ORDER OF THE GOVERNMENT OF THE REPUBLIC OF MOLDOVA

of July 8, 1997 No. 628

About approval of the Restructuring plan of electric utility sector

For the purpose of accomplishment of the measures provided by the Program of activities of the Government of the Republic of Moldova for 1997 - 1998, the orders of the Government of the Republic of Moldova N478 of September 2, 1996. "About additional measures for financial improvement of the companies of fuel and energy complex of the Republic of Moldova", N169 of February 25, 1997. "About urgent measures on financial improvement of the companies of energy complex", the Government of the Republic of Moldova DECIDES:

1. Approve the Restructuring plan of electric utility sector (according to appendix).

2. To department of energy and fuel and energy resources, to the Ministry of privatization and management of state-owned property and Moldenergo state-owned company to provide in full at the scheduled time the embodiment in life of the measures planned in the Restructuring plan of electric utility sector.

3. To impose control over the implementation of this resolution on Mr. Ion Gutsa, the deputy prime minister, the Minister of Economic Affairs and reforms.

Appendix

to the Order of the Government of the Republic of Moldova No. 628 of July 8, 1997.

A. Demonopolization of electric utility sector

Now the Republic of Moldova is supplied with electrical energy by one company - Moldenergo state-owned company which practically is also prime manufacturer of heat energy for municipiums of Chisinau and Belts.

At this stage the Moldenergo state-owned company is in deep financial crisis that caused inability of rhythmical providing consumers with electrical energy in necessary amounts.

1. Main problems of Moldenergo state-owned company

Priorities of Moldenergo state-owned company which require urgent accomplishment are:

1) permanent non-payments of energy consumers of Moldenergo state-owned company and the company to the suppliers (for January 1, 1997 receivables constituted 450 million leu, and accounts payable - pour 1233 million);

2) inadequate tariff policy and system of cross subsidies which make impossible covering of cost of production and creation of necessary funds for repair, updating and development (the losses caused for this reason constituted 368 million leu in 1995 and pour 216 million "in 1996);

3) big technical losses and thefts of energy (22% of useful leave) as because of moral and physical wear of installations (60% are used over 21 year and 40% - 26 years), and due to the lack of modern system of accounting and control;

4) absence in the electrical power market of competitive environment that resulted in lack of openness in financial and economic activities of the energy companies and their low operating efficiency. The present structure of the company very bulky also does not fit into the market relations, it contains the excessive number of workers (80 clients in comparison with 145 in the European countries are the share of one worker). The structure of the company is provided in the appendix N1 to this Restructuring plan of the elekroenergetichesky sector;

5) production, transfer and electricity distribution are inefficient and low-quality (frequent power failure, the frequency of current is unstable and falls to Hz 49,3, mass shutdowns; the available capacity for energy production constitutes only 45% of established). The established and located capacities for production of electrical energy are provided in the appendix N2 to this Restructuring plan of electric utility sector;

6) unreasonable application of some methods of political impact on economic activity of Moldenergo state-owned company (in case of approval of rates the main accent is put on social aspect of problem and coercion to release energy without payment or in the form of commodity loan).

The gained negative effect of financial and technical issues in electric utility system threatens energy security of the state and leads to instability in electric power industry.

The restructuring plan of debts of the energy sector of the Republic of Moldova provided the measures necessary for improvement of financial situation of the energy companies. Obligatory organizational restructuring of electric utility sector is necessary for ensuring the sequence in promotion of economic reforms and use of the principles of market economy. The new structure will provide creation of real premises for development of the sector and stable providing the national economy and the population by necessary amount of electric power.

2. Restructuring purposes

This plan provides determination of short-term, medium-term and long-term actions for achievement of the following strategic objectives:

1) stable providing consumers with the electric power in necessary amounts, the appropriate quality and with the minimum costs;

2) implementation of elements of the competition on electricity market;

3) variety of sources of supply with fuel for secured provision of optimum structure of deliveries of different types of fuel;

4) attraction of local and foreign investments by establishment of clear and stable rules of implementation of activities in energy area for release of the state from obligations on financing of this sector;

5) restriction of influence of the state for production processes and for leave of electrical energy;

6) creation of the legislative and regulatory base which will establish the rights and obligations of all members of electricity market.

Practical accomplishment of the above-stated purposes will be performed in the way:

decentralization, incorporating and privatizations of electric utility sector;

departments of auxiliary productions and social facilities from core activities;

implementations of system of regulation of activities on electricity market and consumer protections.

3. General principles

Activities of electric utility sector include 6 main functions:

a) production of electrical and heat energy;

b) transmission of electricity (high-voltage power networks);

c) services of operational management (dispatching service);

d) wholesale purchase / sale of energy;

e) distribution (power networks of low and average voltage);

f) retail sale of the electric power. Restructuring of electric utility sector will be performed by its separation by the functional principle:

the component of production will be separated Moldenergo state-owned company and divided into the independent companies - joint-stock companies which will be privatized further;

the component of transfer of electrical energy and dispatch center will be united in independent state-owned company;

the component of distribution networks will be transformed to the independent companies - joint-stock companies which will be privatized further.

Restructuring and further optimization of electric utility sector includes also:

creation of private enterprises on retail sale of the electric power which have no networks of low voltage and have no territorial restrictions in activities for purchase and sale; creation of private enterprises on wholesale of electrical energy; department and incorporating the auxiliary companies with subsequent their privatization;

transfer of social facilities local governing bodies or their department and privatization;

transfer of thermal networks and boiler rooms of Moldenergo state-owned company on balance of Termocom joint-stock company, republican production association "Termocomenergo" with their inclusion in the authorized capital of the last or corresponding municipiums.

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