Armenia’s power industry needs structural changes

Mr. Bibin, the power rate in Armenia had been stable for 11 years, but it has been raised twice over the last two years. What is the reason for another rise of the rate?

Within 11 years /1999-2009/ the power rate for consumers was left unchanged, amid growing expenses (inflation, rising fuel price) for sustainable power supply. The rate was not raised in view of the privatization of the power networks, as a private owner always seeks to reduce losses and increase payment collection to 100%.

However, system problems that were in no way connected with the activity of the company – reduction of power generation at big and large HPPs, protracted repair of the nuclear power plant, energy imbalance – have affected ENA’s activity over the last 3 years. The energy balance approved by the public services watchdog did not provide for that.  Eventually, ENA short-received 37.6 billion drams.  This is what has led to such uneasy financial situation. I would not say that the authorities and the Public Services Regulatory Committee were unaware of the situation. We informed both them of the situation, but all their measures proved inefficient, unfortunately. 

It was only a few months ago that a working group was set up at the Ministry of Energy and Natural Resources to develop a method to calculate the true power balance.  The minister of energy approved a document that establishes the procedures of the production profile and cycles which still does not give answers to the major questions: what to do in case of deviation from the planned indicators, how to distribute emerging risks and who is responsible for financial losses?

How is the rate formed? Everyone speaks of the rising rate for ENA, but no one knows anything about applications for new tariffs for other actors in the market.

The ENA requested a new rate of 17 drams, of which 7.2 drams goes to the other actors of the energy market.  9.8 drams are requested for direct expenses of our company, of which 3.7 drams is compensation for the short-received income; 2.6 drams are expenses on operation of the networks (repair, acquisition of construction materials, salary costs); 1.5 drams is compensation for technological loses and the electric power consumed for the company’s needs; 1.3 drams is depreciation rate and profits i.e. the funds necessary to return investments; and 0.7 drams is compensation for uncollectable receivables.

The planned expenses in the energy system in 2014 totaled 158 billion drams, of which 52 billion drams (33%) are ENA’s expenses; the remaining is the expenses of other market actors. The final rates for 2013-2014 greatly depend on the growing expenses in other segments of the power grid. For instance, the final power rate has grown by 11.85 drams/kWh over the last 2 years, of which 2.51 drams/kWh (20%) were ENA’s expenses, including 2.02 drams/kWh were compensation for the losses from the structural failure. Eventually, there is deficit in the system and it is necessary to settle that problem.

I am not sure that the problems with insufficient financing of the power grid must be settled only through raising the power rate. Structural changes are needed. And we have submitted some to the Public Services Regulatory Committee (PSRC) a year ago. The straight-line tariffs established in 1999 (in the last century!) have not been changed. The tariffs for different groups of consumers that are classified in terms of the power supply capacity are the same.  All this is a reason to cast doubt on the economic feasibility and substantiation of the tariffs.  We have development a draft method to calculate the tariffs for final consumers basing on the world’s experience and the peculiarities of Armenia’s energy system.  We have suggested that the tariff for corporate consumers is divided into the power rate and the capacity rate. This will allow guaranteeing to consumers that the generating capacities will be ready to generate the necessary volume of power at the necessary moment.

We have made a range of other suggestions too, for instance, to change the principles of payment for connection of new consumers to the networks. Instead of charging part of the cost of the connection to the network at the expense of the existing consumers, we suggest demanding the new consumers to pay for their connection to the networks in full and registering these funds as prepayment for consumption for several years depending on the consumption volumes. This will allow lifting the tariff burden, ensuring a fairer tariff for the connection, and saving funds for other investments instead of funding connection of new consumers. 

Unfortunately, the public services watchdog has been considering our suggestions for over a year now and no serious discussion has been held on any of the problems we have raised. 

Not so long ago, the energy minister said the Company could increase the proceeds by 5.1 billion drams in case of reducing the losses by 1%.  What do you thin k about it?

First, reduction of the commercial loss cannot lead to an increase in the consumption, as a consumer caught in energy theft will not continue using as much energy as before. In such case, the annual reduction of losses by 1% may bring the company additional 1.4 billion drams.  There is another very important fact:  the losses that exceed the admissible level established by the public services watchdog are included in the final tariff and lay no additional burden on consumers, as ENA and the shareholder undertake these expenses. Consequently, ENA and its owner are most of all interested in reduction of losses. The Company has developed a five-year program that considers all these measures. If implemented, these measures will help reducing losses by 1.8%. The implementation will require 48.2 billion drams.

