Energy Regulatory Commission of the Republic of

Partnership Program (ERC, R. Macedonia - PSB, Vermont) , October 25-29, 2004 PRICE REGULATION FOR THE SECTORS OF:

I. NATURAL GAS AND II. DISTRICT HEATING I. NATURAL GAS S REPUBLIC OF MACEDONIA -O THE GAS PIPELINE SYSTEM P

O

T

Main gas pipeline - M B L K A already built SERBIA AND C DEVE BAIR-MK E M MONTENEGRO K Main gas pipeline - construction priority to be built in 12 to 20 months SKOPJE

Main gas pipeline - planned VELES

KICEVO MK

NEGOTINO MK ALBANIA STRUMICA

STRUGA MK

OHRID

GREECE MK MEGITLIJA MK State of Affairs in the Republic of Macedonia’s Gas Sector: - Current usage of the gas pipeline capacity is lower than 10%; - Natural gas is not used for residential needs; - Stagnation in the construction of main gas pipelines in the country since 1996 due to pending issues related to the ownership structure of capital in the main pipeline; - There is no tariff system in place for natural gas pricing (price determined by natural gas supplier - quarterly). METHODOLOGYMETHODOLOGY OFOF NATURALNATURAL GASGAS PRICEPRICE ANDAND TARIFFTARIFF DESIGN,DESIGN, ANDAND CONTROLCONTROL Applying the Incentive-based Method (price( caps/revenue caps) in price and tariff design for:

¾ Natural gas transmission ƒ Revenue caps ƒ Sliding scale for the initial period of price control to decrease the risk of high profit/loss due to inadequate data ¾ Natural gas distribution ƒ Price caps ƒ Additional encouragement to reduce technical loss ¾ Retail margin ƒ Price cap ƒ Additional encouragement to reduce technical loss Revenue calculation for the natural gas transmission license holder ¾ Price control by means of revenue caps approach

MARMARt == MARMARt-1 xx (1(1 ++ CPICPIt)) xx (1(1 –– X)X) -- KKt –– SSt where

MARt = Maximum allowable revenue to be covered by the transmission license holder in the relevant year t;

MARt-1 = Maximum allowable revenue in the relevant year t-1; CPIt = Consumer Price Index; X = Efficiency factor;

Kt = Correction factor, i.e. deviation from expected real transmitted quantities; St = Profit allocation factor. Revenue calculation for the natural gas distribution license holder ¾ Price control by a revenue cap approach

PPt == PPt-1 xx (1(1 ++ CPICPIt)) xx (1(1 –– X)X) –– ZZt where

Pt = Maximum allowable average revenue to be achieved by the distribution license holder in a relevant (reference) year;

Pt-1 = Maximum allowable revenue for the relevant year t-1;

CPIt = Consumer Price Index; X = Efficiency Factor;

Zt = Loss Factor. Calculation of the retail margin for tariff consumers

RRt == [R[Rt-1 xx (1(1 –– DDt--1)1) xx (1(1 ++ CPICPIt)) xx (1(1 –– X)]X)] // (1(1 -- DDt))

Rt = Maximum average retail margin achieved by the distribution license holder in the relevant year t;

Rt-1 = Maximum average retail margin for the relevant yeart-1;

Dt = Non-collection compensation in the relevant year t;

CPIt = Consumer Price Index; X = Efficiency Factor. II. DISTRICT HEATING ThereThere areare 55 autonomousautonomous regionalregional districtdistrict heatingheating systemssystems inin thethe RepublicRepublic ofof Macedonia:Macedonia:

1. City of Skopje wider area - AD “Toplifikacija”- Skopje 2. City of Skopje northern part - AD “Skopje – Sever” 3. City of Skopje industrial zone - “Sektor za energetika – ESM” 4. Heating utility of the town of - ”Doming” 5. The residential area of the town of Bitola - “Toplifikacija- Bitola” DOO 1. Toplifikacija AD Skopje

The system for district heating in Skopje is a modern system with a high degree of technological process automatization and fully computerized monitoring of the heat production.

