-year incentive based price cap regulation in setting revenues and tariffs. Such an approach involves the determination of allowed revenues or prices for licensees over a long period – possible 3 to 5 years ahead. This procedure avoids the burdensome requirement to calculate tariffs every year and provides licensees with a degree of stability that is not present under a cost of service regime. In the Georgian context it should be noted too that incentive based regulation of network access charges can be an effective instrument to considerably reduce the incentives and possibilities for integrated companies to shift costs from the supply/production business to the network business. Incentive based regulation, apart from its other advantages, can thus be an effective instrument to reduce the risk of cross-subsidisation. Use of a price cap, predicated on a building block system, enables GNERC to determine the value of allowed assets, future operating costs and allowed return for licensees. However, it is important that practical and effective support is provided to GNERC by the MS Partner in updating and implementing this form of regulation rather than a mere repetition of the basic principles of incentive-based regulation – in the mode of one workshop or more.

Incorporation of Benchmarking as a complementary technique

A technique that assists in this process of the provision of incentives in the electricity sector through supporting determination of X efficiency factors to licensees is to benchmark the total or operational costs of licensees to allow an efficient path of costs to be set, i.e. to compare the firms’ actual performance against some pre-defined reference. Such an approach is increasingly being adopted by EU Regulators in the IEM. The challenge is to develop and institutionalise the use of benchmarking within the price setting mechanism in order to set long term tariffs. However a more extensive and detailed analysis of the effects of the different types of approach and methods within these approaches is needed to decide how and where benchmarking should be applied in the process. This is because efficiency values are often sensitive to the parametric or non-parametric nature of the technique and method (COLS, DEA) to be used by GNERC. The focus is therefore to assist GNERC in improving existing data collection procedures, extending the data sets to panel (time series and cross-section) data and potentially developing the use of panel data to predict the expected costs and developing operational procedures which would allow for the phased withdrawal of detailed line-by-line reviews of licensees’ costs as part of the tariff-setting process.

Quality regulation challenges

One of the impacts of using incentive based regulation is the incentive it provides to licensees to maintain or improve the quality of service provided to customers. This arises due to the direct link between incentives to reduce costs and the costs associated with providing different levels of quality of service. Although GNERC has introduced quality of service measures in he last year and now it is in the pilot phase, further assistance is needed to support GNERC in assessing the results and developing and implementing a quality of service programme simultaneously with the updating of incentive-based regulation. The assistance should review the objectives, process, resources, implementation steps and expected results of the quality regulation programme in consistency with the thrust of the development of quality regulation adopted in IEM. This may include defined quality standards on reliability, voltage quality and customer service to be adopted by licensees and monitored and assessed by GNERC.

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Challenge – GNERC’s capability to implement the Twinning Project

A SWOT (strengths, weaknesses, opportunities, threats) analysis of the capability of GNERC shows that GNERC is a regulator of electricity sector since 1997, having 14 years of experience. It is an independent regulator with strong powers and developed staffing. It has a strong history of collaboration with international organisations and Regulators of other countries. On the other hand, a significant lack of English language capabilities (among majority of staff) results in less efficient absorbtion and dissemination of international regulatory knowledge. The quantity of legal and regulatory documents translated into English is insufficient, and this makes analysis of the situation difficult for EU experts and decreases international visibility of the GNERC. The knowledge of and experience in the EU energy acquis should also be enhanced to improve functioning and enhance standing of GNERC with the help of the Twinning project and international best practice.

3.2 Linked activities (other international and national initiatives):

In the recent years, a number of projects financed by different donors have been contributing for development and strengthening of the Georgian energy system and its efficiency. Below is a summary of the main interventions:

The EU funded project under INOGATE ‘Capacity-Building for Energy Regulators in Eastern Europe and central Asia’ January 2009-July 2010 – ext. project promotes and advocates good and sound energy regulatory practices in the Partner Countries of the INOGATE Programme and promotes harmonisation of energy regulatory practices among them. It enables transferring EU best practices and strengthening of cooperation among the countries involved. Furthermore, the project aims to educate relevant ministerial level decision makers of these countries about the purposes and benefits of an independent energy regulatory organization. Beneficiary countries: Armenia, Azerbaijan, Belarus, Georgia, Kazakhstan, Kyrgyzstan, Moldova, Tajikistan, Turkmenistan, Ukraine and Uzbekistan.

The mentioned EU funded project under INOGATE ‘Capacity-Building for Energy Regulators in Eastern Europe and central Asia’ has financed a Peer-Review Study through ERRA in 2009-2010 (Report published in February 2010). The Peer-Review has analysed the ‘Autonomy’ (the degree to which the regulatory body is independent and free from political influence or outside interference); the ‘Authority’ (the degree to which regulatory body has the ability to grant licenses, set tariffs, establish guidelines, and adopt and enforce terms and conditions of service); the ‘Accountability’ (the presence of public participation, ethics requirements, avenues for redress of grievances and oversight that assure transparency and credibility without unnecessarily undermining autonomy) and the ‘Organizational Structure’ (does it enable the regulatory body to efficiently and effectively carry out responsibilities and respond to changes in workload and the structure of the energy markets) of the GNERC and has prepared a series of recommendations to support its further work. The present Twinning Fiche is utilising many of the findings and advice of the Peer-Review.

The EU funded project ‘Georgian-European Policy and Legal Advice Centre – GEPLAC’ (ongoing until February 2012) prepared different analyses on implementation of the EU-Georgia cooperation documents in different fields, including the energy sector. Analysed also the situation and tasks regarding Georgia’s possible membership in the Energy Community. Through STE studies assisted in approximation of Georgian energy legislation to the EU acquis.

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EBRD financed project ‘improve quality of electricity supply’. The EBRD is helping to improve the quality of power supply and stimulate renewable sources of energy in the Caucasus with an €80 million sovereign loan to Georgia for the construction of a new high voltage transmission line - the Black Sea High Voltage line, which will interconnect Georgia and Turkey.

The European Investment Bank (EIB) is lending EUR 20 million to the Republic of Georgia to finance the completion of the rehabilitation of the generator units of the Enguri hydropower plant and investments at the Vardnili hydropower cascade that are essential to ensure safe water evacuation towards the Black Sea. This is the third EIB loan to the Republic of Georgia in 2010 and the Bank’s second operation in the country’s energy sector. In March 2010, the Bank signed a financing contract for the construction of high voltage transmission lines. Both projects are cornerstones of Georgia’s energy sector strategy, which aims to turn the country into a net exporter of hydropower. The EIB will co-finance the project alongside a loan of also EUR 20 million from the European Bank for Reconstruction and Development (EBRD) and a grant of EUR 5 million from the EU Neighbourhood Investment Facility, of which the sum of EUR 4 million will be used for investments and EUR 1 million for technical assistance.

The USAID financed project ‘Energy Capacity Initiative’ implemented by Advanced Engineering Associates International, Inc (AEAI), March 2008 - March 2011 project is designed to enhance energy policy analysis capacity within Georgia; facilitate stakeholder dialogue on policy issues; and support higher education programs in energy. Interventions focus on identifying and addressing policy analysis information and data gaps; building the capacity of local NGOs, think-tanks and universities to address priority policy issues; developing and institutionalizing energy education and training programs for government and non-governmental stakeholders; supporting energy cooperation and trade among the countries of the region; and facilitating Georgia's participation as observer in the EU Energy Community Treaty process.

The USAID financed project ‘GNERC Partnership Program’ implemented by National Association of Regulatory Utility Commissions (NARUC), Sept. 2008 - Sept. 2011 supports the effective functioning of the GNERC by building and strengthening a partnership between GNERC and a U.S. regulator.

The USAID financed project ‘Black Sea Transmission Planning’ implemented by US Energy Association USEA, Sept. 2007 - Sept. 2012 is designed to establish a Caucasus group to enable joint planning of regional transmission links. Support is provided to develop a pool of Georgian professionals with adequate qualifications to conduct analysis of the internal transmission system, and create and regularly update transmission infrastructure plans. These plans will help secure investment for construction of electricity transmission lines to increase electricity trade and integrate Georgia with European electricity networks.

3.3 RESULTS:By the end of the Project, three Mandatory Results will be achieved.

Mandatory Result 1 - Knowledge and skills of respective GNERC management and staff are significantly increased in the electricity sector regulation with specific reference to incentive based electricity tariffs, benchmarking, data monitoring and management and quality of service regulation in line with the EU acquis and best practices.

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Mandatory Result 2 Incentive based electricity tariff methodology and benchmarking is updated in compliance with the EU standards/best practices and the Project’s Final Recommendations are submitted to GNERC.

Mandatory Result 3 The necessary preconditions for the implementation of the updated tariff methodology are created and a simulation model is implemented.

3.4 ACTIVITIES

The list of Components and Activities as well as their method of implementation, benchmarks and resources is indicative only. Applicants are requested to develop their own solutions regarding appropriate activities and their content.

