142 g

USAID MUNICIPAL ENERGY

REFORM PROJECT IN

UKRAINE ANALYTICAL REPORT ON THE ROLES AND FUNCTIONS OF KEY PLAYERS OBSTRUCTING LONG-TERM DEVELOPMENT PLANNING OF DISTRICT HEATING SYSTEMS, INCLUDING NETWORKS, IN UKRAINE

November 2018 This document is produced for review by the United States Agency for International Development (USAID). Prepared by the USAID Municipal Energy Reform in Ukraine Project.

USAID MUNICIPAL ENERGY REPORT PROJECT IN UKRAINE ANALYTICAL REPORT ON THE ROLES AND FUNCTIONS OF KEY PLAYERS OBSTRUCTING LONG-TERM DEVELOPMENT PLANNING OF DISTRICT HEATING SYSTEMS, INCLUDING NETWORKS, IN UKRAINE

This document has been prepared with support of the United States Agency for International Development (USAID). Opinions and views of the authors presented in this publication do not necessarily coincide with the views of USAID or the US Government.

This document was prepared by:

Author Organization Contact Details

Dmytro Levytskyi Municipal Development Institute [email protected] Aliona Nych Municipal Development Institute [email protected] Olha Romanyuk Municipal Development Institute [email protected] Olha Stognushenko Municipal Development Institute [email protected] Nadiia Sylchenko Municipal Development Institute [email protected] Reviewer Organization Contact Details Dmytro Yemelyanenko RTI International [email protected] Diana Korsakaite RTI International [email protected]

CONTENTS

LIST OF FIGURES ····················································································· V LIST OF TABLES ······················································································ V LIST OF ABBREVIATIONS ·········································································· VI EXECUTIVE SUMMARY ·············································································· 1 INTRODUCTION ························································································ 3 ANALYSIS OF INSTITUTIONAL ROLES AND FUNCTIONS OF KEY PLAYERS IN LONG-TERM HEAT NETWORK DEVELOPMENT PLANNING ····························· 8 1. OVERVIEW OF KEY PLAYERS in the HEATING SECTOR ...... 8 2. MANDATE RELATED TO REGULATORY AND LEGAL FUNCTIONS 11 2.1 The Level of National Legislation ...... 11 2.2 The Level of By-laws ...... 11 3. MANDATE RELATED TO DEVELOPMENT, CONFIRMATION, COORDINATION, APPROVAL, AND IMPLEMENTATION OF IPs ..... 13 4. MANDATE OVER TARIFF FORMATION AND SETTING ...... 18 5. MANDATE ON LICENSING OF ECONOMIC ACTIVITY IN THE HEATing SECTOR ...... 30 6. MANDATE FOR STATE SUPERVISION/CONTROL ...... 34 7. MANDATE RELATED TO DEVELOPMENT AND APPROVAL OF HEAT SUPPLY SCHEMES ...... 38 8. MANDATE REGARDING CONNECTION TO/DISCONNECTION FROM HEAT NETWORKS ...... 39 CONCLUSIONS ······················································································· 42 ANNEXES ······························································································· 45 ANNEX 1. CATALOG OF MANDATES REGARDING LONG-TERM HEAT NETWORK DEVELOPMENT PLANNING AND NETWORK INVESTMENT PLANNING ...... 46 ANNEX 2. DISTRIBUTION OF mandateS REGARDING STATE REGULATION OF ACTIVITIES OF HEAT ENERGY GENERATION, TRANSMISSION, AND SUPPLY ...... 49 ANNEX 3. REGULATORY AND LEGAL FRAMEWORK FOR REGULATION OF ACTIVITIES OF ECONOMIC ENTITIES IN HEAT SUPPLY SECTOR (BY NEURC AND OSA LICENSEES)...... 50 ANNEX 4. MANDATE OF KEY PLAYERS WITH RESPECTIVE REFERENCES TO REGULATORY AND LEGAL FRAMEWORK ...... 53 Table 4.1. Mandate Regarding Formation and Implementation of Investment Programs ...... 53 Table 4.2. Mandate Related to Tariff Formation and Setting ...... 58 Table 4.3. Mandate Related to Licensing of Economic Activity in Heat Supply Sector ...... 66

ROLES OF KEY PLAYERS OBSTRUCTING LONG-TERM PLANNING FOR DH SYSTEMS III Table 4.4. Mandate Related to Exercise of State Supervision/Control . 68 Table 4.5. Mandate Regarding Approval of Heat Supply Schemes ..... 70 Table 4.6. Mandate Regarding Connection to/Disconnection from Heat Networks ...... 71

ROLES OF KEY PLAYERS OBSTRUCTING LONG-TERM PLANNING FOR DH SYSTEMS IV LIST OF FIGURES

Figure 1. Distribution of mandate of state administration and state regulation in the heat supply sector ······································································ 9 Figure 2. Summary of main decision-makers regarding long-term heat network development planning and network investment planning ························· 10 Figure 3. Schematic diagram of mandates of the key players in preparation and implementation of IPs and monitoring of IP implementation ····················· 14 Figure 4. Distribution of mandate between government bodies with regard to economic activity licensing in heating sector (per NEURC Resolution #308 of March 22, 2017) ·································································· 33

LIST OF TABLES

Table 1. Summary List of By-laws Developed to Satisfy the Requirement of Art. 261 of the Law of Ukraine On Heat Supply ··········································· 16 Table 2. Classification of Tariffs Based on Activity Type in the Heat Supply Sector ························································································· 19 Table 3. Mandate to Develop and Approve Tariff Formation Procedures in the Heating Sector ·············································································· 21 Table 4. Tariff Setting Mandate in the Heat Supply Sector ·································· 27 Table 5. Distribution of Mandate Between NEURC and OSA/KCSA in Licensing Economic Activity in the Heat Supply Sector ········································ 32 Table 6. Examples of Punitive Sanctions to Be Imposed on Economic Entities for Law Violations ··············································································· 36

ROLES OF KEY PLAYERS OBSTRUCTING LONG-TERM PLANNING FOR DH SYSTEMS V LIST OF ABBREVIATIONS

AMC Antimonopoly Committee of Ukraine ARES Alternative and renewable energy sources CGU Cogeneration unit CHP Combined heat and power plant CHWS Centralized hot water supply COM Cabinet of Ministers of Ukraine DH District heating DRS State Regulatory Service of Ukraine FER Fuel and energy resources FSCP State Service of Ukraine for Food Safety and Consumer Protection Gcal Gigacalories Heat energy transmission Transportation of heat energy by main and local/distribution according to principles of heat networks according to principles of incentive-based incentive-based regulation regulation IFI International financial institution IP Investment program KCSA Kyiv City State Administration LG Local government LTs License Terms MinEnergy Ministry of Energy of Ukraine MinRegion Ministry of Regional Development, Construction, and Housing and Communal Services of Ukraine NCSRC National Communal Services Regulatory Commission NEURC licensees Economic entities subject to state regulation by the National Energy and Communal Services Regulatory Commission NEURC National Energy and Communal Services Regulatory Commission NPP Nuclear power plant OSA Oblast state administrations OSA/KCSA licensees Economic entities licensed by Oblast State Administrations and the Kyiv City State Administration SAEE State Agency for Energy Efficiency and Energy Saving of Ukraine SESI State Energy Supervisory Inspectorate of Ukraine SNRI State Nuclear Regulatory Inspectorate of Ukraine SRS State Regulatory Service of Ukraine

ROLES OF KEY PLAYERS OBSTRUCTING LONG-TERM PLANNING FOR DH SYSTEMS VI TPP Thermal power plant USAID Project USAID Municipal Energy Reform Project in Ukraine VR Verkhovna Rada of Ukraine

ROLES OF KEY PLAYERS OBSTRUCTING LONG-TERM PLANNING FOR DH SYSTEMS VII EXECUTIVE SUMMARY The Analytical Report on the Roles and Functions of Key Players Obstructing Long-Term Development Planning of District Heating Systems, Including Networks, in Ukraine (the Report) evaluates the legally mandated functions and responsibilities of key players in district heating (DH) under current Ukrainian law. The objective of the Report is to identify existing deficiencies in the legal mandates of central government authorities and local government authorities, as well as economic entities, that impede sustainable long-term infrastructure planning activities in the DH sector. The Report presents systematic analysis of the effective legal framework—the roles/functions and rights and responsibilities that are directly or indirectly mandated to key players in the area of network planning. The Report is accompanied by the Catalog of Mandates, which comprises a systematized code that contains cross references to legal acts and regulations applicable to the DH sector as a whole and heat energy transportation in particular. Comparative legal analysis was used to determine how the mandates of the key players impede a sustainable future for DH networks in Ukraine. The analysis identified deficiencies of the system of mandates that impede the efforts of DH entities to engage in long-term infrastructure planning. The deficiencies are classified into seven groups, as follows: 1. There is no systematic approach to the scope of regulatory and legal functions mandated to the key players; 2. A mandate to develop, confirm, coordinate, approve, and implement investment programs (IPs) is missing specifically for long-term IPs, there are overlaps in procedural regulations among governmental authorities, and some legal content is misleading regarding coordination and control functions; 3. The mandate over tariff formation and setting overlaps various legislative bodies and causes distortion in the terms of DH activity; 4. The mandate to license economic activity is dispersed among several bodies, and licensing procedures are incomplete; 5. The mandate of state supervision/control is incomplete; 6. The mandate to develop and approve heat supply schemes is incomplete and not well enforced; and 7. The mandate over connection to/disconnection from the heating network is insufficient. The existing system of mandates granted to key players under the legal framework fails to facilitate long-term development and planning in DH systems, including networks. Many administrative functions present barriers, but the major shortcoming of the system of mandates is as follows: Roles and responsibilities mandated to the players at the levels of classical functions of state policy development and implementation, independent economic regulation and control, local strategic development of the system, and operations are not stipulated with clear boundaries. The Report provides a list of laws that need to be modified to remove administrative obstructions for DH entities to engage in long-term infrastructure planning. The USAID Project will conduct more detailed work at later stages to propose more specific solutions; the current study concludes with the following broad recommendations:  Implement a simple but system-wide approach to allocation of functions to relevant institutions, in particular, the cluster of state policy development and implementation,

ROLES OF KEY PLAYERS OBSTRUCTING LONG-TERM PLANNING FOR DH SYSTEMS 1 cluster of independent economic regulation and control functions, cluster of local strategic development of the system, and cluster of operational-level functions.  Essentially enlarge the mandate to develop, confirm, coordinate, approve, and implement IPs.  Improve the mandate over tariff formation and setting, consider unification of methodological regulations in tariff setting, and establish a mandate for control and dispute resolution involving tariff setting.  Clarify and replenish the mandate to license economic activity.  Enlarge the mandate of state supervision/control.  Enlarge, detail, and enforce the mandate to develop and approve heat supply schemes.  Enlarge and clarify the administrative mandate over connection to/disconnection from the heating network. The analysis limitations are as follows:  The Report does not focus on the legal provisions that are directly or indirectly applicable to the process of DH long-term planning. A separate report presents the legal framework analysis, Analytical Report on Legislative Framework Obstructing Long-Term Development Planning of District Heating Systems, Including Networks, in Ukraine.  The Report does not provide recommendations on specific changes in the system of mandates and legislation toward better long-term DH planning. A separate document, Basic Vision and Roadmap of Legal and Regulatory Changes Needed for DH sector Operations, offers recommendations on changes needed in the laws to ensure a sound future for the DH sector.

ROLES OF KEY PLAYERS OBSTRUCTING LONG-TERM PLANNING FOR DH SYSTEMS 2

INTRODUCTION The Analytical Report on the Mandate of Key Players Obstructing Long-term Heat Network Development Planning (the Report) was prepared as part of completion of Task 1.1 Development of Regulatory and Legislative Enabling Environments under USAID Municipal Energy Reform in Ukraine Project (USAID Project). Task relevance. The DH systems in the Ukrainian municipalities are quite well developed and are highly accessible. However, in recent years they have become outdated and inferior to the systems of autonomous and even individual (apartment-level in multiapartment buildings) heating solutions. The DH systems are now plagued by many interconnected issues, including low energy efficiency, poor reliability (especially of the heat networks), insufficient quality, relatively high cost, and others. Economic benefits of substituting autonomous and individual heat supply solutions with more efficient and cheaper energy sources (waste heat, residual heat, renewable energy, and cogeneration) can be realized by developing more efficient DH systems. Efficient DH systems can ensure the reliability and security of heat supply, strengthen national energy independence, reduce detrimental effects on the environment, contribute to the financial sustainability of DH companies, and attract investments in the DH sector. The technical, legal, organizational, and financial issues related to building more efficient heat energy generation in Ukraine have received significant attention. Use of alternative energy sources has been included in the recent focus on energy generation. The relevant solutions are already available and have been tested. At the same time, new and/or modernized heat energy generation facilities require good operational conditions and sustainable functioning of the heat networks to which they are connected/will be connected, and, for new-build facilities, access to the heat networks. Solving the energy problem requires completion of the following groups of interrelated tasks: (1) ensuring proper technical conditions and development of the heat networks; (2) stopping “outflow” of consumers from the DH systems of Ukraine’s municipalities; and (3) ensuring that new heat energy producers (alternative or competitive with those now in the DH system) have access to the integrated heat networks. The prerequisite for completing these tasks is to conduct long-term heat network development planning at the levels of the state, separate municipalities, and utilities. Long-term heat network development planning addresses the problem in a sustainable way. This Report focuses on administrative barriers obstructing long-term heat network development planning. The Report aims to deconstruct the current system of mandates wielded by key players in the heat supply sector and the exercise of those mandates that directly impact the application of legislative provisions. The USAID Project examines the legal barriers to long-term planning in a separate report. Conducted research. The USAID Project conducted an analysis to identify the mandates of key players in long-term heat network development planning and determine deficiencies. The study results are presented in this report. The key players in the heat supply sector are understood as both enterprises (economic entities) and central government authorities and local governments, and their mandates are understood as their roles/functions and rights and responsibilities granted to them according to current legislation. The Report focuses on the problems related to lack of mandates (where such mandates are needed), cases of overlapping mandates among government authorities, and failure to complete mandates granted to the key players. The Catalog of Mandates of key players (Annex 1) is a product of the study. In addition to the summary Catalog of Mandates, the Annex 4 tables include a summary of the functions of key players in separate areas of state regulation and state

ROLES OF KEY PLAYERS OBSTRUCTING LONG-TERM PLANNING FOR DH SYSTEMS 3 administration, with respective references to the current regulatory and legal framework: mandate with regard to development, confirmation, coordination, approval, and implementation of investment programs (IPs) (Table 4.1); mandate of tariff formation and setting (Table 4.2); mandate of licensing of economic activity in the heat supply sector (Table 4.3); mandate of state supervision/control (Table 4.4); mandate of development and approval of heat supply schemes (Table 4.5); and mandate of connection to heat networks (Table 4.6). Conclusions based on the results of research. The analysis considered the system of mandates granted to key players in the heat supply sector and the practices used in implementing the mandates. The issues that obstruct long-term heat network development planning fall into seven groups, summarized below. 1. The scope of the mandate of regulatory and legal functions At the national level, there is no systemic approach to regulating the activities of economic entities in the heat supply sector and defining the relevant mandates of central government authorities and local governments. At the level of by-laws, the legal mandate to adopt by-laws is not fully practiced by the respective authorized administrative bodies; the National Energy and Communal Services Regulatory Commission (NEURC), over time, has continued to narrow the scope of adopted regulations; this leads to de facto absence of a single regulator in the industry and unequal conditions for the conduct of business by different entities, depending on which body’s regulations apply to them. 2. The mandate to develop, confirm, coordinate, approve, and implement investment programs The current legislation provides the option for economic entities in the heat supply sector to develop long-term investment programs (IPs). The process of developing IPs from inception to coordination/approval can be quite lengthy, and economic entities have no incentives to develop IPs; thus, they have not done so. Other undefined mandates are those related to development, coordination, approval, implementation, and control over conducting, specifically, long-term IPs. NEURC and the Ministry of Regional Development, Construction, and Housing and Communal Services of Ukraine (MinRegion) have some overlapping mandates on development and approval of the Procedure of Formation and Implementation of Investment Programs. Best practice would be to draft one unified regulatory act regarding the procedure of formation and implementation of IPs. No authority is granted to NEURC, MinRegion, local governments (LGs), or oblast state administrations/Kyiv City State Administration (OSAs/KCSA), respectively, to summarize and publish information on any approved/coordinated IPs and implementation of IPs. Thus, the information is fragmented and, when available, very general in nature. The distribution of mandates between LGs and OSAs/KCSA in the process of development and implementation of IPs appears somewhat illogical: LGs are authorized to coordinate IPs, whereas OSAs and KCSA, being licensing/supervisory bodies, are authorized to control IP implementation. The process of development, coordination, approval, and implementation of IPs is partly transparent to the public/consumers. 3. The mandate over tariff formation and setting Ensuring effective tariff regulation by the authorized bodies is an important prerequisite for implementation of any investment project in the heating sector, especially in preparing and executing long-term heat network development plans. Legally, the process of tariff formation and setting defines multiple phases (from drafting of tariff formation procedure/setting by authorized bodies through tariff application) and a considerable

ROLES OF KEY PLAYERS OBSTRUCTING LONG-TERM PLANNING FOR DH SYSTEMS 4 number of players: the Cabinet of Ministers of Ukraine (COM), MinRegion, NEURC, LGs, OSAs and KCSA, State Service of Ukraine for Food Safety and Consumer Protection (FSCP), and economic entities. The mandate on tariff formation and setting is affected by various factors, some of which stem from drawbacks in the regulatory and legal framework. For example, there are differences in the definition of “communal services” according to generic laws. The definition of communal services according to the Law of Ukraine On State Regulation in the Communal Services Sector is broader than the definition provided by the current Law of Ukraine On Housing and Communal Services (2004). According to the Law of Ukraine On Housing and Communal Services (2004), for OSA/KCSA licensees, COM has the power to establish the procedure of tariff formation for DH and centralized hot water supply (CHWS) only. However, COM Decree #869 of June 1, 2011, approves the Procedure of Tariff Formation for Heat Energy, Its Generation, Transmission, and Supply, Services of District Heating and Hot Water Supply. That is, this procedure also covers heat energy, its generation, transmission, and supply. Hence, a legislative conflict is caused by the absence of a law that would have defined the COM mandate with regard to development and establishment of a procedure for the formation of tariffs for heat energy, its generation, transmission, and supply for OSA/KCSA licensees. This problem is further complicated by issues around developing a procedure of tariff formation for heat energy transmission according to the principles of incentive-based regulation and their formation by the OSA/KCSA licensees. For now, NEURC has drafted and approved a procedure of tariff formation for heat energy transmission according to the principles of incentive-based regulation. Therefore, only NEURC licensees are currently able to apply such tariffs. Because multiple administrative agencies are mandated to develop and establish the procedures of tariff formation in the heat supply sector (i.e., NEURC for NEURC licensees and COM for OSA/KCSA licensees), differences are inevitable in the methodologies of tariff formation; consequently, distortions arise in the terms of operation. For example, inclusion of actual costs in tariffs is the difference that directly affects the size of heat energy transmission tariff. Currently, NEURC can include actual costs at a rate higher than normative costs, but OSA/KCSA licensees are not allowed to do so. The existing legislation on the tariff formation and setting includes provisions that are never used in practice. For example, authorized bodies are allowed to leave heat energy tariffs at the level set before implementation of energy saving activities, when energy saving activities result in improvements of heat energy generation and/or reduction of heat energy losses in transmission and supply—but there are no actual instances of this provision being applied. 4. The mandate to license economic activity Economic entities conducting several types of economic activity in the heating sector (generation, transmission, and supply of heat energy), including heat energy generation, may be subject to licensing of different bodies simultaneously. As a result, obtaining the required licenses, and the process in general, are more complicated. License Terms require that a certain amount of heat metering must be installed for heat energy consumers. If the required amount of metering is not achieved by the deadline given, an economic entity, which was formerly a NEURC licensee, would be automatically “transferred” under the licensing authority of OSA/KCSA. Clearly, this licensee will experience substantial changes in the process of tariff formation and setting, development of IPs, reporting procedures, etc., because of the differences in multiple regulatory and legal acts that apply to different licensees. This situation impedes the economic stability of enterprises and preparation of long-term plans.

ROLES OF KEY PLAYERS OBSTRUCTING LONG-TERM PLANNING FOR DH SYSTEMS 5 The license provisions regarding the requested amount of heat metering installation also vary. The licensees that had to transfer from NEURC to OSA/KCSA licensing after having satisfied their metering targets should have returned to NEURC licensing (to comply with the license terms). However, the procedure for return transfer of economic entities, under NEURC licensing, after installation of the required amount of metering devices remains unresolved. 5. The mandate of state supervision/control Currently, the bodies authorized to ensure state supervision/control over compliance with the legislation and license terms in the heat supply sector are appointed under several different legislative acts. The Law of Ukraine On Heat Supply grants the mandate of of state supervision and control to the State Energy Supervisory Inspectorate of Ukraine (SESI) and NEURC and OSAs/KCSA; in this case, SESI is authorized to conduct state energy supervision and NEURC and OSAs/KCSA control compliance with the legislation and license terms. The relevant mandate of NEURC is also stipulated in the Law of Ukraine On State Regulation in the Communal Services Sector and the Law of Ukraine On NEURC. The relevant mandate of OSAs/KCSA are mentioned only in the Law of Ukraine On Heat Supply; no other legislative act (including the Law of Ukraine On Local State Administrations) envisages any mandate for OSAs/KCSA to exercise state supervision/control. Hence, the laws do not explicitly assign the control bodies or establish their mandates and responsibilities. Contrary to the requirements of the Law of Ukraine On the Main Principles of State Supervision/Control in the Field of Economic Activity, currently, no single law imposes sanctions for violation of legislative requirements and clearly defines the violations in the communal services sector that would be cause for a supervisory body to issue an ordinance for rectification. There is no procedure for imposing punitive sanctions for offenses in the heat supply sector; the task of drafting a procedure has been assigned to COM (Art. 31 of the Law of Ukraine On Heat Supply). However, COM has not exercised the authority granted to it by law. The legal framework does not extend the scope of NEURC regulations (in particular, of control procedures) to local-level licensees (to eliminate any available inconsistencies with higher legal force instruments) or create clear and transparent rules for all economic entities, irrespective of their licensing and controlling body. 6. The mandate to develop and approve heat supply schemes The current framework does not name the organization that has the authority to approve a heat supply scheme (local council or its executive bodies). The provision to coordinate the heat supply schemes with MinRegion lacks enforcement. Therefore, either additional requirements are needed to make it obligatory to coordinate a heat supply scheme (e.g., require that a draft heat supply scheme should be coordinated) or the mandate to coordinate the heat supply scheme should be abandoned. NEURC (regulating authority) does not participate in the process of developing, consenting, and approving heat supply schemes. 7. The mandate over connection to/disconnection from the heating network NEURC has yet to exercise its mandate granted by the legislation regarding regulation of relations in the matter of connection to heat networks. The mandate in the area of connection to heat networks lacks a provision giving the heat transmission organization the right to charge fees for connection; this is explicitly at the level of legislative acts. Further steps. The results and findings of the analysis will be used to develop the Basic Vision for improving the current structure of mandates over regulatory and legal functions

ROLES OF KEY PLAYERS OBSTRUCTING LONG-TERM PLANNING FOR DH SYSTEMS 6 of key players. The ultimate goal is to create the necessary legislative prerequisites that will promote long-term heat network development planning. Along with the Basic Vision, a roadmap will be prepared. Structure of the Report. The Report consists of the narrative and annexes. The main part, entitled Analysis of Institutional Roles and Functions of Key Players in Long-term Heat Network Development Planning, discusses findings on mandated government authorities at different levels, local governments, and economic entities in the heat supply sectors in the following areas: (1) legislative and regulatory functions; (2) development, approval, coordination, confirmation, and implementation of IPs; (3) tariff formation and setting; (4) licensing of economic activity; (5) exercise of state supervision and control; (6) development and approval of heat supply schemes; and (7) connection to/disconnection from heat networks. The Annexes are: Catalog of Mandates (Annex 1); Distribution of Mandate in State Regulation of Activities of Heat Energy Generation, Transmission, and Supply (Annex 2); Legislative and Regulatory Framework for State Regulation of Economic Entities in the Heat Supply Sector by NEURC and OSA Licensees (Annex 3); and Mandate of Key Players with Respective References to the Legislative and Regulatory Framework (Annex 4).

