The Agency sought to find out how the heating and utility enterprises (HUE) providing services to Vinnytsya inhabitants can take advantage of these loopholes, and how the figures in the utility bills are calculated.

There are three enterprises in question. These are Vinnytsyamiskteplenergo (VMTE) municipally-owned enterprise of the Vinnytsya City Council, Vinnytsyaoblteplenergo (VOTE) municipally-owned enterprise of the Vinnytsya Oblast Council and the subsidiary enterprise "Vinnytsya Mayak Plant of the City Utility and Heating Enterprise "Mayak" ("Mayak").

Calculations for utility bills

Name	Ownership form	Heating tariff for the population (UAH/GCal with VAT – for houses with meters)	Approving authority	Fuel	Number of boiler stations
VMTE	Municipal, Vinnytsya territorial community	Two-part, 1,123.69	NEPURC	Gas, firewood, wood chips	42 + 1 CHPP
VOTE	Municipal, Vinnytsya territorial community	Single-part, 1,586.66	Vinnytsya Oblast Council	Gas, firewood, wood chips	56
Mayak	Private	Single-part, 1,373.10	NEPURC	Gas	12 central heating units

The fuel cost component makes up a lion's share of the heating tariff of these enterprises, similar to elsewhere in Ukraine; the key fuel is gas, its proportion is 80-85 percent of the fuel structure. For Mayak, this figure is 81.41%, according to Oleh Fedorov, company CEO; for VMTE, according to the data of the National Energy and Public Utilities Regulation Commission (NEPURC), this proportion is 82.51% (94.16% for the two-part tariff).

Actually, calculating fuel consumption for each specific boiler station is not so difficult, says Viktor Dyadkovych, UNIDO (United Nations Industrial Development Organization) expert. He draws a diagram on the sheet of paper: a boiler station - a pipe - a house. Then he writes down the formula: Q = cm(t1-t2), explaining the variables: Q - amount of heat, c - heat capacity of water, m - weight of water in thermal batteries, t1 - water supply temperature, t2 - temperature of the so-called "reverse flow", i.e. inverse water flow in the system: - The boiler station heats up water, the water passes through the pipe to the house with the temperature of 60-90 Celsius degrees at the entry, heats the apartment and flows backwards having the temperature of 35-45 Celsius degrees. Further maths are quite simple: knowing the fuel's calorific value and the boiler efficiency, one can calculate how much fuel is needed to get the required amount of energy.

If, however, we proceed from a single gas boiler station calculations to the company-level tariff, then, according to the Resolution of the Cabinet of Ministers No. 869 of 01.06.2011, the calculation is carried out "on the basis of the actual consumed volumes for the last five years and the projected volumes of production and consumption of thermal energy taking into account contracts concluded with consumers, and other technical and economic factors". Specifically, "the amount of annual planned expenses included in the full cost and annual planned profit" is divided by average number of sold gigacalories (that is, those received by consumers) for the last five years.

According to the common arithmetic laws, the higher are the costs, the higher is the tariff. The companies working on alternative fuels use simpler calculations: their tariffs should not exceed 90% of the average weighted gas tariff in the region.

The tariff is developed in advance, while it is impossible to calculate prospectively the exact amount of thermal energy that will be needed in a particular heating season. Usually the average outdoor temperature during the heating period is taken as a baseline (for Vinnytsya it varies within -1 to +1 Celsius degree – author's note), but the winters can be different in terms of weather. The equipment condition is also important. While the efficiency of a new gas boiler is 90-95% and higher, then an old one performs much worse. And consequently, it consumes more gas, - Victor Dyadkovich highlights the different aspects which ultimately affect the final heating tariffs. And then he adds: - And the key thing to consider is that fuel also may be of different quality, with different calorific value. Therefore, nobody abroad sells gas in cubic meters, unlike us – they use only energy units. The same applies to alternative fuels.

The wastage during the transportation of heat energy is another important component to be factored in the tariffs. According to Mr. Dyadkovich, it should not exceed 18% (here is the reference to the source cited by the expert).

As for Vinnytsya companies, according to Viktor Dovbanyuk, the company's CEO, the forecast wastage included in the tariff for VOTE services amount to 9.7%.