This Project comprises three components related to the specific project purpose and mandatory results above. Inside each Component there is a series of activities which if implemented correctly and in full will lead to the production of the Mandatory Results set out in Section 3.3.

COMPONENT 1: Capacity Building and Project Management

In the beginning of Project implementation it is important that the Twinning Partners get acquainted with each other and the main characteristics of their work and environment. A series of introductory training Workshops will serve this aim. Before starting the development and implementation of incentive-based regulation it is necessary that GNERC experts are familiar with the methodological building blocks and broader conditions of incentive based regulation. The main aim of this component is therefore to introduce each part of the methodology and to develop or reinforce GNERC’s understanding in the purpose of each part of the process. The training activities will be carried out throughout the Project: they will start at the beginning and will be ‘kicking in’ also later on, when solution of a specific task will become opportune.

During the first months of the Project implementation, partnership relations must be established and mutual understanding achieved between the Twinning Partners at managerial levels as well as between experts of EU MS and GNERC WG members. The mechanism of coordinated solution of problematic issues should be elaborated. Significant support to the Project implementation is expected to be received from the PAO, EU Delegation to Georgia and the EU-funded Project for ‘Support to Strengthening Twinning, TAIEX and SIGMA Programme Administration Office (PAO) in Georgia’.

Activity 1.1: Organise Kick-off Conference (in Tbilisi or Kutaisi) and establish the necessary working groups (possibly Regulatory WG and Data &Quality WG)Method: The first month of the Project will be used to allow the installation of the Resident Twinning Adviser (RTA) in Georgia. The RTA will have to be installed in his/her office at the GNERC. S/he will be introduced to the BC stakeholders of the Project and to his counterparts and staff. S/he will also hire an RTA Assistant and a Translator/Interpreter Assistant through an appropriate selection procedure. Hiring a Translator/Interpreter Assistant is important in addition to the RTA Assistant due to the significant amount of interpretation/translation needs amongst the GNERC circumstances.

A one-day Kick-off Conference will be organised in the first month aiming at launching and presenting the Project to the stakeholders, the media and the public at large. In order to guarantee large public information about the start of the Project, the meeting will be concluded with a press conference and a press release. It can be organised either in Kutaisi or Tbilisi in premises provided by the Beneficiary.

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In the first month of the Project the TWG Partners will establish the necessary Working Groups (possibly Regulatory WG-RWG and Data & Quality of Service WG-DQWG) to lead and undertake all activities in the various components, supported by the RTA and the MS-STEs. Excluding the RTA and STEs, the WGs will comprise 10 – 13 GNERC staff. They will be chaired by the RTA and RTA Counterpart. When present in Georgia, the STEs will also participate in the meetings of the WGs.

The Working Groups will meet regularly during the implementation of the Project and minutes of meetings in English and Georgian will be kept, and circulated to all members of each relevant WG within 3 days of each meeting.

The RTA and the RTA Counterpart will be responsible for all coordination, logistical and operational matters regarding the establishment and operation of the WGs. The PLs may wish to assign responsibility for specific Components to STEs.

Benchmarks: Stakeholders, media and public informed about the start and content of the Project by start of month 2; operational and functional Working Groups.Resources: RTA, PL, interpretation, translation, printing costs for materials, interpretation equipment

Activity 1.2: Organise Project Final ConferenceMethod:During the last month of the Project, a closing conference will be organised at which the results of the Project will be presented. The achieved results in the areas of the Project’s interventions will be discussed with the Beneficiary, the Georgian Government and the companies. The conference will be concluded with recommendations for possible follow-up and lessons learnt for similar projects.Benchmarks: Closing Conference organised, recommendations and lessons learnt formulated and discussed, stakeholders, media and public informed about the results of the Project and its completionResources: RTA, PL, interpretation, translation, printing costs

Activity 1.3: Conduct initial legal, institutional and regulatory assessment of GNERCMethod: The RTA with STE support and cooperating with the WGs will prepare a detailed ‘state of the art/baseline’ legal, institutional and regulatory assessment of GNERC status and performance. This must be discussed and agreed on with GNERC when ready to serve as background/introductory document for the experts of the MS Partner. It will also serve as baseline for later assessments and comparisons.Benchmarks: State of the art / baseline assessment is prepared and discussed within the WGs and with GNERC management.Resources: RTA, STEs, interpretation, translation

Activity 1.4: Prepare GNERC staff’ skills gap analysis Method: The RTA with STE support will prepare a detailed skills gap analysis of GNERC expert staff to help to fine-tune training plans and to serve later as baseline for characterising developments in staff skills. Benchmarks: Skills gap analysis prepared and discussed within the WGs and with GNERC management.Resources: RTA, STEs, interpretation, translation

Activity 1.5: Organise three Introductory Training WorkshopsMethod:

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In the first month of the Project the RTA will organise Introductory Workshops on three subjects: a) by MS Contractor on project cycle management/logical framework approach and project implementation with special regard to Twinning projects; b) by MS Contractor on legal, regulatory and market developments/trends/issues in EU Electricity Market and c) by GNERC’s respective Departments on legal, regulatory and market developments/trends/issues in the Georgian Electricity Market. Beyond the GNERC staff – other interested parties may also participate.Benchmarks: Three Workshops organised, training materials distributed, objectives and contents of the Twinning Project components discussed between Workshop participantResources: RTA, STEs, interpretation, translation, printing costs for material

Activity 1.6: Organise English language training service on energy sector specialised terminology for core departments in GNERC. Method:The MS Partner will organise a specialised English language training service on electricity sector specialised terminology for 15-20 GNERC staff participating in the Project. The electricity sector has specialised terminology and it is quite difficult to obtain high quality translators with detailed knowledge of the electricity sector and of sufficient calibre to allow free flowing discussions between all the WG members and the EU Member State experts. Accordingly, it is important to have the GNERC participants as close to fluent in English as possible in order to communicate effectively with the MS Administrations’ experts. The MS Partner might sub-contract an accredited Georgia-based Language Training Institute2 to provide training for 15 months of the Project. STE-s of the Project will take part in the training, delivering sessions on specific energy related topics and terminology. The Georgia-based Training Institute will be contracted within 4 weeks from the start of the Project and training will commence in the second month of the Project. Training and classes will be held at the GNERC offices. Training aids and audiovisuals will be provided by the Language Institute. The Language Training Institute will be certified by the MS Partner. as meeting the required competencies for training GNERC staff in the “immersion” method of English and will provide a training achievement certificate to all participants at the end of the Project. The budget should consider eventual problems in finding the required quality Training Institute in Kutaisi and allow for using Tbilisi based solutions as well.Benchmarks: Training course organisedResources: RTA, Training Institute or Individual, private sector involvement with financing, STEs

Activity 1.7: Train WG members and draft a report on the approaches taken by EU and non-EU Regulators to calculate and approve the Weighted Average Cost of Capital (WACC). Method:The RTA and MS STEs will provide training and draft a report on the approaches taken by EU and non-EU Regulators to calculate and approve the Weighted Average Cost of Capital (WACC) for distribution companies. Benchmarks: Training carried out, report on the different WACCs used by EU Regulators for the return on investment for distribution and transmission companies (minimum 10 Regulatory bodies compared) prepared.Resources: RTA, STEs, interpretation, translation, printing costs for material

2 If no Georgia-based Language Training Company is available for this assignment then the MS Administration may recruit and contract with one or more individual certified and qualified Language Trainers who are not related to any members of the MS Partner and/or Consortium or to any members of GNERC Management and/or staff.

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Activity 1.8: Train WG members and draft a report on the various techniques undertaken by different EU Regulators to determine Regulatory Asset Base (RAB) and future Capital Investments. Method:The RTA and MS STEs will provide training and draft a report on the various techniques undertaken by different EU Regulators to determine RAB Benchmarks: Training carried out, report on the different parametric and non-parametric models to undertake benchmarking of distribution companies with recommendations for its use by GNERC (minimum 10 Regulatory bodies compared) prepared.Resources: RTA, STEs, interpretation, translation, printing costs for material

Activity 1.9: Train WG members and draft a report on the implementation of the different benchmarking approaches and techniques used by EU Regulators. Method:The RTA and MS STEs will provide training on the implementation of the different benchmarking approaches used by Regulators. Benchmarks: Training carried out, report draftedResources: RTA, STEs, interpretation, translation, printing costs for material

Activity 1.10: Train WG members and draft a report on the approaches taken by EU Regulators to determine efficient path of operating costs and X efficiency factors.Method:The RTA and MS STEs will provide training and draft a report on the approaches taken by EU Regulators to determine efficient path of operating costs and X efficiency factors. Benchmarks: Training carried out, report on the different approaches taken to determine efficient OPEX and X efficiency factors (minimum 3 Regulatory bodies compared) draftedResources: RTA, STEs, interpretation, translation, printing costs for material