ROLES OF KEY PLAYERS OBSTRUCTING LONG-TERM PLANNING FOR DH SYSTEMS 7 ANALYSIS OF INSTITUTIONAL ROLES AND FUNCTIONS OF KEY PLAYERS IN LONG-TERM HEAT NETWORK DEVELOPMENT PLANNING The Report presents findings of a study on roles and functions and rights and responsibilities of central government authorities, LGs, and economic entities in the heat supply sector in Ukraine. The study aimed to identify the institutional roles and functions of key players obstructing long-term heat network development planning. The findings are summarized in the Catalog of Roles and Functions (see Annex 1). In addition, summaries of key players’ mandates with respective references to the effective legal and regulatory framework have been prepared and presented in the tables in Annex 4. Below, the issues that emerged from the analysis are discussed.

1. OVERVIEW OF KEY PLAYERS IN THE HEATING SECTOR In this Report, key players are, specifically, the central government authorities and LGs that are granted, to varying degrees, the mandate of performing the function of state administration and/or state regulation in the heat supply sector. The key players also include economic entities engaged in relevant activities in the heating sector. According to the Law of Ukraine On Heat Supply (Art. 9), public administration in the heat supply sector is conducted by (1) COM and central government agencies within their respective authority at the national level and (2) Council of Ministers of the Autonomous Republic of Crimea and local state administrations at the local level. State regulation (according to Art. 15) is performed by (1) COM, (2) NEURC, and (3) Council of Ministers of the Autonomous Republic of Crimea, OSAs, KCSA, and Sevastopol city state administration, according to the law. Figure 1 illustrates the mandated areas for the key players. According to the law, in the heat supply sector:  COM and the local state administrations equally are authorized to perform the functions of both state administration and state regulation;  the central government agencies (specifically, MinRegion) are authorized to perform the function of state administration, whereas NEURC is authorized to perform the function of state regulation (a clear delineation is established); and

ROLES OF KEY PLAYERS OBSTRUCTING LONG-TERM PLANNING FOR DH SYSTEMS 8  LGs are not granted any special mandate either in the field of state administration or state regulation (even though they are authorized to set tariffs for OSA licensees).

Figure 1. Distribution of mandate of state administration and state regulation in the heat supply sector

State State Administration Regulation

Tasks

 Ensuring security of heat supply as one of  Implementing state policy regarding the essential components of human safety operation of the heat energy market  Creating the mechanisms for operation of an  Protecting consumer rights effective heat energy market  Providing equal opportunities for access of  Reducing harmful impacts on the heat supply actors to the heat energy market environment  Preventing monopolization and creating the  Creating conditions that will attract environment for competitive relations in the investments for development and heat supply sector technological modernization of heat supply systems

Authorized Bodies

COM

Central government agencies NEURC

OSAs/KCSA

The key players in the heat supply sector naturally also include the economic entities engaged in the activities of heat energy generation, transmission, and supply. Depending on the specifics of their business, they are subdivided into: (1) heat energy generating enterprises1; (2) enterprises engaged in heat energy transmission via main and local/distribution heat networks; (3) enterprises engaged in heat energy supply; (4) enterprises engaged in heat energy generation at combined heat and power plants (CHPs), thermal power plants (TPPs), nuclear power plants (NPPs), and cogeneration units (CGUs); and (5) enterprises generating heat energy at installations using alternative and renewable energy sources (ARES). Some economic entities are NEURC licensees,2 others are OSA/KCSA licensees. Annex 2 details the division of mandate between NEURC and OSAs/KCSA with regard to state regulation of heat energy generation, transmission, and supply activities. Figure 2 lists the key players discussed herein.

1 Other than the activity of heat energy generation at CHPs, TPPs, NPPs, CGUs, and installations using ARES. 2 As of August 1, 2018, there were 26 heat supply enterprises among NEURC licensees.

ROLES OF KEY PLAYERS OBSTRUCTING LONG-TERM PLANNING FOR DH SYSTEMS 9 Figure 2. Summary of main decision-makers regarding long-term heat network development planning and network investment planning

Central Government Authorities

National Level Local Level

 Verkhovna Rada of Ukraine (VR)  OSAs/KCSA  COM  NEURC  MinRegion  Ministry of Energy and Coal Industry of Ukraine (MinEnergy)  SESI  FSCP  State Agency for Energy Efficiency and Energy Saving of Ukraine (SAEE)*  State Regulatory Service of Ukraine (SRS)*  Antimonopoly Committee of Ukraine* (AMC)

LGs • Local councils (city, village, settlement, and city district councils) • Executive bodies of local councils Economic Entities in Heat Supply Sector • Heat energy generating enterprises (other than activities of heat energy generation at CHPs, TPPs, NPPs, and CGUs, as well as installations using ARES) • Enterprises engaged in heat energy transmission via main and local/distribution heat networks • Enterprises supplying heat energy • Enterprises generating heat energy at CHPs, TPPs, NPPs, and CGUs • Enterprises generating heat energy at installations using ARES

* The mandates of these institutions extends to the entities in the heat supply sector but are not relevant to the topic of this study. The analysis considered the mandates of central government agencies. These agencies are the State Agency for Energy Efficiency and Energy Saving of Ukraine (SAEE), State Regulatory Service of Ukraine (SRS), and Antimonopoly Committee of Ukraine (AMC). The analysis revealed that activities of these central government bodies influence the general operations of economic entities in the heat supply sector; however, they are not relevant to the subject of this study.

ROLES OF KEY PLAYERS OBSTRUCTING LONG-TERM PLANNING FOR DH SYSTEMS 10 2. MANDATE RELATED TO REGULATORY AND LEGAL FUNCTIONS

2.1 The Level of National Legislation The Verkhovna Rada (VR) of Ukraine, the only body of legislative power in Ukraine according to Art. 75 of the Ukrainian Constitution, provides for regulation of activities of economic entities in the heat supply sector at the legislative level. The Catalog of Legislation provides a list of the legislative acts that make up the legislative basis for regulation of activities of economic entities in the heat supply sector in general and of long-term heat network development planning in particular. (The catalog is an annex of the Analytical Report on Legislative Framework Obstructing Long-term Development Planning of District Heating Systems, Including Networks, in Ukraine.) The USAID Project analyzed the listed legislative acts from the perspective of mandates wielded by central government bodies and LGs. The analysis found that the legislators lack a systematic approach to regulating the activities of economic entities in the heat supply sector. For instance, some mandates are mentioned in two or more laws simultaneously (typical of NEURC mandate), and some are only mentioned in individual laws, which requires comparing several legislative acts to determine the complete list of mandates of any specific body (typical of mandate of local state administrations and LGs). For example, the Law of Ukraine On Local State Administrations whose scope as stated in its preamble consists in “organization, mandate, and operating procedures of local state administrations,” does not mention mandates of local state administrations with regard to licensing. Similarly, the Law of Ukraine On State Regulation in the Sector of Communal Services omits the mandate of local state administrations. On the other hand, the respective mandates of the OSAs, KCSA, Sevastopol City State administration, and the Council of Ministers of the Autonomous Republic of Crimea are stated in the Law of Ukraine On Licensing of Economic Activity Types for general mandate and in Art. 16-1 of the Law of Ukraine On Heat Supply for the mandate in the heat supply sector. Another example refers to the mandate of LGs. The Law of Ukraine On State Regulation in the Sector of Communal Services does not list LG mandates in this area. The mandate of LGs in the tariff regulation are defined by Art. 13 of the Law of Ukraine On Heat Supply and Arts. 28 and 43 of the Law of Ukraine On Local Self-government in Ukraine, and the mandate for approving heat supply schemes is stated in Art. 13 of the Law of Ukraine On Heat Supply. The mandate of LGs related to coordination of IPs of economic entities at the legal level are indirectly defined in the Law of Ukraine On Heat Supply, Art. 26-1 by reference to the by-laws (which provide for the relevant power). NEURC’s mandate is defined simultaneously in the Law of Ukraine On NEURC and in the Law of Ukraine On State Regulation in the Sector of Communal Services. At the same time, problems include, for example, inconsistencies in terminology between the two legislative acts, as demonstrated in subsequent sections.

2.2 The Level of By-laws Regarding problems of regulation of activities of economic entities in the heat supply sector at the level of by-laws, not all the mandates for issuing by-laws granted by law are exercised by the relevant authorized bodies. In addition, in some cases, NEURC has intentionally “narrowed,” or limited, the scope of the by-laws that it issues, although no grounds for this are contained in the laws. Annex 3 shows that the regulatory and legal mandate over activities of economic entities in the heat supply sector are granted to COM, NEURC, and MinRegion. Hence, no single body is authorized to draft and approve the regulatory and legal framework for state regulation of

ROLES OF KEY PLAYERS OBSTRUCTING LONG-TERM PLANNING FOR DH SYSTEMS 11 activities of heat energy generation, transmission, and supply. Here, state regulation of activities means inter alia tariff settlement, regulation of investment activity, supervision of legislative and licensing compliance, rules for organization of any reporting submitted by licensees to the authorized regulatory body, and others. Because multiple bodies have the same mandate, a unified regulatory franmework is de facto absent. This situation conflicts with Art. 17 of the Law of Ukraine On NEURC. Art. 17 mandates that NEURC draft and approve regulatory legal acts. Specifically, the law states that NEURC is responsible for development and approval of license terms for conducting economic activity in the energy and communal services sectors; procedures of control over legislative compliance in the respective fields of regulation and conformity to license terms; procedures/rules of organization of accounting and reporting by type of licensed activity; procedures/methodologies for forming, calculating, and setting tariffs; reporting forms for economic entities in the energy and communal services sectors and the procedure of their submission; procedures/methodologies of connection to heat networks, calculation of connection fees, and financing of connection services; and other duties. In other words, the abovementioned documents should have been developed and approved by NEURC, and they should apply to all economic entities irrespective of their licensing authority. In fact, currently, only one regulatory act approved by NEURC applies to both NEURC and OSA licensees, NEURC Resolution of March 22, 2017, #308 On Approving the License Terms for the Conduct of Economic Activity in the Heat Supply Sector (NEURC Resolution of March 22, 2017, #308). All other NEURC regulations in the heat supply sector apply only to NEURC licensees. This creates inequality among the economic entities operating in the heat supply sector. Consequently, there are differences among approaches to the formation of tariffs and development of IPs between NEURC licensees and OSA licensees. For the purpose of tariff formation, OSA licensees use COM Decree of June 1, 2011, #869, whereas NEURC licensees use NEURC Resolution of March 24, 2016, #377 On Approving the Procedure of Formation of Tariffs for Heat Energy, Its Generation, Transmission, and Supply, Services of District Heating and Hot Water Supply (NEURC Resolution of March 24, 2016, #377). Moreover, business enterprises must use different documents for development, coordination, approval, and implementation of IPs. OSA licensees follow the Order of MinRegion dated December 14, 2012, #630 On Approving the Procedures of Development, Coordination, and Approval of Investment Programs of Economic Entities in the Sectors of Heat Supply, Centralized Water Supply, and Sanitation (MinRegion Order of December 14, 2012, #630), whereas NEURC licensees use NEURC Resolution of August 31, 2017, #1059 On Approving the Procedure of Development, Coordination, Approval, and Implementation of Investment Programs of Economic Entities in the Heat Supply Sector (NEURC Resolution of August 31, 2017, #1059). Due to the current regulatory duality, the OSA level lacks important regulatory guidelines such as the Procedure of Control over Licensees’ Legislative and Licensing Compliance; Rules for Organization of Reporting; Procedure/Rules of Organization and Accounting of the Licensed Activity Types; Procedure of Setting Heat Energy Tariffs; and rules on formation of tariffs using incentive-based regulation (see Annex 3). The regulatory inequality could be solved by broadening NEURC regulations to include OSA/KCSA licensees. Such a solution could help build a unified legal environment, eliminating the ambiguity of the mandates of key players in the area of regulatory and legal support, and establishing a sole legislative body authorized to develop and approve the regulatory and legal framework for state regulation in the heat supply sector.

ROLES OF KEY PLAYERS OBSTRUCTING LONG-TERM PLANNING FOR DH SYSTEMS 12 Concluding Comments: At the national legislative level, there is no systematic approach for the legislator to regulate activities of economic entities in the heat supply sector and to define the relevant mandates of central government authorities and LGs. At the level of by-laws, the mandate to adopt by-laws granted by law is not fully realized in practice by the respective authorized administrative bodies; NEURC has been continually “narrowing” the scope of adopted regulations. The result is that, de facto, a sole regulator in the industry is absent, and business conditions for the different entities will vary depending on which body’s regulations apply to them.

3. MANDATE RELATED TO DEVELOPMENT, CONFIRMATION, COORDINATION, APPROVAL, AND IMPLEMENTATION OF IPS The main legal documents establishing the mandate of key players related to development, confirmation, coordination, approval, and implementation of IPs in the heat supply sector are described below. 1. Laws of Ukraine: On Heat Supply of June 2, 2005, #2633; On State Regulation in the Communal Services Sector of July 9, 2010, #2479; On the National Energy and Communal Services Regulatory Commission of September 22, 2016, #1540. 2. Decrees of COM: Certain Issues of Implementation of Investment Programs in the Sectors of Heat Supply, Centralized Water Supply, and Sanitation of October 1, 2014, #552; On Approving the Procedures of Crediting Funds into Checking Accounts with Special Use Regime for the Purpose of Settlements under Investment Programs, Using Said Funds, and Monitoring Their Spending in the Sectors of Heat Supply, Centralized Water Supply, and Sanitation of October 9, 2013, #750. 3. Resolutions of NEURC: On Approving the Procedure of Development, Coordination, Approval, and Implementation of Investment Programs of Economic Entities in the Heat Supply Sector of August 31, 2017, #1059; On Approving the Procedure of Formation of Investment Programs of the Licensees Engaged in Generation of Electrical and Heat Energy at Combined Heat and Power Plants and Cogeneration Units of October 15, 2015, #2585; On Approving the Procedure of Formation of Investment Programs of the Licensees Engaged in Transmission of Electricity via Main and Transnational Power Networks and the Licensees Engaged in Generation of Heat and/or Electric Energy at Nuclear Power Plants, Hydropower Plants, and Pumped Storage Power Plants of June 30, 2015, #1972. 4. MinRegion Order On Approving the Procedures for Development, Coordination, and Approval of Investment Programs of Economic Entities in the Sectors of Heat Supply, Centralized Water Supply, and Sanitation of December 14, 2012, #630. The key players are as follows: MinRegion; NEURC; MinEnergy; LGs; OSAs/KCSA; and economic entities. In addition, the State Nuclear Regulatory Inspectorate of Ukraine (SNRI) is authorized to approve IPs of the economic entities engaged in heat energy generation at NPPs (regarding the activities intended to improve NPP safety and extend its useful service life). Annex 4, Table 4. provides detail on mandates of the key players in formation and implementation of IPs in the heat supply sector. Figure 3 diagrams the mandates of the key players in preparation (development, confirmation, and coordination/approval) and implementation of IPs and monitoring of their progress.

ROLES OF KEY PLAYERS OBSTRUCTING LONG-TERM PLANNING FOR DH SYSTEMS 13 Figure 3. Schematic diagram of mandates of the key players in preparation and implementation of IPs and monitoring of IP implementation

VR COM NEURC MinRegion

Formation/approval of regulatory and legal framework (laws and bylaws)

Economic Entity LG Economic Entity

 Coordinates IP  Promulgates IP  Develops draft IP Economic  Conducts public Entity discussion of draft IP  Includes  Finalizes draft IP investment based on discussion components in results MinEnergy NEURC its tariff

 Approves IP PREPARATION

 Coordinates IP  Approves IP

Economic Entity NEURC

 Implements IP

 Reports on IP OSA/KCSA implementation

 Promulgates information on

IP implementation MinEnergy IMPLEMENTATION

NEURC OSA/KCSA

 Conducts regular and  Conducts regular and unscheduled inspections of unscheduled inspections of IP implementation IP implementation

MinRegion LG MinRegion

MONITORING  Obtains copies of inspection  Obtains copies of inspection  Obtains copies of inspection report or abstract of IP report or abstract of IP report or abstract of IP implementation inspection implementation inspection implementation inspection

Λ1 are NEURC licensees, being the economic Λ2 are OSA/KCSA licensees, being the Λ3 are NEURC licensees, being entities engaged in heat energy generation (except economic entities engaged in heat energy the economic entities engaged generation at CHPs, TPPs, NPPs, and CGUs, and at generation (except generation at CHPs, TPPs, in heat energy generation at installations using ARES), and its transmission via NPPs, and CGUs, and at installations using CHPs, NPPs, and CGUs main and local/distribution heat networks and supply ARES), and its transmission via main and local/distribution heat networks and supply

ROLES OF KEY PLAYERS OBSTRUCTING LONG-TERM PLANNING FOR DH SYSTEMS 14

1. Legal framework and practice developing long-term IPs in the heat supply sector The concept of a long-term IP appears at the legislative level for the first time in Art. 17 of the Law of Ukraine On NEURC. Art. 17 states that such a program will be developed by economic entities in the energy and communal services sectors in case of application of any method of state regulation of prices with the aim of setting a long-term tariff. Following a public discussion of the IP design, the IP is submitted for coordination by NEURC. In addition, the option of developing a long-term IP is envisaged by the Procedure of Development, Coordination, Approval, and Implementation of Investment Programs of Economic Entities in the Heat Supply Sector approved by NEURC Resolution dated August 31, 2017, #1059, which stipulates that a long-term IP will include annual IPs. Further, the the procedure defines the concept of the “planning period IP,” a a long-term IP developed for the planning period, having the corresponding implementation period and consisting of annual IPs. Planning lasts 1 to 5 years for the tariffs set based on economic feasibility principles, and 3, 5, or 8 years for the tariffs developed on incentive-based regulation principles, the structure of which provides financing for implementation of the IP. A similar opportunity for developing a long-term IP is also provided by MinRegion Order dated December 14, #639. This document, however, does not specifically use the term, “long-term investment program.” However, although the current legislation provides an opportunity for the economic entities in the heat supply sector to develop IPs, the practice is not used. At the time of this Report, NEURC is yet to approve a single long-term program. The law also fails to provide essential methodological support (recommendations) for licensees on choosing investment projects for the long-term program, how to group them, how to conduct the financial, economic, social, and environmental assessment, how to ensure transparency and openness in the process of preparation, how to report on program implementation and achieved results, and other guidelines. Moreover, the mandate of the key players regarding the development, coordination, approval, implementation, and monitoring of implementation of long-term IPs, specifically, is not defined. Therefore, the following analysis of government authorities and economic entities was based on the provisions of the current regulatory and legal framework. 2. Mandate granted to key players for development, coordination/approval, and implementation of IPs and its practice The Law of Ukraine On Heat Supply (Art. 261) and other legal acts establish that economic entities will be responsible for the development, confirmation, and submission to authorized bodies for coordination/approval, as well as for implementation of IPs. However, the law does not clearly obligate such entities to develop an IP. No such obligation is established either by COM Decree or NEURC Resolution. The result, among other things, is that no IPs are available in the heat supply sector. The Law of Ukraine On Heat Supply (Art. 261) establishes responsibility of central government authorities for drafting the legal documents that regulate the process of investment activity in the heat supply sector. Among other things, this law stipulates that:  COM will establish the Procedure of Crediting Funds into Special Account, Use of Said Funds, and Control over Their Spending;  COM will establish the Procedure of Control over Implementation of Investment Programs in the Heat Supply Sector;  NEURC will approve the Procedure of Development, Coordination, and Approval of Investment Programs of the economic entities in the heat supply sector whose activities are licensed by NEURC; and

ROLES OF KEY PLAYERS OBSTRUCTING LONG-TERM PLANNING FOR DH SYSTEMS 15  a central executive agency responsible for the formation and implementation of the state policy in the area of housing and communal services (MinRegion) will approve the Procedure of Development, Coordination, and Approval of Investment Programs of the economic entities in the heat supply sector whose activities are licensed by the Council of Ministers of the Autonomous Republic of Crimea, OSAs, KCSA, and the Sevastopol City State administration. At the time of this writing, the abovementioned regulations are approved (see Table 1).

