RESOLUTION OF THE CABINET OF MINISTERS OF THE REPUBLIC OF UZBEKISTAN

of April 13, 2019 No. 310

About measures for further enhancement of tariff policy in electric power industry

According to the resolution of the President of the Republic of Uzbekistan of October 23, 2018 "About measures for the accelerated development and ensuring financial stability of electric power industry", and also for the purpose of enhancement of tariff policy in the electric power industry providing the calculation of electricity tariffs based on covering of the current and capital expenditures, stimulating attraction of private sector in electric power industry, the Cabinet of Ministers decides No. PP-3981:

1. Approve:

The main directions of tariff policy in electric power industry of the Republic of Uzbekistan for the period till 2030 according to appendix No. 1;

Regulations on procedure for forming of electricity tariffs according to appendix No. 2 and to enact it since January 1, 2020.

2. Form the Interdepartmental tariff commission under the Cabinet of Ministers of the Republic of Uzbekistan in structure according to appendix No. 3.

3. To the Ministry of Finance of the Republic of Uzbekistan:

in two-month time together with the Department of Energy, the Ministry of housing-and-municipal servicing and the Ministry of investments and foreign trade of the Republic of Uzbekistan and other interested ministries and departments with technical assistance of the international financial institutions to introduce in accordance with the established procedure to the Cabinet of Ministers the draft of the government decision providing the organization of activities of the Interdepartmental tariff commission under the Cabinet of Ministers of the Republic of Uzbekistan;

in a month together with the interested ministries and departments to bring the regulatory legal acts adopted by them into accord with this resolution.

4. To impose control over the implementation of this resolution on the deputy prime minister of the Republic of Uzbekistan - the Minister of Finance D. A. Kuchkarov and the Minister of Energy of the Republic of Uzbekistan A. S. Sultanov.

Appendix №1

to the Resolution of the Cabinet of Ministers of April 13, 2019 No. 310

The main directions of tariff policy in electric power industry of the Republic of Uzbekistan for the period till 2030

Chapter 1. General provisions

1. These Main directions of tariff policy in electric power industry of the Republic of Uzbekistan for the period till 2030 (further - tariff policy) determine practical mechanisms of realization of state policy of regulation of pricing on the electric power taking into account strategic tasks by steady power supply of the population and industries of economy on the basis of the principles of achievement of financial stability of electric power industry and further development of energy infrastructure.

The main directions of tariff policy upgrades and diversifications of the generating capacities with finishing them to 20 thousand MW during the period till 2030 according to the resolution of the President of the Republic of Uzbekistan of October 23, 2018 No. PP-3981 "About measures for the accelerated development and ensuring financial stability of electric power industry" are developed for the purpose of ensuring electrical power safety of the Republic of Uzbekistan, taking into account expansion.

2. The main directions of tariff policy are:

providing to consumers of access to the electric power on reasonable and competitive rates;

ensuring financial stability and investment appeal of electric power industry;

expansion, upgrade and diversification of the generating capacities, including on the terms of public-private partnership, ensuring efficiency of productive activity, improvement of quality of the made products and the rendered services;

establishment of the principles of pricing on the electric power aimed at providing complete covering of operating and capital costs, necessary net profit of the organizations of electric power industry in transition period;

step-by-step cancellation of practice of cross subsidizing in case of establishment of rates, with ensuring social protection of needy and vulnerable segments of the population by provision of address subsidies according to the procedure approved by the Ministry of Finance and the Ministry of Economy and Industry of the Republic of Uzbekistan;

establishment of transparent, consecutive and predictable regulation of electric power industry, including step-by-step implementation of practice of establishment of rates for the long-term period, for decrease in feeling of regulating risk from investors;

implementation of the differential tariffs after full-scale implementation of the automated control system and accounting of the electric power of all customer groups;

phased transition till 2023 to technique of forming of rates taking into account the advanced international practice.

3. The main directions of tariff policy are based on the following principles:

electricity tariffs are created proceeding from reasonable expenses on its production, transfer, distribution and sale taking into account full recovery of operating and capital costs and maintenance of profitability in the range - at least 10 percent and no more than 20 percent. At the same time profitability is determined by division of size of net profit into the amount of all costs connected with implementation of activities for production, transfer, distribution and sale of the electric power;

since 2023 the electricity tariffs approved in accordance with the established procedure will be effective within at least three years;

purchase and electricity sale by the single purchaser of the electric power will be carried out on the rates determined by the Interdepartmental tariff commission under the Cabinet of Ministers of the Republic of Uzbekistan (further - regulating authority);

the state support of needy and vulnerable segments of the population will be provided by application of basic regulation of electric power consumption, and also provision of compensations in case of growth of electricity tariffs.

