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"Winter is coming": on debts and prospects of Pavlohradteploenergo

03 October 2017372
Kotelnaya

Pavlohrad residents are apprehending the 2017-2018 heating season. Heating bills are always a surprise. A bad one as a rule.

At their apartments and public offices, people in the city do not care about fashion - popular are felted ugg boots, fur vests detached from heavy jackets, and grandmother's head scarfs used as ponchos." What else should one do to get warm? The kitchen talks increasingly come down to complaints about a hefty share of salary to be paid for heating.

Is there any realistic hope for cheaper heating in the future? What amount should be in the accounts of heating companies to ensure a comfortable winter for us? And where are those financial holes that drain the heat that warms us in winter? Павлоград.dp.ua set out to find the answers.

 

WHO PROVIDES HEATING TO PAVLOHRAD?

The heating provider for already 50 years to practically all high-rise residential buildings, social institutions and enterprises of Pavlohrad have been the utility company Pavlohradteploenergo (Pavlohradteploenergo UC). The 100 percent owner of the enterprise is the Pavlohrad City Council. The history of Pavlohradteploenergo UC began in the fall of 1966. Back then, the Horvietka district boiler house was converted to the Pavlohrad raion boiler house, and a heating network developed. Now 19 boiler rooms of the enterprise provide heating to 690 properties: residential buildings, schools, kindergartens, hospitals. The lion's share of the boiler houses operates on decrepit Soviet-era energy-hungry equipment. They are technically capable of providing the city with heating uninterruptedly (yet even experts feel it hard to tell how much loner they will continue in service), but there is another side of the issue, the financial one.

 

UPSIDES AND DOWNSIDES OF PAVLOHRADTEPLOENERGO'S BUDGET

Free cheese is only in a mousetrap. There is no reason to wait for free heating at the apartments and institutions in our city as free heating does not exist in principle. And in order to pay for all the components responsible for a minimum comfortable temperature in Pavlohrad buildings, Pavlohradteploenergo UC needs to stop making losses.

In 2016, Pavlohradteploenergo UC collected UAH 122.4 million in proceeds from paid bills. Households paid UAH 79.12 million, budget-funded and private enterprises, UAH 43.3 million. According to the response to a request for information from the independent portal Павлоград.dp.ua, Pavlohradtekloenergo has received UAH 20.4 million less than it should have. The key reason is residential consumers' debts and the lack of timely compensation for subsidies.

Over the first seven months of 2017, the company collected UAH 81.2 million in payments from households and businesses. But its consumers still owe UAH 9.1 million. In addition to the shortfall of consumer payments, there is a huge amount of subsidies approximating UAH 54 million, and as of July 1, 2017, the state had failed to compensate the company for more than half of this amount - almost UAH 30.3 million. According to the Uniform State Register of Legal Entities and Private Entrepreneurs, the Dnipropetrovsk Oblast Commercial Court initiated bankruptcy proceedings against Pavlohradteploenergo UC on June 23, 2017. The lawsuit was filed by Gas of Ukraine, a subsidiary of NJSC Naftogaz of Ukraine. On September 11, the Commercial Court issued a ruling rejecting the claim as not backed by any proof of the court fee paid under the procedure and in the amount required by law.

In the words of Mykola Vovk, the CEO of the utility company Pavlohradteploenergo, his enterprise has never had such losses in its whole history as in the heating season of 2016-2017.

"If we assume that our whole income equals one hryvnia, 54 kopecks in it are subsidies. The government automatically takes this amount as payment for natural gas, leaving only 46 kopecks for us to pay for the other energy resources that we consume (electricity, water), as well as taxes and wages. This share of money is not enough today," Mykola Vovk argues.

 

WHO DOES PAVLOHRADTEPLOENERGO OWE TO?