Table 1. Summary List of By-laws Developed to Satisfy the Requirement of Art. 261 of the Law of Ukraine On Heat Supply

Document Type and Name of By-law Designation Remarks Procedure of Crediting Funds into COM Decree of October 9, 2013, Does not apply to NEURC Checking Accounts with Special Use #750 licensees engaged in heat energy Regime for Settlements under generation at CHPs, TPPs, NPPs, Investment Programs, Use of Said CGUs, and ARES installations Funds, and Control over Their Spending in the Heat Supply Sector Procedure of Control over COM Decree of October 1, 2014, Does not apply to NEURC Implementation of Investment #552 licensees engaged in heat energy Programs in the Sectors of Heat generation at CHPs, TPPs, NPPs, Supply, Centralized Water Supply, and CGUs, and ARES installations Sanitation Procedure of Development, NEURC Resolution of August 31, Does not apply to: Coordination, Approval, and 2017, #1059  OSA licensees Implementation of Investment  NEURC licensees engaged in Programs of Economic Entities in the heat energy generation at Heat Supply Sector CHPs, TPPs, NPPs, and CGUs Procedure of Development, MinRegion Order of December 14, Not actually applied to NEURC Coordination, and Approval of 2012, #630 licensees Investment Programs of Economic Entities in the Heat Supply Sector Procedure of Formation of Investment NEURC Resolution of October 15, Only applies to NEURC licensees Programs of the Licensees Engaged in 2015, #2585 in the heat supply sector that are Generation of Electric and Heat Energy engaged in heat energy at Combined Heat and Power Plants generation at CHPs and CGUs and Cogeneration Units Procedure of Formation of Investment NEURC Resolution of June 30, Only applies to NEURC licensees Programs of the Licensees Engaged in 2015, #1972 in the heat supply sector that are Transmission of Electric Power via engaged in heat energy Main and Transnational Electric generation at NPPs Networks, and Those Engaged in Generation of Heat and/or Electric Energy at Nuclear Power Plants, Hydropower Plants, and Pumped Storage Hydropower Plants

Table 1 shows that there are currently four approved and effective procedures related to the formation of IPs for economic entities in the heat supply sector, two of which (NEURC Resolution of August 31, 2017, #1059, and MinRegion Order of December 14, 2012, #630) are virtually identical. The only differences are the government agencies that approve them and the entities to which they apply (NEURC licensees and OSA licensees). Thus, overlapping legislative provisions are found among the by-laws. For the economic entities engaged in heat energy generation (other than activities of heat energy generation at CHPs, TPPs, NPPs, CGUs, and installations using ARES), its transmission via main and

ROLES OF KEY PLAYERS OBSTRUCTING LONG-TERM PLANNING FOR DH SYSTEMS 16 local/distribution heat networks and its supply, having a single regulatory act governing the procedure of formation and implementation of IPs would be best practice. Further, there is a conflict in the laws. The Law of Ukraine On Heat Supply recognizes COM as a body responsible for drafting the Procedure of Crediting Funds to the Special Account, Use of Said Funds, and Control over Their Spending, as well as the Procedure of Control over Implementation of Investment Programs in the Heat Supply Sector. However, the effect of COM Decree of October 1, 2014, #552, and COM Decree of 9 October 2013, #750, do not apply to those economic entities that generate heat energy at CHPs, TPPs, NPPs, CGUs, and ARES installations. From examining the provisions of NEURC Resolution of August 31, 2017, #1059, and MinRegion Order of December 14, 2012, #630, and taking into account the specifics of their practice, it is clear that the process of preparation of IPs (from their development to coordination/approval) can be quite lengthy and non-time-limited. In some cases, NEURC took 6 months or more to process and approve IPs. Many parties have a role in the process. Coordination/approval is especially time-consuming because it requires promulgation and public discussion of draft documents/decisions and possible revision of the documents after public comment. Economic entities have no effective incentives to develop IPs for submission to the required coordination/approval process. It should be noted that the process of development, coordination, approval, and implementation of IPs is partly transparent and open to the public/consumers. The requirement is meant to promulgate and ensure public discussion of any IP design and draft NEURC decisions on IP approval, to publish the coordinated/approved IP, and to provide access to information on implementation of IPs. However, these activities prolong the planning phase of IPs, and full access to the information by stakeholders is yet to be ensured. The distribution of mandates between LGs and OSAs/KCSA appears somewhat illogical. For instance, LGs are authorized to coordinate IPs, while OSAs/KCSA, as licensing/supervisory bodies, are authorized to control their implementation. Therefore, in practical terms, a body responsible for coordination of IPs and making decisions on their modification has no special mandate to receive, analyze, and summarize information from economic entities on the status of IP implementation. NEURC and MinRegion (as well as LGs/OSAs) have no authority/obligation to summarize and publish the information about any approved/coordinated IPs (their number, cost, planned investment activities, sources of financing etc.).3 Today, NEURC is performing this work at its own discretion and publishes information in its annual reports; however, the information is highly generalized. Regarding OSAs and KCSA licensees, neither OSAs/KCSA nor MinRegion summarize or publish such information. Similarly, no mandate is granted to NEURC or OSAs/MinRegion to summarize and publish information about implementation of IPs by licensees. The result is that stakeholders lack the information needed to make appropriate decisions.

3 NEURC is publishing its decisions on IPs by each licensee, showing the total cost of IP activities and costs by source of financing.

ROLES OF KEY PLAYERS OBSTRUCTING LONG-TERM PLANNING FOR DH SYSTEMS 17 Concluding Comments:

The current legislation provides for economic entities in the heat supply sector to develop long-term IPs; however, in practice, these entities are not doing so. Moreover, the mandate of key players related to development, coordination, approval, implementation, and control over implementation of long-term IPs is not defined. NEURC and MinRegion have some overlapping mandates regarding development and approval of the procedure of IP formation and implementation. Best practice would be to draft one regulatory act that governs all these activities. No authority is granted to NEURC and MinRegion (and LGs/OSAs, respectively) to summarize and publish the information on any approved/coordinated IPs and on implementation of IPs. The information is fragmented and, when available, highly generalized. The IP process (from development to coordination/approval) can be quite lengthy and non-time-limited, and economic entities have no incentives to develop IPs. The distribution of mandates between LGs and OSAs/KCSA in development and implementation of IPs appears somewhat illogical: LGs are authorized to coordinate IPs while OSAs/KCSA, as licensing/supervisory bodies, are authorized to control IP implementation. The process of development, coordination, approval, and implementation of IPs is partly transparent to the public/consumers.

4. MANDATE OVER TARIFF FORMATION AND SETTING Effective tariff regulation is one of the main prerequisites for realization of any investment project, including long-term heat network development plans. The main legal documents defining the mandate of the key players with regard to tariff regulation are described below. 1. Laws of Ukraine: On Heat Supply of June 2, 2005, #2633; On State Regulation in the Communal Services Sector of July 9, 2010, #2479; On Housing and Communal Services of June 24, 2004, #1875; On Natural Monopolies of April 20, 2000, #1682; On NEURC of September 22, 2016, #1540; On Local Self-Government in Ukraine of May 21, 1997, #280/97; On Access to Public Information of January 13, 2011, #2939; and On the Specifics of Access to Information in the Sectors of Supply of Electric Power, Natural Gas, Heat, Centralized Hot Water Supply, Centralized Potable Water Supply, and Sanitation of December 10, 2015, #887. 2. Decrees of COM: On Ensuring a Common Approach to the Formation of Tariffs for Housing and Communal Services of June 1, 2011, #869; and On Approving the Rules for Provision of Services of District Heating, Cold and Hot Water Supply, and Sanitation, and a Standard Contract for the Provision of Services of District Heating, Cold and Hot Water Supply, and Sanitation of July 21, 2005, #630. 3. Resolutions of NEURC: On Approving the Procedure of Tariff Formation for Heat Energy, Its Generation, Transmission, and Supply, Services of District Heating and Hot Water Supply of March 24, 2016, #377; On Approving the Procedure of Tariff Setting for Heat Energy, Its Generation, Transmission, and Supply of March 31, 2016, #528; On Approving the Procedure of Tariff Setting for the Services of District Heating and Centralized Hot Water Supply of March 31, 2016, #529; On Approving the License Terms for the Conduct of Economic Activity in the Heat Supply Sector of March 22, 2017, #308; On Approving the Procedure of Control over Compliance of the Licensees Conducting Business in the Sectors of Energy and Communal Services with the Legislation in the Respective Sectors and with the License Terms of June

ROLES OF KEY PLAYERS OBSTRUCTING LONG-TERM PLANNING FOR DH SYSTEMS 18 14, 2018, #428; On Approving the Procedure for Conducting Open Discussion of Draft Decisions of the National Energy and Communal Services Regulatory Commission of June 30, 2017, #866; On Approving the Procedure of Tariff Formation for Heat Energy Transmission via Main and Local/Distribution Heat Networks According to the Principles of Incentive-Based Regulation of July 27, 2017, #967; On Approving the Procedure of Tariff Setting of Heat Energy via Main and Local/Distribution Heat Networks According to the Principles of Incentive- Based Regulation of July 27, 2017, #964; On Establishing the Regulatory Rate of Return on the Regulatory Asset Base for the Entities Engaged (Having Intent to Engage) in the Economic Activity of Heat Energy Transmission via Main and Local/Distribution Heat Networks of July 27, 2017, #965; and On Approving the Procedure of Assessing the Regulatory Asset Base of Natural Monopolies Engaged (Having Intent to Engage) in the Economic Activity of Heat Energy Transmission via Main and Local/Distribution Heat Networks of July 27, 2017, #966. The key players are classified into three groups: 1. National Players: COM, MinRegion, NEURC, and FSCP 2. Local Players: LGs and local state administrations 3. Operational Players: Economic entities Areas of mandate and/or responsibility of the key players in formation and setting of tariffs include (1) classification of activity types for which tariffs are set; (2) classification of the procedures of tariff formation and the mandate with regard to their setting; (3) phases of tariff formation and setting; (4) distribution of mandates between the regulatory bodies to issue legal rules on tariff formation and setting; (5) tariff formation by economic entities; (6) providing consumers with access to information on price/tariff changes for heating supply and hot water supply; (7) providing information to consumers and other parties on intentions to change prices/tariffs; (8) tariff setting by authorized bodies; and (9) tariff application. These areas are discussed below. (1) Classification of activity types for which tariffs are set. One of the issues that significantly affects the process of tariff formation and setting is the classification of activity types for which those tariffs are to be set. In the basic laws—the Law of Ukraine On State Regulation in the Communal Services Sector and the current Law of Ukraine On Housing and Communal Services—the classification of tariff objects contains differences that complicate tariff formation and setting.

Table 2. Classification of Tariffs Based on Activity Type in the Heat Supply Sector

Number and Full Name and Name of Designation of the Articles of the Quoted Articles of the Law of Ukraine Regarding Law of Ukraine Law of Ukraine Tariff Classification Tariffs for communal services – Tariffs for heat energy (other than tariffs for heat energy generation at CHPs, TPPs, NPPs, CGUs and installations using ARES), heat energy Law of Ukraine On transmission via main and local/distribution heat networks, State Regulation in the Art. 1. Definitions heat energy supply, as well as tariffs for the services of Communal Services of Terms centralized water supply and sanitation, services of municipal Sector of July 9, 2010, waste processing and disposal, and tariffs for the services of #2479 DH, services of centralized cold water supply, services of CHWS, and services of sanitation (using intrabuilding systems) for the entities, which are the providers of these services. Art. 20.General Heat energy tariff for consumer is defined as a sum total of Law of Ukraine On Principles of Heat the tariff for generation, transmission, and supply of heat Heat Supply of June 2, Energy Tariff energy. 2005, #2633 Formation

ROLES OF KEY PLAYERS OBSTRUCTING LONG-TERM PLANNING FOR DH SYSTEMS 19 Number and Full Name and Name of Designation of the Articles of the Quoted Articles of the Law of Ukraine Regarding Law of Ukraine Law of Ukraine Tariff Classification Art. 13. 1) Depending on their functional purpose, the housing and Subdivision of communal services are subdivided into: Law of Ukraine On Housing and communal services (centralized cold water supply; CHWS; Housing and Communal sanitation [using intrabuilding systems]; gas and power supply; Communal Services of Services DH; municipal waste removal; and others) June 24, 2004, #1875 Depending on the Functional Purpose 2) Communal services means the services of supply and Law of Ukraine On distribution of natural gas, supply and distribution of electric Housing and energy, supply of heat energy, supply of hot water, Communal Services of Art. 5. List of centralized water supply, centralized sanitation, and municipal November 9, 2017, Housing and waste management. #2189 (effective June Communal 9, 2018, with some Services provisions to be enacted May 1, 2019)

Findings from Table 2 are discussed below.  The concept of communal services, according to the Law of Ukraine On State Regulation in the Communal Services Sector, is broader than in the current Law of Ukraine On Housing and Communal Services (2004). According to the first law, communal services include heat energy, DH, and CHWS, whereas according to the second law, communal services include only DH and CHWS. According to the Law of Ukraine On Housing and Communal Services (2017), which will become effective on May 1, 2019, the classification of communal services will include the addition of heat energy supply, removal of DH, and will delete the word “centralized” from the name of the CHWS service.  In the Law of Ukraine On State Regulation in the Communal Services Sector, communal services are defined differently with regard to heat energy. Specifically, according to the Law of Ukraine On Heat Supply, the heat energy tariff is a sum total of the tariffs for heat energy generation, transmission, and supply. According to the Law of Ukraine On State Regulation in the Communal Services Sector, this includes heat energy, transmission and supply of heat energy—that is, it lacks the tariff for heat energy generation, even though the clarification regarding nonapplicability to heat energy generation at CHPs, TPPs, NPPs, CGUs, and ARES installations seems to mean that the “heat energy” also envisages/includes heat energy generation at generating sources other than those listed above. The issues described above have a direct impact on the mandate of government authorities regarding regulatory and legal activity in tariff formation. The tariff formation procedure (tariff methodology) is one of the most important documents regulating the issues of tariff formation, and it affects the economic entity’s (in)ability to invest in long-term projects. (2) Classification of tariff formation procedures and the mandate for tariff setting. As shown in Table 3, national bodies are authorized to develop and approve tariff formation procedures in the heating sector.

ROLES OF KEY PLAYERS OBSTRUCTING LONG-TERM PLANNING FOR DH SYSTEMS 20 Table 3. Mandate to Develop and Approve Tariff Formation Procedures in the Heating Sector

Economic Entities in Heating Authorized Tariffs for Services/ Sector Body Products Mandate  Heat energy Development of procedures/  Heat energy transmission methodologies of formation of tariffs (including transmission for communal services for natural according to principles of monopolies and economic entities in incentive-based regulation) adjacent markets  Heat energy supply (Art. 6 of the Law of Ukraine On State Regulation in the Communal Services  DH, CHWS Sector)  Heat energy generation Development of methodologies for  Heat energy transmission calculation of tariffs for heat energy (including according to generation and fees for its principles of incentive-based transmission and supply regulation) Development of methodology/  Heat energy supply procedure for the formation of heat energy tariffs in the heat supply sector for NEURC NEURC  Heat energy (including natural monopolies and economic licensees transmission according to entities in adjacent markets principles of incentive-based regulation) (Art. 16 of the Law of Ukraine On Heat Supply)  Heat energy Development and approval of  Heat energy generation procedures/methodologies of formation, calculation, and setting of  Heat energy transmission state-regulated prices and tariffs for (including transmission natural monopolies in the sectors of according to principles of energy and communal services, and for incentive-based regulation) other economic entities active in the  Heat energy supply markets of energy and communal  DH, CHWS services, provided the Regulator is granted the relevant mandate by law (Art. 17 of the Law of Ukraine On NEURC)  Heat energy Mandate is not established  Heat energy generation  Heat energy transmission OSAs and  Heat energy supply KCSA COM licensees  DH and CHWS, the prices/ Definition of procedure of tariff tariffs of which are approved formation by local governments for (Art. 31 of the Law of Ukraine On service provision in a specific Housing and Communal Services (2004) territory

Table 3 shows that legal provisions for tariff formation and setting in the heating sector are ambiguous.  Different bodies develop and establish the procedures for the formation of tariffs in the heating sector (i.e., NEURC for NEURC licensees and COM for OSAs/KCSA licensees), which inevitably leads to differences in the methodologies of tariff formation.  For NEURC licensees, the NEURC mandate to develop and approve the tariff formation procedures is established by three laws simultaneously. Notably, these laws use different names for the procedure, such as procedure/methodology of formation, methodology of calculation, and methodology/procedure of formation. Distinctly, the

ROLES OF KEY PLAYERS OBSTRUCTING LONG-TERM PLANNING FOR DH SYSTEMS 21 Law On Heat Supply provides for a NEURC mandate to develop the methodology for calculation of heat energy transmission and supply fees. Also, the Law of Ukraine On NEURC is the only item that deals not only with development but also with approval of the procedures, and not just for tariff formation, but also for tariff calculation and setting.  For licensees of OSAs/KCSA, according to the Law of Ukraine On Housing and Communal Services (2004), COM has the power to establish the procedure of formation of tariffs for DH and CHWS only. However, COM Decree of June 1, 2011, #869, approved the Procedure of Formation of Tariffs for Heat Energy, Its Generation, Transmission, and Supply, Services of District Heating and Hot Water Supply. Therefore, this procedure also covers heat energy, its generation, transmission, and supply. Legislative conflicts arise because of absence of a regulation that defines the COM mandate to develop and establish a procedure of formation of tariffs for heat energy, its generation, transmission, and supply for the licensees of OSAs/KCSA.  The law envisages possible use of heat energy transmission tariffs according to incentive-based regulation only for NEURC licensees. The tariff for heat energy transmission, including according to the principles of incentive-based regulation, is a component of the heat energy tariff. Therefore, the COM mandate with regard to establishing the procedure for the formation of tariffs for heat energy for the licensees of OSAs/KCSA (described in the preceding paragraph) is also relevant for the case of incentive-based regulation. (3) Phases of tariff formation and setting. In the existing regulatory and legal framework, concepts such as tariff “formation” or “setting” do not exist; this means that an economic entity must put together/calculate the tariffs and the authorized body must set them. In fact, tariff formation and setting is a process comprising several main phases: 1) development and approval of tariff formation and setting procedures by authorized bodies, 2) tariff formation by economic entities, 3) ensuring that consumers have access to information about any changes in prices/tariffs in the heat supply and CHWS sectors, 4) providing information to consumers and other interested parties about the intent to change prices/tariffs and about prices/tariffs, and 5) tariff setting by authorized bodies. In addition, at the conclusion of the process of tariff formation and setting, tariff application will begin. This phase involves direct application of tariffs by economic entities for billing. At this phase, tariff control is conducted by authorized bodies. This phase has a significant influence on the level of tariffs because, based on any violations found by the authorized bodies, the tariff amount may change (e.g., due to failure to comply with the cost structure envisaged by tariffs or failure to implement an IP). In particular, according to the Law of Ukraine On Heat Supply, the state bodies authorized to regulate activities of natural monopolies are obligated to decide on reducing any tariff they set by the amount of misapplication of funds in the following instances: use of funds by an economic entity in the heat supply sector for the purposes and/or at the amounts that are not envisaged by the technological development program and/or IP; and use of funds by an economic entity in the heat supply sector for the purposes and/or at the amounts not envisaged by the tariff structure. (4) Mandate for the regulatory bodies to issue legal rules on tariff formation and setting. A note should be made about the procedures of tariff setting. The authorized body should have defined the procedures of tariff setting, which include the procedure of submitting tariff calculations by economic entities (deadlines, form of application for tariff setting, and essential documents) and the procedure of review by the bodies authorized to set the tariffs.

ROLES OF KEY PLAYERS OBSTRUCTING LONG-TERM PLANNING FOR DH SYSTEMS 22 Although NEURC was not mandated to develop and approve the procedures of tariff setting until after enactment of the Law of Ukraine On NEURC (see Table 3), NEURC had already established these procedures. Procedures currently effective for NEURC licensees include those for setting the tariffs for heat energy, its generation, transmission, and supply (NEURC Resolution of March 31, 2016, #528) and for DH and CHWS (NEURC Resolution of March 31, 2016, #529), and for heat energy transmission according to the principles of incentive-based regulation (NEURC Resolution of July 27, 2017, #964). There are no procedures common to all licensees of OSAs and KCSA pursuant to COM Decree of June 1, 2011, #869. Before its revision in November 2017, COM Decree #869 only mentioned in terms of procedural matters that, for tariff setting, an enterprisewill submit to an authorized body its application in hardcopy and electronically, and that the calculations of tariffs for the planning period would be done according to the forms established by such bodies. In addition, when setting two-tier tariffs, an economic entity should also submit the calculation of tariffs according to the form established by the authorized bodies in addition to the abovementioned documents. Therefore, at least the tariff calculation forms for licensees of OSAs and KCSA should have been established by LGs (bodies authorized to set tariffs). The practices show that most LGs never establish such forms, but there are examples of them. For instance, a KCSA letter of July 31, 2014, #050/21-4619, established the list of documents and forms that KCSA licensees must submit to KCSA. After COM Decree #869 was amended in November 2017, it was supplemented with paragraph 106, whereby the review of calculations of the tariffs for heat energy, its generation, transmission, and supply, DH, and CHWS services submitted by the licensee/enterprise must be conducted by the authorized body within 1 calendar month, and in case of tariff adjustment, during 10 calendar days of the date of the respective application receipt according to the procedure established by MinRegion. At the time of preparation of this Report, MinRegion had developed a draft Order On Approving the Procedure of Review by Local Governments of the Calculations of Tariffs for Heat Energy, Its Generation, Transmission, and Supply, as well as the Calculations of Tariffs for Communal Services Submitted for the Purpose of Their Setting.4 Public discussions of this order started on May 24, 2018. According to the draft order, MinRegion developed a procedure of tariff setting and standard forms for tariff formation for use by both OSAs and KCSA licensees; however, these standard forms need to be approved by LGs for each individual case. (5) Tariff formation by economic entities. Formation of tariffs is carried out by economic entities. These entities are entrusted with the responsibility of forming the tariffs pursuant to the Law of Ukraine On State Regulation in the Communal Services Sector and the Law of Ukraine On Housing and Communal Services (2004). Tariff formation by economic entities depends on the availability of approved procedures. The relevant procedures have been developed and are in effect, as follows:  for NEURC licensees – NEURC Resolution of March 24, 2016, #377, and NEURC Resolution of July 27, 2017, #967 On Approving the Procedure of Tariff Formation for Heat Energy Transmission via Main and Local/Distribution Heat Networks According to the Principles of Incentive-Based Regulation; and  for OSAs/KCSA licensees – COM Decree of June 1, 2011, #869. Box 1 provides the story of adoption of NEURC Resolution of March 24, 2016, #377, which included a change in the mandate to approve the procedures of tariff formation.

4 http://www.minregion.gov.ua/base-law/grom-convers/informatsiyni-povidomlennya-pro-provedennya- publichnogo-gromadskogo-obgovorennya-grom-convers/rozpochato-gromadske-obgovorennya-proektu-nakazu- minregionu-pro-zatverdzhennya-poryadku-rozglyadu-organami-mistsevogo-samovryaduvannya-rozrahunkiv- tarifiv-na-teplovu-energiyu-yiyi-virobnitstvo-tr/

ROLES OF KEY PLAYERS OBSTRUCTING LONG-TERM PLANNING FOR DH SYSTEMS 23 Box 1. Approving the Tariff Formation Procedure for NEURC Licensees The power of NEURC (formerly, NERC) to develop the procedures/methodologies of tariff formation for heat energy was established by the Law of Ukraine On Heat Supply of June 2, 2005, #2633. Nevertheless, COM Decree of June 1, 2011, #869, applied to NEURC licensees for their tariff formation for communal services before January 1, 2016. Yet, according to Art. 31 of the Law of Ukraine On Housing and Communal Services, the procedure of formation of tariffs for each type of housing and communal services of group two (housing and communal services, the prices/tariffs for which are to be approved by local governments for their provision in the respective territory) is determined by COM. According to this legislative provision, COM issued its Decree of September 2, 2015, #670, to amend COM Decree of June 1, 2011, #869, stating that as of January 1, 2016, the Procedure of Tariff Formation for Heat Energy, Its Generation, Transmission, and Supply, Services of District Heating and Hot Water Supply and the Procedure of Tariff Formation for Centralized Water Supply and Sanitation; and the Procedure of Tariff Formation for the Services of Centralized Cold Water Supply and Sanitation (using intrabuilding systems) will be used exclusively by local governments for setting the respective tariffs. In other words, these procedures are not used for the formation and setting of tariffs for NEURC licensees. In view of this situation, in late 2015, NEURC developed a Draft Procedure for the Formation of Tariffs for Heat Energy, Its Generation, Transmission and Supply, Services of District Heating and Hot Water Supply for NEURC licensees, which was approved by NEURC Resolution of March 24, 2015, #377.

