1. Energy regulation and quality of service -Macedonian Experience- Slave Ivanovski Energy Regulatory commission of the Republic of Macedonia 4 th Poverty Reduction Strategy Forum Athens, June 26-27 2007

2. Facts About ERC  In accordance with the Energy Law, ERC is authorized to regulated the energy activities related to the: electricity; natural gas; oil and oil derivates; heat; and geothermal energy.  ERC is an independent state authority and has capacity of a legal entity  ERC is composed of five members, with the mandate of five years and none of them can be on this function more than two mandates  Criteria for assessment the independency of the ERC: Appointment and dismissal of the ERC members operation and decision making process (no previous or posterior approval is needed) Reporting (to the Parliament, and to the Government when it is necessary) Financing (from own sources provided through collection of the license fees and through collection of a fee from the total income of the license holders for pursuing of energy activities

3. Responsibilities of the ERC monitors the energy market operations and proposes measures for its promotion due to ensuring non- discrimination, efficient competition and efficient functioning of the market monitors the energy market operations and proposes measures for its promotion due to ensuring non- discrimination, efficient competition and efficient functioning of the market ensures promotion of the protection of the rights of the energy users ensures promotion of the protection of the rights of the energy users delivers regulations on price formation and prescribes Tariff systems of certain types of energy and services delivers regulations on price formation and prescribes Tariff systems of certain types of energy and services adopts decisions for the prices of specific types of energy; adopts decisions for the prices of specific types of energy; issues, amends and revokes the licenses and monitors the compliance of the licensees in the pursuit of certain activities within the energy sector issues, amends and revokes the licenses and monitors the compliance of the licensees in the pursuit of certain activities within the energy sector participates in the resolution or resolves disputes that may arise among the participants on the energy market participates in the resolution or resolves disputes that may arise among the participants on the energy market proposes to the relevant authorities undertaking of measures, within the scope of their competencies, against the entities that pursue the activity contrary to the provisions of this law proposes to the relevant authorities undertaking of measures, within the scope of their competencies, against the entities that pursue the activity contrary to the provisions of this law

4. ERC – Price Regulation ERC Price regulation shall taking into account: ERC Price regulation shall taking into account:  Balancing the interests of energy providers and energy customers  Protecting consumers against monopolistic prices  Creating incentives for efficient operation of regulated energy entities  Creating incentives for development of a competitive energy market  Avoidance of cross-subsidization between individual group of customers  Ensuring non-discriminatory treatment  Using objective criteria and transparent methods  Allowing recovery of costs for providing energy and energy services

5. ERC Tariff systems The Tariff systems, stipulated and adopted by the ERC, shall address: The Tariff systems, stipulated and adopted by the ERC, shall address:  the criteria and standards for classification of the categories of utilization and categories, groups and subgroups of consumers;  calculation elements requisite for determination of the fee for the dispatched energy and power; and  bases and manner of creation of tariff levels and their implementation in the calculation elements. The decision for price setting, adopted by the ERC shall lay down the prices of different types of energy in compliance with the price setting methodology and tariff systems for certain types of energy and regulated services. The decision for price setting, adopted by the ERC shall lay down the prices of different types of energy in compliance with the price setting methodology and tariff systems for certain types of energy and regulated services.

6. ERC-Supply Condition The conditions for supply of different types of energy from the energy systems, determine, in further details, the requirements and the manner for supply and the mutual rights, obligations and liabilities of the supplier and consumer of certain types of energy, and particularly: The conditions for supply of different types of energy from the energy systems, determine, in further details, the requirements and the manner for supply and the mutual rights, obligations and liabilities of the supplier and consumer of certain types of energy, and particularly:  the conditions and manner of issuing energy consent for connection of the user to the energy system;  requirements, manner and terms for conclusion of the contract for dispatch of the relevant type of energy;  manner of calculation and charge of the delivered energy;  conditions and manner of reimbursement of the energy user in case of reduced dispatch or discontinuation and  users to which the supply of energy must not be discontinued for national security reasons and the manner of providing guaranties for settlement of the expenses for consumed energy by these users. The conditions for supply, in cooperation with the enterprises pursuing different energy activities, shall be stipulated and adopted by the ERC. The conditions for supply, in cooperation with the enterprises pursuing different energy activities, shall be stipulated and adopted by the ERC.

