On June 8th, 2023, a draft Methodology for calculating penalties for violations of legislation and license terms in the energy and utility sectors was presented in an online event. This draft document was prepared for the National Energy and Utilities Regulatory Commission (hereinafter – NEURC/Regulator) as a result of a two-year effort led by the USAID Energy Security Project (ESP) with the active involvement and support of EY Ukraine and NEURC Department for Licensing Control.
The introduction of this Methodology will establish an effective and transparent mechanism for penalties calculation in line with best practices and should improve court litigation between NEURC and licensees.
The proposed Methodology is based on a six-step algorithm for determining the penalty level, which includes determining an initial penalty charge and providing the following adjustments considering the duration of the infringement, as well as any mitigating and aggravating circumstances and other factors. It has been developed considering the best experiences of the energy regulators and competition authorities in Austria, the UK, Germany, Slovakia, Hungary, and the Czech Republic. The Methodology’s design will require minimum amendments to the current energy legislation.
“Improving the legal and regulatory environment in the energy sector and higher resilience of energy supply will help to achieve a full-fledged economic development. Thus, providing NEURC with appropriate tools for monitoring, controlling, and supervising their licensees is crucial for the USAID Energy Security Project. While establishing incentives for the regulated entities, the Regulator should also be adequately equipped with an instrument to prevent and compensate any harm to customers. Furthermore, the licensees should not benefit financially from any law violations or failure,” Sukru Bogut, USAID Senior Energy Advisor in Ukraine, noted in his introductory address. “The market participants may have mixed feelings about penalties as, in times of war, being able to survive and operate continuously is seen as the highest priority. However, in these times, it is essential that all participants in the energy sector fully comply with the license terms. Violating the rules by one player may trigger a cascade of violations, and the consequences might be unpredictable. This is why we believe that it is time to introduce a Methodology for penalty calculation with a clear calculation algorithm, which would consider a wide range of factors specific to each licensee,“ – George Karagutoff, Senior Energy Economist of the USAID Energy Security Project (ESP), added.
Earlier that day, on June 8th, NEURC held a meeting at which the Regulator pre-approved the proposed draft Methodology for receiving comments from the licensees. “Our society is in a complicated situation. On the one hand, the monopolies have to work under hardship conditions. On the other hand, there is a higher demand for fairness from the customers. And it is our job – as the Regulator – to find the right solution to the sanctions issue based on a mathematical approach rather than emotions. And using a formula is the best way to go unemotional. This Methodology is timely, and we are grateful to the Energy Security Project that, jointly with our staff and EY Ukraine, has been modeling the situation and studying the penalty effectiveness. This important work has taken a long time. And today, we can share the draft Methodology with all market participants transparently and explain how it will work. Currently, NEURC is preparing for the public discussion of the draft,” NEURC Commissioner Olga Babyi said.
The Regulator evaluated the completeness of the draft document, which is expected to be adopted and introduced shortly. The collected data and proposed developments will be used to develop a penalty calculation Methodology under the REMIT requirements. “This document will be developed further, as the draft Law no. 5322 has been submitted to the Verkhovna Rada of Ukraine and is to be voted. I hope that soon after we have adopted this Methodology – next month already – we will be asking the Project to support the development of a new Methodology in line with the REMIT requirements,” – Commissioner Olga Babyi added.
The public hearings of the draft Methodology will be the next step. The Regulator, USAID ESP, and EY Ukraine are planning similar events to present the draft Methodology and how it will be applied to market participants. All further information will be placed on the Regulator’s website.