Grow­ing gas debts, con­flicts threaten to freeze Ukraini­ans in their homes

Kyiv Post - - National - MELKOZEROV­[email protected]

As the first snow fell on Kyiv on the morn­ing of Nov. 13, com­muters in the city cen­ter met with an un­pleas­ant sur­prise. A heat­ing pipe un­der Ve­lyka Va­sylkivska Street ex­ploded, turn­ing one of down­town Kyiv’s main roads into a river of boil­ing wa­ter.

One car was half-swal­lowed by the crater left in the erup­tion’s wake, and the ac­ci­dent backed up traf­fic for blocks.

And it wasn’t an iso­lated in­ci­dent. As freez­ing weather be­gan to sweep across Ukraine in mid-Novem­ber, heat­ing pipes all over the cap­i­tal have be­gun burst­ing, spew­ing forth gey­sers of hot wa­ter and dam­ag­ing pub­lic and pri­vate prop­erty.

More than 300 Kyiv apart­ment build­ings were left with­out heat­ing and hot wa­ter af­ter the Nov. 13 ac­ci­dent. As of Nov. 21, the city au­thor­i­ties had fixed more than 1,600 burst pipes but around 20 build­ings re­main with­out heat­ing.

The sit­u­a­tion is worse out­side the cap­i­tal. And with even colder weather on its way, the erup­tions, break­downs, and out­ages will likely con­tinue.

Some ob­servers are ask­ing why Ukraine can’t keep its pub­lic util­i­ties prop­erly run­ning. The an­swer is a com­pli­cated mix­ture of grow­ing util­i­ties debts, un­re­paired heat­ing in­fra­struc­ture and le­gal dis­putes with the Naftogaz state gas com­pany.

Com­bined, these prob­lems threaten to leave Ukraini­ans freez­ing in their homes this win­ter.

Bad in­her­i­tance

The prob­lem be­gan in April, when Kyiv au­thor­i­ties broke a 17-year agree­ment with Kyiven­ergo, tak­ing con­trol of over 2,600 kilo­me­ters of pipes, two power sta­tions, and a trash-burn­ing fac­tory.

De­spite seiz­ing these as­sets, the city re­fused to as­sume the com­pany’s Hr 5 bil­lion ($180 mil­lion) debt to Naftogaz.

That led to a se­ries of other prob­lems. The city au­thor­i­ties dis­cov­ered that 80 per­cent of the pipes it in­her­ited were in poor con­di­tion, Mayor Vi­tali Kl­itschko said dur­ing a Nov. 21 meet­ing with Kyiv district heads.

Later, in May, Naftogaz cut off gas sup­plies in an at­tempt to strong-arm the city into ac­cept­ing the debt.

That ap­proach worked: in Oc­to­ber, Kyiv au­thor­i­ties ac­cepted the debt — al­beit with Hr 1.3 bil­lion, or $46.8 mil­lion, in penal­ties writ­ten off. Now, the city owes some Hr 2.6 bil­lion, or about $93.7 mil­lion.

But the dam­age had al­ready been done. The gas shut-off “made the sit­u­a­tion even worse, as the empty pipes were af­fected by cor­ro­sion,” Kl­itschko said.

Out­side Kyiv, the new heat­ing sea­son has proven to be even more chaotic.

As of Nov. 15, 12 cities were with- out heat­ing due to debts, ac­cord­ing to Naftogaz. It went down to five cities by Nov. 20.

Across the coun­try, debts, dis­putes and pri­va­ti­za­tion pro­cesses have be­come stum­bling blocks on the path to re­li­able heat­ing. For these rea­sons, Naftogaz has stopped sup­ply­ing gas to at least 20 of 1,220 Ukrainian heat­ing plants, Naftogaz spokesper­son Aliona Os­molovska told the Kyiv Post on Nov. 20.

Mu­nic­i­pal heat­ing com­pa­nies and power plants owe more than Hr 28.4 bil­lion, or about $1 bil­lion.

Of that, Hr 9.7 bil­lion, about $350 mil­lion, are debts to Naftogaz for gas con­sumed in 2018, the com­pany re­ported on its web­site.

No money, no gas

Naftogaz sells gas to Ukrainian power plants and heat­ing com­pa­nies, who in turn pro­vide heat­ing and hot wa­ter across Ukraine with a 30-per­cent dis­count.

By law, they can­not cut the sup­plies even to con­sumers with grow­ing debts, Os­molovska said.

