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Partner, Shkrebets & Partners
Practices of Provision of General Public Interest on Electricity Market during COVID-19
The onset and further development of the COVID-19 coronavirus pandemic had a tremendous impact on all sectors of the world economy. At national level it actually affected all industries, and the Ukrainian electricity market was no exception.
In order to prevent the spread of coronavirus COVID-19 on 17 March 2020 the Verkhovna Rada of Ukraine adopted the Law of Ukraine On Amendments to Certain Legislative Acts of Ukraine Aimed at Preventing the Occurrence and Spread of Coronavirus (COVID-19), paragraph 3 of Section II The “final provisions” of which provided for a ban on the period of quarantine and restrictive measures related to the spread of coronavirus (COVID-19), and within 30 days from the date of its cancellation, accrual and recovery of penalties (fines, penalties) for late payments for housing and communal services, termination/suspension of provision of such services to citizens of Ukraine in the event of their non-payment or incomplete payment.
Quarantine throughout Ukraine from 12 March 2020 was established by the Resolution of the Cabinet of Ministers of Ukraine from 11 March 2020 No. 211 On Prevention of the Spread on the Territory of Ukraine of Acute Respiratory Disease COVID-19 Caused by Coronavirus SARS-CoV-2.
In these circumstances, the National Commission for State Regulation of Energy and Utilities (hereinafter — NCSREU) developed, at the request of a number of electricity suppliers acting as universal service providers, as well as the transmission system operator PJSC NEC Ukrenergo the draft decision On Actions of Electricity Market Participants during the Period of Quarantine and Restrictive Measures related to the Spread of Coronavirus Disease (COVID-19).
Due to paragraph 4 of Part 3 of Article 5 of the Law of Ukraine On the Electricity Market the powers of the Cabinet of Ministers of Ukraine in the field of electricity include the decision to impose special responsibilities to ensure public interests and conditions (procedure) for the implementation of such special responsibilities.
According to item 9 h. 2, item 10 h. 3 Article 6 of the Law of Ukraine On the Electricity Market one of the main tasks of the NCSREU in the electricity market is to promote the achievement of high standards of execution of special duties to ensure public interest in the electricity market and the monitoring of such execution.
Article 62 of the Law of Ukraine On the Electricity Market provides that in order to ensure the general economic interest in the electricity sector of Ukraine, necessary to meet the interests of citizens, society and the state, and to ensure the sustainable long-term development of the electricity sector and competitiveness of the national economy, this article may be assigned special responsibilities to ensure the public interest in the functioning of the electricity market, in particular: 1) ensuring an increase in the share of electricity production from alternative energy sources; 2) performing the functions of universal service provider; 3) performing the functions of the supplier of “last hope”; 4) provision of services to ensure the development of generating capacity; 5) increasing the efficiency of combined production of heat and electricity; 6) other special duties in compliance with the provisions of Article 62.
The general public interests that can be ensured by the Cabinet of Ministers of Ukraine via the imposition of special responsibilities on market participants include: 1) national security, as well as security of electricity supply; 2) stability, proper quality and availability of electricity, including for vulnerable consumers; 3) environmental protection, energy efficiency, increasing the share of energy produced from alternative sources, and reducing greenhouse gas emissions; 4) protection of the health, life and property of the population.
Proposals on the scope and conditions of special responsibilities will be prepared by the Regulator taking into account the requirements of this Article and submitted to the Cabinet of Ministers of Ukraine after consultations with the Energy Community Secretariat.
Special responsibilities should be clearly defined, transparent, non-discriminatory and temporary.
The scope and conditions of the performance of special duties shall be necessary and proportionate to the legitimate public interest and will create the least obstacles to the development of the electricity market.
The decision of the Cabinet of Ministers of Ukraine on imposing special obligations on market participants defines: 1) the general public interest, to ensure which market participants are assigned special responsibilities; 2) the content and scope of special responsibilities; 3) market participants who have special responsibilities; 4) the scope of rights of market participants, which are subject to special obligations necessary to perform such duties; 5) categories of consumers to whom special responsibilities apply; 6) the territory and term of performance of special duties; 7) sources of funding and the procedure for determining the compensation provided to market participants who have special responsibilities.
The selection of a participant or participants in the electricity market to whom the Cabinet of Ministers of Ukraine has special responsibilities will be made in a transparent and non-discriminatory manner based on criteria approved by the Cabinet of Ministers of Ukraine.
The conditions for the performance of special duties shall ensure that the economically justified costs of the market participant for performance of such duties are covered.
In the substantiation of the draft decision On the Actions of Electricity Market Participants during the Quarantine Period and Restrictive Measures related to the Spread of Coronavirus Disease (COVID-19), the NCSREU proceeded from the need to ensure that universal service providers fulfill special responsibilities in the electricity energy market in accordance with Article 62, Article 63 of the Law of Ukraine On Electricity Market by prohibiting the application to such suppliers of penalties and other sanctions for late and/or incomplete payment for services provided by market participants, the announcement of such suppliers “default” during quarantine due to existing cash gap settlements in different segments of the electricity market, which caused a lack of working capital.