Chapter 2. Tasks of tariff policy

4. Tasks of tariff policy are:

balancing of consumer interests and the organizations of electric power industry by establishment of mutually acceptable rates;

ensuring financial stability of the organizations of electric power industry for investment attraction;

development of the competition and increase in overall performance of the organizations of electric power industry, improvement of quality and ensuring reliability of electric utility service;

step-by-step refusal of the existing cross subsidies in case of settlement of a tariff for consumers of electricity and decrease in impact of increase in rates for needy and vulnerable segments of the population;

transparency, sequence and predictability of tariff regulation and minimizirovany influences of regulatory risks;

implementation of practice of establishment of electricity tariffs for the long-term period for the purpose of creation of the favorable investment climate (provision to investors of possibility of long-term planning);

assistance to consultation of consumers and informing them about the made tariff decisions;

implementation of the practice of the profit distribution on the invested capital (net profit) received as a result of project implementation, approved by the Government of the Republic of Uzbekistan, first of all on reconstruction, upgrade and development of electric power industry.

Chapter 3. The fundamental principles of pricing in electric power industry

5. Forming of rates is based on the following principles:

a) availability - the rate shall assume effective and reasonable usefulness, that is the rate shall be based on options with the smallest costs and exclude inefficiency;

b) openness of information - information on the rates and expenses proving rates shall be available to concerned parties;

c) the sequence and predictability of establishment of rates - rates shall be established consistently (for calendar year or for the long-term period) and their increase or decrease shall be proved and clear for the organizations of electric power industry and consumers;

d) non-discriminatory approach - rates shall be objective and fair;

e) transparency and separateness - complete disclosure of expenses when forming rates. Expenses shall be divided on each regulated activities. Rates shall be simple for understanding and application;

e) flexibility of rates - rates shall be corrected taking into account the commonly accepted macroeconomic indicators (the rate of inflation, consumer price index) in case of approval;

g) independence - rates are established by regulating authority and are not subject to unreasonable political impact;

h) efficiency and productivity - rates are aimed at permanent increase in cost efficiency of organization activity of electric power industry;

i) accountability - timely provision of electric power industry by the organizations and regulating authority of the corresponding reports of the public for the purpose of informing on the happening processes in the field of pricing and discussion of the made decisions;

j) expense recovery by revenue - revenue from rates shall reflect all-in cost (including the reasonable amendment on risk or profit) on electrical supply and to provide economic viability, stability of industry on short-term, medium-term and long-term perspectives;

k) effective use - rates shall promote the general demand and supply from the point of view of cost efficiency and to be structured to encourage steady, effective and efficient electricity use;

l) low implementation cost - capital costs and operating expenses shall be minimized;

m) social support - levels and structures of rates shall consider social policy of the republic;

o) ecological responsibility - production, transfer and electricity distribution shall be performed on steady basis and consider impact on the environment;

o) sufficiency of the generating capacities - expansion due to development of resources with the smallest costs according to national resource planning;

p) withdrawal from government subsidies - the industry shall reach and maintain financial stability without permanent government subsidies;

c) optimal capital structure - the ratio between equity and the debt capital shall be within 40:60. This ratio is used also for calculation of weighted average capital cost (WACC).

Appendix № 2

to the Resolution of the Cabinet of Ministers of the Republic of Uzbekistan of April 13, 2019 No. 310

Regulations on procedure for forming of electricity tariffs

Chapter 1. General provisions

1. This Provision determines the main procedure for forming of regulated rates for electrical and heat energy, and also services in distribution and sale of the electric power (further - products and services).

2. In this Provision the following basic concepts are used:

regulating authority - the Interdepartmental tariff commission under the Cabinet of Ministers of the Republic of Uzbekistan;

regulated activities - activities within which calculations for delivered goods and services are performed on the rates which are subject to state regulation. This concept is applied only for the purpose of identification of the expenses relating to regulated activities and does not include any other regulation concerning these activities, except establishment of rates;

the generating organizations - the organizations making electrical and (or) heat energy such as the thermal power plants, combined heat and power plants, hydroelectric power stations, power plants using renewable energy resources and also other electric power producers connected to single electric utility system;

the distribution organizations - the organizations rendering services in transfer from the high-level power networks of the electric power and to its sale to consumers of the republic;

rates - system of price rates according to which calculations for products and the services made by the organizations performing regulated activities are perfromed;

markup - the allowance (relative or absolute value) to the electricity tariff included in cost in case of electricity trading by the distribution organizations;

the regulation period - the period (calendar year and more) for which rates are calculated;

necessary gross revenue - economically reasonable amount of the financial resources necessary for the organization for implementation of regulated activities during the regulation period;

settlement production volume - forecast volume of production and services for each organization performing regulated activities;

operating expenses - the expenses connected with implementation of regulated activities;

capital investments - the costs connected with forming of the fixed assets and intangible assets connected with implementation of regulated activities;

regulating base of asset (further - RBA) - asset cost on which the organization performing regulated activities has the right to gain income and which is equal to book value of the fixed assets and intangible assets connected with implementation of regulated activities. At the same time the objects of construction in progress and the equipment which are not enacted in the normative (established) time do not join in RBA. The regulating authority can correct RBA for accounting of other balance sheet items that can lead to increase or reduction of RBA.

