VZCZCXRO6947
RR RUEHBW RUEHIK RUEHLN RUEHPOD RUEHVK RUEHYG
DE RUEHKV #0801/01 1151027
ZNR UUUUU ZZH
R 241027Z APR 08
FM AMEMBASSY KYIV
TO RUEHC/SECSTATE WASHDC 5426
INFO RUCNCIS/CIS COLLECTIVE
RUEHZG/NATO EU COLLECTIVE
RHEBAAA/DEPT OF ENERGY WASHINGTON DC
RUCPDOC/DEPT OF COMMERCE WASHDC
UNCLAS SECTION 01 OF 02 KYIV 000801
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TAGS: EPET ECON ENRG PREL UP
SUBJECT: UKRAINE: GOU ANNOUNCES NATURAL GAS PRICE HIKES
Treat as Sensitive but Unclassified. Not for Internet
Distribution.
1. (SBU) On April 14, the Ukrainian Cabinet of Ministers
(CabMin) published a resolution recommending a 3-5% monthly
increase in natural gas prices for individual consumers
beginning in May. The move was unexpected, as the media and
most energy experts predicted that PM Tymoshenko would not
raise household gas prices out of fear that it would greatly
decrease her popularity. Tymoshenko, however, opted to make
small increases in gas prices each month to muffle the
economic impact on consumers. In the same resolution, the
CabMin also approved a 4-6% increase in natural gas prices
for the chemical industry and 8-12% for all other industrial
and public sector consumers. Although the new rates still
will not cover costs, energy experts and our contacts at the
European Bank for Reconstruction and Development have
applauded the move as in important step towards a cost-based
energy pricing policy. These experts caution, however, that
the CabMin move can only be the first step towards a
long-term energy pricing policy based on sound economic
principles.
Getting Approval for Gas Hikes
------------------------------
2. (U) The National Electricity/Energy Regulatory Commission
(NERC) will need to approve the CabMin recommendation. The
Ukrainian press reported that NERC approval is expected
within a week, once written justification for the increase is
received from Ukraine's state-owned gas and oil company
NaftoHaz. In accordance with Ukrainian Law on Price
Formulation, the NERC will also need agreement from the
Federation of Trade Unions of Ukraine before the new rates
can go into effect (Note: In 2006 the NERC obtained union
approval for a gas price hike only after months of
negotiations and delays. End note.) Pending the necessary
approvals, NERC officials hope to increase natural gas prices
for individual consumers as early as May.
Price Categories based on Consumption
-------------------------------------
3. (U) The GOU uses a four-category matrix for determining
the price for natural gas based on consumption levels.
Category 1 pertains to those who consume 2.5 thousand cubic
meters (tcm) of gas or less per year. The Ukrainian Ministry
of Fuel and Energy estimates that 89% of households fall into
this category. The current Category 1 price is $63 per tcm
for those households equipped with gas meters, and $69 per
tcm for households without meters. If the price hike is
approved, these consumers will pay $76-$85 per tcm. Since
the majority of Ukrainians might be expected to pay $13-$16
more for gas, the price increases could become an incentive
for installing gas meters throughout the country. At the
other end of the matrix, those who consume between 6-12 tcm
per year (Category 4) now pay $235-$258 per tcm per year.
These customers will pay up to $344 per tcm if the NERC
approves the rate hikes. (Note: Since most urban residents
obtain heat via district heating and are billed separately
for heat and gas for cooking, for most people, the price
rises will affect directly only the small amount consumers
use for cooking. However, these price rises will certainly
affect prices for gas paid by district heating companies and
they are sure to pass on these costs to consumers eventually.
End Note.)
4. (SBU) Comment. During a time of increased political
uncertainty, the GOU has taken an important step in raising
natural gas prices to more realistic standards. Years of low
prices have created a false sense of security and have
discouraged energy efficiency. In addition, gas companies
and municipal heating districts have accumulated large debts,
leaving them little funding to modernize their networks.
The new rates still will not cover costs, and the NERC still
needs to approve them, but proposing them during a period of
high inflation and political uncertainty sends a strong
signal that the current government realizes the days of cheap
energy are over. Given the public outcry that accompanied
the last wave of utility rate increases two years ago, it is
striking how little comment these changes have aroused.
There still could be a reaction once consumers get the actual
bill, or it could be in the current inflationary environment
consumers are less likely to notice the increases. End
comment.
KYIV 00000801 002 OF 002
Taylor