TARIFF REFORMS AND THE AFFORDABILITY ISSUE Achievement of Albania regarding increasing collections, reduction of losses, electricity tariffs, protection of family in needs and reforming power sector in line with Athens Process. Mr. Bujar LEKA Ministry of Industry and Energy Director of Foreign Relation and Project Directorate

2 At the and of 2000, electricity situation in Albania was dramatic. It was characterized by: Very high level of demand Technical and economical difficulties to meet the demand. Heavy energy rationalizing through load shedding. Very high level of technical and non technical losses. Very low level of collections. For each 100 kwh injected in the network only 55 kwh were billed and 36 kwh were collected. In some areas in north of Albania, for 100 kwh injected only 50 kwh were billed and 26 kwh collected. 1. Background The starting point

Inability of Albanian Power Corporation (KESH) to manage more than 50 territorial units or filials; Huge number of underpaid and under motivated of KESH personnel; Very high level of KESH personnel; Tariffs well below the operating costs; Dramatic financial situation of KESH; Very low level of electricity production; Very high level of needs to import electricity. KESH requests for GoA subsidies on imports. Suspension on investments funds be donors community (WB, EBRD, EIB. Etc). Donors urgent request for avoiding the power system collapse to its physical and structural inadequacy. 1. Background The starting point 3

Based on Power Sector Situation of 2000 and 2001 the GoA and KESH prepared their objectives to face the electricity crisis, which were: a.Restructuring of KESH organization. –Improve the companys effectiveness, in co-management with ENEL (Italian utility) –Transform KESH from a vertical integrated into a unbundled company. –Abolish the direct control of the parent Ministry on KESH operations; –Keeping only steering and control power on the KESHs policy, target to the planning and developments program, by parent Ministry. –Provide the general Director with full powers and autonomy in the companys operations. b.The GoA obligations and contributions. –Electricity imports to be subsidized. –Electricity payments of budgetary and non budgetary institutions to be a executive title. –The establishment of a new police structure specialized on unlegal electricity links connections. –Reorganization of KESH Supervisory Council, composed by the representants of the Ministry of Economy, Ministry of Industry and Energy and Ministry of Finance The GoA and KESH objectives

- Preparing a Action Plan in order to meet policies and targets established by GoA. -Establishing a interministerial Task Force dealing on the Action Plan chaired by the Ministry of Industry and Energy. -The need to prepare e Power Policy Document for the development of the Power Sector, with short and medium terms objectives to be transformed later in a National Strategy of Energy. c.Presentation of the GoA and KESH objectives in a Donors Meeting, which was organized in Tirana, April d.Donors technical assistance for the implementation of the GoA and KESH targets. e.Donors approval of the power Sector Policy Document and their support on drafting.. f.Preparation of the Power Sector Policy Document with support of Donors community The GoA and KESH objectives

Since the beginning the biggest efforts was considered KESH restructuring and organization. The key issues for achieving fundamental objectives were: Company effectiveness and efficiency improvement ; To meet the Action Plan Targets; To transform KESH into a market oriented company; KESH transforming from a vertical integrated company into an unbundled company with perspective of; Local Market Opening; Integration of Albania into regional and European market; Implementation of privatization process KESH Restructuring

New Statute 7 Abolish the direct control of the parent Ministries on KESH operations, by keeping all the steering and control power on the companys policies and targets Provide the General Director with full powers and autonomy in the companys operations in order to meet policies and targets established by the parent Ministry Overcome the decision making previous processes and make clear and unambiguous the responsibilities of the managerial decisions In April 2001 a new Statute was approved with the following main objectives 3. KESH Restructuring

New Reorganization 8 GENERAL DIRECTOR CENTRAL STAFF PRODUCTION DIVISION TRANSMISSION DIVISION DISTRIBUTION DIVISION RMU South of Albania SHAREHOLDERS ASSEMBLY SUPERVISORY COUNCIL Secretariat Personnel & Organization * Economics & Finance Planning & Engineering Legal Audit In April 2001, in the prospective of KESH restructuring and unbundling, a new structure of KESH was approved. This structure provided for 3 main business area, Generation, Transmission, and Distribution, in the organization form of Divisions. For each new organization unit, it was stated: The mission The main processes The internal structure * Including an information systems unit 3. KESH Restructuring