This is the amount to be reimbursed by the tariff. If this proportion is exceeded, we start incurring losses, - Mr. Dovbanyuk notes.

Mayak did not provide information on wastage upon the Agency request. As for VMTE, we had to contact them twice. The response to the first information request stated that the information requested is not subject to Section 5, Clause 6 of the Law of Ukraine "On Access to Public Information", and the entity recommended to contact the regulator, the NEPURC.

The NEPURC, in turn, advised to contact the enterprises for information, noting that "in accordance with clause 3.1.1 of the Technical Guidance (TG) 204 Ukraine 244-94" Norms and guidelines for the standardization of fuel and heat energy costs for the heating of residential and public buildings, as well as for the economic and household needs in Ukraine", heat wastage in heating pipelines depends on their length and diameters, laying method, soil characteristics, service life, operating conditions, etc. and is determined on the basis of appropriate tests of technically sound pipelines".

Meanwhile, the second request to VMTE was more yielding. According to the response, planned wastage of heat energy included in the tariff amounts to 10.93%.

Alternative fuels factor

In general, the structure of the tariff for the heating energy produced by a certain enterprise comprises about 30 components. In addition to fuel, this includes, in particular, electricity, water for technological needs, materials and spare parts, depreciation costs, salaries and social deductions. Moreover, there are such items as "other expenses" and "other direct expenses", the list of which, as well as the tariff structure, is regulated by the Resolution of the NEPURC No. 377 dated 24.03.17.

In terms of law, a tariff may include any imaginable component, but the question is how economically feasible it is, says Ihor Lutsenko, former Deputy CEO of VOTE, currently the Director of the "Technologies, Equipment, Service" company, which specializes in alternative heating. – "While we may raise prices for other goods, and those willing to pay more would get it, the things are different for a heating tariff: there is the economically feasible ceiling price, and anyone has to adjust the costs according to it".

Meanwhile, Mr. Lutsenko notes, the fuel cost makes up to 50% in the tariff for heating generated from alternative fuels, unlike gas heating. Accordingly, the proportion of other components of the tariff may increase. And while the enterprises running on gas usually set it at 10-15%, then the "alternative" fuel enterprises can establish significantly higher figures.

The SAEE (State Agency for Energy Efficiency) has established the following: there is an average weighted solid fuel tariff, and according to the law it should be at least 10% lower than gas tariff. This is done in order to break up the existing obsolete, "Communist-style" municipal heating and power supply market, Ihor Lutsenko says.

According to him, the type of fuel used at a certain enterprise: wood chips, seed, straw, corn pellets, or firewood, is very important. The heat price also depends on it. However, mixed fuel, for example, 20% corn, 20% seeds, etc., is allowed without limitations. And then the cost of fuel will further decrease. But the tariff itself may remain at the level of "gas tariff less 10%".

However, the alternative fuels currently make up just a minor fraction in the total volume of fuel used by VMTE. According to the company, only three boiler stations on the company balance are working on firewood and wood chips. In 2016, the share of heat production from alternative fuels was one percent, in 2017 – two per cent. Instead, 27 out of 56 boilers operated by VOTE are running on alternative fuels. Of these, three are located in Vinnytsya, others − in the districts of the oblast.

And while VOTE in 2016-17 had been procuring wood chips fuel for the same price, UAH 1,783 per ton (excluding VAT), for VMTE it decreased from UAH 1,726 to 1,300. Furthermore, the enterprise representatives said that the calorific value of the purchased fuel increased.

In the meantime, the purchase price of firewood, as reported by the enterprises, has increased: from UAH 510 to UAH 666 per m³ at VMTE and from UAH 643-743 to 830-930 at VOTE.

A profitable subsidiary

Meanwhile, the Mayak boiler stations run exclusively on gas. In 2009, the Executive Committee of the Vinnytsya City Council approved the tariffs for the enterprise services in accordance with the CMU Resolution No. 955 dated July 10, 2006.

According to the company CEO Oleh Fedorov, after 2010 the powers to approve tariffs were handed over to the NEPURC. Since then, the Vinnytsya City Council Executive Committee has changed its tariffs more than ten times, and this was basically an adjustment in line with the rise of salaries and fuel prices, first of all gas price.