7. ELECTRICITY SUPPLY FOR TARIFF CUSTOMERS  Tariff customer of electricity is a consumer who purchases electricity pursuant to set tariff rates.  Wholesale Tariff Customers Electricity Supplier is a legal entity that supplies the requirements of the Retail Tariff Customer Electricity Supplier and tariff customers of electricity directly connected to the transmission network.  Retail Tariff Customer Electricity Supplier is a legal entity that supplies the requirements of tariff customers of electricity connected to the distribution network.  In accordance with the licenses issued by ERC electricity supply for tariff customer is performed by: 1.MEPSO - Wholesale Tariff Customers Electricity Supplier 2.ESM - Retail Tariff Customer Electricity Supplier

8. MACEDONIA’S EXPERIENCE FIGURES & NUMBERS/2006 kWh %of total 1. Domestic 6.653.453.60377,27 1.1. TPP 4.946.103.06457,27 1.2. HPP 1.563.816.66518,16 1.3. SHPP 143.533.8741,68 2. Import 1.958.345.17422,73 3. total 8.611.798.777100

9. MACEDONIA’S EXPERIENCE FIGURES & NUMBERS/2006 AVERAGE PARTICIPATION IN TOTAL CONSUMTION  110kV consumers……………………………31,55%  35 kV consumers………………………………0,93%  35 kV consumers directly connected….0,13%  10 kV consumers…………………………….10,03%  Households…………………………………….45,08%  I tariff degree(small industry -0.4kV)…..2,42%  II tariff degree(small industry -0.4kV)….8,32%  Public lightening……………………………….1,41%

10. ESM Energy activities performed by the ESM, on the basis of licenses issued by the ERC The electricity distributor The electricity distribution system operator The retail tariff customer electricity supplier

11. ESM- ESM- THE ELECTRICITY DISTRIBUTOR The electricity distributor is liable to: The electricity distributor is liable to:  connect to its distribution network all consumers on the territory of the Republic of Macedonia upon their request, pursuant to the distribution grid code  manage, maintain, upgrade and expand the distribution network  install and maintain the equipment necessary for the functioning of the distribution system, pursuant to the distribution grid code  provide secure, safe and quality electricity distribution and delivery through the electricity distribution network  provide distribution network development and maintenance for secure and efficient functioning of the distribution network  submit annually to the ERC:  network development and expansion plan for a period of 5 years,  annual program for realization of the plan, and  report regarding the previous year program realization

12. ESM - DISTRIBUTION SYSTEM OPERATOR In order to provide safety, reliability and security of the national distribution system, the DSO is responsible for long-term planning of the distribution network. In order to provide safety, reliability and security of the national distribution system, the DSO is responsible for long-term planning of the distribution network. The DSO is liable to provide: The DSO is liable to provide:  operational management of the national distribution system  distribution on a non-discriminatory and transparent basis;  reliable and secure functioning of the distribution system;  technical and technological development, maintenance supervision and management of the distribution system  confidentiality of the commercial and business data of the system service users. The DSO is liable to submit to the ERC: The DSO is liable to submit to the ERC:  plans, studies and other information regarding the distribution network expansion and upgrade, including the corresponding expenses financial plan.  report for the financial and physical range of realized services, in a manner and under the terms and conditions determined in the license.

13. ESM - RETAIL TARIFF CUSTOMERS ELECTRICITY SUPPLIER For the needs of the retail tariff customers, at prices approved and published by the ERC, the RTCES purchases electricity: For the needs of the retail tariff customers, at prices approved and published by the ERC, the RTCES purchases electricity:  from the wholesale tariff customer electricity supplier and  from distributed electricity generators The RTCES: The RTCES:  is liable to prepare balances for the needs of the retail tariff customer  purchases the necessary transmission and distribution capacity and regulated services  invoices the delivered electricity pursuant to the tariff system based on the meter reading The RTCES has the right of access to the meter on every property or facility for: The RTCES has the right of access to the meter on every property or facility for:  control, fitting, supervision, modification and replacement of the meter;  switching the electricity delivery off, in case that the owner or the tenant breaches the law or has failed to pay for electricity

14. ESM – NUMBER OF CONSUMERS Voltage level number of consumers number of consumers 35kV20 10kV1324 O,4kV763.488 households678.264 total764.850

15. ESM – THE REGULATED MAXIMUM REVENUE The regulated maximum revenue of the ESM shall cover: The regulated maximum revenue of the ESM shall cover:  distribution costs  the costs for managing the distribution system  the costs for supply and deliver of electricity at medium and low voltage (nominal voltage 35; 20; 10; 6 and 0.4 kV), and  ensure a level of regulated return on capital The regulated maximum revenue must cover the costs for: The regulated maximum revenue must cover the costs for:  the management, operation and maintenance of the distribution system  the development of the distribution system, enabling long-term uninterrupted electricity distribution without any restrictions  the technical losses in the distribution of electricity  ancillary services  connection to the distribution system  the reading, recording and billing of distributed electricity, the maintenance and inspection of measuring devices; and  environmental protection