The regulator also noticed that without restricting commercial imports of electricity from non-energy countries, in a pandemic situation, some producers may decide to reduce capacity by decommissioning. The extent of such a decrease was considered by the NCSREU as unpredictable and could reach critical network operational values.
These risks were also clearly linked by the regulator to a possible shortage of able-bodied staff involved in generating and transmitting electricity in Ukraine.
Clause 6 of the Resolution of the — NCSREU of 8 March 2020 No.766 On Actions of Electricity Market Participants during Quarantine and Restrictive Measures related to the Spread of Coronavirus Disease (COVID-19) (after amendments by the regulator’s resolution dated 30 March 2020 No.905 — paragraph 7) instructed market participants in their applications for balancing electricity to indicate a price not exceeding 105% of the market price limit “day ahead” for this billing period.
Resolution No. 974 of the NCSREU dated 27 May 2020 amended this provision, which additionally provided for the application of the minimum value of the balancing electricity price, namely market participants in their applications for balancing electricity were required to indicate a price not less than the value of 65% of the market price “per day ahead” (hereinafter — RDN) for this billing period and which does not exceed 105% of the price limit on RDN for this billing period.
Another resolution of the NCSREU, No. 1107 of 10 June 2020 increased the specified minimum value to 80% of the price for RDN for this calculation period.
The next resolution of the regulator of 15 July 2020 No. 1430 item 7 of the Resolution of the NCSREU 8 April 2020 No. 766 supplemented the obligation of the settlement administrator to take into account only the applications of market participants for balancing electricity with the price determined in accordance with the provisions of this paragraph.
Based on Article 2, Article 17 of the Law of Ukraine On NCSREU for the effective implementation of state regulation, the tasks of the regulator include the development and, in coordination with the Antimonopoly Committee of Ukraine, approval of regulations in accordance with the Law of Ukraine On the Electricity Market, including Market Rules.
According to paragraph 10.11 of Section XI of the “Market Rules”, as approved by the Resolution of the NCSREU from 14 March 2018 No. 307, to the synchronization of the UES of Ukraine with the associations of energy systems of European Union member states (European Community of Trunk Network Operators in Electricity) market participants are, in their applications for balancing electricity, required to indicate a price of not less than 55% of the price of RDN for this billing period and not more than 115% of the established price limit for RDN for this billing period. If the balancing electricity supplier submits proposals for balancing electricity with a price that is outside the specified range, such an application is automatically rejected by the market management system.
Article 3 of the Law of Ukraine On the Principles of State Regulatory Policy in the Sphere of Economic Activity stipulates that its effect does not extend to the implementation of regulatory activities related to the adoption of acts of the NCSREU.
In turn, Article 15 of the Law of Ukraine On NCSREU establishes a clear and special procedure for the preparation and adoption of draft decisions by the regulator, which have the features of regulatory acts, particularly prior publication of the NCSREU’s draft decision together with materials justifying its adoption and impact analysis — sites of the regulator, comments and suggestions received within the period established by the regulator (from 10 days to three months), their mandatory consideration with the participation of interested parties, as well as the publication of information on the results of their consideration.
Failure to comply with the procedure for adopting and approving regulatory regulations in relation to the electricity market, paragraph 7 of the Resolution of the National Commission for Electricity Market of 8 April 2020 case No. 640/17361/20 and its suspension.
The decision of the District Administrative Court of Kyiv from 21 December 2020 in case No. 640/17361/20 on the grounds of non-compliance with the principles of state regulatory policy, disagreement with changes in the rules of the balancing market with the Antimonopoly Committee of Ukraine, paragraph 7 of NCSREU Resolution No.766 from 8 April 2020 (as amended by the resolutions of the National Commission for Regulation of Economic Competition dated 27 May 2020 No. 974; of 10 June 2020 No. 1107; 15 July 2020 No. 1430) was declared to be illegal and canceled.
Due to the fact that at the time of appeal proceedings in case No. 640/17361/20 the disputed provision of paragraph 7 of NCSREU resolution No. 766 from 8 April 2020 was excluded from the document by another Resolution issued by the regulator, No. 93 from 27 January 2021, the plaintiff in the case withdrew the claim, and such refusal was adopted by the decision of the Sixth Administrative Court of Appeal from 22 February 2021, the decision of the district administrative court of Kyiv from 21 December 2020 was declared invalid, and the proceedings were closed on the basis of p. 2 h. 1 st. 238 CAJ of Ukraine.
Thus, declaring the need to ensure the performance of special duties by universal service providers, the NCSREU, by resolution No.766 of 8 April 2020 for the period of quarantine and restrictive measures related to the spread of coronavirus disease (COVID-19), illegally changed the rules of operation of the balancing market.
The example of the crisis caused by the COVID-19 coronavirus pandemic and the situation with the adoption of NCSREU resolution No. 766 of 8 April 2020 shows the lack of a tool at the disposal of the regulator that would allow it, if necessary, to take its own regulatory measures to ensure the public interest in the electricity market without obligatory observance of sufficiently long procedures of adoption of a regulatory act or initiation of assignment of special duties via a resolution issued by the Cabinet of Ministers of Ukraine.