With debts owed by the government and households to it, Pavlohradteploenergo UC automatically becomes a debtor of a number of enterprises. Gas companies are the first in line to claim their sums due. Debts of companies to NJSC Naftogaz of Ukraine create cash gaps for this company, making it seek funds to be able to import gas.

In 2016, Pavlohrad boiler houses had not received gas until the second half of October due to a debt incurred by heating networks to NJSC Naftogaz of Ukraine. The debt amounted to UAH 95 million as of October 2016. To prevent a disaster, the municipal authorities decided to intervene. The debt was restructured for four years. Such an agreement with NJSC Naftogaz of Ukraine was signed by Anatolii Vershyna, Pavlohrad mayor. He said the company would need to pay about UAH 2 million a month, or UAH 24 million a year.

According to the information posted on the website of NJSC Naftogaz of Ukraine, the debt of Pavlohradtekloenergo decreased in 2017 by UAH 17.1 million and equaled UAH 124.7 million.

During the preparation of this piece of investigative journalism, the company provided a table showing the total amount of debt. A closer look at the table reveals that in addition to NJSC Naftogaz of Ukraine, Pavlohradteploenergo UC has a dozen of other lenders waiting for the company to pay its debts to them. These include Dnipropetrovskgaz, Skela Tertium, UKRTRANSGAS, Kharkivtransgaz, Gas of Ukraine, and Pavlohradvodokanal UC just to name a few.

The total amount of payables equaled UAH 157.9 million as of July 18, 2017.

 

TOO HEAVY A TARIFF

The main source of income for Pavlohradzteploenergo is heating bill payments from residential consumers (70 percent). The situation here is somewhat reminiscent of the relationship between a horse-cab driver and his sick horse: the heavier the load, the slower the pace of the horse.

In an attempt to somehow improve its financial situation, Pavlohradteploenergo UC submits every year to the National Energy and Utilities Regulatory Commission (NEURC) documents asking for an increase in the tariff. This, however, has yielded no positive result so far.

In the 2016-2017 heating season, the tariff for centralized heating in Pavlohrad was UAH 34.61 per sq m, or UAH 1,421.74 / Gcal a month (consumers using building-wide heat meters are charged on the basis of actual consumption). For many residents of the city, this tariff proved too heavy, and if not for the state subsidy program, Pavlohrad residents would have incurred even more debts.

If the heating tariff goes up, the share of subsidies will grow and the company will have even less cash in hand.

"I can give an example of Zhovti Vody. In this city, the city council makes allocations to cover the payroll of the heating company. The share of subsidies there is 86 percent, not 54," Mykola Vovk says. "This is a city with a high unemployment rate and very low-income residents, and the company does not know how to go on and keep itself in repair. Who would talk about any investment activity there?"

 

MUNICIPAL BUDGET OFFERS A HELPING SHOULDER

In a situation when households are unable to pay heating bills in a timely manner, Pavlohradteploenergo UC has to seek financial support from municipal authorities. The municipality cannot stop allocating budget money for the company, otherwise not only private apartments, but also kindergartens, schools, hospitals, etc. will be left without heating. Over the past two years, the allocations from the city budget for financial support of Pavlohradteploenergo UC have increased significantly. In 2016, UAH 18.1 million was allocated form the local budget for the enterprise, and in the first half of 2017, the amount already reached UAH 13 million. The lion's share of the financial support in 2017 has gone to the payment of gas bill arrears, and the next spending item is taxes, payment of water bill arrears, purchases of pipes, heat meters, etc.

Here we have a paradox: taxpayers' money is spent on the problem created by utility bill debtors.

 

INVESTMENT PROGRAMS

The problem of heating companies' growing debts can be resolved only through comprehensive changes in the approaches to state regulation. Ukraine makes some uncertain attempts to address this issue.

In 2012, the procedure for the operation of investment programs for heating companies was adopted.

This procedure was approved by Order No. 630 of the Ministry of Regional Development, Construction, Housing and Utilities of Ukraine, dated December 14, 2012.

