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The only regulatory framework for the RAB-tariff: we refute the myths from the NCRECP
23 July, 2020
Oleksandr Visir

Myth 1. A single regulatory asset base will lead to a significant increase in tariffs

A significant increase in tariffs is something that is always intimidating at every opportunity. First of all, it is necessary to understand what a significant increase in the distribution tariff is. It should be noted that the introduction of the RAB-tariff will increase the final cost of electricity as the current distribution tariffs do not cover the necessary costs for network upgrades.

The distribution tariff is 15-20% (taking into account the payment of technological losses by the SRF) of the final cost of electricity, so its growth will not be able to increase the cost of electricity.

However, the medium-term effect of RAB is the opposite of tariff reduction. As the replacement of networks and their topography will reduce technological losses in networks, which will reduce the cost of distribution services, which on average by 30% consists of the cost of technological losses, and the losses themselves in Ukraine average 10%.

Also in the medium term, the RAB tariff will provide through the use of more efficient technologies to reduce operating costs, will have the effect of reducing the price of the service.

Thus, the myth is refuted.

Myth 2. A single regulatory framework will not help attract investment

Regarding the second thesis about the lack of economic incentives to attract investment using one regulatory asset base, I want to note the following. The economic stimulus will be similar to the introduction of two regulatory asset bases (old and new), plus it will additionally allow reinvestment of revenues from the “old base” in modernization of networks or disbursement of borrowed capital (since the model proposed by the Regulator does not establish a body return mechanism). allows you to only partially repay interest).

The ultimate goal of introducing incentive regulation is the modernization of networks, and raising funds for their modernization is a mechanism to achieve the goal. The option proposed by the regulator is just economically unbalanced and will not allow to raise funds. For example, the financial model of the proposed methodology assumes that the SRF receives a rate of return on the “new asset base” of 15%. In order to create such a base – you need to spend money. The rate of income begins to be paid in 2 years, the depreciation period of the base – 30 years.

Thus, in order to create a “new base”, the SRF must obtain a loan in hryvnia for 30 years (to repay the body of the loan from amortization) at a rate of 15% per annum and deferred payment of the body and interest for 2 years. Such a scenario seems unlikely to me.

The incentive to raise funds for the SRF is also the need to meet the loss reduction indicators and the SAIDI indicator (index of the average duration of disconnection from the grid, which in Ukraine is about 600 minutes per year for each consumer), set by the NERC.

We also refuted the second myth.

Myth №3. Power grids were built at the expense of consumers

Regarding the construction of networks at the expense of consumers – it is worth noting the following: a significant part of the networks were built in Soviet times and not at the expense of consumers. And those networks that were built after 1991, were built at the expense of the relevant regional power companies (hereinafter DSO).

Thus, in the distribution tariff (in today’s model of “costs +”) there are target funds for the investment program and the repair program. They are partly financed by depreciation deductions of SRFs. And of course part of the payment for electricity consumed for the population includes distribution. But the payment for the consumed service is not a reason to believe that the funds needed to provide it are paid for by the consumer of services.

The tariff model for SRF is called “costs +” and financially it ensures that the consumer, consuming the service, pays the costs incurred for its provision plus the earnings of the service provider (SRF).

In the future, such own funds of the SRF are used by it, including for the creation and modernization of its own fixed assets needed to provide services.

If we adopt the logic of the Regulator, I can safely ask SportLife, Kyiv Metro and the cafe under the house that they were built for my money as a consumer of their services (goods).

But buying coffee, not pretending to be a coffee shop or coffee machine. Using the subway, I do not complain to the local community of Kyiv that I pay for the construction of the subway to Vynohradar, although I do not need to go there.

What is the difference then? Why should there be a different attitude to power grids?

Let’s use the market logic of causation, not planned economic prejudices!

The third myth was the easiest to disprove.

https://blog.liga.net/user/avizir/article/edina-regulyatorna-baza-pri-rab-tarifi-sprostovuemo-mifi-vid-nkrekp

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The only regulatory framework for the RAB-tariff: we refute the myths from the NCRECP

Myth 1. A single regulatory asset base will lead to a significant increase in tariffs A significant increase in tariffs is something that is always intimidating at every opportunity. First of all, it is necessary to understand what a significant increase in the distribution tariff is. It should be noted that the introduction of the […]