Activity 1.11: Train WG members and draft a report on the approaches taken by EU Regulators to data collection and analysis for regulatory purposes and quality of service monitoring and assessment.Method:The RTA and MS STEs will provide training and draft a report on data collection and analysis for regulatory purposes and the development of overall and minimum quality of electricity service standards, the development of performance targets and financial compensation values. A case study will be presented on 3 countries in the EU illustrating the best practice use of electricity quality service standards in monitoring of licence holders; financial and technical reporting; data management; quality of service regulation and consumer protection.Benchmarks: Training carried out using the case study prepared, report on the training prepared.Resources: STEs, interpretation, translation, printing costs for material

Activity 1.12: Train GNERC WGs in setting up of an internal electronic Library and an internal electronic Database that serve basic information and data needs across GNERC departments. Method:MS STEs will provide training and draft a report on setting up an e-Library and a regulatory Data Base. The e-Library should contain all relevant natural electricity EU policy, natural electricity regulation - primary and secondary and international tariff regimes. The internal electronic database should include data that serves needs across GNERC departments.Benchmarks: Training carried out, report on the training results prepared.Resources: STEs, interpretation, translation, printing costs for material

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Activity 1.13: Arrange for translation of major EU Energy (electricity regulation) acquis to Georgian and major Georgian electricity related regulations to English for supporting work of the Project and the e-library. Method:After careful consideration of the needs of GNERC and the availability in Georgia, the TWG Project will translate the most important parts of the EU energy acquis to Georgian. With the same methodology major Georgian electricity related regulations will be translated into English. Benchmarks: Major respective parts of EU energy regulation translated into Georgian, and major Georgian electricity related regulations will be translated into English.Resources: Translation of maximum 800 pages

Activity 1.14: Undertake a one-week study tour for GNERC and WG leaders to the Partner institution(s) of the twinning Member State(s) to understand the process that was completed in that Member State to comply with the Electricity-related parts of the EU acquis and the working methods and procedures of the Member State Electricity Regulator with a focus on tariff regulation, data collection and analysis and quality of service management aspects.Method:Leaders of GNERC and the WGs will have the possibility to get acquainted with the TWG Partner institution and its practice in the specific topics of the Project in the framework of a one week study tour.Benchmarks: Study tour carried out, study tour report prepared.Resources: 5 flight tickets, 30 per diems, interpretation by Project Language Asst.,

Activity 1.15: Carry out study visits to the meetings, technical and management committees and training events of international organisations having direct reference to electricity and tariff regulation as well as similar profile international conferences (such as ERRA, the Energy Community, thematic international conferences and meetings).MethodGeorgian specialists will have an opportunity to participate in the meetings, technical and management committees and training events of international organisations having direct reference to electricity and tariff regulation as well as similar profile international conferences in European and regional context. Benchmarks: Study visit reports.Resources: 5 flight tickets, 20 per diems

Activity 1.16: Raise awareness and disseminate results of the ProjectMethod: Dissemination results and raising awareness for increasing openness and visibility of efforts of the GNERC regarding more efficient tariff regulation are tasks that should be practiced throughout the Project. Direct contacts will be developed and maintained with licensees and consumer groups and they will be promoted by a well functioning web site, workshops, conferences and different other visibility actions and materials.Benchmarks: Web site, visibility events and materialsResources: RTA, PL, STE, interpretation, translations, printing costs for materials

COMPONENT 2: Updating of Incentive Based Tariff Methodology and Benchmarking

Building on knowledge gained from the preceding component, the aim of this component is to support GNERC in moving away from cost of service type regulation of the electricity sector towards an incentive-based approach that is being adopted by more advanced EU regulators and is supported within the ECSEE and EU IEM. This involves transferring its annual tariff review cost-plus regulatory approach to an incentive-based multi-year price cap regulation and to start to use benchmarking techniques within the incentive-based regulation.

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Currently, cost plus or rate of return regulation is practiced within GNERC to set the transmission and distribution tariffs, among others, and progress has been made in developing incentive-based tariff methodology. This form of regulation typically sets allowed tariffs for a number of years ahead based on a forecast of future costs over this period including an allowance for expected efficiency improvements. If the licensee is able to reduce actual costs below forecast levels then it is able to retain the additional profits until the next price review, giving it an incentive to look for efficiency savings.

The implementation of incentive based tariffs requires availability of consistent accounting data, particularly of unbundled balance sheets and profit and loss accounts. Benchmarking techniques are a more advanced methodology that may be appropriately used to stimulate competition among local monopolies and encourage the least efficient one to converge towards best practice. Their use requires availability of data about several technical parameters that drive capital and operational costs. Decisions on the appropriate benchmarking approach in Georgia and its incorporation into the tariff review process will be dependent on the extent to which reliable and consistent data across a number of comparators can be obtained, and how this data can be best used.

The component will start by assessing the tariff and price regulation methods currently used by the GNERC and pinpointing different possible options of development in view of the EU acquis and best practices. It will follow with clarifying the necessary data needs, possibilities of application of benchmarking to incentive based regulation and two study tours, engaging the participants in the practice of the EU MS. After the study tours the practical development work will take place for updating the incentive based tariff methodology. This will then be followed by data review, collection and analysis to assist in modelling the total or operating costs of the respective license holders, calculation of tariffs and evaluation of their feasibility.

Activity 2.1: Assess the current tariff and price regulation methodologies used by the GNERC and pinpoint different possible options of development in view of the EU acquis and best practicesMethod: STEs and RWG will assess current tariff and price regulation methods used by the GNERC and pinpoint different possible options of development. A technical report will be prepared as result of the assessment on the currently used tariff methodology and recommendations will be prepared and discussed for possible options of development in view of the EU best practice.Benchmarks: WG analysis and discussion on the current tariff and price regulation methodologies carried out, technical report on the efficiency of the current system of tariff and price regulation used by the GNERC with recommendations prepared.Resources: RTA, STE, interpretation, translations, printing cost of materials

Activity 2.2: Assess availability of related data and organise technical and economic Databases.Method:The STE and RWG will investigate the availability of data, collect the available data and prepare DatabasesBenchmarks: Availability of the necessary data will be clarified, available data collected and organised to DatabaseResources: STE, interpretation, translations, printing cost of materials

Activity 2.3: Assess application of benchmarking to incentive based regulationMethod:

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Based on an analytical document, its discussion and finalisation by the STE and WG a technical report on the applicability of benchmarking techniques to incentive based regulation in Georgian circumstances will be prepared.Benchmarks: Assessment report on the applicability of benchmarking techniques to incentive based regulation in Georgian circumstances.Resources: RTA, STE, interpretation, translations, printing cost of materials

Activity 2.4: Undertake two Study Tours to National Regulatory Authorities in two different EU MS. Method: Members of the Working Groups will have the opportunity to participate in study tours to enhance their knowledge and experience in the subjects of the Project. The focus of the Study Tours will enable GNERC respective staff to fully engage with respective staff of the NRAs in assessing the operation and use of incentive-based regulation and benchmarking by the NRAs after training provided in Component 1.Benchmarks: Two study tours are carried out, study tour reports with recommendations prepared.Resources: 10 flight tickets, 60 per diems, interpretation,

Activity 2.5: Update the methodology for a multi-year incentive based electricity regulation.Method: The MS STE and the WG will update the methodology of Incentive Based Regulation. Based on the existing data availability. The exercise will include description of the review process to be applied in the definition of the allowed revenues; development of technical and economic databases and data collection templates required in the implementation of incentive based regulation; the application of benchmarking techniques for the definition of the regulatory parameters; development of a multi-year incentive-based price regulation model. Benchmarks: Working Group meetings and discussions on the topic are carried out; the model of multi-year Incentive Based Tariff Regulation is prepared and submitted to GNERC.Resources: RTA, STE, interpretation, translations, printing cost of materials

Activity 2.6: Develop draft benchmarking methodology Method:Based on existing data availability and the analysis undertaken in 2.2 provide data collection templates, data collection and analysis and appropriate benchmarking techniques to assist in modelling the total or operating costs of the companiesBenchmarks: Data collection templates for benchmarking are developed, data collected and analysed, incentive based cost models preparedResources: RTA, STE, interpretation, translations, printing cost of materials

Activity 2.7: Roundtable Discussion and recommendations for/by stakeholdersMethod: The MS STEs and WG will discuss the methodology of the implementation of incentive-based regulation and the use of benchmarking in a round table workshop with the stakeholders and will make recommendations for any subsequent improvementsBenchmarks: Roundtable discussion with the respective stakeholders is organised and hold. Recommendations are prepared and published.Resources: RTA, STE, interpretation, translations, printing cost of materials

Activity 2.8: Discuss the draft methodology of the Incentive Based Regulation and draft methodology of Benchmarking at a Conference and make recommendations for any subsequent improvements.Method:

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The draft methodologies will be discussed by the WG within a broad Conference and recommendations will be prepared for any subsequent improvements to the process by the end of the Project. Participants will include the Government and others interested parties. Benchmarks: Working Group/ Workshop/Conference discussions on the two methodologies are carried out; the results are published on the GNERC web-site; recommendations are finalised by the end of the ProjectResources: RTA, STE, interpretation, translations, rent of premises, printing cost of materials

Activity 2.9: Complete the draft Incentive based Tariff Methodology and the draft Methodology for Benchmarking using the results of the discussions and recommendations Method: The WG will synthesise the results of the previous discussions and complete the methodologies for testing.Benchmarks: Draft, completed for the phase methodologiesResources: RTA, STE, interpretation, translations

COMPONENT 3: Creation of Technical, Economic and Organisational Preconditions

This Component will prepare an incentive tariff simulation model through which the updated methodology will be approbated. It will also support GNERC with the improvement of its quality of service activities. Preparing recommendations for a better organised and integrated data and information management system are also parts of this Component. Finally, Recommendations will summarise the proposed follow up actions after the project completion.

