GETTING PREPARED FOR SALES

Prime Minister Viktor Yushchenko is trying to replace the current minister for fuel and energy, the Enerhorynok state-run enterprise continues a mindless war against electricity suppliers, and creditors can in the meantime seize the moment and organize their own shadow privatization of energy companies.

This brings to mind Premier Yushchenko and Yuliya Tymoshenko introducing a new minister, Serhiy Yermilov, to the Ministry for Fuel and Energy.

“I am sure Minister Yermilov will cope with his duties... Please receive Mr. Yermilov so that he feels he has come back home,” Mr. Yushchenko encouraged his brand-new minister before ministry officials.

Throwing his weight behind the good Yermilov, the premier could not resist characterizing his predecessor Serhiy Tulub in negative terms, saying, “The cabinet leadership was disappointed with the performance of the Ministry for Fuel and Energy in the four months when it was headed by Serhiy Tulub.” As subsequent developments showed, “the cabinet leadership” was disappointed to no lesser a degree later, when the ministry was led by Yermilov. This disappointment peaked when the premier filed a request the week before last to dismiss the current fuel and energy minister. Mr. Yushchenko told journalists Mr. Yermilov lacks the professional qualities to be minister for fuel and energy. This comment appeared strange. It implies that last July Premier Yushchenko lobbied for a minister without knowing his professional qualities.

There is hardly any sense in guessing what guided Mr. Yushchenko when he was actively supporting new energy boss Yermilov that July evening or what was the reason why he demanded Yermilov’s dismissal the week before last.

Perhaps only the premier himself knows these why, because it would be ludicrous to expect Ivan Plachkov, being tipped by the cabinet as the next minister, to have a higher professional level than the current one.

This is not the point. Any manager of a viable commercial facility now knows that work begins with identifying a goal, assigning tasks, and selecting those who will fulfill them. Staff reshuffles and the lack of clear selection criteria testify to the absence of any cadre policy, clearly defined goals, tasks, and, hence, strategy. However, no company will weather the market without a strategy. Without a strategy any government is doomed.

A DEGREE OF FORGETFULNESS

The absence of a government strategy in the energy sector causes state managers to resort to chaotic and unbalanced actions: merely changing labels instead of making an in-depth analysis of the industry’s problems and confrontation with energy market operators instead of a search for mutually acceptable economic solutions. The level of today’s so-called energy policy in this country is vividly illustrated by a January 14 letter from Enerhorynok (Energy Market, a state- run entity under the cabinet) Director Yuri Prodan to Vice Premier for Industrial Policy Oleh Dubyna.

Mr. Prodan directs the Vice Premier’s attention to his allegation that the National Commission for Electricity Regulation (NCER) has unjustifiably overrated the share of money transferable to electric companies from their distribution accounts. Moreover, Mr. Yushchenko had also unveiled this kind of information in his speeches a little before as an argument for dismissing NCER Chairman Oleksandr Hrydasov.

This creates an impression that the head of government and Enerhorynok director learned only in February what the media had been repeated reporting since December last. Intentionally or not, Enerhorynok Director Prodan seems to have forgotten in this letter a number of essential events and phenomena without which the vice premier would not get a true picture of the mechanism that sets electricity rates. The Enerhorynok boss forgot to disclose, for example, that since December the NCER has gradually been increasing the transmission and supply rates for all Ukrainian electric companies; that the increase of power transmission and supply tariffs was caused by the increased share of funds the oblenerho (regional electric companies) transfer from distribution accounts; and that the 2000 rate formulas of this kind caused most of the 27 such Ukrainian entities to lose money, brought their employees wage and salary arrears, and depleted almost all resources for repair of the power grids. He also failed to remember that the current rates are far short of the magic 0.8 cents a kWh that strategic investors demanded be in effect by February 1, and that the potential buyers of the Ukrainian oblenerho enterprises, foreign energy companies, think it necessary to set in Ukraine a transmission rate of at least 1.5 cents per kWh.

The average statistical share of funds receivable by the Ukrainian regional power companies accounts for about 20% of the cost of electricity consumed, while foreign practice shows a figure of 40-50%. In 2000, overall losses of electric power in the oblenerho grids rose from 17.72% to 18.56% of transportable electricity vs. the world standard of 5-6%. Electricity losses in transmission lines make up almost half the electricity generated by the natural gas plants supplied by ITERA in 2000. Finally, the despicable technical state of the transmission infrastructure was convincingly demonstrated by the weather- related chaos of late November.