Therefore, economic entities within the same sector must use different procedures for tariff formation because their governing bodies share the same mandate and each body has set its own procedure. Even if NEURC Resolution of March 24, 2015, #377, and COM Decree of June 1, 2011, #869, were identical, some requirements for tariff formation by NEURC licensees and OSA/KCSA licensees would still be different. Some examples are summarized below.  COM Decree of June 1, 2011, #869, stipulates that tariffs must be formed for each individual territorial community separately if the licensed activity is conducted and services provided in several territorial communities. NEURC Resolution of March 24, 2015, #377, contains no such requirement.  According to NEURC Resolution, NEURC licensees are allowed to include losses of heat energy in networks at a rate greater than the standard based on their actual amount, whereas the licensees of OSAs and KCSA are not allowed such an option.  NEURC Resolution of March 24, 2015, #377, contains no provisions on the need to coordinate any borrowing with the authorized body before including loan commitments in the tariffs, whereas the licensees of OSAs and KCSA must comply with such requirements.  NEURC Resolution of March 24, 2015, #377, contains a reference to another NEURC resolution that establishes a mechanism for determining labor costs, which are included in the tariffs. No special mechanism is provided for the licensees of OSAs and KCSA, and the requirements for determination of labor costs are described in COM Decree of June 1, 2011, #869. Further, as mentioned above, OSA/KCSA licensees are not able to form their tariffs for heat energy transmission using incentive-based regulation because no procedure for tariff

ROLES OF KEY PLAYERS OBSTRUCTING LONG-TERM PLANNING FOR DH SYSTEMS 24 formation is approved for their use. To provide an opportunity to form tariffs according to the principles of incentive-based regulation, NEURC has also exercised its mandate envisaged by Art. 13 of the Law of Ukraine On Natural Monopolies dealing with the development and approval of the procedure for evaluating the regulatory asset base, and setting the regulatory rate of return and the long-term regulation parameters for incentive-based regulation. Other bodies have roles in tariff formation. Although, for NEURC licensees, NEURC is authorized to set tariffs, a significant number of indicators used in tariff calculations need to be coordinated with the respective LG. For example, according to NEURC Resolution of March 24, 2015, #377, LGs must carry out the following:  coordinate the annual plans of heat energy generation, transmission, and supply, and provision of the services of DH and CHWS;  coordinate IPs;  give consent to establishing two-rate heat energy tariffs for all user categories;  confirm the heat load for the formation of two-rate tariffs; and  coordinate licensee’s application of heat energy transmission tariffs according to the principles of incentive-based regulation, including two-rate tariffs, in cases where the licensee appeals to NEURC for setting such tariffs; schedule/regime of providing CHWS services during the period for which the heat energy transmission tariffs according to the principles of incentive-based regulation are to be set; etc. For both NEURC licensees and OSA/KCSA licensees, LGs must:  coordinate the temperature schedules for operation of heat networks;  approve the annual hot water consumption rates; and  coordinate the personnel schedules of municipal enterprises, rent for any leased municipal property, and other matters. For OSA/KCSA licensees, the LG coordinates borrowing under the credit agreements; the commitments stated in the agreements are included in the tariffs. Together with LGs, OSAs and KCSA play a very important role in the formation of tariffs both by NEURC and OSA/ KCSA licensees. OSAs and KCSA coordinate the General Production Specific Fuel and Electric Power Rates. This mandate was granted to OSAs and KCSA by the Order of the State Committee of Ukraine on Energy Saving of October 22, 2002, #112 On Approving the Main Provisions of Standardizing the Specific Consumption of Fuel and Energy Resources in Public Production. Because fuels and electric power account for about 80 percent of the structure of heat energy tariffs, the importance of standard specific rates of fuel and electric power consumption cannot be underestimated. Therefore, the competence of the OSAs and KCSA in this matter is extremely relevant. Thus, according to the mandate granted to them, the LGs and OSAs have the authority to substantially influence the tariffs of economic entities in the heat supply sector, including those of NEURC licensees. (6) Providing consumers with access to information on changes in prices/tariffs in the heat supply sector and CHWS. At this phase, safeguarding transparency is the responsibility of all participants in the process of tariff formation and setting. The Law of Ukraine On the Specifics of Access to Information in the Sectors of Electric Power and Natural Gas Supply, Heat Supply, Centralized Hot Water Supply, Centralized Supply of Potable Water, and Sanitation was approved in December 2015. According to this law, consumer access to information is to be ensured by the central government bodies and LGs whose mandate includes setting of prices/tariffs in the sectors of electric power and natural gas supply, heat supply, CHWS, centralized supply of potable water, and sanitation, as well as by the economic entities conducting business in those sectors.

ROLES OF KEY PLAYERS OBSTRUCTING LONG-TERM PLANNING FOR DH SYSTEMS 25 Therefore, according to this law, the central government bodies and LGs must ensure consumer access to information on a variety of subjects, including prices/tariffs, their components for all categories of consumers, and changes in prices/tariffs, by publishing such information on their official websites and information boards and in the mass media. In addition, the central government bodies and LGs whose mandate includes setting of prices/tariffs for the goods and services of natural monopolies in the sectors of electric power and natural gas supply, heat supply, CHWS, centralized supply of potable water, and sanitation determine the procedure for publishing the information on the prices/tariffs, their components for all categories of consumers, changes to prices/tariffs, and public hearings at the sites of service provision to customers by natural monopolies and entities in adjacent markets. Pursuant to the law, NEURC has realized the power to comply with the requirement of determining the procedure for conducting public hearings at the sites of service provision by natural monopolies and entities in adjacent markets. NEURC developed Resolution of June 30, 2017, #866, On Approving the Procedure of Conducting an Open Discussion of Draft Decisions of the Natural Energy and Communal Services Regulatory Commission. No publicly available data exist on the drafting of such a procedure by LGs; therefore, it is not clear if LGs have exercised this power. (7) Provision of information to consumers and other interested parties about intentions to change prices/tariffs and about the prices/tariffs. Informing consumers and other interested parties about prices/tariffs must be conducted before tariff setting, in case of the intent of changing the tariffs; consumers and other parties must be informed after tariff setting, in case there is no tariff change. Both the economic entities and the bodies authorized to set tariffs will be responsible for informing the public, and the mandate to develop the required regulatory and legal framework for provision of information is entrusted to different bodies. The laws that envisage the responsibility of economic entities to provide information about the intent to change tariffs are the Law of Ukraine On Heat Supply, License Terms (with respect to heat energy tariffs), Law of Ukraine On Housing and Communal Services (2004) (with respect to DH and CHWS tariffs), and the Law of Ukraine On the Specifics of Access to Information in the Sectors of Electric Power and Natural Gas Supply, Heat Supply, Centralized Hot Water Supply, Centralized Supply of Potable Water, and Sanitation. At the information dissemination phase, the following will apply:  NEURC licensees will be guided by NEURC Resolution of June 30, 2017, #866. Accordingly, NEURC licensees are required to conduct an open discussion (public hearing) in the affected localities on the need for setting prices/tariffs or changes in tariffs; publish an announcement and a justification of the need to set prices/tariffs or changes to tariffs on their websites; and forward the results of such open discussions (public hearing) in the relevant localities to NEURC.  OSAs/KCSA licensees are guided by MinRegion Order of July 30, 2012, #390 On Approving the Procedure of Informing the Consumers about the List of Housing and Communal Services, Structure of Prices/Tariffs, Change of Prices/Tariffs with Justification of Its Need, and Accounting for the Respective Position of Territorial Communities. This order applies only to DH and CHWS tariffs. At this phase, all licensees are subject to the same requirements as envisaged by the Law of Ukraine On Heat Supply, Law of Ukraine On Housing and Communal Services, Law of Ukraine On the Specifics of Access to Information in the Sectors of Electric Power and Natural Gas Supply, Heat Supply, Centralized Hot Water Supply, Centralized Supply of Potable Water, and Sanitation, and the License Terms.

ROLES OF KEY PLAYERS OBSTRUCTING LONG-TERM PLANNING FOR DH SYSTEMS 26 NEURC and LGs are also required to provide information about changes to prices/tariffs and the status of prices/tariffs. Among other things, according to the Law of Ukraine On NEURC, the Regulator must ensure transparency by publishing Regulator’s draft decisions in the open data format on its official website alongside justifications and decisions made by the Regulator. In addition, according to NEURC Resolution of March 24, 2015, #377, a decision on tariff setting mustl be published by NEURC in mass media outlets and/or on NEURC’s website within 5 working days, except any acts whose dissemination is subject to the Law of Ukraine On Access to Public Information and state registration, and whose publication will take place after their state registration and official publication. For LGs, the Law of Ukraine On Access to Public Information stipulates that any draft regulations and resolutions of LGs drafted by relevant spending units must be published by the LGs no later than 20 working days before the date of their consideration for adoption. Also, according to COM Decree of June 1, 2011, #869, any decisions on tariff setting must be promulgated by the authorized body via mass media outlets and/or published on the authorized body’s website immediately but no later than 5 working days of their adoption date. (8) Tariff setting by authorized bodies. According to the existing legislation, NEURC and LGs are mandated to set tariffs in the heat supply sector (Table 4). The distribution of mandates to set tariffs is clear in the legal framework.

Table 4. Tariff Setting Mandate in the Heat Supply Sector

Economic Entities in Heat Supply Authorized Sector Body Tariff for: Mandate  Heat energy Setting tariffs for communal services for natural  Heat energy monopolies and economic entities in adjacent transmission (including markets whose activities are licensed by according to principles NEURC of incentive-based (Art. 6 of the Law of Ukraine On State regulation) Regulation in the Communal Services Sector)  Heat energy supply  DH, CHWS  Heat energy Setting tariffs for heat energy for natural generation monopolies in the heat supply sector whose  Heat energy activities are licensed by NEURC transmission (including (Art. 16 of the Law of Ukraine On Heat Supply) according to principles Tariffs for heat energy generation, including of incentive-based generation at CHPs, TPPs, NPPs, CGUs, and NEURC NEURC regulation) installations using ARES, for transmission and licensees  Heat energy supply supply of heat energy will be set by NEURC and LGs within the scope of mandate established by the legislation (Art. 20 of the Law of Ukraine On Heat Supply)  Heat energy Setting the state-regulated prices and tariffs for  Heat energy goods/services of natural monopolies and generation other economic entities operating in energy and communal services markets, provided the  Heat energy respective mandates are granted to the transmission (including Regulator by law according to principles of incentive-based (Art.17 of the Law of Ukraine On NEURC) regulation)  Heat energy supply  DH, CHWS

ROLES OF KEY PLAYERS OBSTRUCTING LONG-TERM PLANNING FOR DH SYSTEMS 27 Economic Entities in Heat Supply Authorized Sector Body Tariff for: Mandate  Heat energy Setting the tariffs, for all user categories, for  Heat energy heat energy and heat energy generation generation (except the tariffs for heat energy generated at CHPs, TPPs, NPPs, and CGUs,) according to  Heat energy the procedure and within the scope prescribed transmission by the legislation  Heat energy supply (Art. 13 of the Law of Ukraine On Heat Supply) Tariffs for heat energy generation, including at CHPs, TPPs, NPPs, CGUs, and installations using ARES, heat energy transmission and supply will be set by NEURC and LGs within the scope of the mandate established by the legislation (Art. 20 of the Law of Ukraine On Heat Supply)

OSA and KCSA LGs licensees  Heat energy According to the procedure and within the  Heat energy scope prescribed by law, setting the tariffs for generation everyday and communal services, transport, and other services, except the tariffs for heat  Heat energy energy, centralized water supply and transmission sanitation, processing and disposal of  Heat energy supply municipal waste, services of DH and  DH, CHWS centralized cold water supply, services of CHWS, and sanitation (using intrabuilding systems), which are set by NEURC (Art. 28 of the Law of Ukraine On Local Self- government in Ukraine)  DH and CHWs, the Setting the prices/tariffs for housing and prices/tariffs for which communal services according to law are approved by LGs (Art. 7 of the Law of Ukraine On Housing and for provision in specific Communal Services [2004]) territories

Two points should be discussed here.  The mandate of authorized bodies to set tariffs for each territorial community, rather than for an entire economic entity, when the economic entity operates in the jurisdictions of several territorial communities. As noted above, NEURC Resolution of March 24, 2015, #377, contains no requirements to form tariffs by territorial community, which is confirmed by NEURC’s practices of tariff setting. For instance, PAT OBLTEPLOKOMUNENERGO, based in Chernihiv, is an enterprise that supplies heat to a significant portion of users in Chernihiv and the cities of Koriukivka, Horodnia, Mena, Bakhmach, Snovsk, Novhorod-Siverskyi, and others. This enterprise has unified tariffs set for it by consumer groups without any differentiation by territorial community. COM Decree of October 11, 2017, #817, On Amending the Procedure of Tariff Formation for Heat Energy, Its Generation, Transmission, and Supply, Services of District Heating and Hot Water Supply added the following clauses to the Procedure of Tariff Formation for OSA and KCSA Licensees:

ROLES OF KEY PLAYERS OBSTRUCTING LONG-TERM PLANNING FOR DH SYSTEMS 28 “5: If a licensee conducts activity (has an intent to conduct activity) in several territorial communities, the formation and setting of tariffs for heat energy generation, transmission, and supply shall be conducted for each territorial community separately. In this case, costs are accounted for each type of licensed activity within the boundaries of the respective territorial community; 3: The requirements of this Procedure with regard to the formation of tariffs for heat energy generation, transportation, and supply, services of district heating and hot water supply for each territorial community separately, if the licensed activity is conducted and services provided in several territorial communities, shall not apply to any enterprises jointly owned by territorial communities whose interests are represented by the respective rayon or oblast council.” The difference in the procedures of tariff formation and setting between NEURC licensees and OSA/KCSA licensees is of note.  The mandate of authorized bodies to “freeze” the tariffs. The provision with regard to tariff setting is envisaged by Art. 8 of the Law of Ukraine On Heat Supply. It states that if heat generating or heat supplying organizations undertake any energy saving activities that improve the economic status ofenergy carriers in generation of heat energy and reduce losses in transmission and supply, then an executive body that regulates heat energy tariffs can retain the tariffs at the level set before implementation of those activities for a period of 3 years. Should prices of energy carriers change during the payback period, the tariff level will be adjusted accordingly.In other words, the bodies authorized to set tariffs have the mandate to “freeze” the tariffs. In practice, this mandate is not exercised. (9) Tariff application. The control function of authorized bodies, an activity conducted during the tariff application phase, is mainly realized as discussed below.  Control over compliance with the license terms for the conduct of economic activity in the heat supply sector according to which an economic entity should apply the tariffs set by a state collegiate body authorized by law or by LG within the scope of the mandate granted to them. The problem at this stage is that license terms apply to both NEURC and OSA/KCSA licensees, and the recently approved Procedure of Control over Legislative Compliance in Relevant Sectors and License Terms Compliance of Economic Entities Engaged in Activities in the Energy and Communal Services Sectors applies to NEURC licensees only (the issue is covered is more detail in Section 6). Therefore, NEURC, as a licensing body, has an approved control procedure, whereas OSAs and KCSA have none.  Control over prices/tariffs for housing and communal services with regard to DH and CHWS. According to the Law of Ukraine On Housing and Communal Services (2004), OSAs/KCSA have the mandate of control over the prices/tariffs for housing and communal services. Thus, the tariffs for DH and CHWS services for NEURC licensees are set by NEURC, but their control is exercised by OSAs/KCSA.  Control over compliance with the requirements concerning the formation, setting, and application of state-regulated prices. This function is realized by FSCP. According to the FSCP Charter approved by COM Decree of September 2, 2015, #667, one of FSCP’s main tasks is ensuring compliance with the requirements regarding the formation, setting, and application of state-regulated prices. Hence, FSCP has a very broad mandate of control over tariffs—not only their application, but also tariff formation and setting.

ROLES OF KEY PLAYERS OBSTRUCTING LONG-TERM PLANNING FOR DH SYSTEMS 29 Concluding Comments:

Ensuring effective tariff regulation by the authorized bodies is a prerequisite for implementation of any investment project in the heating sector, especially preparing and executing long-term heat network development plans. Legally, the process of tariff formation and setting envisages numerous phases (from drafting the procedure of tariff formation and setting by authorized bodies through tariff application). The process also has a considerable number of players: COM, MinRegion, NEURC, LGs, OSAs and KCSA, FSCP, and economic entities. The mandate on tariff formation and setting is affected by various factors, some of which stem from ambiguity and conflicts in the regulatory and legal framework. For example, “communal services” has varying definitions in generic laws. The definition of “communal services” according to the Law of Ukraine On State Regulation in the Communal Services Sector is broader than the definition provided by the current Law of Ukraine On Housing and Communal Services (2004). According to the Law of Ukraine On Housing and Communal Services (2004), for OSA/KCSA licensees, COM can establish the procedure of tariff formation for DH and CHWS only. However, COM Decree of June 1, 2011, #869, approves the Procedure of Tariff Formation for Heat Energy, Its Generation, Transmission, and Supply, Services of District Heating and Hot Water Supply. That is, this procedure also covers heat energy, its generation, transmission, and supply. Hence, a legislative discrepancy is caused by the absence of any legal act that would have defined the COM mandate with regard to development and establishment of a procedure for the formation of tariffs for heat energy, its generation, transmission, and supply for OSAs/KCSA licensees. Currently, OSA/KCSA licensees cannot apply tariff formation for heat energy transmission according to the principles of incentive-based regulation. For the present time, only NEURC licensees are able to use prinicples of incentive-based regulation to form tariffs. The existence of multiple administrative agencies mandated to develop and establish the procedures of tariff formation in the heat supply sector (that is, NEURC for NEURC licensees and COM for OSA/KCSA licensees) inevitably leads to differences in the methodologies of tariff formation and, consequently, distortions of the terms of operation. For example, actual costs to be (not) included in tariffs is a difference that has a direct impact on the heat energy transmission tariff. Currently, NEURC is enable to include actual costs at a rate higher than the normative costs, but OSA/KCSA licensees are not allowed to do this. The existing legislation on tariff formation and setting includes provisions that are never practiced. For instance, authorized bodies can retain heat energy tariffs at the level set before energy carriers implemented energy saving measures that improved the carrier’s economics and reduced heat energy losses in transmission and supply. There are no actual instances of this provision being used.

5. MANDATE ON LICENSING OF ECONOMIC ACTIVITY IN THE HEATING SECTOR The main legal documents establishing the mandates of key players with regard to licensing of economic activity in the heat supply sector are currently as follows: 1. Laws of Ukraine: On Heat Supply of June 2, 2005, #2633; On Licensing of Economic Activity Types of March 2, 2015, #222; On State Regulation in Communal Services Sector of July 9, 2010, #2479; On Natural Monopolies of April 20, 2000, #1682; On NEURC of

ROLES OF KEY PLAYERS OBSTRUCTING LONG-TERM PLANNING FOR DH SYSTEMS 30 September 22, 2016, #1540; On Combined Generation of Heat and Electric Energy (Cogeneration) and Use of Dump Energy Potential of April 5, 2005, #2509; and On Housing and Communal Services of June 24, 2004, #1875. 2. Decree of COM: On Approving the List of Licensing Bodies and Revoking Certain Decrees of the Cabinet of Ministers of Ukraine of August 5, 2015, #609. 3. Resolution of NEURC: On Approving the License Terms for the Conduct of Economic Activity in the Heat Supply Sector of March 22, 2017, #308. The key players are COM, NEURC, LGs, OSAs/KCSA, and economic entities. A summary table of mandates of the key players regarding licensing of economic activity in the heat supply sector is presented in Annex 4 (Table 4.3). According to Art. 2 of the Law of Ukraine On Licensing of Economic Activity, the following bodies are responsible for the formation and implementation of state policy in the field of licensing: COM or other central government body in the cases established by law, by means of passing regulatory and legal acts in the field of licensing; a specially authorized body on the issues of licensing5; and licensing bodies. Regarding the economic activities of heat energy generation, heat energy transmission via main and local/distribution heat networks, and heat energy supply, the mandate for licensing is granted to NEURC and OSAs/KCSA, according to Arts. 5 and 6 of the Law of Ukraine On Housing and Communal Services, COM Resolution of August 5, 2015, #609, On Approving the List of Licensing Bodies and Revoking Certain Decrees of the Cabinet of Ministers of Ukraine. However, these legal and regulatory acts do not define the boundaries of such mandate or the division of the mandate among the abovementioned bodies. The division of responsibilities between NEURC and OSAs/KCSA with regard to licensing of economic activity in the heat supply sector is established by the Law of Ukraine On Heat Supply (Art. 16 and Art. 161), as follows:  NEURC is mandated to license economic activity of heat energy generation (other than heat energy generation at installations using ARES), activity of heat energy generation at CHPs, TPPs, NPPs, and CGUs, its transmission via heat networks, heat energy supply within the volumes not higher than the level set by the conditions and rules of conduct of economic activity/license terms;  NEURC is mandated to approve (according to the established procedure) the license terms for conducting economic activity of heat energy generation, including generation at CHPs, TPPs, NPPs, CGUs, and installations using ARES, heat energy transmission and supply, and the procedure of control over their compliance;  OSAs/KCSA are mandated to license the economic activity of heat energy generation (except heat energy generation at CHPs, TPPs, NPPs, and CGUs), its transmission via main and local/distribution heat networks, and heat energy supply within the amounts not higher than the level set by the conditions and rules for the conduct of economic activity (License Terms). In light of this legislative provision, the division of responsibilities between NEURC and OSAs/KCSA is set in respective by-laws more clearly. Pursuant to NEURC Resolution of March 22, 2017, #308,6 the distribution of responsibilities between NEURC and local state administrations in terms of licensing is shown in Table 5.

5 State Regulatory Service of Ukraine. 6 This Resolution approves the License Terms for conducting the economic activity of heat energy generation; the License Terms for conducting the economic activity of heat energy transmission via main and local/distribution heat networks; and the License Terms for conducting the economic activity of heat energy supply.

ROLES OF KEY PLAYERS OBSTRUCTING LONG-TERM PLANNING FOR DH SYSTEMS 31 Table 5. Distribution of Mandate Between NEURC and OSA/KCSA in Licensing Economic Activity in the Heat Supply Sector

Licensing Body NEURC OSAs/KCSA Economic activity of heat energy generation If an economic entity is conducting (intends to If an economic entity is conducting (intends to conduct) an activity of heat energy generation (except conduct) an activity of heat energy generation (except heat energy generation at CHPs, TPPs NPPs, CGUs, heat energy generation at CHPs, TPPs NPPs, CGUs, and installations using ARES), if the stated volume and installations using ARES) at generating facilities (actual volume based on records) of heat energy located in the territory of one oblast of Ukraine (or generation in the next (past) calendar year will only in the territory of the City of Kyiv), and if the exceed (exceeded) 170,000 gigacalories (Gcal), and stated volume (actual volume based on records) of if the economic entity is conducting the licensed heat energy generation in the next (past) calendar activity of heat energy supply with more than 70 year will exceed (exceeded) 170,000 Gcal, and/or if percent of its customers provided with heat energy the economic entity is conducting the licensed activity metering devices as of August 1, 2017, and more of heat energy supply with less than 70 percent of its than 90 percent as of January 1, 2018 customers provided with heat energy metering devices as of August 1, 2017, and less than 90 percent as of January 1, 2018 Is conducting (intends to conduct) an activity of heat Is conducting (or intends to conduct) and activity of energy generation at CHPs, TPPs NPPs, and CGUs heat energy generation at installations using ARES Economic activity of heat energy transmission via main and local/distribution heat networks If the stated volume (actual volume based on records) If heat networks of economic entities are located in of heat energy transmission in the next (past) the territory of one oblast of Ukraine (or only in the calendar year will exceed (exceeded) 145,000 Gcal, territory of the City of Kyiv), and if the stated volume and if an economic entity conducts the licensed (actual volume based on records) of heat energy activity of heat energy supply with more than 70 transmission in the next (past) calendar year will not percent of its customers provided with heat energy exceed (did not exceed) 145,000 Gcal, and/or if an metering devices as of August 1, 2017, and with more economic entity conducts the licensed activity of heat than 90 percent provided as of January 1, 2018 energy supply with less than 70 percent of its customers provided with heat energy metering devices as of August 1, 2017, and with less than 90 percent provided as of January 1, 2018 Economic activity of heat energy supply If the stated (actual based on records) volume of heat If an economic entity supplies (intends to supply) heat energy supply under contract(s) in the next (past) energy in the territory of one oblast of Ukraine (or calendar year will exceed (exceeded) 145,000 Gcal, only in the territory of the City of Kyiv), and if the state and if more than 70 percent of customers are (actual based on records) volume of heat energy provided with heat energy metering devices as of supply under contact(s) in the next (past) calendar August 1, 2017, and more than 90 percent as of year will not exceed (did not exceed) 145,000 Gcal January 1, 2018 (inclusive), and/or if less than 70 percent of customers are provided with heat energy metering devices as of August 1, 2017, and less than 90 percent as of January 1, 2018 Note: A similar division of mandate between NEURC and OSAs/KCSA also applied to setting heat energy tariffs. Figure 4 illustrates the responsibilities of NEURC versus those of OSAs/KCSA regarding distribution of responsibilities for licensing economic activity in the heat supply sector.