Activity 3.1: Assess and report on the existing data collection and analysis system/practice of GNERCMethod: STEs and WGs will assess the entirety of current data collection and analysis system and practice of GNERC, including both financial and technical data. An assessment report will be prepared at the end of the activity. The main criteria of the assessment are efficiency and effectiveness. The system should provide the necessary information for enabling fulfilment of all the authorisations and functions of GNERC, but should not include repeating or unnecessary data. It should also be in harmony with the analytical capacity and computerisation/software supply level of GNERC. Systematised and multipurpose utilisation of the collected data is also an important aim. EU best practices should serve to clarify criteria further.Benchmarks: STE and WG analysis and discussion are performed, assessment report is prepared.Resources: RTA, STE, interpretation, translations, printing cost of materials

Activity 3.2: Assess and report on the existing quality of service/supply regulation and the relevant programme ongoing at GNERCMethod:The STE and WG will investigate the existing quality of service/supply regulation practice at GNERC. New service quality regulations were introduced in 2010, however their implementation is yet in the pilot phase and is lacking important components. Results of the ongoing pilot activities will specifically be assessed. A report will summarise the present situation. Benchmarks: STE and WG analysis and discussion is carried out, report on the findings prepared. Resources: STE, interpretation, translations, printing cost of materials

Activity 3.3: Prepare a tariff simulation modelMethod:

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Using the previously prepared and agreed on materials/project deliverables the WG will prepare a tariff simulation model, through which the updated tariff methodology can be approbated and demonstrated. Electronic programme support / purchasing /developing programme software will be essential to implement the activity.Benchmarks: Submission of results to GNERCResources: RTA, STE, interpretation, translations, costs of software; printing cost of materials

Activity 3.4: Undertake a Study Tour regarding regulatory data and information management and quality of service regulation and monitoring to EU MS Method: Responsible Members of the Working Groups will have the opportunity to participate in a study tour to enhance their knowledge and experience in regulatory data and information management and quality of service regulation and monitoring at EU NRA. The study tour is vital part of the process, followed through within the Project ensuring integration of knowledge development through training, practical (joint) work and study tour experience.Benchmarks: Study tour is carried out, study tour report with recommendations prepared.Resources: 5 flight tickets, 30 per diems, interpretation,

Activity 3.5: Organise a workshop to disseminate results of the study tour in 3.4;Method: The participants of the study tour will disseminate information collected in EU NRAs, since, monitoring and analysis of data as well as monitoring of quality of electricity services are attached broader attention. Benchmarks: Workshop is organised and information disseminated.Resources: RTA, interpretation, translations, printing cost of materials

Activity 3.6: Prepare proposal for an updated regulatory data collection and analysis system, the core data centre of which can be used throughout the GNERC departmentsMethod: Based on the assessment report prepared earlier (3.1) as well as on the results of the methodology testing period the STE and WG will prepare a proposal for updating the regulatory data collection and analysis system used at GNERC. The to be proposed system might provide the necessary information for enabling to fulfil all the authorisations and functions of GNERC, but should not include repeated or unnecessary data. It should also be in compliance with the analytical capacity of GNERC. Multipurpose utilisation of the collected data is also an important aim. EU best practice experience might serve to clarify the criteria further.Benchmarks: Criteria of an improved system is clarified and the proposal is prepared. Resources: RTA, STE, interpretation, translations, printing cost of materials

Activity 3.7: Prepare proposal for updating/modifications of the ongoing pilot quality of service regulation / monitoring system.Method: Based on the assessment completed earlier and the experience gained during the study tour the STE and WG will prepare a proposal for updating/modifications of the ongoing pilot quality of service regulation / monitoring system. The proposal, among others, might include forms of reports to GNERC about quality of service /supply for electricity distributing companies; procedures of registration of electricity supply interruptions; methodology of the losses (damages) evaluation made to customers as result of electricity supply breaks; methodology of losses (damages) compensations to customers as result of electricity supply breaks because of electricity distributing companies together with a penalty/award system for

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companies. The work should be done with the collaboration of Georgia licensees, as it is important for a regulator to consult the utilities and build consensus regarding his activities.Benchmarks: Consultations with license holders organised, proposal prepared. Resources: RTA, STE, interpretation, translations

Activity 3.8: Prepare Overall Project Recommendations for follow up actions Method: The RTA, STEs and WGs will prepare, discuss and submit an report on Overall Project Recommendation for follow up actions based on the results of the Project. The Overall Project Recommendations will also be part of the Final Project Report.Benchmarks: Overall Project Recommendations prepared, discussed and submitted to GNERCResources: RTA, STE, WGs, translations, printing cost of materials

3.5 Means/ Input from the MS Partner Administration:

3.5.1 Profile and tasks of the Project Leader

The Project Leader will coordinate and control the overall thrust of the Project, lead project activities, and ensure the attainment of the mandatory results. He/she should be a senior official from an EU energy regulator and is expected to devote a minimum of 3 days per month to the Project in his/her home administration with an on-site visit at least every 3 months. In addition, he/she should coordinate, from the Member State side, the Project Steering Committee (PSC), which will meet in Georgia every three months.

Profile:

a long-term civil servant from an EU Member State Energy Regulatory body with necessary experience in a leading position in energy regulation

at least 10 years professional experience in the field of energy policy, management and regulation with good understanding of the related subjects and, during that period, he/she must have been in an active senior management position in a Member State Energy Regulatory Authority for at least 3 years;

Have experience in the field of project management, institutional issues and organisation of energy regulation to the European requirements;

Experience in development and implementation of energy regulatory projects in EU and non EU countries;

Have a good command of written and spoken English; Good inter-personal skills

Tasks:

Overall coordination, guidance and monitoring of the Project; Preparation of project progress reports with support of RTA; Timely achievement of the project results; Co-Chairing of project steering committees; Provision of legal and technical advice and analysis whenever needed.

3.5.2 Profile and tasks of the RTA

The Resident Twinning Adviser has the responsibility to guide the work of the team and will coordinate and implement project activities on the ground over a period of 21 months under the overall supervision of the Project Leader. He/she should be a staff member / official from an EU energy regulator or a mandated body and is expected to be working on a permanent basis in the beneficiary country for the duration of the Project.

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The Resident Twinning Adviser on energy regulation will provide advice and technical assistance to the GNERC Commissioners and staff, coordinated through GNERC’s Department of Tariffs on clarifying, defining and helping implement those requirements of the EU internal energy market, which are relevant for GNERC in this Project to converge to the EU Energy acquis in its regulatory practice. The RTA will promote that best European regulatory know-how will be fed into the decision making process at GNERC.

The RTA will be responsible for the day-to-day management and implementation of the Project. S(he) will lead the Regulatory Working Group (RWG) and oversee specifically Components 1 and 2. The RTA will also support the Data and Quality of Service Supply Working Group (DQWG) in Component 3. The RTA and Assistants will be based in GNERC offices and will liaise closely with his/her Counterpart at GNERC.

Profile:

University high level education in Economics, Engineering, Business or Accounting Minimum 6 years of experience in the field of energy regulation including tariff

methodologies; Sound comparative knowledge of relevant EU requirements related to the various

components of this Project; Wide knowledge of related good practice/EU acquis and demonstrated experience in

electricity tariff methodologies and their implementation; Previous experience in project management demonstrating good record in

organisational leadership, staff motivation and communication; Experience in working on similar projects in transition countries would be a must; Good inter-personal skills and good training, public speaking, diplomatic and written

communication skills; Experience in developing, coordinating and conducting training programmes for an

Energy Regulatory Body in the EU or CIS countries would be an asset Excellent computer literacy (Word, Excel, Power Point); Excellent English communication skills, both spoken and written. Command of the

Russian/Georgian language would be a strong asset. At least 2 years experience of the transition economies of the CIS would be beneficial

Tasks:

Overall supervision of the project implementation and coordination of all activities, as well as management of the project administration;

Coordination of the activities of the team members in line with the agreed work programmes to enable timely completion of project outputs;

Provide technical input to the Project whenever needed and provision of advise in his/her field of expertise;

Liaise with MS and BC Project Leaders and daily contacts with BC RTA counterpart; Co-preparation of project progress reports with Project Leader; Liaison with EU Project Manager; Liaison with other relevant projects and Georgian institutions.

