We asked Mr Kostiantyn Ushchapovskyi, Chairman of NEURC Ukraine, his view on the recent Membership of Ukraine as the 25th Member of WAREG.
Mr Kostyantyn Uschapovskyi, we are pleased to welcome the Ukrainian Regulator NEURC as part of WAREG. As a newly accepted WAREG member, how does NEURC consider using its status in the Association to strengthen its support of the Ukrainian water sector? What are your expectations?
Thank you, we are glad to join the circle of colleagues from the European Regulators. We would like to use our membership in WAREG to study and implement the European experience in the water supply and sewerage sector (hereinafter – the WSS sector). In turn, we are ready to share our own unique experience in dealing with the challenges we face during martial law.
The Regulator of Ukraine, as should be noted, started regulation of the WSS sector in 2011. That is why NEURC would benefit from exploring the peculiarities of the working process of utility Regulators in European countries, their functions and tasks, principles of operation, tariff setting and energy efficiency mechanisms introduced by them, mechanisms they use to attract investments into the industry to improve the quality of services provided to consumers, etc.
WAREG members’ regulatory experience can be useful in order to enhance the state policy in the WSS sector in Ukraine and empower the role of the Regulator in this sector. And, of course, in today’s conditions, NEURC is interested in studying the approaches that WAREG members apply to increase the energy independence of water utilities.
Considering the ongoing conflict and challenges in Ukraine, what is the role of NEURC in ensuring continuous and stable water services in the war-ridden regions? Could you please give an example of regulatory measures implemented within this period?
Yes, it should be noted that after the introduction of martial law in Ukraine, caused by the military aggression of the Russian Federation, NEURC adopted a number of decisions to support its WSS licensees. We made decisions as regards the sustainable supply of energy sources to critical infrastructure objects and quick restoration of these objects, simplification of the state regulation mechanisms, etc.
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For instance, we adopted a temporary procedure for Water Supply and Sewerage (WSS) utilities to restore infrastructure that was damaged or destroyed due to combat actions. This procedure includes an algorithm for determining the nature and scale of damage to the WSS objects; compiling a list of priority measures for their restoration; identifying sources of funding for the reconstruction and methods to verify the associated costs; and establishing a procedure for reporting the results of reconstruction works, as well as documenting equipment or materials received as humanitarian aid.
It is also necessary to mention the decisions by which NEURC during martial law:
- extended the timeframes for licensees to submit applications for tariff setting and approval of investment plans in the WSS sector;
- allowed to redirect funds intended for investment plan in the tariff structure to restore damaged infrastructure objects;
- verified the justifiability of expenditures incurred due to military aggression in the course of control measures;
- defined the peculiarities of ensuring water metering on the temporarily occupied territories of Ukraine.
Mr Ushchapovskyi, what are the key regulatory challenges NEURC has faced in the recent years of managing the water sector in Ukraine? How did NEURC overcome these challenges to facilitate transparency, efficiency and accountability?
Among the key challenges of recent years, it is necessary to include, first of all, the implementation of measures to reduce water losses in the networks and also increase the energy efficiency of the WSS sector.
In this context, NEURC already reviewed the methodologies for tariff setting and investment plans approval procedure in the WSS sector, which defined the funding for commercial water meters installation, mechanisms to attract additional investments to reduce the cost of services, namely specific electricity consumption, conduct energy efficiency and other measures including using alternative energy sources.
Meanwhile, the Regulator approved investment plans of the NEURC licensees that comprised measures aimed at updating fixed assets, increasing production efficiency, ensuring metering of natural and energy sources and the volumes of services, optimising technical losses and non-revenue water, enhancing the quality of services etc.
Looking ahead, what is the NEURC’s vision for the future of the water sector in Ukraine? Are there any strategic priorities or initiatives that the Regulator will focus on to foster sustainable development and resilience in the sector?
Yes, of course, the Regulator has its own vision and strategic priorities for the development of the water sector. In this context, it is necessary to note the transition to incentive-based tariff regulation and aggregation of WSS utilities into regional companies.
Thus, both in Ukraine and in global practice, there is observed a positive trend of merging utilities into regional companies based on the so-called “economies of scale”. This means when services are provided by only one company, greater cost savings are achieved than in the case of two or more utilities performing on the same territory. Given the constant cost growth for WSS services, through the aggregation of utilities using a water basin or territory approach, it will be possible to reduce these costs, whereas an increase in the volume of services provided by the merged company will help to level out costs and tariffs at the regional level.
Incentive-based tariff regulation, in turn, aims to create conditions for attracting investments to improve the efficiency of the WSS utilities through their technical re-equipment and the introduction of incentives to improve the quality of services.
From our point of view, the incentive-based approach to tariff-setting is a modern and effective approach to utility regulation since it stimulates a more efficient use of resources and increases efficiency in general. In addition, it allows us to overcome the critical technical condition of WSS infrastructure, where the majority of fixed assets were created decades ago, and considering the periods of protracted high inflation in Ukraine, their value today dropped multiple times below their fair market value.
In light of the conflict and ongoing challenges, what are the most important needs of NEURC and the water sector in Ukraine? How can international organisations and WAREG support NEURC in meeting these needs?
First of all, I would like to emphasize that NEURC is grateful and highly appreciates any support to the Ukrainian water supply and sewerage sector from international organisations and partners.
Every day, we face numerous damages to WSS facilities and critical infrastructure as a result of hostilities, so the help of the international community is crucial, namely through:
- provision of institutional support in the form of experience exchange and capacity building for the specialists of the Regulator and WSS utilities. For instance, on issues of detecting and eliminating water losses in networks and restoration of critical infrastructure objects;
- provision of assistance to elaborate a regulatory framework aimed at adaptation of the Ukrainian legislation to the EU acquis, transition to incentive-based tariff regulation;
- provision of financial and technical assistance to restore critical infrastructure objects and deal with the consequences of hostilities, notably, procurement of water trucks, water tanks, water treatment means, floating pumping stations and other specialised equipment.
Thank you, Mr Uschapovskyi, for this in-depth and enlightening interview. Your perspectives and insights on the challenges facing the Ukrainian water sector, and the steps being taken by NEURC to address these challenges, are invaluable. Your commitment to improving water regulation and supply in Ukraine, despite the ongoing conflict, is truly commendable.
We are delighted to have NEURC as part of WAREG, and we look forward to a fruitful collaboration, learning from your unique experiences and contributing to the growth and resilience of the water sector in Ukraine. We stand ready to support NEURC in any way we can, and we trust that your membership in our Association will strengthen the support for the Ukrainian water sector.
We welcome you once again to WAREG and look forward to further engaging discussions in the future. Thank you.