¾ Number of heating plants: 5 ¾ Installed hot water capacity: ~ 480 MW ¾ Consumption connected: ~ 590 MW

¾ Annual fuel need: ~ 70,000 tequ,HO ¾ Fuel oil: ~ 75 % ¾ Natural gas: ~ 25 % ¾ Heating energy produced: ~ 700 GWh ¾ Electricity consumption: ~ 19 GWh

Toplifikacija AD – Skopje The “Toplifikacija” shareholding company is a utility established in 1965 whose main activity is heating energy production and distribution DISTRIBUTION GRID SERVED BY “TOPLIFIKACIJA”- SKOPJE

~ 170 km grid length

DN25 - DN700 Consumer structure: - 63 % collective housing - 5 % individual housing - 27 % business buildings - 2 % public sector - 3 % schools Changes in power consumption, consumers, and installed capacity 750 MW Innstalled hotwater pipeline capacity t/ann 75,000 700 Consumers connected 70,000 650 Consumtion of eqv. crude oil 65,000 600 60,000 550 55,000 500 50,000 450 45,000 400 40,000 350 35,000 300 30,000 250 25,000 200 20,000 150 15,000 100 10,000 50 5,000

0 year 0 1965 1970 1975 1980 1985 1990 1995 2000 Heating plant installed capacity and consumption for “Toplifikacija”- Skopje

Heating plants Installed capacity of hot Consumption water supply boilers connected “Istok” 279.12 MW 410 MW

“Zapad” 170.97 MW 185 MW “11 Oktomvri” 28.21 MW 35 MW “Park” 8.95 MW 9.5 MW “Vodno” 4 MW Standby status GAS TURBINE SKOPJE Project (Co-generation plant)

The future development policy of “Toplifikacija” lies in participation in the construction of TE-TO Location: Zelezara, Skopje "Energetika" Sector. Capacity Electricity ~ 180 MW Heat ~ 150 MW 2. Heating plant “Sever”- Skopje - Year of starting operation: 2000 - Total installed hot water capacity: 46 MW 2 boilers each with a capacity of 23 MW on natural gas 1 boiler with a capacity of 19.1 MW on fuel oil - Consumption installed: 65 MW - Uses natural gas as power fuel, and fuel oil as an alternative

3. ESM energy sector - Year of starting operation: 1997 - Installed hot water capacity of plant: 15 - 20 MW - Uses natural gas, technical gases and fuel oil 4. Plant “Doming”- the town of Makedonska Kamenica - year of starting operation: 1990 - installed hot water capacity of plant: 12 MW - length of distribution grid: 5 km with consumer coverage capacity of up to 6.5 MW - In the forthcoming period, the system is expected to deliver 5,900 – 6,100 MWh heating energy annually

5. “Toplifikacija” Bitola - year of starting operation: 1999 - installed hot water capacity of plant: 26 MW - consumption connection: 20 MW - total surface area heated: 125,000 m² Heating energy pricing is currently done according to: The pricing methodology for specific energy types (“Official Journal of RM” 43/98) Based on this Methodology, “Toplifikacija” has identified several classes of heating energy consumers and the manner of service billing, including the following: 1. Housing area a) Lump billing per unit m² b) Meter billing - Price depends on the capacity installed and the energy delivered 2. Commercial area a) Lump billing for installed capacity b) Meter billing - Price depends on the capacity installed and the energy delivered 3. Primary schools a) Lump billing for installed capacity b) Meter billing - Price depends on the capacity installed and the energy delivered 4. Experimental heating a) Lump billing per unit m² b) For commercial areas by installed capacity Basic requirements for heating energy distribution and tariff elements for price calculation

1. Payment for heating energy usage consists of three parts: - payment for heating capacity; - payment for heating energy consumed; and - payment for surplus of water flow higher than allowable. 2. Payment for heating energy for various groups of consumers is computed by using the following equation:

