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The Energy Tariffs Debate: Stoking the Fire

The possibility of lowering electricity and gas tariffs has become one of the top discussion topics across the country in the last few weeks. Little wonder of the interest in this topic at the time when gas and electricity bills reach their annual peak in account of the increased use of electricity and gas during the winter period.

Having thought for some time about the feasibility of reducing electricity and gas tariffs in the near future, one comes across three questions that need to be addressed before jumping to hasty and potentially regrettable decisions.

1) How can the government decide on lowering tariffs if, according to the Law on Electricity and Gas, the mandate to set them is vested with the GNEWRC, allegedly an independent regulator?

As part of the reform process of Georgia’s energy sector, several governments have signed several agreements on the privatization of energy-sector infrastructure, payment for transit services, etc. While these agreements remain undisclosed, they surely contain provisions providing safeguards, guarantees and conditions protecting the counterparties’ investments. 2) How feasible is it to re-negotiate them in the immediate future?

The winter months are the most demanding for the companies operating the energy sector (importers, transporters, distributors, etc.). 3) how sensible is it to create uncertainties about the viability of these companies during this period?

Based on the answers to these questions, there is little justification for an immediate reduction of electricity and gas tariffs. That is without running the risk to undo the progress achieved in terms of reliable supply of electricity and gas and to damage the State’s reputation as investor-friendly and law-abiding.

More interestingly, the debate generated around the energy tariffs shows that the energy sector in Georgia is ripe for a review. The comments and analysis in numerous fora (including this blog) over the past months point to the fact that the realities of the energy sector are quite different since the law on Electricity and Gas was first passed in 1997, and since the Parliament approved the Main Directions of Georgia’s State Energy Policy in 2007.

What has changed? According to a World Bank study (Fighting Corruption in Public Services: Chronicling Georgia’s Reforms”, 2012), electricity bills are being paid in full since 2009 and electricity generation increased almost 45 percent between 2004-2010. Official statistics also report that the energy sector attracted in 2011 the largest amount of foreign direct investment.

What about the consumers? Well, first and foremost they no longer suffer long and wide power blackouts or gas cuts (though the quality of supplies can still improve, see below).

Notwithstanding the financial viability and reliable operation of the energy sector, the debate around the energy tariff has brought up a number of issues that need to be addressed to ensure that the energy sector positively contributes to economic development. Yes, at the end of the day, that is all the energy sector is: a necessary evil for the economy to function and people to have access to lighting, water, heating and transport. Some of these issues (contributions are welcome) are:

- Does it make sense to continue state support for hydroelectric plants or should this support be expanded to other energy sources in order to expand the generation mix thus increasing the security of energy supplies?

  • Is the State maximizing the profits from the natural gas it receives as in-kind payment for the transit services offered to Russia and Azerbaijan? How could these profits be increased and spent?
  • Does it make sense to accelerate the liberalization of the electricity and gas markets to increase competition? How this liberalization can be achieved?
  • Is the structure of energy tariffs commensurate with the current state of affairs in the sector?
  • Should producers, transporters, distributors and consumers be motivated to use energy more efficiently thus reducing costs in the sector?
  • Since they are paying in full, aren’t consumers entitled to adequate quality of electricity and gas?

It is the answers to these questions that shall ultimately determine how and when energy tariffs will evolve. The coming winter months are a good opportunity to launch, involving all relevant parties, a revision of the Main Directions of State Energy Policy providing a structured set of guidelines for the sector.


About the author:
Iñigo Arencibia is an independent consultant on energy policy with 15-years experience in Eastern Europe, the Caucasus and Central Asia.

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Guest - Eric on Thursday, 06 December 2012 02:28

Of the many great points in the blog, I chose this one to amplify:
"Since they are paying in full, aren’t consumers entitled to adequate quality of electricity and gas?"

Indeed, they are, and this is not only a question of technical quality (you know it is bad when you have to change the third bulb in a week), and not only a question of power outages.

How about decent customer service?

We've been regularly paying for electricity ever since I came to Georgia more than 5 years ago, but a few times we missed the deadline. Sometimes by a few hours. Guess what, they (Telasi) cut us off. Of course, we stopped missing deadlines after suffering a couple of forced blackouts that lasted a couple of days each. But every month we are spending precious nervous energy to make sure we don't forget to make the f****** payment.

Hello, how about being a bit more nice to your customers? The problem of non-payment is gone. There are other ways of collecting payments. Fine us for being late with payments at whatever rate you like: 10, 20, 30%/day.

And what the hell has been GNEWRC doing all these years? Customer service is under its jurisdiction. It is in any case not regulating the tariffs except on paper (tariffs are fixed). Wake up guys!!!