3.5.3 Profile and tasks of the short-term experts

Tasks of short term expertiseIn order to provide the full range of expertise that is necessary a minimum of 8 short term experts will complete the activities supported by the RTA. As a general approach, the short-term experts will take the responsibility for the implementation of the Twinning project and the achievement of the results, each for his/her individual mission tasks. As well they will prepare the required reports and the output described. The short term experts will be from the

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Regulatory Body/ies in the Member State(s) or from other Public Sector Institutions. The exact number of STEs per activity should be agreed during the contract negotiation process. Specific Terms of Reference for medium / short-term adviser(s) will be elaborated by Project Leader/RTA at the implementation stage.

Profile of short-term expertiseThe STE's shall have the following Qualification and Skills:

a university degree in a relevant subject; an excellent command of written and spoken English; good writing and presentation skills good training and facilitation skills; coaching and mentoring skills; PC computer literacy; Georgian and/or Russian language knowledge would be an asset; experience in Phare/ENP-East countries or in other international projects relating to energy sector / electricity sub sector /management would be an advantage.

In order to achieve the results the STEs involved shall have the following general and specific experience:STE 1: Electricity Legal Expert General professional experience

Be an employee of a public administration body in an EU MS. Minimum 10 years of professional experience. At least 2 years direct experience in providing legal services and advice/guidance

in the Electricity sector to Electricity Regulatory Bodies.Specific professional experience

Experience of assisting Ministries and other Institutions in the EU to transpose EU Electricity Directives into national legislation

STE 2: Incentive Based Regulation & Electricity Tariffs ExpertGeneral professional experience

Be an employee of a MS public administration body Minimum 10 years of professional experience. Strong analytical and managerial capability At least 2 years experience of the transition economies of the CIS would be

beneficial. Specific professional experience

At least 3 years experience in a incentive-based pricing and tariff regulation role in an Electricity Regulatory Body in an EU MS.

Experience in developing, coordinating and conducting pricing and tariff training programmes for an Electricity Regulatory Body in an EU MS.

STE 3: Incentive Based Regulation Financial Modelling ExpertGeneral professional experience

Be an employee of a MS public administration body Minimum 10 years of professional experience. Strong analytical and managerial capability

Specific professional experience At least 3 years experience in developing financial models of incentive-based

pricing and tariff regulation in an Electricity Regulatory Body in an EU MS. Experience in developing, coordinating and conducting pricing and tariff training

programmes for an Electricity Regulatory Body in an EU MS.

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STE 4: Electricity Benchmarking Expert General professional experience

Be an employee of a MS public administration body Minimum 10 years of professional experience. Strong analytical and managerial capability

Specific professional experience At least 2 years experience in using benchmarking methodologies and techniques

in a Electricity Regulatory Body in the EU MS. Experience in developing, coordinating and conducting benchmarking training

programmes for an Electricity Regulatory Body in an EU MS.STE 5: Electricity Quality Regulation Expert General professional experience

Be an employee of a MS public administration body Minimum 10 years of professional experience. Strong analytical and managerial capability

Specific professional experience At least 2 years experience in developing and operating Quality regulation

methodologies, techniques and programmes as well as monitoring in an Electricity Regulatory Body in an EU MS.

Experience in developing, coordinating and conducting quality regulation and monitoring training programmes for an Electricity Regulatory Body in an EU MS.

STE 6: Market Monitoring ExpertGeneral professional experience

Be an employee of a MS public administration body Minimum 10 years of professional experience. Strong analytical and managerial capability At least 2 years experience of the transition economies of the CIS would be

beneficial. Specific professional experience

At least 2 years experience in developing and operating market monitoring methodologies, techniques and programmes in an Energy Regulatory Body in the EU or CIS countries.

Experience in developing, coordinating and conducting market monitoring training programmes for an Energy Regulatory Body in the EU or CIS countries.

STE 7: Accounting ExpertGeneral professional experience

Be an employee of a MS public administration body. Minimum 10 years of professional experience. Strong analytical and managerial capability. At least 2 years experience of the transition economies of the CIS would be

beneficial. Specific professional experience

Experience in providing advice and guidance on organisation of accounting systems under the EU Energy Directives.

Experience in developing, coordinating and conducting training on accounting for an Energy Regulatory Body in the EU or CIS countries.

Experience in drafting guidelines for procedures to effectively monitor financial data in line with EU requirements.

STE 8: Regulatory Data and Information Management/Technology Expert

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General professional experience Be an employee of a MS public administration body. Minimum 10 years of professional experience. Strong analytical and system development capability. At least 2 years experience of the transition economies of the CIS would be

beneficial. Specific professional experience

Experience in providing advice and guidance on organisation of data and information management/technology in a regulatory setting in line with the EU Energy Directives.

Experience in developing, coordinating and conducting training on data and information management/technology for an Energy Regulatory Body in the EU or CIS countries.

Experience in drafting guidelines for procedures to effectively organise data and information management/technology in line with EU requirements.

4. Institutional Framework The main Beneficiary of the Project is GNERC and in particular three GNERC’s departments: The 1997 Law on Electricity created GNERC and in 1999 new legislation added regulation of the natural gas sector to GNERC’s responsibilities. In 2002 the Georgian Parliament enacted the Law on National Independent Regulatory Bodies, making GNERC an independent from other GoG agencies regulatory authority’ Under the new law, only Georgian courts could overturn the GNERC’s decisions. In 2003 the Office of Public Defender was established within the GNERC and, although financed by the GNERC, it remains independent. In 2007 the Parliament amended the Law on Electricity and Natural Gas and placed regulation of potable water supply and sewerage services within the Commission’s jurisdiction.

The current Law on Electricity and Natural Gas gives GNERC the authority to regulate in three broad areas:

Licensing: GNERC has the authority to issue, modify, enforce (including the imposition of penalties), and revoke licenses under appropriate terms and conditions for electricity generation, transmission, dispatch, and distribution, and for natural gas transportation and distribution. GNERC is guided in licensing i) by the Law on Electricity and Natural Gas and also ii) by the Law on Licenses and Permits and iii) by the licensing rules developed by the Commission.

Tariffs: GNERC has the authority to establish and modify tariffs for electricity generation, transmission, dispatch, distribution, pass-through, import, the services provided by the Electricity System Commercial Operator (ESCO), and the system capacity reserve required to be purchased by the ESCO. In the natural gas subsector, GNERC establishes and modifies tariffs for transportation, distribution, delivery and consumption, subject to certain exceptions.

Dispute resolution: GNERC is to resolve disputes on matters within its competence between and among licensees, importers, exporters, suppliers, consumers, and the ESCO.

The GNERC’s Charter, approved early 2008, further details the functions relating to GNERC’s regulatory responsibility - for more details see GNERC web site: www.gnerc.org.

The members of the Commission, out of which one is the Chairman, are appointed and dismissed by the President of Georgia. Within the frame of its competence the Commission issues resolutions as normative acts on general issues of regulation, while on individual issues, decisions are issued as normative acts. Operation of the Commission is not economic

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activity, but its financing does not depend on the state budget: it originates from annual regulation fees paid by license holders.

Democratic procedures, admitted on international level are used for issuance of resolutions and decisions: at open (public) meetings of the Commission any stakeholder (license holder, client, defenders of clients’ rights, representatives of different governmental and nongovernmental organizations) has the opportunity to defend their interests, express their opinion and present evidences. The decision of the Commission can be appealed at Court.

Indicators demonstrating development of the Regulatory body in 2000 – 2010 are provided in the following table:

Development of GNERC 2000-2010 3

Indicators Unit 2000 2005 2006 2007 2008 2009 2010

Number of Commissioners by the end of the year

Unit 3 2 2 3 4 5 5

Number of employees by the end of the year

“ 61 88 90 72 106 106 108

Adopted legal acts “ 99 141 148 65 79 102 208

Among them:              

Resolution “ 10 31 44 24 37 24 31

Decision “ 89 110 104 41 42 78 177

Number of departments “ 5 6 6 7 8 10 10

Revenue Th. GEL 865,2 2083,

6 2835,6 4305,3 5968,4 8317,6 8709.3

Expenses “ 736,1 2063,3 2561,2 3715,1 5609,6 8227,1 7491.

3Number of legal acts per employee Unit 1,62 1,60 1,64 0,90 0,74 0,96 2.3

Creation of GNERC and commencement of its activities 1997-2001 was largely supported by the international community, notably the World Bank and USAID. Donors have contributed training, technical assistance, and other goods and services in support of the regulator and have repeatedly assessed the Commission’s performance and capabilities over the years. However, after 2001 no specific Technical Assistance Project were implemented for GNERC. During the last 4-5 years a limited number of GNERC staff participated in different regional projects and programmes, such as Inogate, ERRA and Energy Community meetings.