The leasing issue is discussed in Armenia most of all these days. What would you say about it?  

When applying to the Public Services Regulatory Committee, we hoped for discussion of the issues connected with the current energy imbalance in Armenia. However, the discussions mainly concern the rented cars, leased immovable property etc. We are extremely concerned over the situation. In fact, they discuss either what was not reflected in the power rate or what accounts for less than 1 percent of it.  When it comes to the system problems, no one wants to change anything.

As to rent of premises – 98% of these expenses were connected with leasing of premises for technological purposes. After privatization, the Company lacked the necessary real estate. If we decided to acquire the necessary real estate, we would need to find an estimated 7.6 billion drams and it would lead to about 0.4drams/kWh increase in the power rate. Therefore, we refrain from buying real estate and seek to find more effective options for consumers.

As to the leasing of vehicles and machinery for operation of the power networks, the Company has 601 pieces of vehicles and machinery, 544 of which are the Company’s property, 57 are leased.  At the same time, the Company experiences a 50% deficit of vehicles and machinery. In other words, similar companies abroad have twice as many vehicles as our company. We have to use our reserves, which is not always a right decision, because it enhances the wear rate. As to the cars of senior managers, I have repeatedly said and will say once again that the costs of these vehicles is not reflected and will not be reflected in the tariff of the next year. Even if it were, the burden on the tariff would not exceed a 0.1%.

What about the loan portfolio of the Company?

Before facing financial problems, the Company had a loan portfolio that was used mainly on the implementation of our investment projects.  US$150 million out of US$300 million investments were made by means of long-term loans. However, during the last years, for the reasons not depending on us – the rising price of the energy we acquire, which, in turn, was a result of the energy imbalance - we have faced a financial gap. Meanwhile, the government took no emergency measures to correct the situation. If the parent company settled the problem, it would turn out that the Russian company funds the entire Armenian energy market and does it without compensation.  If you were a manager, would you agree to do it?

Therefore, it is evident that when considering the final economic indicators of ENA, the managers of Inter RAO, the largest international audit company Ernst & Young, have arrived at a conclusion that the Company is facing a default. The owner banned raising new loans that would increase the company’s losses in view of their high interest rates.

All our last years’ appeals to the Government of Armenia, the regulator, over impossibility to cover the emerging deficit received no response.  

Everyone speaks about the company’s debts, but no one speaks about how much consumers owe to the Company.  What would you say about the consumers that fail to pay for power? 

This issue is also important for settlement of the Company’s debt service obligations. The total debt of consumers is 9.8 billion drams. One of the most painful issues for us is the 2.5 billion drams debt of Nairit Plant and Vanadzor Chemical Industry Company. 

Yet, we have urged the Government to find a solution to the problem of consumers’ debts. We offer measures similar to the once applied in other countries. For instance, we suggest that fines are increased tangibly and non-payers are brought responsible. However, there is so far no progress in the given issue either.

Eventually, the Company experiences an acute financial shortage and may fail to implement the investment program.  To eliminate the financial gap, we were reluctant to take loans from banks at rather high interest rates. Yet in 2012, the Company’s debt obligations accounted for some 60% of the capital, which is considered normal and ensures sustainable operation of the Company. As the Company had to raise more loans to cover the accrued loss recently, its debt obligations have reached 82 billion drams, which is comparable to the cost of all its 100% assets. Naturally, in such conditions, it is impossible to raise more loans. The Company’s debt-to-EBITDA ratio is more than 10/1, while the standard is below 3. Draw your own conclusion.

The rising energy costs will seriously affect the vulnerable sectors of the population. What do you think about it?

It is important to understand that the increase in the power rate is a least-evil solution. It would be possible to avoid such tangible increase in the rate, if the Government took timely measures to settle the problem of energy imbalance. In other words, we could avoid such situation, if the Government carried out impartial market reforms in this segment and ENA would not suffer the losses resulting from the power imbalance. Actually, our appeals have brought to nothing and huge debts were accumulated in the power grid. So far, rising energy costs is the only hope that the power industry will not collapse.

Nevertheless, there are various methods of social protection for the vulnerable sections of the population in different countries. It is upon the Government to decide how to introduce such methods, provide subsidies etc.  It is not about inventing a bicycle. 

Our company is implementing social responsibility projects in Armenia as much as it can afford. I’d like to say that since 2007, ENA has been providing over 50 million drams annually to partially or fully compensate the energy payments of such category of consumers.