"It's like you have a basket of different fruits, and constantly add fruits of a certain type, for example, apples. Later on you already have two baskets, however, they contain almost exclusively apples", Oleh Fedorov describes the adjustment process.

The company under his leadership is not a municipal property, but a subsidiary of PJSC "Vinnytsya Mayak" Plant. The company CEO is Vasyl Terlikovskyi, a deputy of the Vinnytsya City Council, the head of the supervisory board of the company is Petro Kuznetsov, the former deputy of Vinnytsya City Council. He, according to Youcontrol, is one of the final beneficiaries of the company.

The official website of PJSC "Vinnytsya Mayak" plant is silent about the existence of subsidiaries, while, according to Youcontrol, there are about a dozen of them. HUE "Mayak", to the contrary, does not conceal its affiliation with PJSC "Vinnytsya Mayak" plant, informing the visitors on its own website that it was split from the PJSC "to reduce the parent company debt burden". Moreover, "Mayak" website contains information that "the company serves 137 residential houses with a population of 29 thousand people, 5 secondary and special schools, 6 children's educational institutions, and 2 higher educational institutions. The company accounts for about 12% of the total volume of heating and hot water supply services in Vinnytsya".

At the same time, there is no information on the components of tariffs for the company's services on the website. The Agency received it in response to requests to Mayak itself, further requests to the NEPURC enabled us to obtain more details. According to copies of documents provided by the regulator, "Mayak" tariffs envisage the revenue of 1.37%. For VOTE and VMTE, however, it is zero, as stated in the resolution of the NEPURC and the decision of the Vinnytsya Oblast Council, which approved the tariffs for the services of these enterprises.

A fancy price

The profitability of an average 13% is factored in the tariff of another subsidiary enterprise of the VOTE - "Alternative Thermal Energy" (ATE), which was established in 2017. Meanwhile, the tariff for heating supply services for the population approved for ATE is UAH 1,222.05 per Gcal with VAT, according to the decision of Vinnytsya City Council on the ATE dated 20.12.17. That is, it is more than by UAH 300 cheaper than the parent company.

According to the VOTE CEO Valeriy Dovbanyuk, this revenue percentage is expected to help ATE pay a loan in the amount of UAH 8.2 million and interest thereon. The loan was provided by the Oblast Fund for Investment and Construction, and the money was invested in the reconstruction of a boiler station on the territory of the "Medical Town" district along Khmelnytsky highway in Vinnytsya, an area where more than a dozen hospitals and social institutions are located.

As for the "parent" company, its tariffs are not only the highest in the oblast, but are among TOP-15 in Ukraine according to the data of the first quarter of 2017. Until the entry into force of the NEPURC Regulation No. 308 of March 22, 2017, which determined the enterprises whose tariffs should be approved by the state regulator, individual consumers of only 13 out of 189 Ukrainian HUE enterprises paid more than UAH 1,200 without VAT per Gcal. Three of them established tariffs lower than VOTE, where it was equal to UAH 1,229.19.

The current VOTE tariffs were approved by the decision of the Vinnytsya Oblast Council No. 497 dated 28.09.2017. A month before, the information was posted on the official site of the enterprise and in the official publication of the Vinnytsya Oblast Council, the Vinnychchyna newspaper, about VOTE intention to increase the tariff and invitations to citizens to send their comments and suggestions. As the company reported, no proposal or remark was received within 15 days.

However, Andriy Kovalyov, chairman of the Full-time Committee of the Vinnytsia Oblast Council on Housing, Energy Efficiency and Energy Saving, is convinced that the tariff is artificially high.

The fuel price in the VOTE tariff structure is UAH 1,047. One m³ of gas yields 8,800 calories. One gigacalorie is a million calories. If we divide a million by 8,800, we determine that the production of one Gcal needs 113 m³ of gas. The maximum wastage allowed by the NEPURC is 13% (18% - author's remark, see source above), so even with the maximum losses the production of one Gcal should require 148 m³ of gas. If we multiply this figure by the gas price (UAH 7,200 without VAT), we come up with a calculation similar to VOTE's. That is, the tariff is calculated as gas tariff.