Relationships with Political Bodies 9 The new Statute and the New Organization Structure of KESH ask for the observance of new rules in the relationships between the parent Ministries (Ministry of Economy and Ministry of Energy and Industry) and the operating structure of KESH. The parent Ministries can act on the operating structure of KESH only through the Supervisory Council; They have the right or duty to; State the mission of KESH Define the yearly targets (Action Plan ) to be achieved by KESH Monitor the results achieved by KESH The General Director of KESH, as sole responsible of the companys operation, has the duty/right to Act in full autonomy for the achievement of the entrusted targets, Divert any political issue to the Supervisory Council 3. KESH Restructuring

Territorial Units 10 In July 2001, the new structure of the Divisions that was approved, implied a dramatic cut of the Territorial Units in order to ensure the effective control on their operation. 8 Distribution Zones 6 Transmission Regions 6 Production Power Plants New territorial units had the power for recruitment and dismissal of personnel and kept the responsibilities of running their core activities (operation, maintenance and sales of electricity) A more drastic reduction of territorial units was not suggested because of some hindering factors, such as (i) poor infrastructures (i.e.: road conditions, telecommunication) and operating resources (i.e.: vehicles, operating tools, peripheral offices, information systems) 3. KESH Restructuring Central Staff DIRECTOR Terri torial Units About 50 former Filials were reduced (*) to

Structure of new Territorial Units 11 DIRECTOR OPERATION OFFICE MAINTENANCE OFFICE ACCOUNTING UNIT PERSONNEL UNIT DIRECTOR OPERATION OFFICE MAINTENANCE OFFICE ACCOUNTING UNIT PERSONNEL UNIT SUBSTATIONS STAFF TERRITORIAL STAFF Production Power Plants Transmission Regions 3. KESH restructuring

Structure of new Territorial Units 12 Distribution Zones DIRECTOR TECHNICAL OFFICE COMMERCIAL OFFICE ACCOUNTING OFFICE PERSONNEL OFFICE LEGAL UNIT AGENCY STAFF TERRITORIAL CASH OPERATIVE GROUP STAFF 3. KESH Restructuring

Transmission System Operator 13 The Transmission Division was established since April Starting from the second half of 2003, organizational efforts have been focused on the establishment of the Albanian Transmission Operator. That required: a.The reallocation of technical assets. b.The transfer of 110 and 35 kV substation and 35 kV lines from Transmission to Distribution; c.The evaluation of the above-mentioned assets; d. The identification of personnel to be transferred from transmission and distribution division; From January 1, 2004 the above changes have been effected, opening the way to the other steps to be completed by the end of 2004 and mid KESH Restructuring

General Structure of the TSO 14 DIRECTOR CENTRAL STAFF Secretariat & Legal Personnel & Organization Administration & Finance Procurement * For each new organization unit, it was stated: The mission The main processes The internal structure * Procurement staff will be implemented in a successive step OPERATING MANAGEMENT OF TRANSMISSION SYSTEM OPERATION & MAINTENANCE OF TRANSMISSION INSTALLATIONS BUSINESS UNITS 3. KESH Restructuring

TSO Business Units Structure 15 OPERATION & MAINTENANCE OF TRANSMISSION INSTALLATIONS OPERATING MANAGEMENT OF TRANSMISSION SYSTEM DIRECTOR DISPATCHING MARKETING PLANNING ENGiNEERING TERITORIAL UNITS DIRECTOR ENGINEERING OPERATION MAINTENANCE TELECOMMUNICATION METERING TERITORIAL UNITS 3. KESH Restructuring