In the framework of the Government’s programme the Commission was transferred to Kutaisi, more than 200 kms from Tbilisi, in July 2008. This has changed the structure of staffing, since a good proportion of intensively trained and experienced staff was not able to move to Kutaisi. Many of those departing from GNERC had also good English language skills. A part of employees that moved to Kutaisi to work with GNERC still has basic

3 Yearly Reports of GNERC – 2000-2010

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residence in Tbilisi and are in Kutaisi only on workdays. Although the Commission has made significant efforts in many fields to counterbalance and improve the situation, a good part of tasks are still ahead. One of them is further staff capacity building in practically every important field covered by GNERC’s activities as well as in enhancing foreign (English) language capabilities of the staff. The Twinning Project is planned to be instrumental in supporting GNERC in easing the capacity development tasks.

GNERC is a founding and active full member of ERRA – Energy Regulators Regional Association. The Association's main objective is to increase exchange of information and experience among its members and to expand access to energy regulatory experience around the world. The purpose of ERRA is to improve national energy regulation in member countries, to foster development of stable energy regulators with autonomy and authority and to improve cooperation among energy regulators and to increase communication and the exchange of information, research and experience among members and increase access to energy regulatory information and experience around the world and promote opportunities for training. The ERRA web site (http://www.erranet.org/) includes a huge amount of information about the organisation and activities of ERRA as well as about its members.

Organization

GNERC’s Organizational Structure is specified in its Charter (GNERC Resolution No. 4 On Approving the GNERC Charter). Practically all the 10 Departments of GNERC will participate in the Twinning Project. Three of the Departments however will have outstanding importance in fulfilling the tasks and producing the mandatory results, because they are directly involved in development of the incentive based tariff methodology and regulation. The tasks of these departments are described below:

Tariff and Price Formation Department: a) Analyses tariff applications presented by licensees, importers, suppliers, and

consumers of energy, natural gas and water, and ESCO.b) Examines and monitors the economic status of licensees, importers, suppliers, and

commercial operators in electricity, natural gas and water supply sectors.c) Prepares quarterly and annual reports on the department’s activities.d) Prepares draft legislation.e) Prepares conclusions respecting the financial calculations presented by licensees,

importers, exporters, suppliers, consumers of energy, natural gas, water supply sectors, and ESCO.

f) Develops and modifies tariff methodologies in the of electricity, natural gas, and water supply sectors.

g) Calculates and sets connection fees for new consumers.h) Calculates and sets tariffs for energy generation, transmission, dispatch, distribution,

import and consumption, ESCO, obligatory state purchase, systems capacity reserve, transportation, distribution, supply of natural gas, and water supply.

The Department consist of seven specialists including three engineers, one business manager, one mathematician and two economists.

Methodology and Information Analysis Department a) Develops methodologies for the calculation of electric energy, natural gas, and water

tariffs.b) Prepares legal normative acts, including rules for usage of electric energy, natural gas

and water.c) Ensures the proper registration of the Commission’s approved standard acts in the

Ministry of Justice and publishes them at a publishing office.

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d) Examines international tendencies and methodological approaches to regulation and preparation of conclusions.

e) Develops and modifies tariff methodologies for electricity, natural gas, and water supply.

f) Prepares recommendations on rehabilitation and investment programs in the electricity, natural gas and water supply sectors.

The Departments consist of five specialists, including two law specialists, two electric engineers and one with IT background.

Electric Energy Departmenta) Examines and prepares conclusions on normative losses by the licensees on the

initiative of commission.b) Prepares draft legal acts of the Commission. c) Develops standard-technical documentation for electric sector.d) Prepares appropriate conclusions on the technical calculations presented by the

current licensees of electric sector.e) Examines technical documentation filed by license applicants in the electric sector,

prepares conclusions, and receives and reviews conclusions of other departments on similar issues.

f) Prepares documentation for further discussion at the commission meetings on granting the appropriate licenses, modifying or revoking them.

g) Establishes control over the licensing conditions within the electric and natural gas sectors of Georgia and, for violation of the conditions, combines relevant administrative sanctions, according to existing Georgian legislation. In addition, draws up protocols upon the breach of established requirements and makes suggestions on the course of action foreseen by the legislation.

h) Participates in development of the schedule agreeable with licensees, importers, and commercial operators of electric sector on the settlement of regulatory fees.

The Department consists of seven specialists, including four electric engineers, a hydrotechnic engineer, a mechanical engineer and an electric machinery engineer.

Considering the staffing situation in these three and other relevant departments of GNERC it is important that the two Working Groups to be set up within the Twinning Project involve qualified specialists not only from these three departments but also from the other ones to ensure an overall significant capacity building. The composition of the Working Groups should be clarified and agreed on during the first month of the project implementation.

5 Budget

The Beneficiary will provide in kind contribution in the form foreseen in the twinning manual. The maximum total budget available of the action is € 1.1 million.

6 Implementation Arrangements

6.1 Implementing Agency responsible for tendering, contracting and accounting (AO / CFCU / PAO / Commission

The European Union Delegation in Tbilisi will be responsible for tendering, contracting, payments and financial reporting, and will work in close cooperation with the Beneficiary. The person in charge of this Project is:

Mr Michal Nekvasil

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Project Manager Delegation of the European Union to Georgia38 Nino Chkheidze str., 0102 Tbilisi, GeorgiaTel: + 995 32 943 763 Fax: +995 32 943 768e-mail: Michal.NEKVASIL@eeas.europa.eu

PAO will support the TWG Project implementation process together with the EU Delegation. The person in charge of this Project is: Mr Roman KakuliaDirectorOffice Address: Project Administration Office (PAO) in Georgia, Office of the State Minister of Georgia on European and Euro-Atlantic Integration #7, Ingorokva Street, Tbilisi 0134Georgia Office tel./fax: (995 32) 99 89 14e-mail: rk.ncu@caucasus.net; pao@eu-nato-gov.ge

6.2 Main counterpart in the BC, including contact person and contact details. Also include RTA counterpart and the BC Project leader

Project leader: Ms. Irma Kavtaradze, CommissionerGeorgian Energy and Water Supply Regulatory Commission - GNERC 26 Chechelasvili Str, 4600 Kutaisi, Georgia Phone: (+995 231)-4-42-81, 92, 94 Fax: (+995 231)-4-42-02Email: irma.kavtaradze@gnerc.org

RTA counterpart:Mr. Gocha ShoniaHead of Electricity Price DivisionGeorgian Energy and Water Supply Regulatory Commission - GNERC 26 Chechelasvili Str, 4600 Kutaisi, Georgia Phone: (+995 231)-4-42-81, 92, 94 Fax: (+995 231)-4-42-02Email: gocha.shonia@gnerc.org

6.3. Contracts:

The Project will be implemented through one twinning contract.

The Project will be implemented in the form of a twinning contract between Georgia and an EU Member State. The implementation of the Project requires one Project Leader with responsibility for the overall coordination of project activities, one Resident Twinning Adviser to manage project activities and short-term experts (number to be proposed by the Member State). It is essential that the team have sufficiently broad expertise to cover all the areas included in the project description. The interested Member State institution shall include in its proposal the CVs of the designated Project Leader, Resident Twinning Adviser and the proposed short-term experts and the specific tasks to which they will be assigned. Provided that consistency within a consortium can be secured, different Member States may form a consortium.

6.4. Project Steering Committee:A Project Steering Committee (PSC) will be established for the control and supervision of production of the mandatory results and implementation of the activities. The Steering Committee will meet at regular intervals and will submit by the end of each meeting (as recorded in the minutes of meeting) an acceptance / non acceptance of the Project reports.

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Official minutes of the PSC meetings will be kept in English and Georgian and distributed to all parties within 15 days after the PSC meeting. The Steering Committee should be held every three months. The first Project report should be issued at month 4 and the following ones should follow at the same months as Steering Committee meetings. Project closure by the Delegation should be foreseen for the 24th month, after the approval of the Project’s Final Report.

7 Implementation Schedule (indicative)

7.1. Launching of the call for proposals: April 2011

7.2. Start of the project activities: March 2012 7.3. Project completion: February 20147.4. Duration of the execution period (number of months) 24 months with an action implementation period of 21 months (presence of the RTA in Georgia).

8. Sustainability

The Project aims are based on the real development needs of GNERC. They are not additional to the tasks ahead of GNERC, but integral parts of their own plans. The sustainability of the Project will be achieved through a suitable implementation of the project activities and availability of trained by the project personnel in the electricity regulation subjects. It will be promoted by introduction of the project results into GNERC resolutions and decisions. Furthermore, needs of the local and international investors in clear and long term electricity regulations as well as needs of Government of Georgia and its population in a well regulated and stable and reasonably priced electricity sector supply are expected to contribute to maintaining high level services on a constant basis in GNERC.

The sustainability of the project will be achieved also through a smooth and timely implementation of the project activities and availability of trained personnel at the GNERC. The workshops, seminars, on-the-job coaching and mentoring should take into account an opportunity for train-the-trainer approach, since it may entail a multiplier effect and ensure the sustainability of methodologies developed. It is necessary to apply a training approach characterised by focusing on cases in the local context. Direct peer-to-peer and expert-to-expert working relations should be established as well. Constant monitoring of developments shall be ensured through provision of short evaluation sheets (or questionnaires) surveying how Georgian participants appreciate of the content, method, applicability and transferability of the delivered topics.