Of the many great points in the blog, I chose this one to amplify: "Since they are paying in full, aren’t consumers entitled to adequate quality of electricity and gas?" Indeed, they are, and this is not only a question of technical quality (you know it is bad when you have to change the third bulb in a week), and not only a question of power outages. How about decent customer service? We've been regularly paying for electricity ever since I came to Georgia more than 5 years ago, but a few times we missed the deadline. Sometimes by a few hours. Guess what, they (Telasi) cut us off. Of course, we stopped missing deadlines after suffering a couple of forced blackouts that lasted a couple of days each. But every month we are spending precious nervous energy to make sure we don't forget to make the f****** payment. Hello, how about being a bit more nice to your customers? The problem of non-payment is gone. There are other ways of collecting payments. Fine us for being late with payments at whatever rate you like: 10, 20, 30%/day. And what the hell has been GNEWRC doing all these years? Customer service is under its jurisdiction. It is in any case not regulating the tariffs except on paper (tariffs are fixed). Wake up guys!!!
Guest - Inigo on Thursday, 06 December 2012 17:32

Indeed Eric, customer service is the most obvious missing link. Let's look at the two issues you bring up.

First, the point about the frigging (is the word you had in mind) payment: in my experience (just over 3 years), making sure that it gets paid is the one and only customer-driven point where the Tbilisi electricity company has conceded. As far as I have lived here, electricity bills have arrived on the same date every month with the punctuality of a British train from the good old times. Moreover, the only user friendliness (not easy to find, I agree) of the company website lies in the function that lets users check the status of their bills (in 3 languages) by entering their customer number. Last but not least, it appears easy enough to pay the bills at any bank or in those e-payment machines that decorate Tbilisi's pavements. Alternatively, it is easy enough to make a standing order at your bank for automatic settling of this type of bills.

As to how and when the regulator is to address quality and customer service, now that consumers have got used to paying for the energy they consume the time is certainly ripe for demanding a quid-pro-quo from the energy companies in that they start to work as service providers. In addressing this, GNEWRC might benefit from a little push from the government as part of the proposed review of the priorities for the energy sector.

Indeed Eric, customer service is the most obvious missing link. Let's look at the two issues you bring up. First, the point about the frigging (is the word you had in mind) payment: in my experience (just over 3 years), making sure that it gets paid is the one and only customer-driven point where the Tbilisi electricity company has conceded. As far as I have lived here, electricity bills have arrived on the same date every month with the punctuality of a British train from the good old times. Moreover, the only user friendliness (not easy to find, I agree) of the company website lies in the function that lets users check the status of their bills (in 3 languages) by entering their customer number. Last but not least, it appears easy enough to pay the bills at any bank or in those e-payment machines that decorate Tbilisi's pavements. Alternatively, it is easy enough to make a standing order at your bank for automatic settling of this type of bills. As to how and when the regulator is to address quality and customer service, now that consumers have got used to paying for the energy they consume the time is certainly ripe for demanding a quid-pro-quo from the energy companies in that they start to work as service providers. In addressing this, GNEWRC might benefit from a little push from the government as part of the proposed review of the priorities for the energy sector.
Guest - Michael on Friday, 07 December 2012 01:52

I would be interested in learning what the reasons for the often low quality of the current are. Are these technical reasons? Economic reasons? A mix of the two? Or poor management?

I would be interested in learning what the reasons for the often low quality of the current are. Are these technical reasons? Economic reasons? A mix of the two? Or poor management?
Guest - Inigo on Friday, 07 December 2012 12:48

Michael, why would a taxi driver invest in a new car when his revenue is stable enough while using a fifth-hand opel?

That being said, one of the main reasons as to the privatization of utilities is to secure fresh funds towards the modernization of their networks. It is standard practice that these investment obligations are described in the purchase agreement between the privatisation authority and the buyer. Hence the underlying question is: did someone forget to set out this obligation at the time of privatising the company? If the obligation was set out (and I am pretty confident it was), then, the regulator (GNERWC) has not been doing its job properly to ensure that utilities honour their commitments.

Michael, why would a taxi driver invest in a new car when his revenue is stable enough while using a fifth-hand opel? That being said, one of the main reasons as to the privatization of utilities is to secure fresh funds towards the modernization of their networks. It is standard practice that these investment obligations are described in the purchase agreement between the privatisation authority and the buyer. Hence the underlying question is: did someone forget to set out this obligation at the time of privatising the company? If the obligation was set out (and I am pretty confident it was), then, the regulator (GNERWC) has not been doing its job properly to ensure that utilities honour their commitments.
Guest - Lintu on Thursday, 27 December 2012 16:56

The energy tariffs which we had included the fixed costs of building new power plants,improving management and so on... Which didn't happen, services still need to be improved, company didn't fulfill the plan, it turned out that we payed more for no reason. there were some improvements definitely, but less than promised.
So now it's time to do one of the two: improve the situation (services, new plants...) or decrease the prices to the real level. I'd like to see both together XD

The energy tariffs which we had included the fixed costs of building new power plants,improving management and so on... Which didn't happen, services still need to be improved, company didn't fulfill the plan, it turned out that we payed more for no reason. there were some improvements definitely, but less than promised. So now it's time to do one of the two: improve the situation (services, new plants...) or decrease the prices to the real level. I'd like to see both together XD
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