The program is expected to help:

  •   renovate the fixed assets,
  •   improve operational performance,
  •   organize accounting of natural and energy resources,
  •   optimize technological costs and thermal energy losses;
  •   improve the quality of services provided, operational organization, etc.

However, all good intentions remain only on paper. In reality, there is nothing but paradoxes as a result: the investment programs bump into a host of obstacles. Among them are consumer debts, which leave no untied working cash for heating suppliers.

According to Pavlovhradteploenergo, the company currently has only two investment programs - for 2014 and for 2016. The program for 2013 is nonexistent, the one for 2015 was not approved by the NEURC, and the one for 2017 is under development.

According to Resolution No. 126 of the NEURC, dated October 16, 2014, UAH 2.9 million was allocated for the implementation of the 2014 investment program. The funding source was planned to be depreciation charges (UAH 1.5 million) and production investments from incomes (UAH 1.4 million). In 2016, this amount increased by almost a million, up to UAH 4 million.

 

PARADOXES AND PUBLIC PROSECUTORS

The investment program for heating enterprises in Pavlohrad is linked to some other story, this time - of criminal nature. The situation at hand speaks a lot about both the efficiency of such programs and the degree of their clarity and transparency.

In April 2017, the official website of the Office for Combating Economic Crimes of the National Police of Ukraine reported that Pavlohradteploenergo's CEO had not created special accounts for accumulating investment program funding. As a result, the investment money included in the tariff may have been used improperly.

"The inaction by a public official resulted in damage to the state and the territorial community of Pavlohrad in the amount of more than UAH 1.8 million. Criminal proceedings were initiated on this fact under Part 2, Article 367 (official negligence) of the Criminal Code of Ukraine. Investigators of the first investigation unit of the Dnipropetrovsk Oblast Prosecutor's Office have recently notified the company's CEO that he is suspected of a criminal offense. According to this Article, the suspect faces an imprisonment term of two to five years and debarment from specific positions or activities for a period of up to three years and with or without a fine between one hundred and five hundred nontaxable minimum incomes of a citizen. The pre-trial investigation is underway," the website reports.

After all media in the city published the news about the negligence of Mykola Vovk, no more information has come from law enforcement agencies in development of this story.

We sent a written information request to the Office for Combating Economic Crimes of the National Police of Ukraine. A few weeks later, an investigator of the Pavlohrad police department called our editorial office and said that the request had been forwarded from Dnipro to Pavlohrad, but investigators in the latter city know nothing about this case and sent a letter to the e-mail address of the independent portal Павлоград.dp.ua, reporting that our letter... had been forwarded to the oblast prosecutor's office.

While our letter travels from office to office, the suspect himself knows little about the criminal case.

"Decisions regarding investment programs are made by the NEURC. 70 percent of all heating companies in Ukraine are holders of licenses from it. But the blame for no opened investment accounts in 2015 has been initiated solely against me. I do not know why. Maybe it is an experiment of some sort? During the investigation, we showed the 2015 program. It had been developed and approved by the city council's meeting, but we did not submit it for consideration to the National Commission for a very simple reason: in November 2014, the enforcement service seized our investment account. Only in 2016 did we succeed to lift the seizure and unblock the account through court,” Mykola Vovk comments. “By its order, the NEURC bound all those who had not developed or had failed to fulfill an investment program for 2015 to include the unused amounts in the investment program for 2016. And we did so."

The company's accounts are under an incessant threat of seizure. And it is not able to spend so much on litigations. One lawsuit costs the company in excess of UAH 1,600. With such overheads, the company will have no cash for maintaining its equipment.