But there are ex­cep­tions. Naftogaz is al­lowed to stop de­liv­er­ies to com­pa­nies that have not paid at least 90 per­cent of the cost for gas al­ready con­sumed if the com­pany has no

money, is un­der ar­rest, or is set for pri­va­ti­za­tion.

Power plants in Kher­son, Severodone­tsk, and Kryvyi Rih were set for pri­va­ti­za­tion in 2018 and trans­ferred to the State Prop­erty Fund. But that agency has no bud­get to pay for gas.

The gas can also be cut if the new owner re­fuses to in­herit its pre­de­ces­sor’s debts — as hap­pened in Kyiv and Smila, a city nearly 200 kilo­me­ters to the south of Kyiv in Cherkasy Oblast.

Smila, a city of 70,000 peo­ple, has an Hr 85 mil­lion ($3 mil­lion) gas debt. The lo­cal gov­ern­ment has re­fused to pay the debt af­ter cut­ting ties with the city’s pri­vate heat­ing com­pany in 2018.

While in Kyiv, the au­thor­i­ties stated that the long-last­ing con­flict has brought good re­sults and de­creased the debt, Os­molovska be­lieves that Kyi­vans were forced to live with­out hot wa­ter in vain.

“It is a nor­mal pro­ce­dure. The new owner must take over the debts of the pre­vi­ous owner,” she said. “The penal­ties could have been writ­ten off im­me­di­ately and the debts re­struc­tured for five years.”

Naftogaz also cut sup­plies to the cities of the Rus­sian-oc­cu­pied Donetsk, Luhansk and Crimea re­gions. Now those ter­ri­to­ries are fu­eled di­rectly by Rus­sia’s Gazprom.

Even more cuts

Naftogaz has cut sup­plies to 20 heat­ing com­pa­nies for fail­ing to pay for gas. To restart sup­plies, the gas mo­nop­oly has bro­kered a deal with the Cabi­net of Min­is­ters: it de­creased the 90 per­cent pay­ment norm to 78 per­cent for heat­ing com­pa­nies and 60 per­cent for power plants, Os­molovska said.

On Nov. 14, the Cabi­net ap­proved the new con­di­tions and for­bade gas cuts un­til the heat­ing sea­son ends. Af­ter that, heat­ing re­turned to most Ukrainian cities.

“We couldn’t restart gas pro­vi­sion in any other le­gal way,” Os­molovska said. “But to make peo­ple freeze in their apart­ments also wasn’t an op­tion.”

While heat­ing com­pa­nies can­not pay for gas al­ready con­sumed, soon they will have to pay more for new sup­plies. The gov­ern­ment hiked gas prices for con­sumers by 23.5 per­cent start­ing in Novem­ber. Be­cause of that, debts will con­tinue to grow, ac­cord­ing to An­driy Gerus, en­ergy ex­pert from Ukraine’s Util­i­ties and En­ergy Con­sumers As­so­ci­a­tion.

How­ever, the heat­ing com­pa­nies need two more months to form the new higher heat­ing tar­iffs for con­sumers.

So they “will have to work at a loss un­til Jan­uary,” Os­molovska ex­plained.

The gov­ern­ment is sup­posed to com­pen­sate heat­ing com­pa­nies with sub­si­dies for losses in­curred due to the tar­iff tran­si­tion. But the Fi­nance Min­istry pays sub­si­dies with de­lays.

“As the re­sult, mu­nic­i­pal heat­ing com­pa­nies do not pay for gas in time,” Gerus ex­plained.

“(Then) Naftogaz im­poses penal­ties, which heat­ing com­pa­nies have no right to shift onto pub­lic com­pa­nies and other con­sumers who don’t pay util­i­ties.”

More­over, ex­perts say that, with higher prices, heat­ing com­pa­nies will have to lo­cate more money to pay for gas. They also have to pay wages. As a re­sult, al­most noth­ing will be left for re­pair­ing the heat­ing in­fra­struc­ture.

A way out?

Os­molovska does not be­lieve the Hr 28.4 bil­lion gas debt can be re­paid. In 2011, the gov­ern­ment wrote off Hr 16 bil­lion, or $576 mil­lion in gas debt.

She be­lieves the only way out of this sit­u­a­tion is not let­ting the debt grow fur­ther, con­sum­ing gas more re­spon­si­bly, and mod­ern­iz­ing the heat­ing sys­tem to con­sume less gas.