N= W x CTM + EPOT x CE + D where N = Payment value (in denars) W = Heating capacity (kW), different for each consumer group, and depends on metering procedures i.e. whether by using calorimeters or accounting procedures

Ctm = Price of heating capacity defined by the Heating Energy Pricing Methodology (den/kW)

Epot = Consumed (needed) heating energy (kWh), different for each consumer type: - first-group consumers, in accordance with heated surface area in m² - for all other consumers, in accordance with consumer installed heating capacity

Ce = Heating energy price defined by the Heating Energy Pricing Methodology (denar/kWh) D = Price for excess of water flow higher than the allowable one (in denars). METHODOLOGYMETHODOLOGY FORFOR DESIGNDESIGN ANDAND CONTROLCONTROL OFOF HEATINGHEATING ENERGYENERGY PRICESPRICES ANDAND TARIFFSTARIFFS ApplicationApplication ofof thethe incentiveincentive basedbased methodmethod (price( caps/revenue caps) for price and tariff design, for:

¾ Heating energy production ƒ Revenue caps of fixed operational costs and capital costs (depreciation and assets return)

¾ Heating energy distribution ƒ Revenue caps ƒ Additional encouragement for technical loss reduction Revenue computation for the license holder for heating energy production

MARt = FIXt-1 x (1 + CPIt) x (1 – XF) + CAPt + VARt + FUELt where

MARt = Maximum allowable revenue to be covered by the producer during the relevant year t;

FIXt-1 = Maximum allowable revenues presented as a sum of capital related costs including fixed operational costs and maintenance costs in the relevant year t-1;

CPIt = Consumer Price Index; XF = Adjustment or X-factor applicable to capital related costs, fixed operational costs and maintenance costs;

CAPt = Maximum allowable revenues presented as a sum of capital related costs including allowable depreciation costs and allowable revenue with net fixed producer assets in the relevant year t-1;

VARt = Allowable revenue presented as expected sum of variable operational costs and maintenance costs, or the VAR- factor for the relevant year t. VARt = [Ot-1 x (1 + CPIt) x (1 – XO)] x Gt

• Ot-1 = maximum allowable average variable operation and maintenance cost, for the relevant year t-1 • XO = adjustment or X-factor applicable to variable operation and maintenance costs

• Gt = forecast value of generation units by utility requirement of public service for the relevant year t,

• FUELt = allowable revenue presented as expected sum of fuel costs or FUEL-factor for the relevant year t - For heating plants using lignite as basic fuel:

FUELt = [0.9 x ACTt + 0.1 x ACTt-1 x (1 + CPIt) x (1 – XF)] x Gt

ACTt = Current average costs per fuel unit expressed in denars for kWh generated electricity in the relevant year t;

ACTt-1 = Current average costs for fuel unit expressed in denars for kWh heating energy generated in the relevant year t-1; XF = Adjustment or X-factor applicable to fuel costs

- For heating plants using gas as basic fuel:

FUELt = [0.9 x ACTt + 0.1 x ACTt-1 x (1 + GASt) x (1 – XF)] x Gt

GASt = Percentage modification of the [gas price index] - For heating plants using HFO or crude oil as basic fuel:

FUELt = [0.9 x ACTt + 0.1 x ACTt-1 x (1 + HFOt) x (1 – XF)] x Gt

HFOt = Percentage modification of the [price index for HFO or fuel oil] Computation of revenues for the license holder for heating energy distribution

MARt = [MARt-1 x (1 - Ct-1) x (1 + CPIt) x (1- X) - Kt -Zt] / (1- Ct) where

MARt = Maximum allowable revenue to be covered by the holder of a distribution license in the relevant year t;

MARt-1 = Maximum allowable revenue for the relevant year t-1; Ct-1 = Compensation for non-payment in the relevant year t-1; CPIt = Consumer Price Index; X = Efficiency factor;

Kt = Corerction factor i.e. Deviation from expected real distributed quantities; Zt = Loss factor; Ct = Compensation for non-payment for the relevant year t. Thank you for your attention!