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United States Agency for International Development (USAID)National Association of Regulatory Utility Commissioners (NARUC)

Sponsored by the

The Illinois Commerce Commission (ICC)and

The Energy Regulatory Office of Kosovo (ERO)Partnership ActivityPartnership Activity October 27 – 30, 2008

Prishtina, Republic of Kosovo

Generation, transmission, distribution and supply tariffs in electricity sector in Kosovo, Rate setting based on specific

power sector example in Kosovo

Theranda BeqiriBoard Member

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Content

Legislative Hierarchy Tariff Design Criteria Tariff Calculation Basis Tariff Methodology – Revenue Cap Regulatory accounting statements Tariff Modelling Cost allocation procedure Calculation of tariffs Tariff Design Allowed Revenues by ERO for 2007 and 2008 Requested and Allowed Capital Expenditure for 2008 Energy flows summary Billed and Losses Main Indicators and Financial Flows in Electricity Market Building Block Tariff Developments in Energy Tariffs Future Activities

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Legislative Hierarchy

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Primary Law

1.1. Law on EnergyLaw on Energy Nr. 2004/8- which involves: strategy, programs and balancing; energy efficiency, renewable sources of energy and co-production; investments; economic regulatio of energy activities; competition in energy activites; restrictive measures on energy supply; the right of way and access to private land and supervision.

2.2. Law on ElectricityLaw on Electricity Nr.2004/10 – include: electricity system; generation of electricity; transmission of electricity; distribution of electricity; third party access; market organization; supply services; cross-border metering and accounting of electricity.

3.3. Law on the Energy RegulatorLaw on the Energy Regulator Nr. 2004/9- includes: organization of the Energy Regulators Office (ERO, ERO competencies; ERO funding, taxes; administrative procedures, licenses; building of new generation capacities; gas networks, direct electricity lines and direct pipelines; regulation of prices; unbundling and transparency of energy companies; mandatory public services; conditions for energy supply; bankruptcy of licensees; supervisions and punitive provisions.

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Tariff Design Criteria

Based on well-established & understood economic principles;

Ensure no discrimination or cross subsidy between customer groups;

Minimize complexity & associated costs including cost of metering and billing;

Tariffs should provide cost reflective price signals; Enable protection of vulnerable customers

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Tariff Constructed as a Building Block Demand Forecast Generation Availability Generation & Mining Costs Imports Transmission Costs (Unbundled from KEK) Distribution Costs Supply Costs Loss Costs Depreciation (for assets past 2005)

***Subsidies + Exports + Costs of unregulated customers are subtracted from allowed costs

Basis of Tariff Calculation

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Tariff Methodology – Revenue Cap

• KEK HQ allowed costs are allocated between other KEK businesses in proportion to their share of employee numbers;

• An allowance for costs of losses purchases is added for KEK Distribution and KOSTT and for import purchases for KEK Supply

Allowed revenues are built up from ‘building blocks’

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Regulatory accounting statements

The specific regulatory accounts items required are:1. Cover2. Income statement3. Balance sheet4. Cash flow statement5. Analysis of turnover6. Analysis of operating and maintenance costs7. Regulatory asset base (RAB)8. Capital expenditure9. Depreciation10. Additions11. Major projects summary12. Provisions

•A copy of the licensee’s most recent statutory accounts and accompanying auditor’s report and

• An auditor’s regulatory report on the regulatory accounts

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Tariff Modelling

KOSTT Data Submission

KEK Data SubmissionData

Review

Data Review

TSO

ModelSupplier

Model

DSO

Model

Output Review

Output Review

Output Review

Tariffs

Standing Data

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Cost allocation procedure

Step 1: Definition of Cost Cost Categories (e.g. cost for labour, material) Cost Centres (places where cost occur,

e.g. 110 kV network) Products / Services (e.g. transmission services)

Step 2: Allocation of costs to cost categories from cost categories to cost centres (intermediate cost

centre for common services) from cost centres to customer categories

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Calculation of tariffs

The Revenue and Tariff Model calculates

Regulated retail tariffs TUOS, SO and MO charge DUOS charges An internal transfer price from KEK Mining to KEK

Generation and from KEK Generation to KEK Supply is calculated

Cost-reflective tariffs are calculated for each customer category, broken-down into customer (standing) charges energy charges demand charges reactive power charges

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Tariff Design

No Category

Forecasted Energy

Consumption%2008

Forecasted Allowed

Revenues % 2008

Average Tariffs

€/cent kVh 2008

Fixed (Euro/year)Demand (euro/kW)Energy (euro/kWh) with time of day (high/low) and seasonal variation (high/low)Fixed (Euro/year)Demand (euro/kW)Energy (euro/kWh) with time of day (high/low) and seasonal variation (high/low)Reactive Power (euro/kvArh)Fixed (Euro/year)Demand (euro/kW)Energy (euro/kWh) with time of day (high/low) and seasonal variation (high/low)Reactive Power (euro/kvArh)Fixed (Euro/year)Demand (euro/kW)Energy (euro/kWh) with time of day (high/low) and seasonal variation (high/low)

Reactive Power (euro/kvArh)Fixed (Euro/year)Demand (euro/kW)Energy (euro/kWh) with time of day (high/low) and seasonal variation (high/low)

Fixed (Euro/year)Energy (euro/kWh) with time of day (high/low) and seasonal variation (high/low)Fixed (euro/year)Energy (euro/kWh) with time of day (high/low) and seasonal variation (high/low)Fixed (Euro/year)Energy (euro/month)Fixed (Euro/year)Energy (euro/kWh)