"There is yet another paradox here. The tariff includes an investment component. (Here is a manipulation: not profit, but revenue and other sources (for example, loans). Of the UAH 4 million in the 2016 investment program sources, only UAH 716,000 comes from profit - the author). It is included in the tariff for budget-funded and other institutions and not in the tariff for households where this component is set to zero. The company finishes the year with a loss, its annual financial result is negative. And here we have the so-called difference in tariffs,” the heating specialist explains. “That is, the company's tariff includes profit, but it finishes the year with losses. There is no compensation provided for this tariff difference. If we channel the money to the investment account, the loss, our negative value, will increase even further. Unfortunately, the National Commission does not give answers to our questions."

 

ALL INVESTMENT MONEY FOR METERING DEVICES

So far the company concentrates all its investment efforts on the installation of building-wide heat meters. According to http://teplo.gov.ua, heat meters have been installed in 43 percent of buildings by now (discounting those where such installation is technically impossible).

"We are still implementing the 2016 investment program, but the program for 2017 is already under development. We have a special account opened with a state-owned bank. We use this account for the proceeds established by the program. In order to use money for development, renovation and so on, it is necessary to equip 100 percent of the housing stock with metering devices. By January 2018, at least 90 percent of buildings should be equipped with metering devices," Pavlohradteploenergo CEO says.

The enterprise began intensively purchasing meters in 2016. This information is posted on the website of electronic purchases "Prozorro." In December 2016, 16 Ultraheat T550/UH50 meters were purchased. Purchases from ERGOMERA helped save almost UAH 24,000 (instead of the expected UAH 400,000, UAH 376,000 has been actually spent).

In April 2017, Pavlohradteploenergo UC purchased a large lot of meters - 110 units of Ultraheat T550/UH50 or equivalent. The winner of the tender was Ekon R&D LLC that offered the lowest price of UAH 1.75 million (the starting price was UAH 2.3 million).

In May, the tender for the purchase of 50 heat meters Ultraheat T550/UH50 or equivalent was completed. Instead of the budgeted UAH 950,000, the meters were acquired for UAH 702,000 (the tender winner was Ekon R&D LLC).

Yet another tender was held in July for 60 heat meters - all of the same brand and model or its equivalent. The company has saved a lot thanks to electronic tenders. In particular, instead of the budgeted UAH 1.14 million, the company concluded an agreement for UAH 665,000 with RODNIK-UT.

The latest tender update of August 14 reported 20 more meters purchased for a total of approximately UAH 490,000.

It is technically impossible to install metering devices in every building. In the words of first deputy mayor Vitalii Movchan, there are 91 buildings where the installation of meters is technically impossible. These are the so-called "no basement" buildings. They do not have any rooms meeting the technical requirements for meter installation. In such cases, a heat distributor will be installed, allowing approximate metering of consumed heat.

The high-rise buildings with heat meters installed will definitely appreciate the benefits of thermo-modernization as the insulated basements and walls, energy-efficient double-glazed window packages, insulated piping, modern radiators in apartments, and thermostats on radiators will be now contributing to much lower heating bills. Meters are the first and mandatory step to be followed by the installation of energy-efficient equipment (including, at the expense of state support and "warm loans," if the building is a condominium). The final stage is the installation of individual heat meters in apartments.

 

GAS, PELLETS, GARBAGE, COAL, OR ELECTRICITY: WHAT WILL OUR CHILDREN USE AS FUEL?

As already mentioned, the threat of failure of the heating season is the most probable as a result of gas suppliers' refusal to supply natural has without an adequate level of payments. Gas prices are steadily on the rise. Households are already unable to pay the bills. Is there a way out? Maybe we should resort to alternative sources of fuel? These are the questions Pavlohrad is trying to answer now.

In July 2017, Pavlovhradteploenergo UC held a tender for the "development of a heat supply scheme for Pavlohrad."

A heat supply scheme for the city is a document containing pre-project materials or feasibility study promising efficient and safe operation of the heat supply system, its development in the direction of energy saving and improved energy efficiency.