16. ESM – ASSETS TO PROVIDE QUALITY OF SERVICES DISTRIBUTION LINES 110Kv…………148.3 km 35 kV……… 1008,7 km 20 kV………….719 km 10 kV………..8921,6 km 0.4kV…………11590 km Total …………22388 km TRANSFORMERS110Kv………………….51 35 kV…………………117 10(20) kV………….9281 Total ………………9449

17. AVERAGE TARIFF PRICES/2006 Category of consumers Aver. prices (€/MWh) 1. WTCES  RTCES 27,34 2. CONSUMERS CONNECTED TO THE DISTRIBUTION NETWORK 46,78 2.1. 35 kV CONSUMERS 43,46 2.2. 10 kV CONSUMERS 48,96 2.3.HOUSEHOLDS38,52 2.4. I TARIFF DEGREE (sme-0,4 kV) 55,44 2.5. II TARIFF DEGREE (sme-0,4 kV) 84,89 2.6. PUBLIC LIGHTENING 53.89

18. LEVEL OF PAYMENT 1. Commercial losses (technical losses included) of electricity:  30,3 % (January-March, 2006)  21% (April-December, 2006) 2. Level of payment:  2005-Approximately 72%  2006-Approximately 85% 3. Steps to increase the level of payment: 3.1. incentives to consumers:  Giving opportunities to consumers for settlement of old debts in 10 equal installments  Awarding prizes to those consumers that regularly pay their electricity bills 3.2. Law suits against non payers (≈400.000)  Against Government for the debts of 10.000.000.€  Against municipalities

19. CURENT SITUATION MACEDONIA’S ELECTRIC SECTOR IS IN A PRECARIOUS FINANCIAL POSITION 1. HIGHER THAN FORECAST ELECTRICITY IMPORT COSTS. 2. COSTS ARE NOT BEING PASSED THROUGH TO CUSTOMERS DUE TO THE:  ADDITIONAL POLITICAL CONSTRAINTS  DESIGN OF TARIFF SYSTEM 3. EXISTING AGREEMENTS WITH THE LARGE INDUSTRIAL CONSUMERS THAT ENTAIL:  LOW TARIFF PRICES and  NO CONSEQUENCE FOR OVER – ESTIMATING CONSUMPTION (exacerbating MEPSO’s financial crisis). 4. POLITICALY-SET MANAGEMENT GOALS LEFT THE SECTOR UNDERINVESTMENT AND FINANCIALY UNSTABLE. 5. POOR LEVEL OF RATE COLLECTION (theft and non-invoicing) 6. TARIFF SCHEMES UNAPROPRIATE TO THE ELECTRICITY MARKET DESIGN

20. INVESTMENTS 1. In accordance with existing Supply Condition the parameters for quality of supply are: -Approved deviations of the nominal voltage: For 110 kV, 35 kV, 20 kV, 10 kV and 6 kV: - 10% to +10% For 0,4 kV: -10% to +5% -Approved deviations of the nominal frequency (50 Hz): -0,1% to +0,1% 2. Despite the poor collection rate ESM invests in the distribution network to improve security and quality of electricity supply, in accordance with the obligation stipulated in the Energy Law and Licenses for performing energy activities: 2005 - 14.160.000€ 2006 - 13.275.000€ 2007 - 42.000.000€ - in announcement

21. KEY UNDERSTANDINGS/1  Quality of services depends of investments in the energy facilities  Investments depends of the:  Electricity prices, and  Rate collection 1. Electricity prices depend of the regulated maximum revenue which must cover the cost for:  operating maintenance and development of the distribution system, and  ensure a level of regulated return on capital 1.2. Electricity prices should not cover  The commercial losses (theft and non-invoicing)  Unnecessary investments, (overinvestment) and  Other cost not related with the regulated energy activities Investment plans must be subject of the regulatory control/approval

22. KEY UNDERSTANDINGS/2 1. Rate collection depend on:  Efficient practice of supplier  Supportive legal and regulatory framework  Efficient judicial system and  Political understanding 1.1. Efficient practice of supplier  Fulfillment of public service obligations  Fair and non discriminatory treatment of the consumers  Incentives for regular payers and appropriate measures against non payers  Satisfactory level of the quality of services 1.2. Supportive legal and regulatory framework  Market liberalization  Elimination of cross-subsidization  Legal treatment of the debts for unpaid electricity like any other debts  Legally based incentives for energy efficiency and energy savings

23. KEY UNDERSTANDINGS/3 1.3.Efficient judicial system  Not to prolong the court procedures against non payers  Fast execution of court decisions  Equal treatment of the state owned and private owned suppliers 1.4. Political understanding  Supplier is a profit oriented company, not social protection institution  Delivered electricity must be paid to the supplier  Adoption of appropriate policy for protection vulnerable customers  Activation of social funds in order to protect vulnerable customers  Strategy for promotion of energy efficiency