Actual issues of tariff setting of natural monopolies subjects of the Kazakhstan Republic

Kazakhstan catastrophically needs new large-scale investments in the electric power industry. They were needed yesterday, because the construction of new facilities or networks takes a long time. Unfortunately, the current state of things and ongoing reforms in the industry will not allow to solve this big problem [1].

There are two opposite positions in the tariff setting in the current time.

The first one is government position.

At the end of 2018, a meeting of the Security Council of the Republic of Kazakhstan was chaired by the Head of State, at that time Nursultan Nazarbayev. The meeting discussed the formation of current tariffs for electric and thermal energy, as well as the activities of government agencies that provide pricing control in the energy services market.

Opening the meeting, the Head of State informed those present about the results of the inspection of tariff setting for electricity and heat by the General Prosecutor's Office.

"Before voicing the Message of this year, we conducted a special survey among citizens in order to identify the most pressing problems. This case study showed that the high cost of utilities is in the first place. Therefore, the Prosecutor General was instructed to carry out an audit in this area. The results of the audit necessitated the consideration of this issue at a meeting of the Security Council" - Nursultan Nazarbayev said.

Nursultan Nazarbayev emphasized that a special order was given to clean up the tariffs for utilities and natural monopolies in the current Message of the Kazakhstan Republic president.

The head of state focused on the implementation of the "Tariff in exchange for investments" program and spoke about violations identified as a result of checking the quality of its implementation.

"For a certain purpose, we at one time adopted the program "Tariff in exchange for investments". It has allowed monopolists to earn billions of money to modernize production since 2009, over the past 7 years. It was to improve the entire fund of generating capacities that we went for a twofold increase of tariffs. Large energy companies illegally enriched themselves at the expense of consumers, including bonuses to their employees in the cost of services, as well as unreasonably overstated production costs instead of upgrading capacities with this money" - the President of Kazakhstan said.

Nursultan Nazarbayev noted that the damage to the population from such actions of energy transmission companies amounted to 14 billion tenge, the illegal income of energy supply companies - 15 billion tenge.

The audit also revealed the inefficient use of subsidies allocated by local executive bodies to reduce tariffs.

"This state of affairs can arise for two reasons: either it is a conscious opposition to the President's Message, or it is mismanagement, which occurs as a result of irresponsibility and lack of understanding of its role. I consider both reasons as a crime. Just one example from the city of Kapchagay. For the duration of the program, the tariff has doubled. Depreciation of capacities increased from 53 to 77%. All violations became possible due to inaction and lack of control by the ministries of the national economy, energy and local executive bodies" - the Head of State stressed.

In addition, the President of Kazakhstan instructed to check the authorized state bodies for price collusion and corruption offenses in this area.

"The costs of utilities, including payment for heat, electricity, occupy a significant share in the total expenses of the population. The higher the tariffs, the greater the burden on the family budget. Tariff growth should not be carried out without a real business case" - Nursultan Nazarbayev said.

The head of state pointed out the weak work of the MNE antimonopoly committee and instructed the Prime Minister to put things in order in its work and evaluate the effectiveness of work at the level of all regional antitrust departments.

"The Ministry of Energy should be held accountable for every tyin paid by consumers. This money should work for the development of our economy. When making a decision on increasing tariffs each time, first of all, one must take into account the solvency of the population. A public discussion of all planned tariff changes is either not carried out at all, or it has a formal nature. It is necessary to change the current mechanism, providing for the wide involvement of the public, non-governmental organizations and the media" - the President of Kazakhstan instructed.

The head of state pointed out the absence of an effective system of "feedback" from the Committee for the Regulation of Natural Monopolies, Protection of Competition and Consumer Rights with Citizens.

Nursultan Nazarbayev also noted the need for action by the Ministry of Energy to reduce the cost of electricity for the population.

The President of Kazakhstan demanded from the Government and the General Prosecutor's Office the appropriate implementation of all legal acts in relation to persons involved in unreasonably high tariffs.