ROLES OF KEY PLAYERS OBSTRUCTING LONG-TERM PLANNING FOR DH SYSTEMS 32 Figure 4. Distribution of mandate between government bodies with regard to economic activity licensing in heating sector (per NEURC Resolution #308 of March 22, 2017)

HEAT ENERGY HEAT ENERGY HEAT ENERGY GENERATION TRANSMISSION SUPPLY

 Activity of heat energy generation  Heat energy  Heat energy supply (except generation at CHPs, TPPs, transmission volume more than

NPPs, CGUs, and ARES installations): volume more than 145,000 Gcal

 Heat energy generation volume 145,000 Gcal

 More than 70 percent and

more than 170,000 Gcal and  More than 70 of customers provided

 More than 70 percent of percent of with heat meters (as of customers provided August 1, 2017), and and customers provided with heat

meters (as of August 1, 2017), with heat meters (as more than 90 percent NEURC and more than 90 percent (as of of August 1, 2017), (as of January 1, 2018) January 1, 2018) and more than 90 percent (as of  Activity of heat energy generation at January 1, 2018) CHPs, TPPs, NPPs, and CGUs

 Activity of heat energy generation  Heat networks in the  Heat energy supply in (except heat energy generation at territory of one oblast the territory of one CHPs, TPPs, NPPs, CGUs, and ARES

of Ukraine (or only in oblast (or only in the insinstallations):

the territory of the territory of the City of

and  Generating facilities in one City of Kyiv) Kyiv)

oblast of Ukraine (or only in the

and

 Heat energy and  Heat energy supply territory of the City of Kyiv)

transmission volume volume less than

 Heat energy generation volume more than 145,000 145,000 Gcal (inclusive) /or

more than 170,000 Gcal /or Gcal and/or less than 70

and percent of customers

 Less than 70 percent of  Less than 70 percent and customers provided with heat of customers provided provided with heat meters (as of 1 August OSA/KCSA meters (as of August 1, 2017), with heat meters (as and less than 90 percent (as of of August 1, 2017), 1, 2017), and less than January 1, 2018) and less than 90 90 percent (as of January 1, 2018)  Activity of heat energy generation at percent (as of January ARES installations 1, 2018)

ROLES OF KEY PLAYERS OBSTRUCTING LONG-TERM PLANNING FOR DH SYSTEMS 33 Concluding Comments:

Economic entities conducting several types of economic activity in the heating sector (generation, transmission, and supply of heat energy) can be subject to licensing from different bodies simultaneously, which can complicate the process of obtaining the required licenses. License terms specify the amount of commerical heat energy meters that economic entities must supply to consumers. If the required level is not achieved by the given deadline, an economic entity that was a NEURC licensee would automatically be transferred to the licensing authority of OSA/KCSA. Clearly, such a licensee will be subject to substantial changes in the process of tariff formation and setting, development of IPs, reporting procedures, etc., as it changes from NEURC to OSA/KCSA. The ability to development long-term heat energy plans is thereby affected by the discrepancies in the laws. License terms vary with regard to the amount of heat metering devices to be installed. The licensees that had to transfer from NEURC to OSA/KCSA licensing after having achieved the required level of metering should have returned to NEURC licensing (to comply with the license terms). However, the procedure for economic entities transferring back to NEURC licensing after achieving the required metering coverage has not been developed and remains unclear.

6. MANDATE FOR STATE SUPERVISION/CONTROL The main legal documents establishing the mandate of key players in implementing the function of state supervision/control in the heat supply sector are as follows: 1. Laws of Ukraine: On Natural Monopolies of April 20, 2000, #1682; On Main Principles of State Supervision and Control in the Sphere of Economic Activity of April 5, 2007, #877; On Heat Supply of June 2, 2005, #2633; On State Regulation in the Communal Services Sector of July 9, 2010, #2479; and On NEURC of September 22, 2016, #1540. 2. Decrees of COM: Certain Issues of the State Energy Supervisory Inspectorate of Ukraine of February 14, 2018, #77; and Approving the Criteria for Evaluating the Degree of Risks from the Conduct of Economic Activity on the Natural Gas Market, in the Sectors of Electric Power, Transportation of Oil and Petroleum Products via Main Pipeline, Centralized Water Supply and Sanitation, Heat Energy Generation, Heat Energy Transmission via Main and Local/Distribution Heat Networks, and Heat Energy Supply, Which Activity Is Subject to Licensing by the Natural Energy and Communal Services Regulatory Commission, and for Determining the Periodicity of Scheduled Activities of State Supervision/Control of August 5, 2015, #565. 3. Resolutions of NEURC: On Approving the Procedure of Control over Legislative Compliance in Respective Sectors and Compliance with License Terms of the Licensees Conducting Activity in the Sectors of Energy and Communal Services of June 14, 2018, #428; and On Approving the License Terms for the Conduct of Economic Activity in the Heat Supply Sector of March 22, 2017, #308. The key players are state supervisory/control bodies in the heat supply sector: COM; MinRegion; NEURC; LGs; OSAs/KCSA; SESI; and economic entities. Annex 4, Table 4.4A presents a summary of mandates of the key players with regard to state supervision/control in the heat supply sector. According to Art. 4 of the Law of Ukraine On Main Principles of State Supervision/Control in the Sphere of Economic Activity, only laws can establish the following:

ROLES OF KEY PLAYERS OBSTRUCTING LONG-TERM PLANNING FOR DH SYSTEMS 34  economic activity types that are subject to state supervision/control;  bodies authorized to conduct state supervision/control in the sphere of economic activity;  the method of conducting the state supervision/control; and  list of violations of the legislative requirements and the sanctions for violating them, which can serve as the basis for issuing ordinances or other prescriptive documents by a state supervisory/control body. Economic activity types subject to state supervision/control. According to Arts. 5 and 6 of the Law of Ukraine On Natural Monopolies and Art. 9 of the Law of Ukraine On Licensing of Certain Economic Activity Types, the areas of state supervision/control include types of economic activity such as heat energy generation, its transmission via main and local/distribution heat networks, and heat energy supply. Bodies authorized to conduct state supervision/control. Art. 4 of the Law of Ukraine On Heat Supply states that state supervision/control in the heat supply sector will be conducted by a central executive body that is implementing the state policy in the field of supervision/control in the heat supply sector, SESI. According to COM Decree of February 14, 2018, #77 Certain Issues of the State Energy Supervisory Inspectorate of Ukraine, SESI activities will be directed and coordinated by COM via MinEnergy. The main SESI tasks include organization and implementation of state policy regarding supervision/control in the electric power industry and heat supply sector. Among other things, SESI implements state energy supervision over the heating and heat- using installations and networks of entities in the heat supply sector with regard to their compliance with regulatory and legal acts; regulations on the matters of technical conditions of heating and heat-using installations and networks, their operation, design, construction, and verification of readiness for operation; and use of energy in the heat supply sector. In addition, SESI has the right to shut down heating and heat-using installations and networks due to unsatisfactory technical conditions; impose sanctions according to the law for violation of regulatory and legal acts and regulations on the technical conditions of heating and heat-using installations and networks, their operation, design, construction, and use of energy in the heat supply sector; and consider cases of administrative offenses in the instances envisaged by law. However, the Law of Ukraine On Heat Supply (Art. 16) also stipulates that NEURC has the mandate to exercise overall control over compliance with the license terms, consider cases of violation of license terms, and make decisions based on the results of such consideration. In the heat supply sector, the mandate to conduct “control, according to their competences, over compliance with the license terms” is also granted to OSAs/KCSA (Law of Ukraine On Heat Supply Art. 161). However, the legislative provisions grant no mandate for them to impose sanctions in case of licensees’ violating the legislation and/or the license terms. No other legislative act (including the Law of Ukraine On Local State Administrations) envisages any mandate for OSAs/KCSA to exercise the function of state supervision/control. Therefore, the Law of Ukraine On Heat Supply grants the mandate of state supervision and control to SESI, NEURC, and OSAs/KCSA. SESI is authorized to implement state energy supervision, whereas NEURC and OSAs/KCSA exercise control over legislative compliance and compliance with the License Terms. The mandate of NEURC as control body is also stated in the Law of Ukraine On State Regulation in the Communal Services Sector (Art. 6), which establishes that NEURC is the body authorized to exercise oversight/control over activities of natural monopolies and economic entities in adjacent markets. A similar provision appears in the Law of Ukraine On NEURC. Art. 17 of this law envisages that NEURC will control the licensees’ compliance with legislation in the respective area of regulation and with the license terms for the conduct of

ROLES OF KEY PLAYERS OBSTRUCTING LONG-TERM PLANNING FOR DH SYSTEMS 35 economic activity, and undertake measures to prevent violations of the license terms; consider cases of violation of the license terms, as well as cases of administrative offenses, and make decisions on imposing sanctions and administrative penalties based on the consideration results and in the instances envisaged by law; and, within the limits of its competences, make decisions to submit materials about legislative violations to the appropriate state bodies. Therefore, several different legislative acts name the bodies authorized to perform the function of state supervision/control over compliance with the legislation and the license terms in the heat supply sector; this gives rise to confusion over mandates and responsibilities. Method of conducting state supervision/control. The Law of Ukraine On the Main Principles of State Supervision/Control in the Field of Economic Activity (Art. 7) stipulates that control measures can be scheduled and unscheduled, and defines several kinds of measures, including inspection, audit, examination, and visual inspection. The Law of Ukraine On State Regulation in the Communal Services Sector (Art.11) stipulates that “the state supervision/control over activities of economic entities in the communal services market shall be conducted by checking the status of implementation by natural monopolies and economic entities in adjacent markets of requirements of the law and the license terms.” In addition, the article envisages that for exercising state supervision/control over the communal services market, NEURC officials have the right to conduct scheduled and unscheduled inspections. Therefore, according to the legislation, the state supervision/control bodies in the heat supply sector can use both scheduled and unscheduled inspections. Establishment of legal sanctions for violations of legislative requirements. Contrary to requirements of the Law of Ukraine On the Main Principles of State Supervision/Control in the Field of Economic Activity, no single legislative act establishes sanctions for violation of legislative requirements or clearly defines the violations in the communal services sector for which the supervisory body would issue an ordinance to remedy. For instance, Art. 17 of the Law of Ukraine On Natural Monopolies stipulates that, for violating the conditions and rules of conduct of entrepreneurial activity in the sectors of natural monopolies and in adjacent markets (license terms), the National Natural Monopolies Regulatory Commission may impose fines on natural monopolies at the rate of up to 5,000 tax-exempt personal subsistence incomes. At the same time, according to Art. 31 of the Law of Ukraine On Heat Supply, the authorized bodies can impose punitive sanctions on economic entities for violations of the license terms at the rate of up to 2,000 tax-exempt personal subsistence incomes. There are other examples of legal inconsistencies in the list of violations and sanction amounts that can be imposed in specific circumstances (Table 6). Such ambiguities increase the potential for corruption and subjective and biased decision-making.

Table 6. Examples of Punitive Sanctions to Be Imposed on Economic Entities for Law Violations

According to the Law of Ukraine On Natural On Heat Supply Monopolies List of Violations (Art. 31) (Art. 17) At the rate of … tax-exempt personal subsistence incomes Violation of conditions and rules of conduct of economic activity up to 5,000 up to 2,000 (License Terms) Untimely submission of information to the bodies controlling the Provision up to 200 activities of natural monopolies unavailable Failure to submit the information required by law or submission of up to 1,000 up to 500 deliberately false data Failure to comply or untimely compliance with the decisions of up to 5,000 up to 300 economic activity regulatory bodies

ROLES OF KEY PLAYERS OBSTRUCTING LONG-TERM PLANNING FOR DH SYSTEMS 36 Failure of heat network owners to connect a heat generating installation or heat energy user located in the territory assigned to --- up to 300 the owners to the heat network if they satisfy the connection requirements Unauthorized disconnection of user from the heat network of the heat supply/heat generating organization before expiry of the heat --- up to 300 energy sales contract

For licensees of NEURC, the Law of Ukraine On NEURC (Art. 13) envisages one more type of fine in case of failure to pay the regulatory contribution or failure to pay it in full. The fine rate is up to 5 percent of the defaulted regulatory contribution amount. The Procedure of Control over the Legislative and License Terms Compliance of the Licensees Conducting Activity in the Heat Supply Sector is an important component of the system of regulatory and legal support for state supervision/control in the communal services sector. At the time of this writing, this procedure has been drafted and approved by NEURC Resolution of June 14, 2018, #428. This procedure establishes the process for organization and performance of scheduled and unscheduled inspections, presentation of inspection results, guidelines for control over implementation of NEURC decisions, imposing sanctions on licensees for violations of legislation and license terms, and other items. However, contrary to the legislative requirements,7 it applies only to NEURC licensees (paragraph 1.2). This situation creates a gap in the regulatory and legal support—that is, neither OSAs nor KCSA are governed by adocument that provides guidelines for activities of state supervision/control. This problem is not new, and some attempts have been made to successfully address it. For instance, NEURC Resolution On Procedure of Control over Licensees’ Compliance with License Terms of August 10, 2012, #284, applied only to NEURC licensees. Since August 2014, following adoption of the National Communal Services Regulatory Commission (NCSRC) Resolution of August 1, 2014, #1118, the procedure of control has applied to all economic entities whose activity was licensed both by NEURC and OSAs/KCSA. The effect of the new procedure of control, NEURC Resolution of June 14, 2018, #428, is again limited to NEURC licensees, which is contrary to the legislative provisions/requirements, and fails to clarify which legal act should be used by OSAs/KCSA for activities of control over compliance with the legislation and license terms.

7 See the Law of Ukraine On State Regulation in the Communal Services Sector (Art. 6), Law of Ukraine On NEURC (Art. 17), and Law of Ukraine On Heat Supply (Art. 161).

ROLES OF KEY PLAYERS OBSTRUCTING LONG-TERM PLANNING FOR DH SYSTEMS 37 Concluding Comments:

Currently, multiple legislative acts name the supervisory bodies that are authorized to conduct state supervision/control over compliance with the legislation and license terms in the heat supply sector. The Law of Ukraine On Heat Supply grants the mandate of implementation of state supervision and control to SESI, NEURC, and OSAs/KCSA. SESI is authorized to conduct the state energy supervision and NEURC and OSAs/KCSA are mandated to control compliance with the legislation and license terms. The relevant mandates of NEURC are also stipulated in the Law of Ukraine On State Regulation in the Communal Services Sector and the Law of Ukraine On NEURC. The relevant mandates of OSAs/KCSA are mentioned only in the Law of Ukraine On Heat Supply; no other legislative act (including the Law of Ukraine On Local State Administrations) envisages any mandate for OSAs/KCSA to exercise the function of state supervision/control. Hence, the laws are unclear in assigning the control bodies and establishing their mandates and responsibilities. Contrary to requirements of the Law of Ukraine On the Main Principles of State Supervision/Control in the Field of Economic Activity, currently no single legislative act specifies imposes sanctions for violation of legislative requirements and lists the violations in the communal services sector for which a supervisory body would issue an ordinance for rectification. There is no procedure for imposing punitive sanctions for offenses in the heat supply sector. The task of drafting this procedure has been assigned to COM (Art. 31 of the Law of Ukraine On Heat Supply), but thus far, COM has not completed the assignment granted to it by law. Extending the scope of NEURC regulations (in particular, control procedures) to local-level licensees (to eliminate any available inconsistencies with higher legal force instruments) and creating clear and transparent regulations that apply across all economic entities, irrespective of their licensing and controlling body, are not provided in the legal framework.

7. MANDATE RELATED TO DEVELOPMENT AND APPROVAL OF HEAT SUPPLY SCHEMES Currently, the main legal act establishing the mandates of key players in development and approval of heat supply schemes is the Law of Ukraine On Heat Supply of June 2, 2005, #2633. The key players are MinRegion, LGs, and economic entities. Annex 4, Table 4.5 presents a summary table of the mandates of key players in development and approval of heat supply schemes. According to the definition presented in paragraph 1.3 of the Methodological Recommendations for Developing Energy and Ecologically Efficient Heat Supply Schemes in Settlements of Ukraine approved by the Order of the Ministry of Construction, Architecture, and Housing and Communal Services of Ukraine of April 26, 2006, #147, and paragraph 3.12 of the State Building Standard DBN V.2.5-30:2008 Engineering Installations of Buildings and Structures. External Networks and Structures. Heat Networks, a heat supply scheme is “a pre- design document, which provides the justification of economic soundness and business need for designing and building new and upgrading the existing sources of heat energy and the heat networks.” Therefore, the heat supply scheme is one of the basic tools for long-term heat network development planning at the local level.

ROLES OF KEY PLAYERS OBSTRUCTING LONG-TERM PLANNING FOR DH SYSTEMS 38 Part 1 of Art. 13 of the Law of Ukraine On Heat Supply stipulates that the mandate of LGs will include “approval, with due account for requirements of the legislation in the heat supply sector, of draft urban development programs, master plans for development of settlements, heat supply schemes and other urban planning documentation.” The law does not specify, however, which LG bodies (local councils or their executive bodies) will exercise these mandates. Regarding approval of urban development documentation, paragraph 42, Part 1, Art. 26 of the Law of Ukraine On Local Self-government in Ukraine states that this power will belong to the exclusive competences of the respective local council (“approval according to the established procedure of local urban development programs, master plans of development of respective settlements, and other urban development documentation”). However, the Law of Ukraine On Regulation of Urban Development Documentation does not officially recognize the heat supply scheme as part of urban development documentation. Therefore, the laws do not settle the issue of which body—the local council or its executive bodies—is authorized to approve the heat supply schemes. In practical terms, heat supply schemes are approved by local councils. Part 2 of Art. 11 of the Law of Ukraine On Heat Supply envisages that the mandate of a central executive body that implements the state policy in the housing and communal services sector (currently, MinRegion), will include coordination of heat supply schemes for settlements with populations greater than 20,000, and regional programs for modernization of heat supply systems. The law does not specify that a draft heat supply scheme should be subject to coordination. Based on the formal logical analysis of this provision, it appears that coordination of the heat supply scheme specifically is required—that is, coordination of previously approved documents. Moreover, the legislation does not state that a heat supply scheme is “invalid” if approved by an LG without being coordinated by MinRegion. Moreover, the legislation envisages no sanctions whatsoever, even for failure to develop and approve heat supply schemes.

Concluding Comments:

The current legislative framework does not specify which body (local council or its executive bodies) has the authority to approve a heat supply scheme. The requirement to coordinate heat supply schemes with MinRegion is without any enforcement sanctions. Therefore, either additional requirements are needed to make it obligatory to coordinate a heat supply scheme (i.e., require that a draft heat supply scheme be coordinated) or the requirement for coordination should be abandoned. NEURC (regulating authority) is not a participant of the process of development, consent, and approval of heat supply schemes.

8. MANDATE REGARDING CONNECTION TO/DISCONNECTION FROM HEAT NETWORKS The main regulatory and legal acts currently establishing the mandates of key players regarding connection to/disconnection from heat networks are described below. 1. Edict of the President of Ukraine: On Approving the Charter of the National Energy and Communal Services Regulatory Commission of September 10, 2014, #715/2014.

ROLES OF KEY PLAYERS OBSTRUCTING LONG-TERM PLANNING FOR DH SYSTEMS 39 2. Laws of Ukraine: On Heat Supply of June 2, 2005, #2633; On State Regulation in the Communal Services Sector of July 9, 2010, #2479; On the National Energy and Communal Services Regulatory Commission of September 22, 2016, #1540; On Combined Generation of Heat and Electric Energy (Cogeneration) and Use of Dump Energy Potential of April 5, 2005, #2509; and On Regulation of Urban Development Activity of February 17, 2011, #3038. The key players are COM, MinRegion, NEURC, and economic entities. Annex 4, Table 4.6 summarizes the mandates of the key players with regard to connection to/disconnection from heat networks. The Law of Ukraine On Heat Supply envisages general guarantees of connection to heat networks for both consumers and producers of heat energy (described in more detail in the Analytical Report on the Legislative Provisions Obstructing Long-term Heat Network Development Planning). However, some practical problems in connecting to heat networks are linked to failure of the authorized bodies to exercise the mandates granted to them under the legislation. According to the requirements of Art. 25 of the Law of Ukraine On Heat Supply, Art. 12 of the Law of Ukraine On Combined Generation of Heat And Electric Energy (Cogeneration) and Use of Dump Energy Potential, and Art. 30 of the Law of Ukraine On Regulation of Urban Development Activity, connection to heat networks is to be conducted upon the heat energy user’s obtaining and implementing the technical specifications. According to the abovementioned legislative provisions, the technical specification for connection to proprietary heat networks will be issued by an economic entity engaged in the business of heat energy transmission. The following rules of connection to heat networks and the rules of issuance and coordination of the technical specification for connection to heat power engineering networks/structures have been approved:  Rules of Issuance and Coordination of the Technical Specification for Connection to Heat Networks approved by NECSRC Resolution of October 29, 2009, #1232, and MinRegion Order of October 29, 2009, #334;  Rules of Connection of Cogeneration Units to Heat Networks approved by MinRegion Order of July 24, 2009, #223; and  Rules of Connection to Heat Networks approved by NCSRC Resolution of October 19, 2012, #343. Since the time of approval of the said by-laws, the mandates of NEURC and MinRegion have changed. Thus, drafting and approving the rules of issuance and coordination of the technical specifications for connection to heat power engineering networks/structure are no longer within the remit of MinRegion; this mandate is with NEURC, but is stated in its Charter rather than established by legislative act. Moreover, NEURC is yet to realize its mandate to draft and approve the rules for using heat energy and the procedures/methodologies of connection to heat networks, calculation of connection fees, and financing of connection services. The Rules of Using Heat Energy have been approved by COM Decree of October 3, 2007, #1198. However, paragraph 3 of Part 1 of Art. 17 of the Law of Ukraine On NEURC provides that this power should belong specifically to NEURC. Therefore, a decision should be made about whether or not to legally grant NEURC this power. Regarding the procedure/methodology of connection to heat networks, on the one hand, similar rules have already been approved by NEURC and the respective power is still provided by paragraph 14 of Part 1 of Art. 6 of the Law of Ukraine On State Regulation in the Communal Services Sector. On the other hand, any instruments described as “procedure/methodology” are subject to approval by NEURC pursuant to paragraph 3 of Art. 17 of the Law of Ukraine On NEURC. Thus, a minor terminological inconsistency between the two legislative acts is apparent.

ROLES OF KEY PLAYERS OBSTRUCTING LONG-TERM PLANNING FOR DH SYSTEMS 40 More important is that NEURC has yet to exercise its power to approve the procedures/methodologies of calculating heat network connection fees—although, even if such procedure/methodology is approved, collection of the fees could become problematic because the laws do not explicitly grant the right of a heat transmission organization to charge such fees.

Concluding Comments:

NEURC has yet to exercise all the mandates granted to it by the laws on regulation of relations in the matter of connection to heat networks. The mandate involving connection to heat networks lacks a provision giving heat transmission organizations the right to charge fees for connection. This is explicitly at the level of legislative acts.