At the same time, the deputy emphasizes, since half of the VOTE boiler stations are working on alternative fuels cheaper than the gas, the tariff should be lower than the company calculations, which are based on the cost of gas only. At the same time, the revenues that may eventually flow past the budget might amount to millions of hryvnias, says Andriy Kovalyov.

He himself, by the way, did not vote for the approval of the tariff, despite the fact that the commission headed by him, as well as the budget commission, approved the VOTE tariff. The voting at the relevant session sparked a discussion, during which the participants requested VOTE director to explain why the tariff at his enterprise was higher than at VMTE (see here video from 5:53 to 6:11).

However, Valeriy Dovbanyuk rebuffs the assumption as to an overpriced tariff:

Tariff calculations are being prepared for half a year. They are then submitted to the OSA Department for International Cooperation and Regional Development. Over the course of several months, the department has been validating these calculations and concluded that they were accurate. Then the utility services commission and the budget commission considered and approved them. Subsequently the tariffs were forwarded to the Presidium of the Council, then included to the session agenda and approved by a majority of votes.

Regarding the high tariff, Mr. Dovbanyuk said: firstly, a large number of boilers and the total length of the pipelines require a large number of employees for their maintenance. Secondly, last year the company received only two million hryvnias of budget subsidies - and only for the purpose of fulfilling the terms of the agreement with Vinnytsya Oblast Water Supply Systems Enterprise (Vinnytsyaoblvodokanal) "for the repayment of the tariff difference". If there were budget allocations similar to those provided to VMTE, the tariff could be lower, says VOTE CEO.

Budget support

According to the Vinnytsya City Council, over the period from 2013 to 2017, more than UAH 260 million was allocated from the budget of Vinnytsya to replenish the authorized capital of VMTE. The amount committed for 2018 is UAH 60 million.

As Nataliya Lutsenko, Director of the Vinnytsya City Council Department of Finance explained, the replenishment of the authorized capital of VMTE municipally-owned enterprise is one of the items of the municipal budget expenditures, and it is formed in the same way as the budget as a whole, in accordance with the Budget Code and other regulatory documents.

The principal budget holder, that is VMTE, compiles a budget request based on the calculations, we consider it and include a certain amount in the draft budget, depending on the available funding. The project is being heard at a meeting of the Executive Committee, upon approval it is considered at public hearings, commissions of the City Council, including a profile commission on financial planning, budget and socio-economic development. And the final stage is the budget approval at the City Council session. The majority of the funds are allocated for the reconstruction of existing networks, the construction of boiler stations − that is, capital expenditures, which allow to increase the efficiency of boilers and the enterprise as a whole, considering the fact that currently it is unprofitable, Mrs. Lutsenko noted.

According to her, works carried out at the expense of the authorized capital are not included in the cost component of the tariff.

But there is such an indicator as depreciation, it is accrued in accordance with the requirements of the current legislation, and these funds also are used to support repairs, and they are part of the cost, the department director says.

We asked a clarification question: does this mean that without replenishment of the authorized capital at the expense of the budget, all these expenses would be included in the tariff, Natalia Lutsenko replied: "Partly yes".

In general, the whole work of both the municipal enterprise and the city council is aimed at bringing it to a proper performance, she emphasizes.

Considering that the proceeds from personal income tax and the single tax payable by individual entrepreneurs are the main source of budget revenues in Vinnytsya (in the three quarters of 2017 their share was 57% and 16.5% respectively), it is possible to conclude that Vinnytsya actually citizens pay more for the VMTE services than indicated in the bills, but a part of the payment is included in the budget subvention. And thus, not only consumers of the services of the enterprise, but also those who receive heating supply services from VOTE and Mayak, as well as owners of individual heating system, contribute to these payments. Given that the population of Vinnytsya is approximately 370,000, each citizen during 2013 to 2017 had additionally paid VMTE about UAH 710, and in 2018 this amount will increase by about UAH 160.

If other heating supply enterprises of Vinnytsya would receive the same level of budget support, the situation would probably be similar.

