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Sara Petrosyan

Armenia's Consumer Electricity Rate: Future Increases Are In the Cards

The rate hike request presented by Electric Networks of Armenia CJSC (ENA) made the crisis in Armenia’s energy sector all the more visible. It’s a crisis that the government has carefully hidden from the public.

During parliamentary hearings on the matter, some MPs realized that the problem wasn’t the ENA or, moreover, the 7 dram rate increase. Thus, they suggested that a sector wide discussion take place, on the understanding that the security of Armenia’s energy sector was no longer guaranteed and that the ENA was just a part of that sector.

Nevertheless, what are the causes of the drop in ENA’s profitability? Experts point to a situation that has been subjectively forced on ENA and that, as a result of not searching for solutions, the problems has deepened, especially in the past few years.

The reasons given are:

1) Unexpected large increase in costs. While conducting its policy regarding the ENA, the government expected that the ENA would obtain electricity on the basis of cheap to expensive. But the producers of cheap electricity – the Metzamor atomic power station – didn’t operate as long as expected. During 2012-2014, the Vorotan hydro-plant and the Sevan-Hrazdan cascade weren’t receiving adequate water flows, and numerous mini hydro-plants weren’t producing enough power.

ENA obtained 40% of its electricity via thermal power plants and 28-29% from the atomic power station and hydro-plants. As a result, from 2012-2014 it incurred 27 billion AMD (US$ 57 million) in losses. The government never made up for these losses.

2) Consumer energy rates remained the same because those years saw a number of elections – the 2012 parliamentary election; the 2013 presidential election; and the 2103 Yerevan Municipal Council election.

At issue for the ruling regime was to avoid at social unrest at any cost, and a rise in rates would have done just that. The government thus artificially suppressed utility rates.

As a result of this policy, the ENA was not only deprived of profit, but its losses as of December 31, 2014 reached 55.1 billion AMD. To sustain its operation in the short-term (2-3 years) the ENA got loans from three Armenian commercial banks.

3) The ENA also incurred losses due to debt obligations. The Nairit chemical plant alone owes ENA 1.2 billion AMD. The Vanadzor KimProm plant owes the ENA some 1.379 billion AMD. The ENA went to court to have KimProm declared bankrupt. It didn’t happen. The ENA did the same regarding Glendale Hills Ltd. over the 138 million AMD it owes the utility company.

The government, however, dragged its feet it publicly confessing that Armenia faced energy security problems and that the situation was a result of poor management. In order to stave off social unrest the government brought in a number of state energy companies into its short-sighted policy, utilizing their resources.

On November 28, 2014, at a meeting with management and employees of Nairit, Minister of Energy Yervand Zakharyan announced that monies used to keep the plant on its feet and to pay workers had been taken from funds obtained from other companies in the energy sector; companies that are now financially floundering.

Nairit hasn’t been operating for years. Nevertheless, in Zakharyan’s words, during this time 178 employees have received substantial salaries ranging from 400,000 AMD to 2.6 million per month ($850 to $5,500).

Overall, Nairit owes employees 6 billion AMD in back wages. According to a statement made by Prime Minister Hovik Abrahamyan at a cabinet session, as of April 2, 2015, Nairit still had 480 employees on the books after a wave of layoffs.

One year ago, Lori Provincial Governor Artour Nalbandyan told Hetq that: “I am happy to report that the 450 million AMD in back wages owed by KimProm has been completely paid, just as promised by President Sargsyan.”

There are 621-700 employees on the books of Vanadzor KimProm. The average salary is 80,000 – 100,000 AMD per month. The government has paid the monthly 48.5 million in wages, and continues to do so, from funds taken from state electricity companies.

In addition, the mentioned chemical plants owe a great deal to the electrical energy sector. For example, Nairit owes 20 billion AMD to Yerevan TPC (Yerevan Thermal Power Plant)

Yerevan TPC and the atomic power station had to take 16 billion AMD loans (1-2 years at 11-12%) to maintain their resources. Yerevan TPC owes GazProm 23 billion AMD; a debt amassed in four years. Yerevan TPC has also been forced to lay off workers because it must pay Nairit employees.

Together, Yerevan TPC and High Voltage Electric Networks CJSC owe 40 billion AMD to a number of banks and to GazProm. How they’ll pay remains a mystery.

On June 27, President Sargsyan finally broke the ice and publicly announced that new solutions are needed for the country’s energy sector and to neutralize the burden of utility rate hikes on the people.

“As I noted, I am certain that voiding the electricity rate hike would be extremely dangerous. Thus, prior to reaching a conclusion [by an audit commission-Hetq], the government will assume the full burden of the rate increase,” President Sargsyan said.

At the same time Sargsyan said that if the audit sustained the need for a rate hike, consumers would immediately began paying it without having any doubts on the matter.

President Sargsyan has no doubts that the rate hike is justified. The World Bank has already studied the sector and has made suggestions to reform the sector   to the Armenian government; all designed to guarantee the adequate and needed supply of electricity. Otherwise, more brownouts are on the way.

The World Bank has suggested that a new thermal electric station be built by 2010. Funds have already been allocated. The WB has also suggested some short-term measures as well to improve the energy sector, including cash incentives to the poor and energy saving measures. The government accepted this suggestion and will start to compensate families 105,000 AMD and an additional social allotment of 24,000 per year.

Prime Minister Abrahamyan stated that: “After consulting with the president we have drafted a decision that will increase the compensation of 105,000 AMD per family, 400,000 individuals overall, by 24,000 per year. The government will allocate 2.5 billion AMD ($5.279 million) yearly to lighten the burden of the rate hike on needy families.”

But where will this 2.5 billion AMD come from? In the past, such expenses were ‘forcibly’ assumed by state electric companies who are now financially strapped.

As noted in a previous article, these companies paid out 1.1 billion AMD to subsidize needy families after the hike in gas prices during the past few years. These companies are in no condition to assume another such burden. At the same time, the World Bank has suggested, as part of its plan to immediately improve the health of Armenia’s energy sector, to stop financing the gas subsidy to needy families at the expense of state electric companies.

As a result of these government measures, has the prospect of social unrest in Armenia lessened, or has it paved the way for an even greater explosion of public discontent?

In 2016, the Metzamor atomic power station will go off line for one year. This means that the ENA will have to purchase electricity at a higher price from thermal power plants. Thus, consumer rate hikes seem unavoidable.

Who will be the unfortunate messenger to bring this news to those on Baghramyan Avenue protesting the rate hike? 

Comments (1)

One should never trust the reports or judgements of the World Bank or IMF or other such bodies. Their aim is never the betterment of humanity. They are wolves in sheep's clothing, and their hidden agenda is the enslavement of the whole human race.

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