ROLES OF KEY PLAYERS OBSTRUCTING LONG-TERM PLANNING FOR DH SYSTEMS 41 CONCLUSIONS

The analysis of the mandates granted to the key players in the heat supply sector and the exercise of such mandates, in practice, revealed some core obstructions to long-term heat network development planning in the DH sector of Ukraine. For the purpose of the Report, the key players are understood as (1) government authorities (both at the central and local levels) and LGs that, to varying degrees, are granted the mandate to exercise the function of state administration and/or state regulation in the heat supply sector, and (2) the economic entities engaged in heat energy generation, transmission, and supply. The study aimed to identify cases of lack of mandate (if such mandates are needed), overlapping mandates among different authorities, or nonperformance of mandates granted to the key players or their failure to perform them in full. The conclusions are summarized as follows. 1. The scope of mandate of regulatory and legal functions National legislation lacks a systemic approach to regulating activities of economic entities in the heat supply sector and defining the relevant mandates of central government authorities and local governments. At the level of by-laws, the mandate to adopt by-laws is not fully practiced by the respective authorized administrative bodies. NEURC appears to be continually narrowing the scope of adopted regulations; this leads to de facto absence of a unified regulatory approach for the industry’s activities and unequal conditions for the conduct of business by different entities, depending on which body’s regulations apply to them. 2. The mandate to develop, confirm, coordinate, approve, and implement investment programs The current legislation provides the option for economic entities in the heat supply sector to develop long-term IPs. The process of developing IPs from inception to coordination/approval can be quite lengthy, and economic entities have no effective incentives to develop investment programs; thus, they have not done so. Also, the mandates of the key players are not clear in the area of development, coordination, approval, implementation, and control over conducting specifically the long-term investment programs. There is some overlap of mandates between NEURC and MinRegion with regard to development and approval of the Procedure of Formation and Implementation of Investment Programs. Best practice would be to draft one unified regulatory act regarding the procedure of formation and implementation of IPs. No authority is granted to NEURC, MinRegion, LGs, or OSAs/KCSA to summarize and publish information on any approved/coordinated IPs and implementation of IPs. The information is fragmented and, when available, very general in nature. The distribution of mandates between LGs and OSAs/KCSA in the process of development and implementation of IPs is not logical or efficient: LGs are authorized to coordinate IPs, whereas OSAs/KCSA, being licensing/supervisory bodies, are authorized to control IP implementation. The process of development, coordination, approval, and implementation of IPs is partly transparent to the public/consumers. 3. The mandate over tariff formation and setting Ensuring effective tariff regulation by the authorized bodies is an important prerequisite for implementation of any investment project in the heating sector, especially in preparing and

ROLES OF KEY PLAYERS OBSTRUCTING LONG-TERM PLANNING FOR DH SYSTEMS 42 executing long-term heat network development plans. Legally, the process of tariff formation and setting calls for a phased approach (from drafting of tariff formation procedure/setting by authorized bodies through tariff application) and a considerable number of players: COM, MinRegion, NEURC, LGs, OSAs and KCSA, FSCP, and economic entities. The mandate on tariff formation and setting is affected by various factors, some of which stem from ambiguity in the regulatory and legal framework. For example, “communal services” is defined differently among the generic laws. The definition of communal services according to the Law of Ukraine On State Regulation in the Communal Services Sector is broader than the definition provided by the current Law of Ukraine On Housing and Communal Services (2004). According to the Law of Ukraine On Housing and Communal Services (2004), for OSA/KCSA licensees, COM has the power to establish the procedure of tariff formation for DH and CHWS only. However, COM Decree of June 1, 2011, #869, approves the Procedure of Tariff Formation for Heat Energy, Its Generation, Transmission, and Supply, Services of District Heating and Hot Water Supply. That is, this procedure also covers heat energy, its generation, transmission, and supply. Hence, the laws are conflicting because of lack of an act that would have defined the COM mandate with regard to development and establishment of a procedure for OSA/KCSA licensees regarding the formation of tariffs for heat energy, its generation, transmission, and supply. This problem is further complicated by issues around developing a procedure of tariff formation for heat energy transmission by OSA/KCSA licensees according to the principles of incentive-based regulation and their formation. For the time being, such a procedure for tariff formation has been drafted and approved by NEURC. Therefore, only NEURC licensees are currently able to apply such tariffs. The existence of multiple administrative agencies mandated to develop and establish the procedures of tariff formation in the heat supply sector (i.e., NEURC for NEURC licensees and COM for OSA/KCSA licensees) inevitably results in differences in the methodologies of tariff formation and, consequently, distortions in the terms of operation. For example, inclusion of actual costs in tariffs is the difference that directly affects the size of heat energy transmission tariff. Currently, NEURC can include actual costs at a rate higher than normative costs, but OSA/KCSA licensees are not allowed to do this. The existing legislation on tariff formation and setting includes provisions that are never used in practice. This, for instance, applies to the power of authorized bodies to retain heat energy tariffs at the level set before implementation of energy saving activities, when those activities resulted in improvements in heat energy generation and/or reduction of heat energy losses in transmission and supply. There are no actual instances of this provision being applied. 4. The mandate to license economic activity Economic entities conducting certain types of economic activity in the heating sector (generation, transmission, and supply of heat energy), including heat energy generation, may be subject to licensing of different bodies simultaneously, which makes obtaining the required licenses and the the licensing process overall more complicated. License Terms specify a certain amount of heat metering devices must be installed for heat energy consumers. If the required metering is not achieved by the deadline given, an economic entity, which was formerly a NEURC licensee, would be automatically “transferred” under the licensing authority of OSA/KCSA. Clearly, such licensee will experience substantial changes in the process of tariff formation and setting, development of IPs, reporting procedures, etc., resulting from the multiple regulatory and legal acts. This situation impedes the stable operation of enterprises and their ability to create long-term development plans. The license provisions regarding the requested amount of heat metering installation also vary. The licensees that had to transfer from NEURC to OSA/KCSA licensing after having satisfied their metering targets should have returned to NEURC licensing (to comply with the license terms). However, the procedure for return transfer of economic entities under NEURC

ROLES OF KEY PLAYERS OBSTRUCTING LONG-TERM PLANNING FOR DH SYSTEMS 43 licensing after completion of the required installation of commercial metering devices remains unresolved at present. 5. The mandate over state supervision/control Currently, the bodies authorized to ensure state supervision/control over compliance with the legislation and license terms in the heat supply sector are appointed under several different legislative acts. The Law of Ukraine On Heat Supply grants the mandate of of state supervision and control to SESI and NEURC and OSAs/KCSA; in this case, SESI is authorized to conduct state energy supervision and NEURC and OSAs/KCSA will control compliance with the legislation and license terms. The relevant mandate for NEURC is also stipulated in the Law of Ukraine On State Regulation in the Communal Services Sector and the Law of Ukraine On NEURC. The relevant mandate for OSAs/KCSA is mentioned only in the Law of Ukraine On Heat Supply; no other legislative act (including the Law of Ukraine On Local State Administrations) envisages any mandate for OSAs/KCSA to exercise state supervision/control. Hence, the laws do not clearly assign the control bodies or establish their mandate and responsibilities. Contrary to the requirements of the Law of Ukraine On the Main Principles of State Supervision/Control in the Field of Economic Activity, currently no single legislative act exists that covers sanctions for violations of legislative requirements and clearly defines what violations in the communal services sector would be subject to an ordinance for rectification by a supervisory body. There is no procedure for imposing punitive sanctions for offenses in the heat supply sector; the task of drafting a procedure has been assigned to COM (Art. 31 of the Law of Ukraine On Heat Supply). However, COM has not exercised its authority granted to it by law. Extending the scope of NEURC regulations (in particular, of control procedures) to local-level licensees (to eliminate any available inconsistencies with higher legal force instruments) and creating clear and transparent rules for all economic entities, irrespective of their licensing and controlling body, is not provided in the legal framework. 6. The mandate to develop and approve heat supply schemes The current framework does not specify the name of the body that has the authority to approve a heat supply scheme (local council or its executive bodies). The requirement of coordinating the heat supply schemes with MinRegion is a provision without any enforcement sanctions. Therefore, either additional requirements should make it obligatory to coordinate a heat supply scheme (e.g., require that a draft heat supply scheme should be coordinated) or the mandate to coordinate the heat supply scheme should be abandoned. NEURC (regulating authority) does not participate in the process to develop, consent, and approve heat supply schemes. 7. The mandate over connection to/disconnection from the heating network NEURC has yet to exercise its mandate granted by the legislation regarding legal regulation of relations in connection to heat networks. This mandate lacks a provision giving the heat transmission organization the right to charge fees for connection; this is explicitly at the level of legislative acts.

ROLES OF KEY PLAYERS OBSTRUCTING LONG-TERM PLANNING FOR DH SYSTEMS 44 ANNEXES

ROLES OF KEY PLAYERS OBSTRUCTING LONG-TERM PLANNING FOR DH SYSTEMS 45 ANNEX 1. CATALOG OF MANDATES REGARDING LONG-TERM HEAT NETWORK DEVELOPMENT PLANNING AND NETWORK INVESTMENT PLANNING Mandate regarding: Development, confirmation, coordination, and Control over Regulatory and legal approval of investment Tariff formation and Licensing of economic legislative Development of heat Connection to/disconnection Empowered Entity support programs setting activity compliance supply schemes from heat networks National level VR passes laws COM passes by-laws; approves the procedure exercises the right of of formation of tariffs for legislative initiative communal services set by LGs approves the Rules of Provision of Communal Services MinRegion passes by-laws develops and approves the approves individual forms coordinates heat supply establishes the rules for connection essential regulatory and legal for calculation of tariffs schemes for settlements with of cogeneration plants to heat framework (Procedure of approves the procedure populations greater than 20,000 networks Formation of IPs for licensees of informing consumers of OSAs) about prices/tariffs provides regulatory and legal support to activities of local state administration for exercise of control over prices/tariffs for communal services NEURC passes by-laws develops and approves the develops and approves conducts licensing of controls compliance of develops and approves the rules of essential regulatory and legal procedures/methodologies activity licensees with legislation connection to heat networks, rules of frameworks (Procedure of of formation, calculation, sets the limits/conditions in respective area of use of heat energy* Formation of IPs for NEURC and setting of state- for conducting activity regulation and with the develops and approves the Licensees) regulated prices and without licenses License Terms for the procedures/methodologies of approves IPs, including tariffs, and makes them conduct of economic available to the public develops and approves the connection to heat networks, public discussion of draft License Terms activity, and takes steps calculation of connection fees, and resolution on IP approval (for sets the regulatory rate to prevent violation of the provides information about financing of connection services* NEURC licensees) of return on regulatory License Terms asset base and approves decisions (including develops and approves the rules of modifies IPs (for NEURC licenses) on website considers cases of issuance and coordination of licensees) the procedure of violation of the License compiles and submits to a technical specifications for evaluating the Terms, as well as cases controls IP implementation by regulatory asset base of specially authorized body on connection to heat power engineering NEURC licensees of administrative offenses, networks/structures** natural monopolies in the licensing in its annual and makes decisions controls NEURC licensees’ heat energy transmission licensing report about imposition of expenditures from special sector sanctions for offenses, accounts that contain funds for provides consumers imposes administrative specific purposes with access to penalties in cases information about provided by law, and, change in prices/tariffs within its competence, provides information to makes decisions about consumers about intent forwarding materials on to change prices/tariffs legislative violations to appropriate state bodies determines the procedure of publication of information about prices/tariffs and conducts open hearings at the location of service provision to consumers; conducts open discussion of draft decision on matters of

ROLES OF KEY PLAYERS OBSTRUCTING LONG-TERM PLANNING FOR DH SYSTEMS 46 Mandate regarding: Development, confirmation, coordination, and Control over Regulatory and legal approval of investment Tariff formation and Licensing of economic legislative Development of heat Connection to/disconnection Empowered Entity support programs setting activity compliance supply schemes from heat networks setting and/or changing prices/tariffs sets tariffs informs customers about prices/tariffs controls application of tariffs NEURC Territorial Offices − control implementation of controls tariff has control over IPs by NEURC licensees application licensees’ legislative control NEURC licensees’ compliance and expenditures from special compliance with license accounts that contain funds for terms specific purposes

MinEnergy passes by-laws coordinates IPs (for entities − generating heat energy at CHPs, NPPs, and CGUs) SESI − − conducts state supervision/control in the power industry and heat supply sectors imposes punitive sanctions according to the law draws reports and considers cases of administrative offenses Local level OSAs and KCSA − control implementation of IPs coordinate general plant- license activities control compliance with by OSA licensees specific consumption of inform about decisions the license terms within control NEURC licensees’ fuel and energy resources (including related to licensing the scope of its expenditures from special control prices/tariffs for on its website) competences accounts that contain funds for housing and communal compile and submit annual specific purposes services licensing report to specially appointed licensing body LGs − coordinate IPs (both for form the tariffs approve heat supply schemes NEURC and OSA licensees) provide consumers amend IPs (for OSA access to information revise heat supply schemes licensees) about changes in every 5 years prices/tariffs inform consumers about intent to change prices/tariffs determine the procedure for publication of information about prices/tariffs and changes in prices/tariffs, and conduct open hearings at the sites where service is provided to customers set the tariffs inform consumers about prices/tariffs Economic entity in heat supply − develops an IP forms the tariffs prepares an application for has the right to appeal carries out design, provides equal access to its heat sector (calculation) obtaining a license, decisions of state construction, and networks for all economic entities

ROLES OF KEY PLAYERS OBSTRUCTING LONG-TERM PLANNING FOR DH SYSTEMS 47 Mandate regarding: Development, confirmation, coordination, and Control over Regulatory and legal approval of investment Tariff formation and Licensing of economic legislative Development of heat Connection to/disconnection Empowered Entity support programs setting activity compliance supply schemes from heat networks promulgates draft IP, ensures provides consumers compiles a respective set supervisory/control reconstruction of heat supply connects heat generating public discussion, and with access to of documents, and submits bodies to the respective facilities based on heat supply organizations that intend to engage in modifies document as needed information about it to the licensing body central government body schemes activities of heat energy generation based on comments received change of prices/tariffs or court of justice complies with the license issues permits and technical approves IP informs consumers terms specifications for connection of users coordinates IP with LG (both about intent to change to distribution heat networks for NEURC and OSA prices/tariffs licensees) informs consumers obtains approval of IP from about prices/tariffs NEURC (for NEURC applies tariffs licensees) complies with the cost promulgates the structure of the approved approved/coordinated IP tariff implements the IP opens special accounts for settlements under IP transfers funds into the accounts and uses them exclusively for implementation of IP opens special accounts for borrowed funds (if needed) and uses them for intended purposes prepares and submits to the licensing body the following: - IP progress report - report on spending special account funds for intended purposes provides access to information about implementation of IPs * The document has neither been either developed nor approved by the authorized body. ** This power is not explicitly envisaged by legislative acts.

ROLES OF KEY PLAYERS OBSTRUCTING LONG-TERM PLANNING FOR DH SYSTEMS 48 ANNEX 2. DISTRIBUTION OF MANDATES REGARDING STATE REGULATION OF ACTIVITIES OF HEAT ENERGY GENERATION, TRANSMISSION, AND SUPPLY

Heat Energy Generation: except activities of heat energy generation at Heat energy CHPs, TPPs, transmission via NPPs, CGUs, and main and Heating and Mandate in the area installations using at CHPs, TPPs, at installations local/distribution Heat energy hot water of: ARES NPPs, and CGUs using ARES heat networks supply supply service Licensing of economic NEURC/OSAs* NEURC OSAs NEURC/OSAs* NEURC/OSAs* Not provided activity Tariff regulation NEURC/OSAs* NEURC LGs NEURC/LGs* NEURC/LGs* NEURC/LGs* Control over compliance NEURC (Territorial NEURC (Territorial OSAs NEURC (Territorial NEURC NEURC with legislation and Offices)/OSAs Offices) Offices)/OSAs (Territorial (Territorial License Terms and Offices)/OSAs Offices)/OSAs imposition of relevant sanctions *Depending on production volume/license terms.

ROLES OF KEY PLAYERS OBSTRUCTING LONG-TERM PLANNING FOR DH SYSTEMS 49 ANNEX 3. REGULATORY AND LEGAL FRAMEWORK FOR REGULATION OF ACTIVITIES OF ECONOMIC ENTITIES IN HEAT SUPPLY SECTOR (BY NEURC AND OSA LICENSEES)

Regulatory and Legal Acts NEURC OSA/KCSA Name Details licensees licensees Problems (gaps) License Terms for the Conduct of Economic NEURC Resolution of March 22, 2017, #308 On Activity in the Heat Supply Sector Approving the License Terms for the Conduct of √ √ Economic Activity in the Heat Supply Sector Procedure of Control over Compliance of the NEURC Resolution of June 14, 2018, #428 On There is no such procedure of Licensees Engaged in the Energy and Approving the Procedure of Control over Compliance of control available for OSA/KCSA Communal Services Sectors with the the Licensees Engaged in the Energy and Communal √ − licensees Legislation in Respective Sectors and with the Services Sectors with the Legislation in Respective License Terms Sectors and with the License Terms Procedure/Rules of Organization and Keeping NEURC Resolution of October 10, 2017 #1223 On There are no such of Accounts for Licensed Activity Types by Approving the Procedure/Rules of Organization and procedures/rules of organization Economic Entities in Heat Supply Sector Keeping of Accounts for Licensed Activity Types by √ − and keeping of accounts by Economic Entities in Heat Supply Sector licensed activity type available for OSA/KCSA licensees Rules of Organization of Reports Submitted by NEURC Resolution of May 31, 2017, #717 On There are no such rules for Economic Entities in the Sectors of Heat Approving the Rules of Organization of Reports organization of reports for Supply, Centralized Water Supply, and Submitted by Economic Entities in the Sectors of Heat OSA/KCSA licensees available Sanitation to the National Energy and Supply, Centralized Water Supply, and Sanitation to the √ − (and no form of report on Communal Services Regulatory Commission National Energy and Communal Services Regulatory implementation of IP for the Commission licensees to report to the authorized bodies) Procedure of Tariff Formation for Heat Energy, COM Decree of June 1, 2011, #869 On Ensuring a The decree does not apply to the Its Generation, Transmission, and Supply, Unified Approach to the Formation of Tariffs for economic entities engaged in − Services of District Heating and Hot Water Housing and Communal Services √ heat energy generation at ARES Supply installations Procedure of Tariff Formation for Heat Energy, NEURC Resolution of March 24, 2016, #377 On The existence of two documents Its Generation, Transmission, and Supply, Approving the Procedure of Tariff Formation for Heat (COM Decree of June 1, 2011, Services of District Heating and Hot Water Energy, Its Generation, Transmission, and Supply, #869, and NEURC Resolution of Supply Services of District Heating and Hot Water Supply March 24, 2016, #377) and differences between some of their − √ provisions result in the adoption of different approaches to tariff formation, producing economic inequalities among the various entities

ROLES OF KEY PLAYERS OBSTRUCTING LONG-TERM PLANNING FOR DH SYSTEMS 50 Regulatory and Legal Acts NEURC OSA/KCSA Name Details licensees licensees Problems (gaps) Procedure of Tariff Setting for Heat Energy, Its NEURC Resolution of March 31, 2016, #528 On The resolution does not apply to Generation, Transmission, and Supply Approving the Procedure of Tariff Setting for Heat the economic entities engaged in Energy, Its Generation, Transmission, and Supply √ − heat energy generation at CHPs, TPPs, NPPs, CGUs, and ARES installations Procedure of Tariff Setting for Services of NEURC Resolution of March 31, 2016, #529 On District Heating and Centralized Hot Water Approving the Procedure of Tariff Setting for Services √ − Supply of District Heating and Centralized Hot Water Supply Procedure of Development, Coordination, NEURC Resolution of August 31, 2017, #1059 On Neither document applies to the Approval, and Implementation of Investment Approving the Procedure of Development, economic entities engaged in Programs of Economic Entities in Heat Supply Coordination, Approval, and Implementation of √ − heat energy generation at CHPs, Sector Investment Programs of Economic Entities in Heat TPPs, NPPs, CGUs, and Supply Sector installations using ARES. Procedures of Development, Coordination, MinRegion Order of December 14, 2012, #630 On Moreover, the law presents the and Approval of Investment Programs of Approving the Procedures of Development, following conflict: As of July 2018, Economic Entities in the Sectors of Heat Coordination, and Approval of Investment Programs of the effect of both resolutions Supply, Centralized Water Supply, and Economic Entities in the Sectors of Heat Supply, officially applied to all licensees Sanitation Centralized Water Supply, and Sanitation (both NEURC and OSA licensees), even though “by silent consent” NEURC Resolution of − √ August 31, 2017 #1059 is used for NEURC licensees and MinRegion Order of December 14, 2012 #630 is used for OSA licensees. According to the Law of Ukraine #2417; the issue is not resoved as of December 2018. Procedure of Crediting Funds to Checking COM Decree of October 9, 2013, #750 On Approving Neither document applies to the Accounts with Special Use Regime for the the Procedure of Crediting Funds to Checking Accounts economic entities engaged in Purpose of Payments under Investment with Special Use Regime for the Purpose of Payments heat energy generation at CHPs, Programs, Use of Said Funds, and Controlling under Investment Programs, Use of Said Funds, and √ √ TPPs, NPPs, CGUs, and Their Spending in Heat Supply Sector Controlling Their Spending in the Sectors of Heat installations using ARES. It Supply, Centralized Water Supply, and Sanitation appears to be a conflict because, according to the Law of Ukraine Procedure of Control over Implementation of COM Decree of October 1, 2014, #552 Certain Issues On Heat Supply (Art. 261), COM Investment Programs in the Sectors of Heat of Implementation of Investment Programs in the is the body responsible for Supply, Centralized Water Supply, and Sectors of Heat Supply, Centralized Water Supply, and √ √ Sanitation Sanitation development of these documents for all economic entities engaged

ROLES OF KEY PLAYERS OBSTRUCTING LONG-TERM PLANNING FOR DH SYSTEMS 51 Regulatory and Legal Acts NEURC OSA/KCSA Name Details licensees licensees Problems (gaps) in heat energy generation, transmission, and supply. Procedure of Conducting an Open Discussion NEURC Resolution of June 30, 2017, #866 On of Draft Decisions of the National Energy and Approving the Procedure of Control over Communal Services Regulatory Commission Implementation of Investment Programs in the Sectors √ − of Heat Supply, Centralized Water Supply, and Sanitation Regulatory and Legal Framework for Implementation of Incentive-based Regulation in the Sector of Heat Energy Transmission Procedure of Tariff Setting for Heat Energy NEURC Resolution of July 27, 2017, #964 On There are no similar documents Transmission via Main and Local/Distribution Approving the Procedure of Tariff Setting for Heat available to guide OSA/KCSA Heat Networks According to Principles of Energy Transmission via Main and Local/Distribution √ − licensees Incentive-based Regulation Heat Networks According to Principles of Incentive- based Regulation Regulatory Rate of Return for Entities NEURC Resolution of July 27, 2017, #965 On Engaged (Having Intent to Engage) in the Establishing the Regulatory Rate of Return on the Activity of Heat Energy Transmission via Main Regulatory Asset Base for Entities Engaged (Having − and Local/Distribution Heat Networks Intent to Engage) in the Activity of Heat Energy √ Transmission via Main and Local/Distribution Heat Networks Procedure of Determining the Regulatory NEURC Resolution of July 27, 2017, #966 On Asset Base for the Natural Monopolies Approving the Procedure of Determining the Regulatory Engaged (Having Intent to Engage) in Asset Base for the Natural Monopolies Engaged − Economic Activity of Heat Energy (Having Intent to Engage) in Economic Activity of Heat √ Transmission via Main and Local/Distribution Energy Transmission via Main and Local/Distribution Heat Networks Heat Networks Procedure of Tariff Formation for Heat Energy NEURC Resolution of July 27, 2017, #967 On Transmission via Main and Local/Distribution Approving the Procedure of Tariff Formation for Heat Heat Networks According to Principles of Energy Transmission via Main and Local/Distribution √ − Incentive-based Regulation Heat Networks According to Principles of Incentive- based Regulation