The only two-part tariff

Today VMTE is heating 85% of Vinnytsya and has 66 000 individual subscribers. And if VOTE's specific feature is the highest tariff in the oblast, then VMTE applies a two-part tariff instead. It was approved in 2008 by the decision of the Executive Committee of the City Council, which made Vinnytsya one of the first cities in Ukraine, where the components of the heat supply tariff were divided into a conditional fixed rate and a conditional variable rate.

Despite numerous explanations from both the company itself and the city leadership, Vinnytsya inhabitants had mixed feelings about this novelty. However, a few ventured to start a lengthy and tiresome process of getting the decision abolished.

Thus, the deputy head of the All-Ukrainian public organization "Protection of Children of War" Mykola Borshchevskyi in 2011 appealed to the court about the unauthorized, in his opinion, actions of the Vinnytsya City Council regarding the introduction of a two-part tariff, but the court dismissed his claim.

Having analyzed the received heat bills after the introduction of the two-part tariff, Mr. Borshchevskyi concluded: during 2009-2016, consumers of VMTE services have overpaid the company about UAH 70 million due to the introduction of a two-part tariff, which is approximately 10% higher than the single tariff.

At the request of the Agency, VMTE checked calculations by Mykola Borshchevskyi. Conclusion was that these are not substantiated, in particular because "they compare the tariffs for heating energy with the tariff for the services of centralized heating, which is not quite correct".

However, the majority of Vinnytsya people are concerned not so much with the peculiarities of the formation of two- and single-part tariffs and calculations, but with actual bills for services rendered. Analysis of appeals placed on the official website of VMTE (such information is not available on VOTE and Mayak websites) suggests that the inhabitants of multi-storey buildings start complaining about the excessive, in their opinion, amounts in the bills, in particular, after the installation of metering devices in the buildings. As a result, according to them, the amounts in bills increase in comparison with the period prior to the meter installation, when the calculated rather than actually consumed gigacalories were subject to payment. The enterprise reiterates the same answers: the company tariff is the same for all consumers, and the amount in a bill depends on the actual heating energy consumed by the building and on its space.

In general, according to VMTE, 4050 requests were registered in 2017 for re-calculation of hot water and 437 - for centralized heating bills. The re-calculation was made under all the appeals for the total amount of UAH 286,800: UAH 242,400 for heating and UAH 44,400 for hot water. On average, it turns out about UAH 11 for each complaint on water supply bills and UAH 555 for heating supply bills.

Little savings make heavy purses

On August 29, 2017, VMTE held open discussions on tariff increase. According to the minutes, 32 people participated in the discussion. During the discussion, the participants were explained that this action is necessary, because the last adjustment was made in 2016, and since then the minimum wage has increased and gas, electric power and cold water prices were also raised.

However, the NEPURC Decree No. 1516 of 28.12.2017, reduced the heat tariff for Vinnytsya inhabitants receiving VMTE services by a few kopecks since 31.12.2017.

According to the state regulator, the two-part tariff is applied in seven municipally-owned enterprises of Ukraine other than VMTE, in Lviv, Bilhorod-Dnistrovskyi, Stanislav, Ivano-Frankivsk, Dniprorudnensk. Of these, in 2017, the highest tariff was at VMTE: for the population it was UAH 1,065.44, excluding VAT.

However, VMTE is currently somewhere in the middle of the NEPURC tariff rating, that is, the list of enterprises whose tariffs are approved by the regulator rather that the local government.

Conclusions

As noted earlier, the process of heating and hot water tariff setting is regulated by legislation, which allows heating supply companies to take advantage of certain loopholes. Can the Vinnytsya citizens influence this process? Yes. In particular, they should take a more active part in public hearings and discussions about new tariffs, as these events do not show any considerable public involvement at the moment and are rather held just to imitate the procedure (and is true not only for hearings by heat supply companies). Moreover, creation of supervisory boards in communal enterprises would allow imposing control and, hence, taking responsibility for the tariff setting. However, until these actions are implemented, the transparency and reliability of heating services billing will lack credibility. It will raise doubts even where this transparency is actually one hundred percent, not to mention the cases when tariff calculations are far more obscure.

The investigation is carried out within the framework of USAID Transparent Energy project. The author's opinion does not reflect the positions of the United States Agency for International Development and DiXi Group Think Tank.