It seemed like a miracle, at first.
The introduction of market-level pricing for natural gas in Ukraine, and the corresponding price hikes, allowed the state gas monopolist Naftogaz to quickly rid itself of its chronic debts and cleared the way for further lending to Ukraine from the International Monetary Fund.
But Naftogaz’s debts didn’t just disappear into thin air: they have just migrated to other parts of the market — mainly district heating companies.
One of these companies is Kyivenergo, which provides heating and hot water to the Ukrainian capital. The company has stopped its planned preparations for the winter heating season because of a sudden shortage of cash: its accounts were arrested by the state executive service after Naftogaz won court cases against the company demanding the repayment of debts.
Kyivenergo is the biggest debtor to Naftogaz, owing Hr 957 million ($38.5 million), according to the monopolist. On top of that, the company owes Hr 372 million ($15 million) in fines for overdue debts.
As a result, all of the cash flowing into Kyivenergo from its clients goes straight to paying the company’s debts and fines, leaving nothing to pay for vital repairs to equipment, and preparations for winter – so Kyivenergo says.
Naftogaz, however, accuses Kyivenergo of blackmailing its customers. “In fact, Naftogaz was forced to lend Kyivenergo billions free of charge and without any reason in past years,” the national gas company said in a press release on July 8. “Kyivenergo’s expenses are included in the tariff for central heating and hot water. That means they are financed by Kyiv’s residents.”
In turn, Kyivenergo blames the government for the accumulated debts. According to Kyivenergo, the state and other consumers owe it six times more than the energy company owes Naftogaz.
And it’s not just Kyivenergo that is having problems with Naftogaz — 104 other central heating providers owned by local communities have also had their accounts arrested because they have failed to pay fines for overdue debts to Naftogaz.
As of July, the outstanding debt of these enterprises to Naftogaz is Hr 18 billion ($726 million). The fines for overdue payments amount to more than half of that again — Hr 10 billion ($403 million).
Chronic problem
This debt problem has existed throughout the 25 years of Ukraine’s independence. Until the government started increasing gas and utility tariffs last year, Ukrainians enjoyed the cheapest utility tariffs in Europe.
That was because the state regulator set below-the-market prices for energy. Unable to raise sufficient revenues from their customers, district heating and hot water providers turned to the state to make up the price difference for utility tariffs.
Overall, they consume 7 billion cubic meters of gas annually, which is 17.5 percent of total consumption in Ukraine.
Formerly, the government compensated Naftogaz for the shortfall in payments from local utility companies at the end of each financial year, in the form of clearing payments between the state and the gas company. The government would write off rent and tax payments that the gas company owed it.
But at the same time, Naftogaz demanded payment for fuel consumed by the local utilities companies every month, and charged fines for overdue payments. However, the energy regulator’s tariff calculations did not take into account the funds needed to pay such fines. As a result, debts have been mounting at these local energy companies for years.
Delays in payments
The debt problem did not disappear when the government increased energy prices. Indeed, it was further aggravated by delays in the payment of subsidies by the government.
The delay between the allocation of money for subsidies and actual payments being made in Kyiv can be up to three or four months, according to officials.
“This is not an issue of documents or red tape,” Oleksiy Tykhonov, an adviser to the deputy head of Kyiv City Administration told the Kyiv Post. “This is an issue of a lack of money. The money is not paid at the government level, or it is diverted or blocked at lower levels.”
Another issue that has created more debts was the slow movement of the state tariff regulator this year. The government increased the price of gas in May, but the regulator only set a new tariff for hot water in July. So for two months the district heating companies had to sell hot water as if the fuel burned to heat it cost Hr 3,000 per 1,000 cubic meters, while the true cost of the gas was double that.
Meanwhile, Naftogaz is energetically using the courts to recover the debts owed to it by local utility companies.
“As of today, Naftogaz is very harshly seizing money from the accounts of communal district heating companies,” Tykhonov said.
Possible solutions
District centralized heating providers across the country are now waiting for the president to sign a bill that would unfreeze their bank accounts and ban the imposition of further fines for overdue debts. If signed, the legislation would then allow the companies to prepare for the winter heating season.
However, the IMF, Ukraine’s key creditor, has urged the president to veto the bill, according to lawmaker Aliona Babak, the deputy head of the parliament committee for construction, housing and utilities.
“The IMF is against any moratoriums,” she told the Kyiv Post. “They think that there should be market mechanisms, and the government should pay everything on time.”
An alternative, comprehensive solution to the debt problem that has been drawn up by the government could still be approved — but only after parliament convenes after the summer break.
But by then, Babak says, there won’t be enough time to prepare the country’s centralized heating systems for winter.
“If we don’t start verifying the outstanding debts, forming a registry, and confirming the sums that need to be paid from the state budget now, in summer, then in October we won’t be able to do anything, because the heat power industry will have collapsed,” she warned.