It can only be hoped that Mr. Dubyna will eventually look into the tightly-knotted energy problems with the aid of highly skilled experts who will supply him with analytical materials.

STATISTICS AS A STYLE OF WORK

Was Mr. Prodan supposed to tell the person in charge of this country’s industry and the fuel and energy complex about the important things he forgot to mention earlier?

The management of Enerhorynok, the wholesale electricity monopoly, is stubbornly reducing its own role to that of a statistical recorder of financial flows in this sector. Since the times when energy and fuel was taken care of by Yuliya Tymoshenko, Enerhorynok has been duly informing its bosses about which oblenerho remitted a certain amount of money to the common distribution account. Those who remitted less money were threatened with such punishments as central management, legal action, bankruptcy, and fines.

Neither the cabinet nor En erhorynok seemed terribly much preoccupied with why there were no 100% monetary payments for electrical power or why the punishments meted out were ineffective. They never took into account such things as the absence of budget funds to pay for energy resources, commercial losses of electricity in the grids, practical impossibility of cutting off electricity from some deadbeats, and inability of most oblenerho enterprises to muster sufficient technical and financial resources to efficiently sell their energy.

Mrs. Tymoshenko was loath to go into details on this Great Energy War.

Enerhorynko seems to be sticking to the same style of work. The full arsenal of the “wholesale market resource distributor” seems to come down to making statistical reports, spotting “underachievers,” and punishing the guilty. What is also surprising is the arbitrary interpretation by Enerhorynok bureaucrats of the current procedure of energy market resource distribution set by the law on electrical energy.

The aforementioned letter from Mr. Prodan to Mr. Dubyna says, “Moreover, the NCER applies a practice when, in addition to the stipulated interest, funds are transferred as compensation for what was undertransferred to the electricity companies when payments were being made according to certain Cabinet of Ministers resolutions.”

As we know, settlements according to certain cabinet resolutions is nothing but interbank offsets not involving money, so widely resorted to under the leadership of Mrs. Tymoshenko. She increased this practice of clearing in the second half of last year during the drive to increase indices of payments for electricity. The share of interbank clearing sometimes exceeded 50% of total electricity payments.

In making clearing settlements, the electric companies failed to receive the money due them from the distribution accounts, which ran counter to the funds distribution algorithm. To compensate the oblenerho at least to some extent for tens of millions of hryvnias they failed to receive in 2000, the NCER sets additional monthly allocations to these companies from the energy market account in compliance with the law on electrical energy.

This quite justifiable and lawful practice does not suit the Enerhorynok director who under Ms. Tymoshenko’s leadership had become accustomed to securing money receipts to the energy market account at any price. The reasoning was very simple: the regional companies did not transfer earlier all the electricity money to the energy market account, so it was not necessary to return them the funds they failed to receive in 2000 because of clearing operations.

It still remains a question whether the Enerhorynok boss can pursue this double standard and reduce his energy market functions to whip-cracking alone.

Meanwhile, the Enerhorynok statute approved by government resolution No. 922 of June 5 sets out a broader range of activities for this state monopoly.

Enerhorynok was conceived, among other things, to become the main organizer of the wholesale electricity market, a research, consultative, and analytical center as soon as it gained independent legal status. To this end, Enerhorynok was to be duly financed by the energy market operators themselves, and its employees be highly paid, twice the average figure in the electricity sector.

MOHAMMED GOES TO THE MOUNTAIN

The Ukrainian energy sector in its present state of impasse and possible collapse would do well to have a real analytical center. With endless procrastination of the privatization of energy facilities against the backdrop of a steep rise in the debts of enterprises, the state has thus laid the groundwork for a shadow and uncontrollable privatization of the energy sector. This kind of privatization could have completely unpredictable consequences.

As the Enerhorynok management and lawyers were choosing punitive measures for energy market operators, i.e., power suppliers, it became clear there would soon be nobody to apply these measures to. Burdened with billions in debts and dozens of lawsuits from creditors, including Enerhorynok itself, the electricity generating and supplying companies have ended up facing virtual extinction.

The public has left almost unnoticed the auction sale of the better part of Donetskoblenerho electric grids in 2000.