ROLES OF KEY PLAYERS OBSTRUCTING LONG-TERM PLANNING FOR DH SYSTEMS 52 ANNEX 4. MANDATE OF KEY PLAYERS WITH RESPECTIVE REFERENCES TO REGULATORY AND LEGAL FRAMEWORK Table 4.1. Mandate Regarding Formation and Implementation of Investment Programs Reference to regulatory/legal act granting respective mandate or Empowered entity Responsibilities/mandate establishing responsibilities Economic entity in heat develops IPs Art. 26-1 of the Law of Ukraine On Heat Supply supply sector approves IPs Para.2.1 of NEURC Resolution of August 31, 2017, #1059 On Approving the Procedure coordinates IPs with LGs (for both NEURC and OSA of Development, Coordination, Approval, and Implementation of Investment Programs of licensees) Economic Entities in Heat Supply Sector obtains approval of IPs from NEURC (for NEURC Para.2.1 of MinRegion Order of December 14, 2012, #630 On Approving the Procedures licensees) of Development, Coordination, and Approval of Investment Programs of Economic Entities in the Sectors of Heat Supply, Centralized Water Supply, and Sanitation Para.3.2 of NEURC Resolution of March 22, 2017, #308 On Approving the License Terms for the Conduct of Economic Activity in the Heat Supply Sector ensures public discussion of draft IP and modifying the Paras.2.8-2.12 of NEURC Resolution of August 31, 2017, #1059 On Approving the draft, as necessary, based on discussion feedback Procedure of Development, Coordination, Approval, and Implementation of Investment Programs of Economic Entities in Heat Supply Sector Paras.2.9-2.13 of MinRegion Order of December 14, 2012, #630 On Approving the Procedures of Development, Coordination, and Approval of Investment Programs of Economic Entities in the Sectors of Heat Supply, Centralized Water Supply, and Sanitation Para.2.1 of NEURC Resolution of June 30, 2017, #866 On Approving the Procedure of Conducting an Open Discussion of Draft NEURC Decisions promulgates IP approved/coordinated by authorized Para.4.10 of NEURC Resolution of August 31, 2017, #1059 On Approving the Procedure body of Development, Coordination, Approval, and Implementation of Investment Programs of Economic Entities in Heat Supply Sector Para.4.1 of MinRegion Order of December 14, 2012, #630 On Approving the Procedures of Development, Coordination, and Approval of Investment Programs of Economic Entities in the Sectors of Heat Supply, Centralized Water Supply, and Sanitation Art. 6 of the Law of Ukraine On the Specifics of Access to Information in the Sectors of Electric Power and Gas Supply, Heat Supply, Centralized Hot Water Supply, Centralized Potable Water Supply, and Sanitation of December 10, 2015, #887 implements IP Para.6.2 of NEURC Resolution of August 31, 2017, #1059 On Approving the Procedure of Development, Coordination, Approval, and Implementation of Investment Programs of Economic Entities in Heat Supply Sector Para.3.2 of NEURC Resolution of March 22, 2017, #308 On Approving the License Terms for the Conduct of Economic Activity in the Heat Supply Sector

ROLES OF KEY PLAYERS OBSTRUCTING LONG-TERM PLANNING FOR DH SYSTEMS 53 Reference to regulatory/legal act granting respective mandate or Empowered entity Responsibilities/mandate establishing responsibilities opens (according to the procedure established by the Art. 26-1 of the Law of Ukraine On Heat Supply legislation) special accounts at authorized banks for COM Decree of October 7, 2013, #750 On Approving the Procedures of Crediting Funds making payments under IPs to Checking Accounts with Special Use Regime for Payments under Investment Programs, Use of Said Funds, and Control over Their Spending in the Sectors of Heat Supply, Centralized Water Supply, and Sanitation Para.3.2 of NEURC Resolution of March 22, 2017, #308 On Approving the License Terms for the Conduct of Economic Activity in the Heat Supply Sector

opens special accounts for loan funds of economic Art. 26-1 of the Law of Ukraine On Heat Supply entities Art. 26-1 of the Law of Ukraine On Heat Supply transfers funds into special accounts at the amount Art. 26-1 of the Law of Ukraine On Heat Supply envisaged in the set tariffs for implementation of IPs in the heat supply sector Para.6.1 of NEURC Resolution of August 31, 2017, #1059 On Approving the Procedure of Development, Coordination, Approval, and Implementation of Investment Programs of Economic Entities in Heat Supply Sector. Transfer of funds is OBLIGATORY, irrespective of existence of an IP. Para.3.2 of NEURC Resolution of March 22, 2017, #308 On Approving the License Terms for the Conduct of Economic Activity in the Heat Supply Sector uses funds in special accounts exclusively for Art. 26-1 of the Law of Ukraine On Heat Supply implementation of IPs (use of funds for intended purpose) uses funds for the intended purposes according to the Art. 26-1 of the Law of Ukraine On Heat Supply terms and conditions of any agreements concluded with IFIs, foreign government institutions or intergovernmental agreements, i.e., use of such funds for preparation and implementation of IPs/activities (control and responsibility) prepares and submits report on implementation of IPs Para.8 of COM Decree of October 7, 2013, #750 On Approving the Procedure of and report on use of special account funds for their Crediting Funds to the Checking Accounts with Special Use Regime for Making intended purpose by the licensing body Payments under Investment Programs, Use of Said Funds, and Implementing Control over Their Spending in the Sectors of Heat Supply, Centralized Water Supply, and Sanitation Para.6 of COM Decree of October 1, 2014, #552 Certain Issues of Implementation of Investment Programs in the Sectors of Heat Supply, Centralized Water Supply, and Sanitation provides access to information about implementation of Para.6 of COM Decree of October 1, 2014, #552 Certain Issues of Implementation of IPs Investment Programs in the Sectors of Heat Supply, Centralized Water Supply, and Sanitation Para.6.10 of NEURC Resolution of August 31, 2017, #1059 On Approving the Procedure of Development, Coordination, Approval, and Implementation of Investment Programs of Economic Entities in Heat Supply Sector

ROLES OF KEY PLAYERS OBSTRUCTING LONG-TERM PLANNING FOR DH SYSTEMS 54 Reference to regulatory/legal act granting respective mandate or Empowered entity Responsibilities/mandate establishing responsibilities Para.5.6 of MinRegion Order of December 14, 2012, #630 On Approving the Procedures of Development, Coordination, and Approval of Investment Programs of Economic Entities in the Sectors of Heat Supply, Centralized Water Supply, and Sanitation Para.3.2 of NEURC Resolution of March 22, 2017, #308 On Approving the License Terms for the Conduct of Economic Activity in the Heat Supply Sector COM establishes the Procedure of Crediting Funds to Art. 26-1 of the Law of Ukraine On Heat Supply Special Account, Use of Said Funds, and Control over Their Spending establishes the Procedure of Control over Art. 26-1 of the Law of Ukraine On Heat Supply Implementation of Investment Programs

approves the Procedure of Development, Art. 31 of the Law of Ukraine On Housing and Communal Services Coordination, and Approval of Investment Programs Realized Using Budget Funds, Funds of State Enterprises, Institutions, and Organizations, as well as at the Expense of the Loans Provided under State Guarantees, Procedure of Control over Their Implementation, as well as the Ceiling of the Value of Investments, Which Can Be Attracted under Investment Programs, Which Are Included for Calculating Economic Justified Costs, and the Maximum Duration of Investment Programs until Full Repayment of Obligations under Such Programs LGs coordinate IPs (both for NEURC and OSA licensees) Art. 13 of the Law of Ukraine On Heat Supply amend IPs (for OSA licensees) Paras.3.2, 4.1 of NEURC Resolution of August 31, 2017, #1059 On Approving the facilitate implementation of investment activity Procedure of Development, Coordination, Approval, and Implementation of Investment Programs of Economic Entities in Heat Supply Sector Paras.3.2, 4.1 of MinRegion Order of December 14, 2012, #630 On Approving the Procedures of Development, Coordination, and Approval of Investment Programs of Economic Entities in the Sectors of Heat Supply, Centralized Water Supply, and Sanitation Art. 6 of the Law of Ukraine On the Specific of Access to Information in the Sectors of Electric Power and Natural Gas Supply, Heat Supply, Centralized Hot Water Supply, Centralized Potable Water Supply, and Sanitation of December 10, 2015, #887 NEURC approves IPs (for NEURC licensees) Art. 17 of the Law of Ukraine On the National Energy and Communal Services Regulatory Commission of October 22, 2016, #1540

ROLES OF KEY PLAYERS OBSTRUCTING LONG-TERM PLANNING FOR DH SYSTEMS 55 Reference to regulatory/legal act granting respective mandate or Empowered entity Responsibilities/mandate establishing responsibilities Chapter 4 of NEURC Resolution of August 31, 2017, #1059 On Approving the Procedure of Development, Coordination, Approval, and Implementation of Investment Programs of Economic Entities in Heat Supply Sector Chapter 4 of MinRegion Order of December 14, 2012, #630 On Approving the Procedures of Development, Coordination, and Approval of Investment Programs of Economic Entities in the Sectors of Heat Supply, Centralized Water Supply, and Sanitation coordinates long-term IPs Art. 17 of the Law of Ukraine On the National Energy and Communal Services Regulatory Commission of October 22, 2016, #1540 Holds open discussion of draft decisions on approval Art. 16 of the Law of Ukraine On the National Energy and Communal Services of IPs Regulatory Commission Paras.1.2, 2 of NEURC Resolution of June 30, 2017, #866 On Approving the Procedure of Holding an Open Discussion of Draft NEURC Decisions promulgates draft decision on IP approval and holds Paras.3.3, 3 of NEURC Resolution of June 30, 2017, #866 On Approving the Procedure open discussion of Holding an Open Discussion of Draft NEURC Decisions amends IPs (for NEURC licensees) Chapter 5, Paras.5.1-5.4 of NEURC Resolution of August 31, 2017, #1059 On Approving the Procedure of Development, Coordination, Approval, and Implementation of Investment Programs of Economic Entities in Heat Supply Sector Paras.5.2-5.4 of MinRegion Order of December 14, 2012, #630 On Approving the Procedures of Development, Coordination, and Approval of Investment Programs of Economic Entities in the Sectors of Heat Supply, Centralized Water Supply, and Sanitation controls implementation of IPs of NEURC licensees Art. 6 of the Law of Ukraine On State Regulation in the Communal Services Sector Paras.3, 7, 10, 11 of COM Decree of October 1, 2014, #552 Certain Issues of Implementation of Investment Programs in the Sectors of Heat Supply, Centralized Water Supply, and Sanitation controls NEURC licensees’ use of funds from special Art. 6 of the Law of Ukraine On State Regulation in the Communal Service Sector accounts for their intended purpose Para.8 of COM Decree of October 7, 2013, #750 On Approving the Procedures of Crediting Funds to Checking Accounts with Special Use Regime for Payments under Investment Programs, Use of Said Funds, and Control over Their Spending in the Sectors of Heat Supply, Centralized Water Supply, and Sanitation decides on reducing the set tariff by the amount of Art. 20 of the Law of Ukraine On Heat Supply improper use of funds for the purposes and/or at the amounts not envisaged by the IP establishes the procedure of promulgation and open Art. 6, Para.2 of the Law of Ukraine On the Specifics of Access to Information in the discussion of IPs Sectors of Electric Power and Gas Supply, Heat Supply, Centralized Hot Water Supply, Centralized Potable Water Supply, and Sanitation of December 10, 2015, #887

ROLES OF KEY PLAYERS OBSTRUCTING LONG-TERM PLANNING FOR DH SYSTEMS 56 Reference to regulatory/legal act granting respective mandate or Empowered entity Responsibilities/mandate establishing responsibilities OSAs and KCSA control implementation of IPs by licensees of OSAs Para.3, Para.7, Para.10, Para.11 of COM Decree of October 1, 2014, #552 On Certain Issues of Implementation of Investment Programs in the Sectors of Heat Supply, Centralized Water Supply, and Sanitation control OSA licensees’ use of funds from special Para.8 of COM Decree of October 7, 2013, #750 On Approving the Procedures of accounts for their intended purpose Crediting Funds to Checking Accounts with Special Use Regime for Payments under Investment Programs, Use of Said Funds, and Control over Their Spending in the Sectors of Heat Supply, Centralized Water Supply, and Sanitation Note: For the economic entities (heat supply enterprises) that, according to the procedure established by the legislation, obtained an appropriate license for the right to conduct an economic activity of heat energy generation (except activities of heat energy generation at CHPs, TPPs, NPPs, CGUs, and installations using ARES), its transmission via main and local/distribution heat networks, and supply.

ROLES OF KEY PLAYERS OBSTRUCTING LONG-TERM PLANNING FOR DH SYSTEMS 57 Table 4.2. Mandate Related to Tariff Formation and Setting Reference to regulatory/legal act granting respective mandate or Empowered entity Responsibilities/mandate establishing responsibilities Economic entity in performs tariff formation: Art. 10 of the Law of Ukraine On State Regulation in the Communal Services Sector heat supply sector, Paras. 1.2, 7.1, 18.1, 20.1 of NEURC Resolution of March 24, 2016, #377 On Approving i.e., NEURC licensee – for communal services* the Procedure of Tariff Formation for Heat Energy, Its Generation, Transmission, and Supply, Services of District Heating and Hot Water Supply Para.1.5 of NEURC Resolution of March 31, 2016, #528 On Approving the Procedure of Tariff Setting for Heat Energy, Its Generation, Transmission, and Supply Para.1.4 of NEURC Resolution of March 31, 2016, #529 On Approving the Procedure of Tariff Setting for the Services of District Heating and Centralized Hot Water Supply – for communal services** Subpara.1, Para.1, Art. 21 and Art. 31 of the Law of Ukraine On Housing and Communal Services Para.1.2 of NEURC Resolution of March 24, 2016, #377 On Approving the Procedure of Tariff Formation for Heat Energy, Its Generation, Transmission, and Supply, Services of District Heating and Hot Water Supply – for heat energy transmission according to the principles of Art. 10 of the Law of Ukraine On State Regulation in the Communal Services Sector incentive-based regulation Para.1.1 of NEURC Resolution of July 2017, #967 On Approving the Procedure of Tariff Formation for Heat Energy Transmission via Main and Local/Distribution Heat Networks According to the Principles of Incentive-Based Regulation Para.1.3 of NEURC Resolution of July 27, 2017, #964 On Approving the Procedure of Tariff Setting for Heat Energy Transmission via Main and Local/Distribution Heat Networks According to the Principles of Incentive-Based Regulation provides consumers access to information about Art. 3 of the Law of Ukraine On the Specifics of Access to the Information in the Sectors changes in prices/tariffs in the sectors of heat supply and of Electric Power and Natural Gas Supply, Heat Supply, Centralized Hot Water Supply, centralized hot water supply Centralized Potable Water Supply, and Sanitation informs consumers about the intent to change Art. 25 of the Law of Ukraine On Heat Supply prices/tariffs: Subpara.17 Para.3.2 of the License Terms for the Conduct of Economic Activity of Heat Energy Generation of NEURC Resolution dated March 22, 2017, #308 On Approving – for heat energy (for communal services* with regard to the License Terms for the Conduct of Economic Activity in the Heat Supply Sector heat energy and its transmission according to principles of Subpara. 10 Para.3.2 of the License Terms for the Conduct of Economic Activity of Heat incentive-based regulation) Energy Transmission of NEURC Resolution of March 22, 2017, #308 On Approving the License Terms for the Conduct of Economic Activity in the Heat Supply Sector Subparas. 14, 15 Para.3.2 of the License Terms for the Conduct of Economic Activity of Heat Energy Supply of NEURC Resolution of March 22, 2017, #308 On Approving the License Terms for the Conduct of Economic Activity in the Heat Supply Sector – for communal services** Art. 32 of the Law of Ukraine On Housing and Communal Services holds open discussions, at the affected locations, of the Para.2.1 of NEURC Resolution of June 30, 2017, #866 On Approving the Procedure of issues regarding the need to set and/or change Conducting Open Discussions of Draft Decisions of the National Energy and Communal prices/tariffs for those localities: Services Regulatory Commission

ROLES OF KEY PLAYERS OBSTRUCTING LONG-TERM PLANNING FOR DH SYSTEMS 58 Reference to regulatory/legal act granting respective mandate or Empowered entity Responsibilities/mandate establishing responsibilities – for communal services* publishes on the official website notices and justifications Para.2.1 of NEURC Resolution of June 30, 2017, #866 On Approving the Procedure of of the need to set and/or change tariffs: Conducting Open Discussions of Draft Decisions of the National Energy and Communal – for communal services* Services Regulatory Commission submits to NEURC and publishes on NEURC website the Para.2.1 of NEURC Resolution of June 30, 2017, #866 On Approving the Procedure of results of open discussion/open hearing in the localities: Conducting Open Discussions of Draft Decisions of the National Energy and Communal – for communal services* Services Regulatory Commission sets tariffs – informs consumers about prices/tariffs Art. 25 of the Law of Ukraine On Heat Supply Para.6 Art. 32 of the Law of Ukraine On Housing and Communal Services Para.2 Art. 5 of the Law of Ukraine On the Specifics of Access to Information in the Sectors of Electric Power and Natural Gas Supply, Heat Supply, Centralized Hot Water Supply, Centralized Potable Water Supply, and Sanitation Subpara.17 Para.3.2 of the License Terms for the Conduct of Economic Activity of Heat Energy Generation of NEURC Resolution dated March 22, 2017, #308 On Approving the License Terms for the Conduct of Economic Activity in the Heat Supply Sector Subpara. 10 Para.3.2 of the License Terms for the Conduct of Economic Activity of Heat Energy Transmission of the NEURC Resolution of March 22, 2017, #308 On Approving the License Terms for the Conduct of Economic Activity in the Heat Supply Sector Subpara. 14 Para.3.2 of the License Terms for the Conduct of Economic Activity of Heat Energy Supply of NEURC Resolution of March 22, 2017, #308 On Approving the License Terms for the Conduct of Economic Activity in the Heat Supply Sector conducts application of tariffs: Subpara. 8 Para.3.2 of the License Terms for the Conduct of Economic Activity of Heat Energy Generation of NEURC Resolution dated March 22, 2017, #308 On Approving – for heat energy the License Terms for the Conduct of Economic Activity in the Heat Supply Sector Subpara. 8 Para.3.2 of the License Terms for the Conduct of Economic Activity of Heat Energy Transmission of NEURC Resolution of March 22, 2017, #308 On Approving the License Terms for the Conduct of Economic Activity in the Heat Supply Sector Subpara. 9 Para.3.2 of the License Terms for the Conduct of Economic Activity of Heat Energy Supply of NEURC Resolution of March 22, 2017, #308 On Approving the License Terms for the Conduct of Economic Activity in the Heat Supply Sector – for communal services** Art. 32 of the Law of Ukraine On Housing and Communal Services COM Decree of July 21, 2005, #630 On Approving the Rules of Provision of the Services of District Heating, Cold and Hot Water Supply, and Sanitation, and a Standard Contract for Provision of the Services of District Heating, Cold and Hot Water Supply, and Sanitation

ROLES OF KEY PLAYERS OBSTRUCTING LONG-TERM PLANNING FOR DH SYSTEMS 59 Reference to regulatory/legal act granting respective mandate or Empowered entity Responsibilities/mandate establishing responsibilities complies with the cost structure per items approved in Subpara. 9 Para.3.2 of the License Terms for the Conduct of Economic Activity of Heat the tariffs: Energy Generation of NEURC Resolution dated March 22, 2017, #308 On Approving the License Terms for the Conduct of Economic Activity in the Heat Supply Sector – for heat energy Subpara. 9 Para.3.2 of the License Terms for the Conduct of Economic Activity of Heat Energy Transmission of NEURC Resolution of March 22, 2017, #308 On Approving the License Terms for the Conduct of Economic Activity in the Heat Supply Sector Subpara. 10 Para.3.2 of the License Terms for the Conduct of Economic Activity of Heat Energy Supply of NEURC Resolution of March 22, 2017, #308 On Approving the License Terms for the Conduct of Economic Activity in the Heat Supply Sector Economic entity in conducts tariff formation: Art. 10 of the Law of Ukraine On State Regulation in the Communal Services Sector heat supply sector, Paras. 2, 49, 50, 102, 103 of COM Decree of June 1, 2011, #869 On Ensuring a Unified i.e., OSA/KCSA – for communal services* Approach to the Formation of Tariffs for Housing and Communal Services licensee – for communal services** Subpara.1 Para.1 Art. 21 and Art. 31 of the Law of Ukraine On Housing and Communal Services Para.2 of COM Decree of June 1, 2011, #869 On Ensuring a Unified Approach to the Formation of Tariffs for Housing and Communal Services Provides consumers with access to information about Art. 3 of the Law of Ukraine On the Specifics of Access to the Information in the Sectors change of prices/tariffs of Electric Power and Natural Gas Supply, Heat Supply, Centralized Hot Water Supply, Centralized Potable Water Supply, and Sanitation Informs consumers about intent to change prices/tariffs for: Art. 25 of the Law of Ukraine On Heat Supply

– for heat energy (for communal services* with regard to heat Subpara. 17 Para.3.2 of the License Terms for the Conduct of Economic Activity of Heat energy) Energy Generation of NEURC Resolution dated March 22, 2017, #308 On Approving the License Terms for the Conduct of Economic Activity in the Heat Supply Sector Subpara. 10 Para.3.2 of the License Terms for the Conduct of Economic Activity of Heat Energy Transmission of NEURC Resolution of March 22, 2017, #308 On Approving the License Terms for the Conduct of Economic Activity in the Heat Supply Sector Subparas. 14 and 15 Para.3.2 of the License Terms for the Conduct of Economic Activity of Heat Energy Supply of NEURC Resolution of March 22, 2017, #308 On Approving the License Terms for the Conduct of Economic Activity in the Heat Supply Sector - for communal services** Art. 32 of the Law of Ukraine On Housing and Communal Services Para.2.2 of MinRegion Order dated July 30, 2012, #390 On Approving the Procedure of Informing Consumers about the List of Housing and Communal Services, Structure of Prices/Tariffs, Change of Prices/Tariffs with Justification of Its Need, and on Taking into Account the Relevant Position of Territorial Communities