Nursultan Nazarbayev also commissioned a comprehensive analysis of the targeted spending of funds allocated from the budget as subsidies.

"All these measures should not be a one-time promotion. I demand maximum publicity, regular reporting, effective work of competent state bodies. The population should be informed about the measures taken to return funds that were illegally appropriated" - the President said.

In conclusion, the Head of State addressed all the leaders and owners of energy supplying companies: "The population should know where, for what purposes money is being spent. It is necessary to restructure work, feel social responsibility, be open and earn people's trust" [2].

The second is position of natural monopolies subjects.

There are two main problems for natural monopolies subjects. They are:

1) high physical wear and tear of equipment. Figure 1 shows average level of wear and tear of equipment in percent.

Figure 1 - Average level of wear and tear of equipment

2) lack of incentive methods of tariff settings.

Currently, the country has a complex, multi-stage process of tariff formation using the cost-effective pricing method, the main task of which is to curb tariff growth [3].

Cost pricing, which is being applied now, implies rationing the costs of the natural monopoly and its profits, as well as removing any economy of enterprises by introducing a compensating tariff for non-fulfillment of the tariff estimate.

This does not stimulate enterprises to increase efficiency and introduce new technologies. It is profitable for an enterprise to invest in basic capital, and currently reinvestment is taking place without improving the quality - profit is growing not due to cost optimization, but due to capitalization.

Since the profit of the enterprise in the framework of the cost-based method is limited by the size of the investment program, in practice net income is excluded. As a result, the natural monopoly entity begins to seek income through the implementation of other activities, including illegal ones: it imposes on the consumer the work of connecting to its services, inflating the cost of such work obviously, commits offenses regarding the cost of procurement and tendering.

All this creates a shadow business and discourages foreign investors. Therefore, there is a need to reform the tariff system.

Consequences of the current situation:

1) significant deterioration in asset quality in the sector;

2) the current tariffs do not provide a sufficient level of profit for the development of the company, the modernization and updating of the existing infrastructure, as well as its further expansion;

3) the current tariff regulation does not motivate to increase efficiency and optimize operating costs;

4) lack of access to commercial finance and lack of investment attractiveness;

5) the current tariff regulation leads to the appearance of non-transparent schemes for withdrawing funds from the company;

6) excessive administrative burden associated with the approval process and monitoring of tariffs and investment programs [4].

Possible solutions:

1) switch to the incentive tariff method regulation (RAB regulation);

2) update the rules for calculating profit rates in order to meet changing market conditions and the economic situation;

3) introduce a mechanism to compensate for deviations actual from the approved scope of services;

4) implement performance targets with incentive mechanisms;

5) abolish the application of standards and implement targets for quality, reliability and efficiency [5].

The most important thing is bureaucracy. It is necessary to simplify the relevant rules regarding the application for approval of tariffs, tariff estimates and investment programs, since at present the whole procedure is not transparent and is bureaucratic [6].

RESOURCES

1. https://forbes.kz//process/expertise/kak_ostanovit_nadvigayuschuyusya_katastrofu _v _elektroenergetike/?

2. http://www.akorda.kz/ru/events/akorda_news/meetings_and_sittings/ zasedaniesove-ta -bezopasnosti-pod-predsedatelstvom-glavy-gosudarstva-11

3. https://kursiv.kz/news/vlast-i-biznes/2017-12/mne-predlagaet-svyazat-tarify-monopo-listov -s-ikh-effektivnostyu

4. "The basic principles of the new tariff regulation in housing and communal services" European Bank of Reconstruction and Development

5. https://tengrinews.kz/zakon/agentstvo_respubliki_kazahstan_po_regulirovaniyu _es-testvennyih _ monopoliy/ hozyaystvennaya_ deyatelnost/id-V030002154_/

6. https://www.zakon.kz/4744926-regulirovanie-estestvennykh-monopolijj.html