4.63

4.45

5.26

8.32

5.43

6.02

6.71

8 Public Lighting0.34% 0.53%

7.26% 7.50%7 Household no

meter 3.65% 3.06%

5 Household 2 rate meter 56.81% 47.90%

6 Household 1 rate meter

0.4 kV / commercial large

non-reactive power consumers 12.12% 19.34%

3.85

8.52

3.96%

1.57%

8.37%3 0.4 kV /

commercial large reactive power

consumers 5.54% 7.76%4

Tariff Design

10 kV/Industrial2

5.70%

1.51%

7.07%

0 110 kV/Industrial

35 kV/Industrial1

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Allowed Revenues by ERO for 2007 and 2008

a) Imports + Energy Purchase costs from HPP Ujmani and Distribution-Embedded Generation

2007 2008Allowed Allowed

Non-KEK Power Purchase Costs 000 € 46,316.1 50,584.7KEK Mining 000 € 42,150.8 44,102.4KEK Generation 000 € 38,047.5 41,500.2KEK Distribution (exc. losses purchases) 000 € 16,843.5 23,197.9KEK Supply (exc. power purchase costs) 000 € 6,008.9 2,949.5KOSTT (exc. losses purchases) 000 € 8,635.3 9,403.8Total allowed revenues 000 € 158,002.1 171,738.6Import subsidies 000 € 9,872.9 19,800.0Export revenues 000 € 2,765.1 1,461.9Revenues from sales to eligible customers 000 € 10,329.5 19,150.7Total allowed revenues recovered from regulated customers 000 € 135,034.6 131,326.0Sales to regulated customers GWh 2,699.7 2,564.5Average regulated unit cost €c/kWh 5.00 5.12

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Requested and Allowed Capital Expenditure for 2008

Adjustments are applied for:o unpaid subsidies included in allowed revenues in the preceding yearunpaid subsidies included in allowed revenues in the preceding yearo capex underspend relative to allowed levels in the preceding yearcapex underspend relative to allowed levels in the preceding year

Requested KCB allocated Notes

Grant Loan

KEKMining 92,800,000 22,800,000 70,000,000 92,800,000 92,800,000Generation 24,100,000 6,000,000 9,400,000 15,400,000 15,400,000

Distribution 31,140,100 9,200,000 0 9,200,000 19,200,000Allowed includes meters (€10 million)

Supply 1,153,400 0 0 0 0HQ 2,883,500 0 0 0 0Total 152,077,000 38,000,000 79,400,000 117,400,000 127,400,000

KOSTT Other ResourceTotal 38,468,700 15,519,300 19,165,000 34,684,300 34,684,300

Total

Allowed

Difference between allowed and KCB-

allocated represents committed grants from

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Energy flows summary

2007 2008Allowed Allowed

Imports GWh 576.6 458.1Average cost (contracted imports) €c/kWh 7.40 10.40KEK generation GWh 3,942.0 4,407.3Average cost (including mining costs) €c/kWh 2.03 1.94Kosovo transmission-connected generation GWh 113.0 76.0Average cost €c/kWh 2.13 2.40Kosovo distribution-connected generation GWh 41.3 28.0Average cost €c/kWh 3.00 4.00Total supplies GWh 4,672.8 4,969.4Average cost €c/kWh 2.71 2.74Transmission losses GWh 169.9 194.5

3.7% 3.9%of which, transmission losses on transit flows GWh -31.0 -31.0Distribution losses GWh 1,382.8 1,444.7

35.0% 37.4%Internal consumption GWh 0.0 100.0Exports GWh 92.2 33.0Sales to eligible customers (Feronikeli) GWh 359.2 663.6Sales to 110kV customers GWh 131.6 146.3Sales to distribution-connected customers GWh 2,568.1 2,418.2Total sales to regulated customers GWh 2,699.7 2,564.5

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Billed and Losses

Energy Billed and Lost

Billed, 54%Billed, 64%

Losses, 36%Losses, 46%

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

2007 2008

Years

Losses

Billed

The collection rate is unsatisfactory as last year it reached 75%

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Main Indicators and Financial Flows in Electricity Market

Transmission

Distribution

Non-Eligible Customers

Ferronikeli, Sharrcem -

Eligible Customers

Kosovo Consolidated

Budget

Import Export Traders

Distribution-Embedded Generation, HPP Ujmani

KEK Generation

PUBLIC SUPPLIER

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• Regulated Tariff review period is set for 3 years from 2007-2009

• The first regulated tariffs were approved by the board of ERO on 31.05.2007

• The second regulated tariffs were approved by the board of ERO on 27.06.2008

• The regulated tariff of 2008 is on average 5% higher than that of 2007.

• Tariffs were calculated intending the gradual elimination of cross-subsidies between different tariff groups during the tariff review period.

• ERO is currently in the process of analysis of Feed-In tariffs for small Hydro Power Plants and reviewing the tariffs of district heating for the season 2008-2009.

Developments in Tariff Process

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Future Activities

The district heating tariff for the 2008-2009 season will be approved by the end of October 2008.

The Electricity Tariff review for the 2009 season will begin in November 2008.

The development of secondary legislation in the PTD, foreseen for 2009:

The development of the Tariff Methodology for Electricity produced from Renewable Resources

The development of the Tariff Methodology for district heating

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Thank You!