2.12 New Structure of Distribution 16 Operation, maintenance and development of the HV assets, transferred from the former Transmission Division, called for a drastic revision of the Distribution Division structure. The structure of the Distribution Staff Units, shown in the diagram above, has been totally reviewed in terms of both job processes and personnel requirements DIRECTOR Tirana District Tirana Zone Durres Zone Elbasan District Elbasan Zone Korce Zone Fier District Fier Zone Berat Zone Burrel District Shkoder Zone Burrel Zone Staff 3. KESH Restructuring

Tariff policy objectives 17 The Main objectives behind tariff reform were to : Allow KESH to become a financially autonoms company; Allow KESh to be able on covering operating and capital costs be revenues; Allow GoA not to subsidize any longer the Power Sector ( up to the end of 2004); Promote consumers to make a rational use of electricity; Attract foreign investors to invest and upgrade of the generation capacity; Create the appropriate environment in view of the future privatization process. 4. Tariff reform

The reference tariff rates identified by Regulatory Body (ERE) for 2001 and 2002, were; For customers fed at high voltage level, 5.6 Lek kwh Lek kwh 2002 For customers fed at medium voltage level, 9.6 Lek kwh Lek kwh2002 For customers fed at low voltage level, 12 Lek kwh Lek kwh2002 For household customers the tariff was 4 lek/kwh. In 2002 to protect low income customers was put in place a two system tariff. under 300 kw per month Over 300 kw per month. 4. Tariff reform New Tariffs 18

Trend of Tariff Increase Lek/kWh Since January 1, 2004, the border between 1 st and 2 nd tier was reduced from 300 to 220 kWh per month FULL TARIFFS 4. Tariff reform AVERAGE KESH SELLING PRICE ~100% Data source: Third & Fourth Power Sector Action Plan

Low income customers protection 20 In addition to the protecting of the families in need (vulnerable customers), the GoA has adopted a social scheme to protect them from electricity tariff increase, since January 1, The GoA is supporting directly the vulnerable customers for their the most needed electricity consumption (lighting, cooking, radio-TV and washing machine); The GoA social support cost for year 2004 is about 2.8 Million USD, and for year 2005 will be about 3.5 Million USD. 4. Tariff reform

Starting point 21 In 2001, it was started the implementation of a computerised Billing System in order to replace the manual procedure. The following were the major issues: 1. Use of the project hardware, financed by Swiss Government; 2. System Assignment of software development responsibility to the established Information System Unit; 3. Implementation of a large facilities, such as: i.daily meter reading schedule, ii.issue of computerised monthly bills, iii.bills payment check with the subsequent identification of bad payers to be disconnected iv.rich set of output reports aimed at monitoring the effectiveness of the billing process 5. Billing System

Installation of metering apparatus. For many reasons in 2001 were identified a very high level of needs in metering apparatus in all distribution units, about meters. In cooperation with donors community active in Albania (World Bank, EIB, Italian Cooperation) and using KESH financial sources, was prepared a supplying program of meters, for 2003 and After 2004 no more flat tariffs for household customers. To address all issues in extension of higher level of collection, KESH is preparing a program of pre-payment meters installation in some very particular areas of the country. 5. Billing System Meters 22

23 6. Main Results

Reduction of Losses Main Results

Increase of Collections Main Results

Reduction of Personnel Main Results

Trend of operating Revenues and Costs 27 Revenues < costs Revenues > costs 6. Main Results Lek million

Improvement of Gross Operating Margin 28 GOM < 0 GOM > 0 6. Main Results Lek million

7. In form of Conclusions 29 After the implementation of a four year Action Plan, when a lot of major interventions, measures, activities, and solutions were implemented, we can state that: A new organizational culture customer-oriented has progressively been taking place; Our achievements have been used to open the way towards further future improvements.

7. In form of Conclusions 30 The most critical issues to be addressed starting from 2005, are: Further improvements of the financial management, especially as for investments and loan agreements. Finalization of the KESH unbundling and the establishment of an independent TSO, generation and Distribution; The implementation of Standard Model Market Design based on clear and clean market rules. The establishment of the open energy market in Albania and its integration in regional and european market; Preparing a transparent and open process for the privatization of Distribution and after Generation companies.

Thank You For Your Attention