1. www.ero-ks.org 1 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 Activity Partnership 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 Beqiri Board Member

2. www.ero-ks.org 2 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

3. www.ero-ks.org 3 Legislative Hierarchy

4. www.ero-ks.org 4 Primary Law 1. Law on Energy 1. Law 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. Law on Electricity 2. Law 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. Law on the Energy Regulator 3. Law 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.

5. www.ero-ks.org 5 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

6. www.ero-ks.org 6 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

7. www.ero-ks.org 7 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’

8. www.ero-ks.org 8 Regulatory accounting statements The specific regulatory accounts items required are: 1. Cover 2. Income statement 3. Balance sheet 4. Cash flow statement 5. Analysis of turnover 6. Analysis of operating and maintenance costs 7. Regulatory asset base (RAB) 8. Capital expenditure 9. Depreciation 10.Additions 11.Major projects summary 12.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

9. www.ero-ks.org 9 Tariff Modelling KOSTT Data Submission KEK Data Submission Data Review TSO Model Supplier Model DSO Model Output Review Tariffs Standing Data

10. www.ero-ks.org 10 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

11. www.ero-ks.org 11 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

12. www.ero-ks.org 12 Tariff Design

13. www.ero-ks.org 13 Allowed Revenues by ERO for 2007 and 2008 a) Imports + Energy Purchase costs from HPP Ujmani and Distribution-Embedded Generation

14. www.ero-ks.org 14 Requested and Allowed Capital Expenditure for 2008 Adjustments are applied for: o unpaid subsidies included in allowed revenues in the preceding year o capex underspend relative to allowed levels in the preceding year

15. www.ero-ks.org 15 Energy flows summary

16. www.ero-ks.org 16 Billed and Losses The collection rate is unsatisfactory as last year it reached 75%

17. www.ero-ks.org 17 Main Indicators and Financial Flows in Electricity Market PUBLIC SUPPLIER KEK Generation Distribution- Embedded Generation, HPP Ujmani Import Export Traders Kosovo Consolidated Budget Ferronikeli, Sharrcem - Eligible Customers Non-Eligible Customers DistributionTransmission

18. www.ero-ks.org 18 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

19. www.ero-ks.org 19 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

20. www.ero-ks.org 20 Thank You!