Now this company is dutifully paying rent for what are now grids belonging to others, continues to run up debts, and expects new auctions. The Donetskoblenerho precedent has proven attractive. Last week government officials almost finished taking inventory of the Donbasenerho electric generating enterprise’s power plants in compliance with the ruling of Ukraine’s High Court of Arbitration following a lawsuit brought by the Ukrainian Gas Trading House.

We can only sympathize with Ihor Smirnov, chairman of the Donbasenerho board of directors, who began to seek solace and protection with his colleagues at the energy market board meeting on February 13. Mr. Smirnov’s speech resembled the weeping of one dying in a lepers’ colony, while the electric company bosses sitting in the hall could only wring their hands in sympathy and dismay. The energy market has no free money to pay off the Donbasenerho debt to the Trading House, but even if such money were available, it would hardly help Mr. Smirnov. For the Trading House is being trailed by a host of other creditors, starting with the State Reserve, Energy and Fuel of Ukraine, regional motor transport authorities, and finishing with a host of smaller scale creditors in the guise of commercial structures.

The rest of the generating companies are in a not much better state, for the auction sales of their property is only a question of time.

In addition to thermal power plants, the Dnistrohydroenerho hydroelectric enterprise is also undergoing bankruptcy. Creditors have filed the first suits against it. The Enerhoatom enterprise is paying in suit to Zaporizhabrazyv whose controlling shares belong to the far from obscure Brinkford.

Lawsuits are on the rise, creditors marching in droves, and energy companies running up billions in debts, bringing the Ukrainian energy sector still closer to being auctioned off. The situation is further aggravated by fact that, even if energy suppliers manage to pay all their electricity debts, the generating companies will still be incurring several billions in new debts. At the beginning of this year, power suppliers owed UAH 9.8 billion to Enerhoatom, Enerhorynok owed UAH 11.3 billion to the generating companies, while the latter ran up a UAH 17 billion debt to their creditors.

It would seem that the government should mobilize all its intellectual powers to ward off the chaotic sale of energy facilities and bring it under control. The earliest possible inventory of energy company debts should be made as well as a restructuring of what can be restructured in order to write off some of the debts and begin negotiations with investors on the conditions of an early open tender sale of the facilities.

The government has managed to restructure the debts of four of the six regional enterprises tendered, linking the debt chain through the generating companies to the State Reserve. It should be noted, however, that the generators owe UAH 2.2 billion to the State Reserve, while the oblenerho enterprises are in debt to the energy market to tune of UAH 9.8 billion. In addition, the government plans to put up for sale all Ukraine’s electric companies by the end of the year, with privatization being impossible unless the problem of their debts is solved.

What is Enerhorynok doing in the current situation? It is launching a new round of legal actions and bankruptcy procedures against the electricity supplying companies, further tightening the already unbreakable knot of debt-suit problems.

It is through the fault of Enerhorynok, which failed to get the arbitration court ruling in respect of Kherson Oblenerho suspended, that it became practically impossible and senseless to restructure this company’s debts. This gives the company only a slim chance of being sold.

Enerhorynok does not seem to have drawn the relevant conclusions from this lesson. The state-run enterprise continues to mind its own business, reporting to the higher echelons of power about the work it has done. The Ukrainian energy sector is tottering on the brink of being painfully divided into the tiniest of parts with all that this implies. It cannot be ruled out that very soon not only every power plant but also every power unit will be owned by one or even more than one entity.

Each pipe, boiler access door, or turbine blade will have its own owner. It could well take these new owners much time to find out who and how much must be paid to whom for the use of a boiler or turbo-generator part. As the dispute drags on, the turbo-generator could grind to a halt.

And what about the cabinet leadership? What is it doing? The Cabinet of Ministers leadership is looking for a new candidate minister for fuel and energy with which it has already been disappointed in only a few months of working together.

INCIDENTALLY

Former Prime Minister and leader of the People’s Democratic Party Valery Pustovoitenko thinks that 2000 was “a year of failure, as far as energy is concerned,” because in that year coal production in Ukraine dropped by 4.3 million tons, the transit of Russian gas across the Ukrainian territory by 12 billion cubic meters, oil production by 17%, and oil processing in Ukrainian refineries by 40 %, Interfax- Ukraine reports.