Brief Review of Changes in the Legislation Governing Heat and Power Industry
Sayat Zholshy & Partners Law Firm
In 2004 the power industry legislation in Kazakhstan underwent a number of significant changes with the adoption of 21 legal acts directly regulating this strategic sector of the national economy.
The Kazakhstan Government Resolution of 18 February 2004 has an important place among these acts; it approved The Concept for Further Development of Market Relations in the Power Industry of Kazakhstan for the period 2004-2006, and the Action Plan to Implement the Concept.1
1.Kazakhstan Government Resolution ¹ 190 of 18 February 2004, On Further Development of Market Relations in the Power Industry of Kazakhstan.
According to the Concept, reforms will be aimed at increasing the efficiency of the industry, forming market pricing mechanisms in the retail market and improvements to the wholesale market in electrical power and services, creating conditions to attract investment into the rehabilitation and development of the electric power potential of Kazakhstan.
The Concept outlined the main problems in the wholesale and retail power market which the new legislative initiatives aim to solve. Thus, it is planned to change the structure of the wholesale market in order to increase the proportion of power sold through centralised trading. In the retail market, the plan is to move away from a state-regulated monopoly, where all the provision in a given territory is made by one supplier, to a competitive market, in which suppliers compete for the right to provide power to end users.
In the first stage, ending by 1 April 2005, it is planned to create the conditions for the development of competition, divide up the activities of power distribution companies according to type and launch power supply companies. The Concept provides for the creation of a fully functioning centralised power trading market. In the second stage – by 31 December 2006 – it is planned to make the transition to competition between power supply companies.
The other extremely important regulatory legal act is Law No.588-IIof 9 July 2004, On the Power Industry. This document repealed the Law of 16 July 1999 with the same name.
In accordance with the provisions of the Concept and the new Law, the wholesale electric power market will adopt a structure consisting of the following segments:
· A decentralised electric power purchase and sale market, functioning on the basis of Electric Power Purchase and Sale Contracts concluded by market participants, the prices and supply conditions of which are set by agreements between the parties;
· A decentralised electric power trading market, which is an organised trading place for the purchase and sale of electric power on short-term (spot trade), medium-term (weekly, monthly) and long-term (quarterly, yearly) bases;
· An on-line balancing market, operating for the purpose of physical and consequent financial settlement of the hourly imbalances between actual and contracted quantities of generated and consumed electric power in the unified electric power system of Kazakhstan, which occur during the 24-hour operating period and are approved by the system operator in a 24-hour schedule of power generation and consumption;
· A system and supplementary services market, operating on the basis of both purchase of electric power from wholesale market participants and provision of relevant services to these entities by the system operator in order to ensure that the reliability of operation of the unified electric power system of Kazakhstan and the quality of the electric power meet state standards.
The retail market in electric power is defined as a system of relations operating on the basis of contracts (purchase and sale, power transmission and consumption, as well as provision of related services) between its members outside the wholesale electric power market.
A market participant called the “system administrator” has been created in accordance with the Law and performs day-to-day centralised power system dispatching for the unified power system of Kazakhstan.
The closing provisions of the Law state the obligation of the wholesale market members to participate in the on-line balancing mechanism (for physical and consequent financial settlement of imbalances, occurring during a 24-hour operating period), which obligation comes into force only from 1 January 2006.
Another provision states that, before 1 October 2004, power transmission companies should separate power and/or heat transmission from power supply, and regional power distribution companies should separate electric power transmission from power supply by creating power supply companies.
Also, since 1 October 2004, power generating companies and guaranteeing power suppliers (i.e., those supplying electric power in cases where power supplies are cut off through no fault of the consumer) are obliged to participate in centralised electrical power trading, and also to provide electric power to consumers on a contractual basis in cases of termination of power supply through no fault of the latter.
In accordance with the new structure and functions of the electric power market participants, on 28 October 2004 the Kazakhstan Government adopted Resolution No.1105 to approve the Regulation of the Ministry of Energy and Mineral Resources of Kazakhstan. Government Resolution No.1106 approved the Regulation of the Committee of State Energy Supervision of the Ministry of Energy and Mineral Resources of Kazakhstan.
Within the framework of the above Law, and in accordance with Order of the Prime Minister of Kazakhstan No.284-p-1 of 28 September 2004, To Approve Measures for Implementation of the Law of Kazakhstan, On the Power Industry,a number of subordinate acts have been adopted. Special attention should be paid to Resolution No.1044 of 8 October 2004, To Approve the Rules for Connecting Additional Load and Recovering Costs for Reconstruction and Extension of Electric Power Facilities.
The issues of recovery of costs for extension and reconstruction of electrical facilities in cases where additional load is hooked up arise during the construction and modernisation of large sites (plants, residential buildings, etc.). Connecting such sites requires the extension of electrical facilities, which is essentially expensive. In turn, in certain cases the legislation allows the imposition of an obligation on the connected consumers to reimburse these costs.