Termosystemy R&D LLC from Kharkiv became the winner of the tender competition. The service costs UAH 647,942. The scheme will identify the best locations in Pavlograd to build boiler houses and determine the fuel for them to operate on (including secondary and non-traditional resources). After that, the municipality will be able to invite investors to build new boiler houses or upgrade the existing ones.

"The first step should be a municipal heat supply scheme. It will let us better understand which source of energy we should stake on: pellets, wind, garbage, electricity, or something else. What I am sure of is that our boiler houses should abandon natural gas,” Anatolii Vershyna, the Pavlohrad mayor, comments. "At the same time, we should leave the central heating system in place. I have visited several European countries, studied their experience, and it shows that developed countries return to the practice of building one boiler house per district or town. This is because it is more economical this way."

 

Pavlohrad residents often wonder why living in a coal region, we do not use coal for heating buildings? There are many factors to it, but the most important of them is the modern environmental standards.

And looking back into the history, one will find that boiler houses were built in Pavlohrad before the coal industry began to develop here. However, there are two satellite towns - Ternivka and Pershotravensk - that were established near coal mines, so there are coal-operated boiler houses there. Now such boiler houses are allowed to be built only outside the city limits. In addition, coal mining is getting increasingly costly year after year, so it is hard to tell for sure whether or not it will be cheaper to use coal to fuel the boilers.

Mykola Vovk has been managing Pavlohradteploenergo UC for 24 years. He concedes that this company, as it is now, is not promising at all. Does the company head feel himself responsible for such a state of affairs?

"Will the company be changing? Most likely so. How? It is hard to guess. So far, we do not see the targets, we need to know the opinion of specialists and city council members. The municipality is considering abandoning natural gas and installing high-efficiency electric boilers with an efficiency level of 98 percent. But this requires a big investment. A serious investor is needed to invest over UAH 1 billion. It would be too naive to hope that such money will be allocated from the state budget."

But before considering new sources of fuel, it would be more logical to first reduce heat consumption through metering, insulation, and other energy-saving measures. Only after we have a demand forecast, can we make heat supply projections and elaborate heat supply schemes.

The questions of thermo-modernization and insulation of existing buildings is only starting to be addressed in Pavlohrad. Over the past two years, co-owners of half of the city's high-rise buildings have created condominium associations. Most active condominium associations have already taken part in the EU/UNDP grant programs "Community Based Approach to Local Development," and this year, a municipal program of support for associations of apartment building co-owners has been developed and implemented for the first time, with a USD 4 million allocation made to finance it. The government's "warm loans" program is also underway, but condominium associations still remain overly careful to take advantage of it right away as compensations for subsidies sometimes keep them waiting for half a year to arrive and their accounts have enough just to pay salaries, taxes, electricity bills, and cover emergency repair costs.

All of these processes - the development of the city's heat supply scheme, repayment of the debts incurred by Pavlohrad residents, thermo-modernization of buildings, searches for alternative fuels and investors to renovate the boiler-houses - should proceed consistently and in parallel. Only then will the city have a future.

Incidentally:

In August 2017, the Cabinet of Ministers of Ukraine approved the Concept of State Heat Supply Policy. It describes the existing problems of district heating companies (they are all similar to those observed at Pavlohradtekloenergo). The Concept envisages a number of measures for 2018-2035, including hundred percent coverage of consumers with installed heat meters, development and promotion of heat production from alternative sources, a growing share of combined production of electricity and heat (co-generation), reduced heat consumption through thermo-modernization of buildings, introduction of an effective mechanism for bringing consumers to responsibility for late utility bill payments, transition to double-rate tariffs, more efficient management of heating companies, and so on. The program is to be funded by international financial and donor organizations, as well as through grants and loans.

by Tetiana Volkova, http://павлоград.dp.ua

This text has been prepared as part of the USAID's Transparent Energy project. The views of the author may not necessarily coincide with the views of the United States Agency for International Development and the DiXi Group Think Tank. If this investigative material is to be reprinted, the disclaimer is required to be included as well.

 


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