Archive for July 30th, 2017

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RAB – The right policy for Oblast Energy?

July 30, 2017

It appears that the National Commission for Energy Regulation and Utilities (NCRECU), the Ukrainian regulator, is set to introduce Regulatory Asset Base (RAB) tariff incentives for the regional electricity providers.

How very European – in fact RAB is a UK concept employed across much of Europe.

A reader should think of RAB as a sort of alternative to PPP (Public, Private Partnership) as a way to bring investment into infrastructure – ex ante.

The issue with ex ante is that the Ukrainian consumer/customer will have to hope that the NCRECU gets its math right – for ex ante relies upon the regulator being able to differentiate between the operating costs recoverable from users and what is not.  It is also dependent upon existing asset value assessment employed in the regulated function.  In short it simply has to arrive at an accounting number that reflects the historical investment in infrastructure – albeit in the Ukrainian case, it will reflect the assets acquired by the oligarchy that have seen little (or no) investment historically as all profits were simply sucked out year on year.

Thus any accounting figure necessarily takes the view of valuing long-lived infrastructure more highly than its worth for it will eventually require replacement at today’s cost – not those of yesterday when the assets were acquired.

The ultimate aim of RAB, via the regulator, is to (at the very least) insure that capitol investment in the infrastructure remains and that monetary and/or asset market value is consistent through the passage of time, whilst also placing a form of ex ante price control on the participants.  Ergo by default ex ante presumes some form of free market failure/exceptionally high barrier to entry (and nobody is going to arrive in Ukraine and install a new electricity infrastructure).

There is also a requirement for the regulator to get the math right regarding new investment (that by default increase the RAB value), asset depreciation, the aforementioned operating costs, and financial costs (loans etc).

Further, specific agreements clearly identifying licencing, responsibilities/obligations and rights have to be addressed. – which brings about just how the regulator will evaluate performance – quality and delivery (superior life cycle investment), or delivery efficiency (target driven)?

Is there any flexibility in either approach that may (and therefore will) facilitate shenanigans by the owners of the Oblast energy infrastructure?

Will the RAB incentive model equate to better social welfare outcomes?  (That will almost certainly depend upon the strength of the Ukrainian NCRECU regulator.)

So what is the RAB incentive for oligarchy/current owners of Ukrainian infrastructure?

How do they benefit by investing money when traditionally they have simply sucked all the money out, investing only enough to keep their infrastructure running held together with scotch tape and “make do and mend” maintenance – particularly when the NCRECU is capping profits?

The regulator it appears, will provide for 12.5% profit from the value of the decrepit infrastructure already owned which will be deliberately over valued.  That over-valuation, it is claimed, equates to something approaching UAH 30 billion per annum for those in the business, plus an additional 12.5% from any new infrastructure investment.

It will be a particularly sensitive issue – for many Ukrainian electricity infrastructure owners are the oligarchy.  Messrs Kolomoisky, Akhmetov, Grigorishin feature prominently – as does the Russian firm VS Energy, ultimately owned by Alexander Babakov (who is associated with numerous organised crime figures such as the late (assassinated) Maxim Kurochkin, Alexander Lebedev et al).

It therefore follows that scandalous and nefarious acts are to be expectantly anticipated from all involved – notwithstanding a possible further price hike to insure maximised returns within the regulatory price cap.

Nevertheless, what of the core policy goal of upgrading the infrastructure?  Will it bring much needed investment by these men into what it beyond decaying infrastructure?

At a RAB capped 12.5% profit from new infrastructure investment it seems extremely unlikely.  The high street banks are offering between 13% – 16% on UAH deposit accounts.  Quite simply, other than emergency investment/maintenance, the offered bank interest is better than the investment return (and some of the above individuals own minority/majority/completely the banks).

So, is the RAB policy the right policy (even if it is a well used policy across Europe and beyond)?  If it is, then are not the details in need of tweaking to insure the desired outcome?

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