Before adopting the above Rules, the legislative regulation of the reimbursement of additional expenses was a controversial issue. Thus, the Law of 16 July 2001, On Architectural, Urban Planning and Construction Activities in Kazakhstan provided an opportunity to resolve the cost recovery between suppliers and consumers in particular cases on a contractual and recoverable basis, where “recoverability” could be interpreted as "the return of money received". At the same time, the previously applicable Regulation of the Procedure and Conditions of Recovery of Additional Costs for Extension and Reconstruction of Facilities Supplied with Additional Load allowed the recovery to be made by shares (participation shares) in the supplier. The new Rules expressly state that the recovery of costs from the consumer should be made by cash. Shares in power generating and transmitting companies may be used to recover funds received from the budget for extension and reconstruction of power sources as well as transport networks.
The Rules introduce the notions of "payment for the connected load", "natural growth of demand", "additional load", "electric power transmission network".
Among other acts adopted in 2004 and related to the power industry, Government Resolution No.810 of 30 July 2004, To Approve the List of Strategically Important Facilities by Industries, which Facilities are subject to State Property Monitoring could be mentioned. This List also includes a number of power generation and distribution companies: AES Ekibastuz Power Plant No.1, Ekibastuz Power Plant No.2, Eurasian Energy Corporation, Almaty Power Consolidated, AES Ust-Kamenogorskaya Hydro Power Plant, AES Shulbinskaya Hydro Power Plant, East-Kazakhstan Regional Power Company, Almaty Teplokommunenergo, and KEGOC. This Resolution was adopted in pursuance of Law No.490-II of 4 November 2004, On State Property Monitoring in Strategically Important Industries.
In conclusion we would like to mention the Law of Kazakhstan of 2 December 2004, On the State Budget for the Year 2005, which includes allocation of budgetary funds (740 million tenge) to compensate for increased tariffs for electric power generated by the power generation company and to ensure a sustained power supply in Southern Kazakhstan. This is caused by the growing deficit of power supplies, especially in the southern regions of the country, forcing Kazakhstan to purchase electric power from Russia and Kyrgyzstan at higher prices.
Some Subordinate Acts Related to Power Industry, Adopted in 2004
· Order of the Minister of Energy and Mineral Resources of Kazakhstan No.54 of 4 March 2004, To Appoint the Operator of the Centralised Electric Power Trading Market
· Kazakhstan Government Resolution No.623 of 4 June 2004, To Approve the Plan for Developing the Open Joint Stock Company Kazakhstan Electricity Grid Operating Company (KEGOC) for the period 2004–2006
· Order of the Acting Minister of Energy and Mineral Resources of Kazakhstan No.197 of 27 August 2004, To Approve the Rules for Organising and Operating the Wholesale Electric Power Market of Kazakhstan
· Order of the Acting Minister of Energy and Mineral Resources of Kazakhstan No.212of 10 September 2004, To Approve the Rules for Organising and Operating Centralised Electric Power Trading in Kazakhstan
· Order of the Acting Minister of Energy and Mineral Resources of Kazakhstan No.213of 10 September 2004, To Approve the Rules for Providing Services by the System Operator and Organising and Operating the System and Supplementary Services Market
· Order of the Minister of Energy and Mineral Resources of Kazakhstan No.232of 30 September 2004, To Approve the Rules for Organising and Operating the Retail Electric Power Market, Access to that Market and Provision of Services in the Market
· Order of the Acting Minister of Energy and Mineral Resources of Kazakhstan No.214of 10 September 2004, To Approve the Rules for Energy Expert Examinations
· Order of the Minister of Energy and Mineral Resources of Kazakhstan No.220of 16 September 2004, To Approve the Rules for Preventing and Eliminating Emergency Breakdowns in the Unified Electricity System of Kazakhstan
· Kazakhstan Government Resolution No.1044 of 8 October 2004, To Approve the Rules for Connecting Additional Load and Recovering Costs for Reconstruction and Extension of Electric Power Facilities
· Order of the Minister of Energy and Mineral Resources of Kazakhstan No.120of 28 May 2004, To Approve the Instructions for Issuing Permits to Organisations Applying to Carry out Energy Expert Examinations(revoked by Order of the Minister of Energy and Mineral Resources No.180 of 16 August 2004)
· Order of the Chairman of the Kazakhstan Agency for Regulation of Natural Monopolies and Protection of Competition No.215-OD of 30 April 2004, To Approve the Methods for Calculating the Temporary Reduction Coefficient to the Tariff (Price, Rate of Charge) for Electric Power Transmission Services and/or Technical Dispatch of Output to the Electricity Network
· Order of the Chairman of the Kazakhstan Agency for Regulation of Natural Monopolies and Protection of Competition No.402-ODof 30 September 2004, To Approve the Rules for Separate Accounting of Costs in Regional Electricity Network Companies and Electric Power Transmitting Companies by Type of Activity and Transfer of Sales Activities to Power Supply Companies
· Order of the Chairman of the Kazakhstan Agency for Regulation of Natural Monopolies and Protection of Competition No.417-OD of 6 October 2004, To Approve the Rules for Separate Accounting of Revenues, Costs and Operational Assets by Natural Monopolists Providing Electric Power Transmission Services over Inter-Regional Networks and Other Services
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