9. Crosscutting issues (equal opportunity, environment, etc…)

The principle of equal opportunity will be integrated into all stages of the project implementation. The Project does not have direct environmental consequences, although environmental awareness raising and environment friendly decision making in all branches of the energy sector is a task of continuously growing importance.

10 Conditionality and sequencing

The Twinning project fiche has been drafted with the GNERC, which, by endorsing the Twinning Fiche, commits itself to provide the contributions stated in the Fiche. They, among others, include: Strong commitment and support of GNERC management to the Project implementation,

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Strong involvement/ commitment of GNERC staff at all levels, Assigning indispensable personnel to activities connected with the Project, Ensuring co-ordination between departments and institutions connected with the Project, Ensuring access to indispensable information and documents, Ensuring sufficient development of computerisation within GNERC, Supply office rooms for the RTA and the RTA assistants for the entire duration of their

work, including access to computers, telephone, internet access, printer, photocopier, Adequate conditions for the STEs to perform their work while on mission to the BC, Providing suitable venues and equipment for training sessions and meetings that will be

held under the Project, Designating a GNERC counterpart for each MS expert.

Significant changes in the GNERC staff could be of a significant risk for successful implementation of the Project. This primarily refers to professional staff having participated in the project design and those having a knowledge of the English language.

Support of the Project from the GNERC side requires significant labour costs not yet envisioned by the Commission’s staffing plan. In order to successfully implement the Twinning Project it is regarded as important that the Government of Georgia and the GNERC management take measures to ensure appropriate staffing – both in volume and quality - and motivation for participation in the TWG Project and achieving the mandatory results jointly with the EU Partners.

The ‘language barrier’ may become a critical issue of project implementation: most probably practically every meeting, discussion and workshop will require interpretation services and all presentations and technical material must be translated before hand. This will pose serious strain on the Project’s capacities but also may double and sometimes even triple the time required and planned for each activity. GNERC management is advised to take steps to improve the situation as possible yet before the Project start.

List of Acronyms

CIS Commonwealth of Independent StatesDEA Data Envelopment AnalysisDSO Distribution System OperatorsDQWG Data & Quality of Service Working GroupEBRD European Bank of Reconstruction and DevelopmentECSEE Energy Community of South East EuropeEIB European Investment BankESCO Electricity System Commercial OperatorENP European Neighbourhood PolicyERGEG European Regulatory Group for Electricity and GasERRA European Regional Regulatory Association EU European UnionGDP Gross Domestic ProductGNERC Georgian National Energy and Water Supply Regulatory

CommissionGoG Government of GeorgiaIEM Internal Energy MarketKfW Kreditanstalt für WiederaufbauNRA National Regulatory AuthoritiesOPEX Operating (and maintenance) expenditures or costs

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PAO Programme Administration Office (overseeing Twinning Projects)

PL Project Leader(s)PSC Project Steering CommitteeRAB Regulatory Asset BaseRTA Resident Twinning AdvisorRWG Regulatory Working GroupSTE Short term ExpertsSWOT Strengths, Weaknesses, Opportunities, Threats TA Technical AssistanceTSO Transmission System OperatorTSO/DSO Transmission/ Distribution System OperatorWACC Weighted Average Cost of CapitalWEM Wholesale Electricity Market

ANNEXES TO PROJECT FICHE

1 Logical framework matrix in standard format 2 Detailed implementation chart 3 GNERC Structure

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Annex 1: Logical Framework

Annex 1 Logical Framework Analysis: STRENGTHENING CAPACITIES OF THE GEORGIAN NATIONAL ENERGY AND WATER SUPPLY REGULATORY COMMISSION (GNERC) IN UPDATING INCENTIVE BASED ELECTRICITY REGULATION .

Twinning number:

OVERALL OBJECTIVE Measurable indicators Means of verification Assumptions

Improved Georgian Electricity Regulation that promotes long term investments and functions in line with European Union standards and best practices

1. Electricity regulation encouraging long term investments

2. Evidence of competition in the production and supply of electricity

3. Wholesale and retail electricity price setting is transparent to consumers, external parties/analysts/media

1. Governmental and Parliamentary reports

2. Analyses of International Organisations

3. Opinions, statements of investors

Not relevant

PROJECT PURPOSE Measurable Indicators Means of verification Assumptions

To update the incentive based electricity tariff regulation and prepare conditions for its initial implementation.

1. Updated tariff methodology submitted to GNERC

2. Increased capabilities and skills of the GNERC staff in electricity sector regulation - core staff trained and institutional / organisational structure is strengthened for development and implementation of the updated tariff methodology and other linked aspects of GNERC’s tasks.

3. Cooperation is enhanced between the regulator and electricity companies on one side and the regulator and consumers, on the other.

4. Further progress achieved towards commercially competitive electricity system.

5. Institutional visibility of GNERC is enhanced within the time scale of the Twinning project

1. Analyses of International Organisations (IO)

2. Governmental and Parliamentary Reports

3. GNERC Annual Reports4. Comparisons with baseline

assessments carried out in the beginning of the Project

5. Acts and Minutes of the Project Steering Committee (PSC).

6. EU Monitoring Reports7. Final Report of the Project.8. Independent publications and

reviews.

1. GNERC management remains committed to strengthening GNERC’s professional and institutional standing.

2. Economic conditions in Georgia do not create obstacles to the implementation of cost effective regulatory principles.

3. Institutional impediments do not hinder GNERC’s actions in the accomplishment of its regulatory duties in harmony with EU acquis and best practices.

4. Financing of the GNERC is adequate to enable it to take necessary steps for professional development and deliver its regulatory duties effectively.

5. There is sufficient capacity within the GNERC and companies to absorb the assistance provided

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6. Effective and timely financial administration and strong project back up on the part of the EC Delegation and PAO.

MANDATORY RESULTS Measurable indicators Means of verification Assumptions

Mandatory Result 1 - Knowledge and skills of respective GNERC management and staff are significantly increased in the electricity sector regulation with specific reference to incentive based electricity tariffs, benchmarking, data monitoring and management, licensing and quality of service regulation in line with the EU acquis and best practices.

1. Two Working Groups (Regulatory WG; Data and Quality WG of 10-13 experts each) are established in the first month of the Project

2. Initial legal and regulatory assessment of GNERC prepared and discussed during the first month of the Project

3. A staff skills gap analysis is prepared during the first month of the Project

4. At least 25 staff members from core departments of GNERC improve their capacities in the fields of incentive based regulations, tariff determination methodologies, price setting, benchmarking of electricity companies, monitoring of licence holders, financial and technical reporting, data management, quality of service management and consumer protection.

5. At least 15 staff from core departments of GNERC improves their capacities through intensive English Language Training, which is focused on energy/electricity technical and regulatory practice and terminology.

6. Knowledge of all GNERC staff significantly enhanced in electricity related EU acquis and best practices

1. Baseline Assessment and Skills Gap analysis reports

2. Interim Project Reports3. PSC Meeting minutes4. Feedback evaluation

sheets (training)5. Reports published on

the GNERC website 6. Results of skills

assessment and SWOT analysis of GNERC between the periods of the start (baseline), the middle (11th

month) and the end (21st

month) of the Project 7. Project Final Report

1. GNERC remains committed to adopting EU best practice in electricity regulation within and after the Project timeline

2. Staff able and motivated to attend Training Workshops

3. Time & Resources commitments are properly managed

4. Staff shows active interest in improving technical & management skills & knowledge

Mandatory Result 2 - Incentive based electricity tariff methodology and benchmarking is updated in compliance with the EU

1. Technical report on the efficiency of the current system of tariff and price regulation used by the GNERC

2. Report on the applicability of benchmarking techniques to incentive based

1. Working Groups’ Meeting minutes

2. Project Steering Committee Meeting minutes

3. Feedback evaluation

1. Time & Resources commitments are properly managed

2. Participants show active interest in improving adaptive & business management skills &

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standards/best practices and the Project’s Final Recommendations are submitted to GNERC

regulation in Georgian circumstances.3. Submission of data templates for

benchmarking4. Recommendations of the Project are

submitted to GNERC by the 13th and 21th month resp.

sheets 4. Report on the

efficiency of the GNERC’s system of tariff and price regulation and recommendations

5. Report on the application of benchmarking to incentive regulation at the companies

6. The RWG-s proposal on tariff design for submission to the GNERC

7. Study Tour Reports8. Project Final Report

knowledge3. Collaboration of the

electricity industry in the development of procedures for accessing relevant quantitative data and information

Mandatory Result 3 - The necessary preconditions for the implementation of the updated tariff methodology are created and a simulation model is implemented with the assistance of the EU Partner institution(s)

1.The existing data collection and analysis system and the quality of service/supply regulation system of GNERC is assessed and reported on by the 6th month of the Project;

2. Tariff simulation model is designed and implemented

3.Experiences are analysed and lessons learned by the end of the Project.