3. Rates are a part of the system regulated rates and free (non-regulated) rates.

Treat regulated rates:

rates for the electrical and heat energy made by the generating organizations;

the markup on services in distribution and sale of the electric power applied by the distribution organizations;

electricity tariffs for the different customer groups determined according to the Instructions for use electrical energy approved by the resolution of the Cabinet of Ministers of January 12, 2018 No. 22.

Electricity tariffs, acquired and implementable according to international treaties, including interstate transits on national networks belong to free (non-regulated) electricity tariffs.

4. Main objectives of forming of regulated rates are achievement of full recovery of all costs and provision to the organizations of electric power industry of support and the financial opportunities for development generating, transporting and the distributing capacities for the purpose of satisfaction of increasing demand for the electric power. Regulated rates shall reflect expenses, provide incentives for effective work of electric power industry and consider social compensations.

5. Regulation of rates is based on obligation of separate accounting by the organizations performing regulated activities, amounts of products and services, the income and expenses, and also the involved assets on production of electrical and heat energy, transfer, and also distribution and sale of the electric power.

The organizations performing regulated activities shall keep separate account on the following types of activity:

production of electricity;

production of heat energy;

transmission of electricity on the high-level power networks;

distribution and sale of the electric power to final consumers.

In case of establishment of regulated rates repeated accounting of the same expenses on the specified types of activity is not allowed.

6. In case of establishment of regulated rates the regulating authority takes the measures directed to exception of calculations of economically unreasonable expenses of the organizations performing regulated activities.

If following the results of the regulation period based on the this the statistical and financial reporting and other materials unreasonable expenses of the organizations performing regulated activities are revealed, regulating authorities shall make the decision on exception of these expenses of expense amount considered in case of establishment of rates for the next period of regulation.

At the same time the expenses which are not connected with implementation of regulated activities, revealed based on the this statistical and financial reportings and other materials belong to economically unreasonable expenses of the organizations performing regulated activities.

7. If the organization performs except regulated other types of activity, expenses on their implementation and income (losses) gained from these types of activity is not considered when calculating regulated rates.

If the organizations performing regulated activities during the period of regulation incurred economically reasonable expenses which are not considered in case of establishment of regulated rates, including the expenses connected with objective and unplanned increase in prices for products consumed during the regulation period, these expenses are considered by regulating authorities in case of establishment of regulated rates for subsequent period of regulation (except for the expenses connected with servicing of loan, the funds raised for covering of shortcoming except directed to fuel acquisition).

8. In case of regulation of rates the fixed sizes of rates per unit of products and services are established.

The specified rates can be established with calendar breakdown (monthly, quarter, annual), and also with breakdown on customer groups taking into account their features.

9. Regulated rates are calculated on the basis of the size of necessary gross revenue of the organizations performing regulated activities and settlement production volume of the corresponding type of products and services for the period of regulation.

At the same time regulated rates (markups) are determined by division of necessary gross revenue into settlement production volume by the following formula: The rate (markup) per unit of products and services = the Necessary gross revenue Settlement production volume Settlement volume of production and (or) the rendered services is determined proceeding from the composite balance estimation of production and electrical supplies created by the Department of Energy of the Republic of Uzbekistan.

10. Originally the period of regulation of rates is established for a period of one year, with the subsequent increase up to five years.

Chapter 2. Procedure for forming of necessary gross revenue

11. The necessary gross revenue for each organization performing regulated activities shall be established at the level sufficient for covering of the following costs:

effective level of operating expenses;

the depreciation charges on the assets connected with implementation of regulated activities;

profit on the invested capital.

The necessary gross revenue for all organizations performing regulated activities is established on the following formula:

NVV = SHOUTING + Amor + PEAK,

where:

NVV - necessary gross revenue;

SHOUTING - total annual operating expenses;

Amor - the annual depreciation charges;

PEAK - profit on the invested capital.

12. Operating expenses which are reasonable and necessary for implementation of regulated activities are included in the expenses for calculation of necessary gross revenue. The regulating authority can approve or correct the operating expenses provided by the organizations performing regulated activities on the basis of independent expert evaluation, comparative analysis or any other methods which will provide exact reflection of reasonable and reasonable expenses.

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