On 26 August 2020 the National Commission for Regulation of Energy and Utilities (NEURC) approved the draft Procedure for establishing (forming) tariffs for electricity distribution services (the "Procedure") and regulatory asset base tariff (RAB tariff). The RAB tariff will be valid for all operators of the Ukrainian electricity distribution system (oblenergo) starting from 2021.
Additionally, the NEURC approved the following related resolutions:
The RAB tariff is a system of tariff formation based on long-term tariff regulation aimed at attracting investment for the construction and modernization of electricity network infrastructure and stimulating the cost efficiency of electricity distribution companies. Based on the Procedure oblenergos are guaranteed to receive a profit that will depend on the total value of assets. The tariff forms the profit for subsequent investments. Thus, the company is interested in its development: the more it builds and modernizes, the higher the income is.
The main purpose of the Procedure and other approved resolutions is to attract investment for the Ukrainian depreciated electricity facilities. The Procedure establishes that the company that operates the grids and invests in their development receives an additional premium in its tariff. The Procedure proposes a rate of return of 16.7% on the new asset base, and for the old base is 3%.
According to the Procedure, it is assumed that electricity losses in the grids of distribution system operators should be reduced by at least 1% in the first voltage class and by 3.5% in the second voltage class annually. The SAIDI (System Average Interruption Duration Index) should be decreased steadily over 13 years from 466 to 150 minutes in urban areas and from 960 to 300 minutes in rural areas.
The NEURC has analyzed the macro-financial and economic indicators of Ukraine, the balance of the market, the cost of electricity as a commodity, and in case of positive signals, it will return to considering the issue of increasing the profitability indicators of the debt sustainability analysis (DSA) with a simultaneous reduction in the period for achieving the target indicators. The Procedure creates incentives for customers of transportation services to better forecast and operate in the market.
According to the NEURC, in 2019, more than 10.3% of annual production was "lost" due to the poor condition of power grids during transportation. This is 0.5% more than a year earlier.