ROLES OF KEY PLAYERS OBSTRUCTING LONG-TERM PLANNING FOR DH SYSTEMS 60 Reference to regulatory/legal act granting respective mandate or Empowered entity Responsibilities/mandate establishing responsibilities handles registration and obligatory review of all comments Para.2.9 of MinRegion Order dated July 30, 2012, #390 On Approving the Procedure of and suggestions, deciding to incorporate or reject such Informing Consumers about the List of Housing and Communal Services, Structure of comments and suggestions Prices/Tariffs, Change of Prices/Tariffs with Justification of Its Need, and on Taking into Account the Relevant Position of Territorial Communities informs customers who have provided their suggestions or comments about their acceptance or rejection sets tariffs – informs consumers about prices/tariffs Art. 25 of the Law of Ukraine On Heat Supply Para.6 Art. 32 of the Law of Ukraine On Housing and Communal Services Para.2 Art. 5 of the Law of Ukraine On the Specifics of Access to the Information in the Sectors of Electric Power and Natural Gas Supply, Heat Supply, Centralized Hot Water Supply, Centralized Potable Water Supply, and Sanitation Subpara. 17 Para.3.2 of the License Terms for the Conduct of Economic Activity of Heat Energy Generation of NEURC Resolution dated March 22, 2017, #308 On Approving the License Terms for the Conduct of Economic Activity in the Heat Supply Sector Subpara. 10 Para.3.2 of the License Terms for the Conduct of Economic Activity of Heat Energy Transmission of NEURC Resolution of March 22, 2017, #308 On Approving the License Terms for the Conduct of Economic Activity in the Heat Supply Sector Subpara. 14 Para.3.2 of the License Terms for the Conduct of Economic Activity of Heat Energy Supply of NEURC Resolution of March 22, 2017, #308 On Approving the License Terms for the Conduct of Economic Activity in the Heat Supply Sector conducts application of tariffs: Subpara. 8 Para.3.2 of the License Terms for the Conduct of Economic Activity of Heat Energy Generation of NEURC Resolution of March 22, 2017, #308 On Approving the – for heat energy License Terms for the Conduct of Economic Activity in the Heat Supply Sector Subpara. 8 Para.3.2 of the License Terms for the Conduct of Economic Activity of Heat Energy Transmission of NEURC Resolution of March 22, 2017, #308 On Approving the License Terms for the Conduct of Economic Activity in the Heat Supply Sector Subpara. 9 Para.3.2 of the License Terms for the Conduct of Economic Activity of Heat Energy Supply of NEURC Resolution of March 22, 2017, #308 On Approving the License Terms for the Conduct of Economic Activity in the Heat Supply Sector – for communal services** Art. 32 of the Law of Ukraine On Housing and Communal Services COM Decree of July 21, 2005, #630 On Approving the Rules of Provision of the Services of District Heating, Cold and Hot Water Supply, and Sanitation, and a Standard Contract for Provision of the Services of District Heating, Cold and Hot Water Supply, and Sanitation complies with the cost structure per items approved in the Subpara. 9 Para.3.2 of the License Terms for the Conduct of Economic Activity of Heat tariff: Energy Generation of NEURC Resolution of March 22, 2017, #308 On Approving the License Terms for the Conduct of Economic Activity in the Heat Supply Sector

ROLES OF KEY PLAYERS OBSTRUCTING LONG-TERM PLANNING FOR DH SYSTEMS 61 Reference to regulatory/legal act granting respective mandate or Empowered entity Responsibilities/mandate establishing responsibilities – for heat energy Subpara. 9 Para.3.2 of the License Terms for the Conduct of Economic Activity of Heat Energy Transmission of NEURC Resolution of March 22, 2017, #308 On Approving the License Terms for the Conduct of Economic Activity in the Heat Supply Sector Subpara. 10 Para.3.2 of the License Terms for the Conduct of Economic Activity of Heat Energy Supply of NEURC Resolution of March 22, 2017, #308 On Approving the License Terms for the Conduct of Economic Activity in the Heat Supply Sector COM conducts tariff formation Art. 32 of the Law of Ukraine On Housing and Communal Services

approves procedures of formation of the tariffs for communal services, which are set by local governments:

– for communal services** COM Decree of July 21, 2005, #630 On Approving the Rules of Provision of the conducts application of tariffs: Services of District Heating, Cold and Hot Water Supply, and Sanitation, and a Standard Contract for Provision of the Services of District Heating, Cold and Hot Water Supply, – for communal services** and Sanitation MinRegion establishes forms of source data and technical and Paras. 90, 94, 99 of COM Decree of June 1, 2011, #869 On Ensuring a Unified economic performance indicators required for calculating Approach to the Formation of Tariffs for Housing and Communal Services (for OSA and two-rate tariffs for the services of DH and CHWS; forms for KCSA licensees) calculating semifixed and semivariable costs of heat supply Para. 1 of MinRegion Order of December 3, 2012, #605 On Approving the Forms enterprise for providing DH service Required for Calculating Two-Rate Tariffs for Heat Energy, Services of District Heating, and Hot Water Supply (for OSA and KCSA licensees) informs consumers about intent to change prices/tariffs: Art. 31 of the Law of Ukraine On Housing and Communal Services Para.2.2 of MinRegion Order of July 30, 2012, #390 On Approving the Procedure of – for communal services** Informing Consumers about the List of Housing and Communal Services, Structure of Prices/Tariffs, Change of Prices/Tariffs with Justification of Its Need, and on Taking into Account the Relevant Position of Territorial Communities conducts application of tariffs (control function): Para.7 Art. 5 of the Law of Ukraine On Housing and Communal Services

– for communal services** NEURC performs tariff formation:

– for communal services*, for heat energy transmission according to principles of incentive-based regulation Subpara. 3 Para.1 Art. 17 of the Law of Ukraine On NEURC

develops and approves procedures/methodologies for Para.2 Art. 6 of the Law of Ukraine On State Regulation in the Communal Services formation, calculation, and setting of state-regulated prices Sector and tariffs for natural monopolies in the sectors of energy Art. 16 of the Law of Ukraine On Heat Supply and communal services;

ROLES OF KEY PLAYERS OBSTRUCTING LONG-TERM PLANNING FOR DH SYSTEMS 62 Reference to regulatory/legal act granting respective mandate or Empowered entity Responsibilities/mandate establishing responsibilities Para.1.1 of NEURC Resolution of March 24, 2016, #377 On Approving the Procedure of publishes the procedures/methodologies for formation, Tariff Formation for Heat Energy, Its Generation, Transmission, and Supply, Services of calculation, and setting of state-regulated prices and tariffs District Heating and Hot Water Supply for natural monopolies in the sectors of energy and Para.1.1 of NEURC Resolution of July 27, 2017, #967 On Approving the Procedure of communal services Tariff Formation for Heat Energy Transmission via Main and Local/Distribution Heat Networks According to the Principles of Incentive-Based Regulation

establishes the regulatory rate of return and approves Para.4 Art. 17 of the Law of Ukraine On National Energy and Communal Services the Procedure of Determining the Regulatory Asset Base Commission of Natural Monopolies Engaged (Intending to Engage) in Art. 13 of the Law of Ukraine On Natural Monopolies Economic Activity of Heat Energy Transmission via Main Para.1 of NEURC Resolution of July 27, 2017, #965 On Establishing Regulatory Rate of and Local/Distribution Heat Networks Return on the Regulatory Asset Base for the Entities Engaged (Having Intent to Engage) in Economic Activity of Heat Energy Transmission via Main and Local/Distribution Heat Networks Para.1.1 of NEURC Resolution of July 27, 2017, #966 On Approving the Procedure of Determining the Regulatory Asset Base of Natural Monopolies Engaged (Having Intent to Engage) in Economic Activity of Heat Energy Transmission via Main and Local/Distribution Heat Networks provides consumers with access to information about Art. 3, At. 4 of the Law of Ukraine On the Specifics of Access to Information in the changes in prices/tariffs Sectors of Electric Power and Natural Gas Supply, Heat Supply, Centralized Hot Water Supply, Centralized Potable Water Supply, and Sanitation informs customers about intent to change prices/tariffs Para.5 Art. 24 of the Law of the Ukraine On NEURC (publishes draft Regulator decisions with justifications on its official website) determines the procedure of publication of information Art. 4 of the Law of Ukraine On the Specifics of Access to Information in the Sectors of about prices/tariffs and holding open hearings on this Electric Power and Natural Gas Supply, Heat Supply, Centralized Hot Water Supply, information Centralized Potable Water Supply, and Sanitation Para.3 Art. 16 of the Law of Ukraine On NEURC holds open discussions of draft decisions on setting of Para.1.2 of NEURC Resolution of June 30, 2017, #866 On Approving the Procedure of prices/tariffs and changes in prices/tariffs Holding an Open Discussion of Draft Decisions of the National Energy and Communal Services Regulatory Commission sets state-regulated prices and tariffs for goods/services Para.13 Art. 17 of the Law of Ukraine On NEURC of natural monopolies and other economic entities engaged Para.2 Art. 5, Para.1 Art. 6 of the Law of Ukraine On State Regulation in the Communal in the markets in the sectors of energy and communal Services Sector services, if the respective mandates are granted to the Regulator by law Para.16 Art. 8, Art. 20 of the Law of Ukraine On Heat Supply informs consumers about prices/tariffs Para.6 Art. 24 of the Law of Ukraine On NEURC

ROLES OF KEY PLAYERS OBSTRUCTING LONG-TERM PLANNING FOR DH SYSTEMS 63 Reference to regulatory/legal act granting respective mandate or Empowered entity Responsibilities/mandate establishing responsibilities Para.1 Art. 3 of the Law of Ukraine On the Specifics of Access to Information in the Sectors of Electric Power and Natural Gas Supply, Heat Supply, Centralized Hot Water Supply, Centralized Potable Water Supply, and Sanitation Para. 20.8 of NEURC Resolution of March 24, 2016, #377 On Approving the Procedure of Tariff Formation for Heat Energy, Its Generation, Transmission, and Supply, Services of District Heating and Hot Water Supply conducts tariff application (control function) Art. 19 of the Law of Ukraine On NEURC Para.11 Art. 6, Art. 11 of the Law of Ukraine On State Regulation in the Communal Services Sector Subpara. 5 Art. 31 of the Law of Ukraine On Heat Supply Para.3.7 Annex 14, Para.3.7 Annex 15, Para.3.8 Annex 16 of NEURC Resolution of June 14, 2018, #428 On Approving the Procedure of Control over Compliance of the Licensees Conducting Activity in the Sectors of Energy and Communal Services with the Legislation in the Respective Sectors and with the License Terms LGs conduct tariff formation: Subpara. 4 Para. 6 Art. 27 of the Law of Ukraine On Local Self-Government in Ukraine coordinate the annual plans for generation, transmission, Paras.2.5, 8.2, 12.2 of NEURC Resolution of March 24, 2016, #377 On Approving the and supply of heat energy, provision of DH services, Procedure of Tariff Formation for Heat Energy, Its Generation, Transmission, and provision of CHWS services Supply, Services of District Heating and Hot Water Supply Para.6.1 of NEURC Resolution of March 24, 2016, #377 On Approving the Procedure of grant consent for setting two-rate tariffs for heat energy for Tariff Formation for Heat Energy, Its Generation, Transmission, and Supply, Services of all consumer categories for NEURC licensees District Heating and Hot Water Supply

confirm the heat load for the formation of two-rate tariffs Subparas. 6.4, 16.3, 17.3 of NEURC Resolution of March 24, 2016, #377 On Approving the Procedure of Tariff Formation for Heat Energy, Its Generation, Transmission, and approve the annual hot water allowances Supply, Services of District Heating and Hot Water Supply Para.12.2 of NEURC Resolution of March 24, 2016, #377 On Approving the Procedure coordinate the loans under credit agreements, the of Tariff Formation for Heat Energy, Its Generation, Transmission, and Supply, Services obligations under which are included in tariffs of District Heating and Hot Water Supply

Para.3 Art. 7 of the Law of Ukraine On Housing and Communal Services

Paras. 22, 64, 82 of COM Decree of June 1, 2011, #869 On Ensuring a Unified Approach to the Formation of Tariffs for Housing and Communal Services Provide consumers with access to information about Art. 3, Art. 4 of the Law of Ukraine On the Specifics of Access to Information in the changes in prices/tariffs Sectors of Electric Power and Natural Gas Supply, Heat Supply, Centralized Hot Water Supply, Centralized Potable Water Supply, and Sanitation

ROLES OF KEY PLAYERS OBSTRUCTING LONG-TERM PLANNING FOR DH SYSTEMS 64 Reference to regulatory/legal act granting respective mandate or Empowered entity Responsibilities/mandate establishing responsibilities inform consumers about intent to change prices/tariffs (publication of draft regulations, decisions of local Para. 3 Art. 15 of the Law of Ukraine On Access to Public Information governments) determine the procedure for publication of information Art. 4 of the Law of Ukraine On the Specifics of Access to Information in the Sectors of about prices/tariffs and conduct open hearings about such Electric Power and Natural Gas Supply, Heat Supply, Centralized Hot Water Supply, information Centralized Potable Water Supply, and Sanitation conduct tariff setting: Art. 28 of the Law of Ukraine On Local Self-government in Ukraine Art. 13 of the Law of Ukraine On Heat Supply – for heat energy Art. 20 of the Law of Ukraine On Heat Supply – for communal services** Art. 7 of the Law of Ukraine On Housing and Communal Services inform consumers about prices/tariffs Para.1 Art. 3 of the Law of Ukraine On the Specifics of Access to Information in the Sectors of Electric Power and Natural Gas Supply, Heat Supply, Centralized Hot Water Supply, Centralized Potable Water Supply, and Sanitation Para.3 Art. 15 of the Law of Ukraine On Access to Public Information Para.107 of COM Decree On Ensuring a Unified Approach to Formation of Tariffs for Housing and Communal Services of June 1, 2011, #869 conduct tariff application (control function) –

OSAs conduct tariff formation:

coordinate the general production-specific consumption Para.7.7 of the Order of the State Committee of Ukraine on Energy Saving of October of fuel and energy resources for enterprises, institutions, 22, 2002, #112 On Approving the Main Provisions on Standardization of Specific and organizations with the summary annual consumption of Consumption of Fuel and Energy Resources in Public Production energy resources above 1,000 tonnes of oil equivalent conduct tariff application (control function) Para.6 Art. 6 of the Law of Ukraine On Housing and Communal Services

FSCP conducts tariff application (control function) Subpara. 2 Para.3 of COM of September 2, 2015, #667 On Approving the Charter of the controls compliance with the requirements for formation, State Service of Ukraine for Food Safety and Consumer Protection setting, and application of state-regulated prices Notes: Tariffs for communal services* means the tariffs for heat energy (except tariffs for heat energy generation at CHPs, TPPs, NPPs, CGUs, and ARES installations), heat energy transmission via main and local/distribution heat networks, and heat energy supply, as well as the tariffs for the services of DH and CHWS and services of sanitation (using intrabuilding systems) for the entities that are providers of such services. Communal services** means CHWS and DH.

ROLES OF KEY PLAYERS OBSTRUCTING LONG-TERM PLANNING FOR DH SYSTEMS 65 Table 4.3. Mandate Related to Licensing of Economic Activity in Heat Supply Sector References to regulatory/legal act granting respective mandate or Empowered entity Responsibilities/mandate establishing responsibilities Economic entity in heat Prepares license application, compiles a respective set Paras. 1.6, 1.7 of NEURC Resolution of March 22, 2017, #308 On Approving the supply sector of documents, and submits to the licensing body License Terms for the Conduct of Economic Activity in the Heat Supply Sector Implements License Terms Para.1 Art. 9 of the Law of Ukraine On Licensing of Economic Activity Types COM Adopts regulatory and legal acts in the field of Para.5 Art. 2 of the Law of Ukraine On Licensing of Economic Activity Types licensing Appoints the licensing bodies and economic activity Subpara. 1 Para.1 Art. 3 of the Law of Ukraine On Licensing of Economic Activity types to be licensed by respective body Types LGs – – NEURC Licenses activities Art. 13 of the Law of Ukraine On Natural Monopolies Subpara.2 Para.1 Art. 6, Art. 5 of the Law of Ukraine On State Regulation in the Communal Services Sector Art. 2 of the Law of Ukraine On Licensing of Economic Activity Types Art. 15, Art. 16 of the Law of Ukraine On Heat Supply Art. 3, Subpara.4, Para.1 Art. 17 of the Law of Ukraine On NEURC Art. 8 of the Law of Ukraine On Combined Heat and Power Generation (Cogeneration) and Use of Dump Energy Potential Para.1.4. of NEURC Resolution of March 22, 2017, #308 On Approving the License Terms for the Conduct of Economic Activity in the Heat Supply Sector Determines the limits/terms of conduct of activity Subpara.7 Para.1 Art. 6 of the Law of Ukraine On State Regulation in the Communal without licenses Services Sector Develops and approves the License Terms Art. 16 of the Law of Ukraine On Heat Supply Art. 17 of the Law of Ukraine On NEURC Art. 6 of the Law of Ukraine On State Regulation in the Communal Services Sector Informs about decisions (including about licensing) on Subpara. 8 Para.2 Art. 6 of the Law of Ukraine On Licensing of Economic Activity website Types Prepares and submits annual licensing report to a Subpara. 9 Para.2 Art. 6 of the Law of Ukraine On Licensing of Economic Activity specially authorized licensing body Types

ROLES OF KEY PLAYERS OBSTRUCTING LONG-TERM PLANNING FOR DH SYSTEMS 66 References to regulatory/legal act granting respective mandate or Empowered entity Responsibilities/mandate establishing responsibilities OSAs and KCSA License activities Para.1 Art. 6 of the Law of Ukraine On Housing and Communal Services Art. 2 of the Law of Ukraine On Licensing of Economic Activity Types Art. 15, Art. 161 of the Law of Ukraine On Heat Supply Para.26 of COM Decree of August 5, 2015, #609 On Approving the List of Licensing Bodies Para.1.5 of NEURC Resolution of March 22, 2017, #308 On Approving the License Terms for the Conduct of Economic Activity in the Heat Supply Sector Inform about decisions (including about licensing) on Subpara. 8 Para.2 Art. 6 of the Law of Ukraine On Licensing of Economic Activity website Types Prepare and submit annual licensing report to a Subpara. 9 Para.2 Art. 6 of the Law of Ukraine On Licensing of Economic Activity specially authorized licensing body Types

ROLES OF KEY PLAYERS OBSTRUCTING LONG-TERM PLANNING FOR DH SYSTEMS 67 Table 4.4. Mandate Related to Exercise of State Supervision/Control References to regulatory/legal act granting respective Empowered entity Responsibilities/mandate mandate or establishing responsibilities Economic entity in has the right to appeal to the central executive body or court of justice Art. 21 of the Law of Ukraine On Main Principles of State heat supply sector against decisions of state supervisory/control bodies Supervision/Control in the Field of Economic Activity Chapter 7 of NEURC Resolution of June 14, 2018, #428 On Approving the Procedure of Control over Compliance of the Licensees Engaged in Activities in the Energy and Communal Services Sector with the Legislation in Respective Sectors and with the License Terms COM approves the criteria for evaluating the degree of risks from the Art. 5 of the Law of Ukraine On Main Principles of State conduct of economic activity and determining the periodicity of conducting Supervision/Control scheduled activities handles procedure of imposing punitive sanctions for violations of law Art. 31 of the Law of Ukraine On Heat Supply in heat supply sector NEURC exercises supervision/control over activities of natural monopolies and Art. 6 of the Law of Ukraine On State Regulation in the Communal economic entities on adjacent markets and imposes respective Services Sector sanctions on those entities that violate the terms and rules of conducting the relevant types of economic activity exercises general control over compliance with the license terms; Art. 16 of the Law of Ukraine On Heat Supply considers cases of violation of the license terms and makes decisions within the scope of its competence based on the results of such consideration

controls compliance of licensees with the legislation in the respective Art. 17 of the Law of Ukraine On NEURC area of regulation and with the License Terms for the conduct of economic activity, and acts to prevent violations of the license terms considers cases of violation of the License Terms and cases of administrative offenses and, based on the results, makes decisions on imposition of sanctions, imposition of administrative actions in the cases envisaged by law, within the scope of its competence, and decides on submitting the materials about the legislative violations to the respective state bodies OSAs and KCSA exercise control over compliance with the License Terms within the Art. 16 of the Law of Ukraine On Heat Supply scope of their competence

SESI Conducts state supervision/control in the sectors of electric power and Art. 14 of the Law of Ukraine On Heat Supply heat supply Exercises state energy supervision over heat and heat-using COM Decree of February 14, 2018, #77 On Certain Issues of the State installations and networks of entities in the heat supply sector regarding Energy Supervisory Inspectorate of Ukraine compliance with requirements of regulatory acts, statutory documents on the issues of technical condition of heat and heat-using installations and

ROLES OF KEY PLAYERS OBSTRUCTING LONG-TERM PLANNING FOR DH SYSTEMS 68 References to regulatory/legal act granting respective Empowered entity Responsibilities/mandate mandate or establishing responsibilities networks, their operation, design, construction, confirmation of readiness for regular service, and use of energy in the heat supply sector has the right to: - impose (according to the law) punitive sanctions for violation of the requirements of regulatory acts, statutory documents on … the issues of technical conditions of heat and heat-using installations and networks, their operation, design, construction, and use of energy in the heat supply sector; and - draw reports and consider cases of administrative offenses in the cases provided by law

ROLES OF KEY PLAYERS OBSTRUCTING LONG-TERM PLANNING FOR DH SYSTEMS 69 Table 4.5. Mandate Regarding Approval of Heat Supply Schemes References to regulatory/legal act granting respective mandate or Empowered entity Responsibilities/mandate establishing responsibilities Economic entity in heat Oversees design, construction, and reconstruction of Art. 26 of the Law of Ukraine On Heat Supply supply sector heat supply facilities based on approved heat supply schemes LGs approve heat supply schemes Art. 13 of the Law of Ukraine On Heat Supply review heat supply schemes every 5 years Art. 6 of the Law of Ukraine On Heat Supply

OSAs and KCSA - - MinRegion coordinates heat supply schemes for settlements with Art. 11 of the Law of Ukraine On Heat Supply populations greater than 20,000 NEURC - - - - COM - - - -

ROLES OF KEY PLAYERS OBSTRUCTING LONG-TERM PLANNING FOR DH SYSTEMS 70 Table 4.6. Mandate Regarding Connection to/Disconnection from Heat Networks References to regulatory/legal act granting respective mandate or Empowered entity Responsibilities/mandate establishing responsibilities Economic entity in heat ensures equal access to own heat networks for all Art. 25 of the Law of Ukraine On Heat Supply supply sector economic entities connects a heat generating organization that intends Art. 21 of the Law of Ukraine On Heat Supply to engage in activity of heat energy generation issues permits and technical specifications for Art. 25 of the Law of Ukraine On Heat Supply connection of users to distribution heat networks Art. 12 of the Law of Ukraine On Combined Generation of Heat and Electric Energy (Cogeneration) and Use of Dump Energy Potential Art. 30 of the Law of Ukraine On Regulation of Urban Planning Activity LGs – – – –

OSAs and KCSA – – MinRegion establishes the rules for connection of CGUs to heat Art. 12 of the Law of Ukraine On Combined Generation of Heat and Electric Energy networks (Cogeneration) and Use of Dump Energy Potential develops and approves the rules of issuance and coordination of the technical specifications for

connection to heat power engineering networks/structures ** NEURC develops and approves the rules of connection to heat Para.14 Art. 6 of the Law of Ukraine On State Regulation in the Communal Services networks Sector develops and approves the rules of use of heat energy* Para.3 Art. 17 of the Law of Ukraine On NEURC develops and approves the procedures/methodologies Para.3 Art. 17 of the Law of Ukraine On NEURC of connection of heat networks, calculation of connection fees, and financing of connection services* develops and approves the rules of issuance and Subpara. 5 Para.4 of Decree of the President of Ukraine dated September 10, 2014, coordination of the technical specifications for #713/2014 On Approving the Charter of NEURC connection to heat power engineering networks/structures** COM approves the rules of using heat energy*** Art. 20 of the Law of Ukraine On COM * The document has not been developed and approved by the authorized body. ** The mandate is not explicitly envisaged by legislative acts. *** The manadte is referred by legislative acts to NEURC terms of reference.

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