The final prices of electricity and the change in the “transmission” and “access” components predicted by DCEFR will have a negative impact on both companies operating on the territory of North-East Bulgaria — ENERGO-PRO Sales and ENERGO-PRO Networks

Today, 27 December 2013, the DCEFR presented to the public consultation a draft decision on the change of electricity prices from 1 January 2014. Immediately after the end of the discussion, ENERO-PRO Networks and ENERGO-PRO Sales submitted opinions to the Commission objecting to the proposed project. The parameters set out in it will lead to an increase in financial deficits in the energy system and increase the risks of destabilization of the chain of production — transmission — distribution — supply of electricity. This draft decision, in order to alleviate some of the accumulated problems in the energy sector, such as the indebtedness of the NEC, imposes an immeasurable financial burden on the network companies and the final suppliers who have direct contact with consumers and take care of their service.

If adopted, the annual revenues required in the report of DCEVR issued today will be extremely insufficient for both the network operator ENERGO-PRO Grids and the final supplier ENERGO-PRO Sales to carry out their activities.

Some of the provisions in the draft decision are of particular concern. For ENERGO-PRO Networks, the changes foreseen in the project of DKEVR will aggravate the difficult financial situation of the electricity distribution company. The planned further reduction of the company's transmission and access prices will inevitably be at the expense of investment opportunities and the level of maintenance of the electricity distribution network and customer service.

It is perplexing that, for the third time in less than a year, the rate of costs for technological losses — which should correspond to the actual technical condition of network facilities and change only when the actual state of the network changes — is puzzling. It is a well-known fact that the reduction of technological losses is achieved by upgrading the electricity distribution network and the use of more modern and weather-resistant equipment. The process, in addition to being extremely expensive, takes years, and the lower the level of losses achieved, the more difficult it is to reduce them further, due to objective physical laws. Since DCEVR's previous pricing decisions completely lacked projected investment costs, it is absolutely unclear how the electricity company is expected to reduce its technology losses in a matter of months and without investment.

In practice, the reduction of the recognized amount of costs for technological needs is entirely to the detriment of ENERGO-PRO Networks AD and its customers and is not in line with the real state of the network in the licensed territory serviced by the company and the conditions under which the company carries out its activities. The amount of technology losses achieved by the company has been steadily decreasing over the past few years. For the last calendar year, the company's technological costs are 14.14%. For its higher rates compared to other companies, there is an explanation. This is the lower concentration of the grid — just 38 users per km2, resulting in longer overhead and cable power lines and transformers that are extremely low-loaded and cannot be switched off and therefore incur transformation losses. In the EDPS proposal, the percentage of expenditure for technological needs does not cover the inherent necessary costs by 5.14% compared to the last accounting year (when technological losses were 14.14%). This is contrary to Art. 31 of the Energy Act, according to which, when implementing price regulation, the Commission is guided by the principles that prices must cover the economically justified costs of the activities of each of the market participants.

The amount proposed by the State Regulator of 9% of the costs for technological needs will result in unrecognized required annual revenues in the amount of BGN 32.5 million per annum, and this expense exceeds the total value of the return recognized by the DCEFR in the amount of BGN 28.1 million. In practice, this means that only due to the amount of unrecognized real and proven technological costs with invoices issued to it by the public supplier NEC EAD, DKEVR determines with the prices offered the company to operate at a loss.

There is a contradiction in the proposals made by the State Regulator — pursuant to Article 13, para. 1 Ordinance No. 1 of the DCEFR on the regulation of electricity prices, under the applicable pricing method for electricity distribution enterprises, the DCEFR has the obligation to recognize investment costs, especially in cases where it obliges the electricity distribution company to reduce costs for technological needs. This is the normal logic, given that the level of technological costs is directly proportional to the investments in the electricity distribution network. In order to have expectations of reducing the technological losses of the company, the necessary funds should be provided for the renewal, rehabilitation and repair of the network owned by the company. Something that in previous price periods, was at least partially done and that has led to the annual reduction in the amount of technological expenses of the company. An amount that to date is within and even below the average of the percentage of technological costs in other countries in Europe and the world.

According to data of the World Bank in the section “Countries and Markets” — Economic indicators of the Electricity Distribution Sector for technological losses in the transmission of electricity along the chain from high voltage to the final consumer, in the neighboring countries of Bulgaria, where the development of the electricity distribution network is relatively comparable, the percentage of technological losses of distribution of electricity from high voltage supplies the end user can also not reach the bet percentage of the DCEFR. In countries such as Lithuania, Macedonia and Kosovo, the figures exceed 18% and go up to 20%. Bulgaria is on the same level with countries such as Romania (12%), Turkey (14%) and Albania (13.8%).

In view of all the above, the reduction of the technological cost for the electricity distribution company by a new 2% is unjustified and the rate of change in the costs for technological needs should be adjusted taking into account the characteristics of the network and a percentage of technological costs of not less than 11% as laid down in Decision C-25/29.07.2013 should be set.

Like the price decision of 29.07.2013, in this draft decision, DCEVR has again not included the costs that the electricity distribution company has to balance the technological cost. With the latest decision of the State Regulator in the summer, the company was not recognized for such expenses. The lack of corrective actions in the new pricing solution will only further increase the financial hole with which ENERGO-PRO Networks will have to carry out its activities, which will inevitably affect the quality and reliability of its services and drastically limit its opportunities for new investments.

From the point of view of ENERGO-PRO Sales with the revenues referred to in the draft decision, the company will have to cover the full amount of its costs for the purchase of electricity in connection with the implementation of the activities of coordinator of a special balancing group. The report submitted by the State Regulator indicates that such costs are about to occur within the current price period. At the same time, in the necessary revenues thus determined by the DCEFR, additional costs for the purchase of electricity for balancing are not foreseen, and as a result of the shortage of funds, the supply company will not be able to finance its purchase.

The estimated costs calculated on the basis of the results of the test work carried out at Electricity System Operator EAD on the balancing market show that the balancing costs of the final supplier group are significant. For ENERGO-PRO Sales, their amount can reach over BGN 35 million. In the event that the financial settlement of the coordinator of the balancing group of the final supplier comes into force from 01.01.2014, the expenses of the company for the period January - June 2014 alone are expected to be in the amount of BGN 21.5 million. According to the regulator's report, these costs will not be reimbursed.

In addition to the above-mentioned costs arising from new obligations for the company, ENERGO-PRO Sales has daily expenses related to the daily activity of supplying electricity to over 1.1 million customers, which in 2012 amounted to over BGN 21.1 million. The DKEVR envisages that the company will cover these costs through a mark-up for final suppliers in the amount of 3% of the cost of purchasing electricity. With the mark-up thus proposed, the real costs of supply of the company cannot be reimbursed, and their non-recognition deprives the supply company ENERGO-PRO Sales of the opportunity to provide a return.