Ukraine has made attempts at achieving all three. But like with many other reforms, the process has not been linear and well-managed.
Sadly, the structural changes have been stalled for political reasons and not due to legislative complexities. Besides some ancillary regulations, the EU rules for gas and electricity markets are laid out in just two directives. The provisions related to the independent regulatory authority are common in both directives. Needless to say, neither electricity nor natural gas will become depoliticized commodities without a government agency that is not de-politicized itself.
For very unfortunate reasons, the Ukrainian legislator has opted for an incredibly fragmented implementation of the Third Energy Package. The biggest achievement towards the approximation of the Ukrainian legislation was the adoption of the Law on the Natural Gas Market a year ago. This statute was a legislative step towards the unbundling of system operators, consumer protection, transparent licensing policies, deregulation of prices, and the security of supply. It is a considerable proof of Ukraine’s commitment towards the integration with European energy markets, which is considered as a success story by Energy Community.
The government is still working on the secondary legislation that is supposed to help institute the full-fledged market in natural gas, while simultaneously pushing forward a widely-criticized version of the electricity law.
Unfortunately, neither market will work without the timely reform of the National Energy and Utilities Regulatory Commission. As with many other policy issues in Ukraine, energy reforms lack synergies and continue to focus on putting out the fires here and there, rather than on structural solutions. In a recent editorial brief on Ukraine’s progress, Energy Community openly accused Ukraine of stalling the regulator reform for “political reasons.”
Fortunately, I had to modify this publication in the course of writing as the Ukrainian parliament adopted the draft law on the national regulator in the first reading. The law is certainly a step forward, but has a range of shortcomings. The document offers an unjustified parliamentary influence on the committee that would select the NEURC’s management. Another issue is the failure to introduce responsibility mechanisms for the pressure or intrusion in the internal decision-making process. The government has been attempting to pass a bill on NEURC since spring 2015, originally with very little support in the Verkhovna Rada due to the constructive criticism across the aisle (especially on the unjustified level of President’s influence on the selection) during a parliamentary debate.
Following the decision by President Poroshenko in August 2014, the newly created body became a regulatory superpower. The authority is in charge of natural gas, coal, electricity, oil, household utilities, such as heating and water supply, and even waste recycling. In regard to these commodities and services, the regulator has powers to approve permits, set retail prices, protect consumers, and monitor compliance with the market rules.
A closer look at the role of the equivalent body in the countries with developed energy markets does not give ground to criticize the comprehensiveness of the regulatory scope of the Ukrainian body. However, regulators in Canada, Australia, France, the United Kingdom, and the United States have something in common with each other and something very different from their Ukrainian colleagues. They mitigate the risks of vesting a powerful authority in one body by making it…independent. A respective parliamentary statute specifies the exact peculiarities of the functioning, duties, regulatory scope, and relevant procedural rules. Experienced jurisdictions choose to ensure that the legislator decides on the status of energy regulator, its powers, and responsibilities. In all of these countries, the institution has a clear independent status, as it is not subordinated to any other government agency. The decision-making is free from any involvement from other official bodies, and, thus, decisions on granting permits, setting prices, or imposing fines can only be challenged in the court of law.
In Ukraine, there is still no parliamentary statute in force that would clearly and comprehensively vest de facto exercised powers and competencies in the energy authority. Thus, the issue is not the comprehensiveness of the regulatory scope; it is the lack of independence. As a result, the objective of Ukrainian energy independence is facing the most serious challenge not from the Russian energy blackmail but fro, the functional dependence of the regulator on the government, oligarchs, and political populism.
Third Energy Package requires that Ukraine assigns all powers and responsibilities necessary for the accomplishment of the markets in natural gas and electricity to a single regulatory authority. Consequently, the decision-making process is de-politicized due to the assurance of functional independence and the principle of impartiality. In practice, this means that the appointment of management must be merit-based with the use of a competitive selection that would mitigate the risk of political bargaining.
Hence, in order to comply with the EU requirements, the Ukrainian legislator has to boost transparency by introducing public vacancy announcements and involving an independent selection committee. The quality of NEURC’s staff also suffers from the lack of clear, measurable, and objective appointment criteria, as currently the requirements are limited to the vague “moral qualities […] and health conditions”. The exact procedure has to be specified by the Ukrainian law, as the European legislation defines only the reform objectives, not the means of their achievement. From the legal point of view, it is critical to include a comprehensive set of rules for methodologies, competencies, duties, and tools in regard to the regulator’s functioning. The legislative process is the parliament’s unique opportunity to contribute to the designation of a professional regulatory authority. After the reform is complete, NEURC will have to gain meaningful independence from the impact of parliamentary political discourse.
Functional independence is not limited to the de jure separation from other governmental bodies. It is equally important to set legislative guarantees that decisions of NEURC are final and not subject to review or approval by any public agency or body. At the moment, the Ukrainian regulator is formally subordinated to the President of Ukraine. Moreover, its decisions are subject to review by the State Committee for Regulatory Policy of Ukraine. Meaningful independence of NEURC calls for appropriate checks and balances. The management must be subject to rotation schemes and limited terms. Moreover, transparency must underpin the decision-making process. Thus, the annual policy program and internal regulations (e.g. tariff methodologies) must be made publicly available.
Furthermore, even the most effective reform and the groundbreaking level of transparency will stay impressive only on paper without proper funds. Financial independence of the regulator requires that the body remains in charge of assessing its own money needs. Currently, the Ministry of Finance makes all relevant budget decision for NEURC.
All in all, Ukraine needs an honest broker to secure its energy sector. To achieve this aspiration, the reform needs to entail the following pillars:
Harmonious implementation of Third Energy Package.
All stakeholders involved in the legislative processmust adhere to the underlying framework – a concrete EU regulatory instrument. The gas and electricity markets are to be regulated based on the common set of principles, with requirements for the energy regulator being an integral part of the legislative package. In practice, the adherence to the goals of Third Energy Package means re-aligning the NEURC reform with the partially implemented natural gas directive and the upcoming electricity reform.
Vision.
At the same time, the reform is not about the mechanical transposition of pan-European requirements into the Ukrainian realities. Third Energy Package is an empowering instrument, but it leaves it up to Ukraine to decide on the long-term strategic change enabled by a re-born NEURC.
De-politicization.
By de-politicization, the Ukrainian legislator should not understand only the result of the reform, but the process itself. Constant political bargaining has been the critical factor slowing down the transformation of the energy sector and the NEURC reform in particular. Provided that the consensus on the functional role of the new regulator has been reached, the particularities of powers, transparency requirements, decision-making process, and human resources must be drafted by experts, not politicians.