4.Recommendations are prepared for an updated regulatory data collection, analysis and reporting system by the end of the Project

5.Recommendations for an updated Quality of Service Monitoring are prepared by the end of the Project.

6. Recommendations for follow up actions submitted to GNERC by the end of the Project.

1. Assessment Report on the existing data collection and analysis system and the quality of service/supply regulation and practice.

2. Seminar materials on the results of the tariff simulation model, Report of the Seminar.

3. Project Steering Committee Minutes, STE reports

4. Project Final Report

1. Collaboration of the electricity industry in the development of procedures for accessing relevant quantitative data and in the setting up the tariff simulation model

2. Supplying the data in a timely and reliable way for the update of the data management system, monitoring, and quality of service system

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COMPONENT 1: Capacity Building and Project Management Activities MEANS-COSTS AssumptionsActivity 1.1: Organise Kick-off Conference and establish the necessary working groups (possibly Regulatory WG-RWG and Data & Quality of Service WG-DQWG)

Activity 1.2: Organise Project Final Conference

Activity 1.3: Conduct initial legal and regulatory assessment of GNERC

Activity 1.4: Prepare GNERC staff’ skills gap analysis Activity 1.5: Organise three Introductory Training Workshopsa) by MS Contractor on project cycle management/logical framework approach and project implementation with special regard to Twinning projectsb) by MS Contractor on legal, regulatory and market developments/trends/issues in EU Electricity Market andc) by GNERC’s respective Departments on legal, regulatory and market developments/trends/issues in the Georgian Electricity Market.

Activity 1.6: Organise English language training service on energy sector specialised terminology for core departments in GNERC.

Activity 1.7: Train WG members and draft a report on the approaches taken by EU and non-EU Regulators to calculate and approve the Weighted Average Cost of Capital (WACC).

Activity 1.8: Train WG members and draft a report on the various techniques undertaken by different EU Regulators to determine Regulatory Asset Base (RAB) and future Capital Investments.

Activity 1.9: Train WG members and draft a report on the implementation of the different benchmarking approaches and techniques used by EU Regulators.

Activity 1.10: Train WG members and draft a report on the approaches taken by EU Regulators to determine efficient path of operating costs and X efficiency factors.

PL – 1x3 mdays, RTA, STEs – 3x3 md

PL 1x3; RTA, STEs 3x3 md

RTA, STEs –2x5 md

RTA, STEs –2x5 mdRTA, STEs – 5x3 md

Private Sector Inv.

RTA, STEs – 2x5 md

RTA, STEs – 2x5 md

RTA, STEs – 2x5 md

RTA, STEs – 2x5 md

1. GNERC management remains committed to developing and strengthening use of Incentive Based Regulation

2. Staff able / committed to attend Training Workshops

3. Time & Resources commitments are properly managed

4. WG members show active interest and is motivated in improving skills & knowledge

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Activity 1.11: Train WG members and draft a report on the approaches taken by EU Regulators to data collection and analysis for regulatory purposes and quality of service monitoring and assessment.

Activity 1.12: Train GNERC WGs in setting up of an internal electronic Library and an internal electronic Database that serve basic information and data needs across GNERC departments

Activity 1.13: Arrange for translation of major EU Energy (electricity regulation) acquis to Georgian and major Georgian electricity related regulations to English for supporting work of the Project and the e-library.

Activity 1.14: Undertake a one-week study tour for GNERC and WG leaders to the Partner institution(s) of the twinning Member State(s) with a focus on regulatory practice, tariff regulation and data and quality of service management aspects.

Activity 1.15: Carry out study visits to the meetings, technical and management committees and training events of international organisations having direct reference to electricity and tariff regulation as well as similar profile international conferences and events.

Activity 1.16: Raise awareness and disseminate results

RTA, STEs – 2x5 md

RTA, STEs – 1x3 md

Priv. Sector Inv.

5 flights, 30 perdiems

5 flights, 20 perdiems

RTA, STEs –3x3 md

COMPONENT 2: Updating of Incentive Based Tariff Methodology and Benchmarking Activities MEANS-COSTS Assumptions

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Activity 2.1: Assess the current tariff and price regulation methods used by the GNERC and pinpoint different possible options of development in view of the EU acquis and best practices

Activity 2.2: Assess availability of data and organise technical and economic Databases

Activity 2.3: Assess application of benchmarking to incentive based regulation

Activity 2.4: Undertake two Study Tours to National Regulatory Authorities in two different EU MS. The focus of the Study Tours will enable GNERC staff to fully engage with respective staff of the NRAs in assessing the operation and use of incentive-based regulation and benchmarking by the NRAs after training provided in Component 1

Activity 2.5: Update methodology of the multi-year Incentive Based Tariff Regulation

Activity 2.6: Develop draft benchmarking methodologyBased on existing data availability and the analysis undertaken in 2.2 provide data collection templates, data collection and analysis and appropriate benchmarking techniques to assist in modelling the total or operating costs of the companies

Activity 2.7: Roundtable Discussion and recommendations for/by stakeholders.

Activity 2.8: Discuss the Draft methodology of the Incentive Based Regulation and Draft methodology of Benchmarking at a Conference and make recommendations for any subsequent improvements. The discussion and recommendations will be annotated and published on GNERC’s website in English and Georgian

Activity 2.9: Complete the draft Incentive based Tariff Methodology and the draft Methodology for Benchmarking using the results of the discussions and recommendations

RTA, STEs – 2x5 md

RTA, STEs – 2x5 md

RTA, STEs – 2x5 md

8 flights, 48 perdiems

RTA, STEs – 2x20 md (4 missions)

RTA, STEs – 1x20 md (2 missions)

RTA, STEs – 1x3 md

RTA, STEs – 2x5 md

RTA, STEs – 2x5 md

1. GNERC management remains committed to strengthening / changing tariff regulatory approaches

2. Staff is motivated to participate/work in the WGs

3. Time & Resources commitments are properly managed

4. Staff shows active interest in improving price regulation and benchmarking skills & knowledge

5. Good availability & accuracy of data on costs of companies to validate the benchmarking modelling

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COMPONENT 3: Creation of Technical, Economic and Organisational PreconditionsActivities MEANS - COSTS AssumptionsActivity 3.1: Assess and report on the existing data collection and analysis system/practice of GNERC

Activity 3.2: Assess and report on the existing quality of service/supply regulation and the relevant programme ongoing at GNERC

Activity 3.3: Prepare a tariff simulation model

Activity 3.4: Undertake a Study Tour regarding regulatory data and information management and quality of service regulation and monitoring to EU MS

Activity 3.5 Organise a workshop to disseminate results of the study tour

Activity 3.6: Prepare proposal for an updated regulatory data collection and analysis system, the core data centre of which can be used throughout by the GNERC departments

Activity 3.7: Prepare proposal for updating/modifications of the ongoing quality of service regulation / monitoring system

Activity 3.8: Prepare Overall Project Recommendations for follow up actions

RTA, STEs – 1x5 md

RTA, STEs – 1x5 md

RTA, STEs – 3x20 md (3x2x10 days m.)software4 flights, 24 perdiems

RTA, STE – 1x3 md

RTA, STEs – 2x10 md

RTA, STEs – 2x10 md

PL, RTA, STEs – 2x10 md

1.GNERC remains committed to strengthening the regulation f quality of service/supply monitoring

2.Staff is motivated to participate/work in the WGs

3.Time & Resources commitments are properly managed

4.Staff shows active interest in improving Quality regulation skills & knowledge

5.Staff shows active interest in improving data management and monitoring

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ANNEX 2. DRAFT IMPLEMENTATION CHART

ACTIVITIES Months                    

  1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24Component 1 - Project Support, Capacity Building and Development of Building blocks of Multi-Year Incentive-Based Electricity Tariff

Regulation and its PreconditionsActivity 1.1Activity 1.2Activity 1.3                                        Activity 1.4                                          Activity 1.5                                          Activity 1.6                                          Activity 1.7                                          Activity 1.8                                          Activity 1.9                                          Activity 1.10                                          Activity 1.11Activity 1.12Activity 1.13Activity 1.14Activity 1.15Activity 1.16Component 2 - Develop Incentive Based Tariff Methodology and Benchmarking  Activity 2.1                                          Activity 2.2                                          Activity 2.3                                          

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Activity 2.4                                          Activity 2.5                                          Activity 2.6                                          Activity 2.7                                          Activity 2.8                                          Activity 2.9                                          

Component 3 - Pilot Implementation of Incentive based Tariff Methodology and Preparation of Recommendations for its Full scale Introduction

 Activity 3.1                                          Activity 3.2                                          Activity 3.3                                          Activity 3.4                                          Activity 3.5Activity 3.6Activity 3.7Activity 3.8

Project Reporting

  1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24

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ANNEX 3

40