Ukraine got a taste of liv­ing in a gas-sav­ing regime in March. Back then, Rus­sia’s Gazprom re­fused to com­ply with the Stock­holm ar­bi­tra­tion court rul­ing and re­new gas sup­plies to Ukraine un­der up­dated con­di­tions.

To com­pen­sate for the short-term gas short­age, Naftogaz called on Ukraini­ans to use less gas, launch­ing a #prykruty (“turn the gas down”) flash mob.

The Stock­holm court de­ci­sion in Feb­ru­ary obliged Rus­sia to pay $2.6 bil­lion to Naftogaz and de­creased the min­i­mum amount of gas Ukraine must buy from Rus­sia ac­cord­ing to a 2009 con­tract from 52 bil­lion cu­bic me­ters to 5 bil­lion.

Gazprom was sup­posed to re­new sup­plies to Ukraine start­ing March, but on the last minute re­turned the ad­vance pay­ment and de­creased the pres­sure in the tran­sit pipes go­ing through Ukraine. Naftogaz CEO An­driy Kobolyev called that “re­venge.”

“All the coun­try mo­bi­lized and helped Naftogaz to cover the short­age of gas,” Gerus wrote.

To com­pen­sate for the short­age, in March heat­ing plants and com­pa­nies had ei­ther used fuel oil mazut in­stead of gas or cut the gas in­take sig­nif­i­cantly.

Naftogaz should have re­warded them with fi­nan­cial com­pen­sa­tions for ev­ery saved cu­bic me­ter of gas, Gerus said.

“That re­ward would be more than Hr 100 mil­lion — a sum that Kher­son Power Plant, which used heat­ing oil in spring and cut the gas con­sump­tion by 18 per­cent, would need to­day,” Gerus said.

The in­debted Kher­son power plant only be­gan work­ing on Nov. 14, when the gov­ern­ment obliged Naftogaz to sup­ply gas to the com­pa­nies that paid at least 60 per­cent of their gas debt, cut­ting that from the pre­vi­ous 90 per­cent norm.

Still, Naftogaz broke no laws by cut­ting gas sup­plies to heat­ing power plants that re­sponded to its call and turned the gas con­sump­tion down in spring.

Af­ter four years of re­form, the gas prices in Ukraine fi­nally went up, re­spond­ing to the de­mands of Ukraine’s in­ter­na­tional donors and lenders, mainly the In­ter­na­tional Mon­e­tary Fund. Naftogaz has be­come a prof­itable com­pany. But mu­nic­i­pal heat­ing com­pa­nies and heat­ing and power plants con­tinue los­ing money and in­creas­ing debts.

In nu­mer­ous state­ments, Naftogaz and Pres­i­dent Petro Poroshenko have put the blame on the in­ac­tion of lo­cal au­thor­i­ties.

Prime Min­is­ter Volodymyr Groys­man and Poroshenko have threat­ened to fire may­ors.

May­ors, like Kl­itschko, in turn, have threat­ened to fire the heads of city dis­tricts and mu­nic­i­pal heat­ing com­pa­nies for in­ac­tion.

“As of now, en­ergy sec­tor re­form hasn’t made our sys­tem more ef­fec­tive, but shifted the cen­ter of debts and losses from Naftogaz to mu­nic­i­pal heat­ing com­pa­nies,” Gerus said.

“And the pop­u­la­tion now will have to pay more but might stay with­out heat­ing and hot wa­ter.”

But there is a way out of the util­i­ties chaos, the ex­pert added. The gov­ern­ment in­deed has to raise gas and util­i­ties prices. But also it has to im­prove the ef­fec­tive­ness of heat pro­duc­tion, re­pair the in­fra­struc­ture, and cut con­sump­tion as soon as pos­si­ble.

Oth­er­wise, soon there will be no pipes left to de­liver heat­ing and hot wa­ter to Ukrainian homes.

BY VERONIKA MELKOZEROV­A Peo­ple cross a street flooded with boil­ing wa­ter and shrouded by steam from an ex­ploded heat­ing pipe in the cen­ter of Kyiv on Nov. 15, 2018. (Pavlo Po­d­u­falov).

Emer­gency ser­vice work­ers in­spect a car that fell through cracked as­phalt on Kyiv's cen­tral Shota Rus­taveli Street on Nov. 13, 2018. A busted wa­ter pipe caused dam­aged to the road and opened up the dan­ger­ous fis­sure. No in­juries were re­ported. (Oleg Pe­tra­siuk)

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