In this article, discover how the water supply and sewerage sector in Ukraine coped with the outbreak of full-scale conflict and the actions taken by the National Energy and Utilities Regulatory Commission (NEURC) to ensure the provision of continuous and reliable water services. With a focus on the legal framework and tariff regulation in the sector, gain valuable insights into the measures taken by NEURC to support the financial sustainability of water supply and sewerage utilities in the face of conflict.
State regulation of centralized water supply and sewerage in Ukraine under martial law
- Area: 603,700 km²
- People: 43.79 million people (January 2022)
- Population density: 74 people per 1 km 2 (2021)
- The number of WSS utilities: 1,550
- The number of WSS utilities regulated by NEURC: 55
- The level of technical availability of WSS: 99.1% city, 89.8% urban-type settlement
The National Energy and Utilities Regulatory Commission (NEURC) is a permanent independent state collegial body for state regulation, monitoring and control in spheres of electricity, natural gas, centralized water supply and sewerage (WSS), and district heating as well.
The Regulator is a collegial body regulated by 7 Commissioners, including the Chairman. Commissioners of the Regulator are appointed by the Cabinet of Ministers of Ukraine (the Government) for a 6-year term with the application of the rotation mechanism. The work of NEURC is carried out by its central office and territorial bodies and counts about 600 employees.
State regulation in the sphere of WSS was launched in 2011. At different times, NEURC regulated between 47 and 151 water utilities. The main functions of NEURC in the WSS sphere are licensing, control, tariff setting and approval of investment programs, monitoring of the quality of services and protection of consumer’s rights. All the necessary legal framework for the regulation of the sector, including licensing conditions and, tariff setting methodology, quality of services monitoring, was developed and approved by NEURC.
As part of the decentralization policy implemented in Ukraine, the regulation of small water utilities was gradually delegated to the local level. Thus, today NEURC regulates the activities of the 55 largest licensees (including ones on the temporarily occupied territories: 2 utilities in Crimea and 1 in the Donetsk region) serving settlements with a population of more than 100,000 people. In general, these utilities cover 76% of the national market of WSS services. Other Ukrainian WSS utilities are licensees of local self-government bodies.
The main legislation in WSSsphereof Ukraine:
- Law of Ukraine “On the National Energy and Utilities Regulatory Commission”;
- Law of Ukraine “On drinking water, drinking water supply and sewerage “;
- Law of Ukraine “On sewerage and Wastewater Treatment”;
- Law of Ukraine “On Housing and Communal Services”;
- Law of Ukraine “On Natural Monopolies” ;
- Law of Ukraine “On state regulation in the sphere of communal services” .
In terms of tariff regulation, NEURC applies the “cost-plus” methodology, which provides for annual revisions of tariffs with elements of incentive regulation. This gradually reduces losses in networks, implements energy-efficiency measures, and increases production efficiency and service quality.
The impact of military operations on the financial sustainability of WSS utilities and the role of regulation in addressing these challenges
As of February 24, 2022, as a result of the outbreak of a full-scale war, martial law was imposed on the entire territory of Ukraine on the basis of the Decree of the President of Ukraine.
The consequences of military operations for WSS utilities were:
- a sharp drop in consumer demand as a result of population migration and relocation of businesses or complete cessation of business activity;
- non-payment by consumers due to the loss of a source of income;
- rapid rates of inflation and rising prices of resources, in particular, a twofold increase in the prices of reagents and fuel, which, moreover, were in short supply for some time;
- growth of account receivables and payables of licensees;
- destruction of water supply and sewerage networks and other objects in the combat zones, as well as resulting increase in drinking water losses;
- interruptions in water supply due to power outages caused by the destruction of energy infrastructure facilities.
Since WSS utilities belong to the critical infrastructure of the state, the reliability and sustainability of their activities had to be ensured in the first place.
In extremely difficult conditions, to support licensees in the sphere of WSS, NEURC adopted a number of decisions aimed at ensuring the uninterrupted energy supply to critical infrastructure facilities, simplifying state regulatory mechanisms, and reimbursing the costs of restoring damaged infrastructure facilities that allowed the utilities to function in war conditions.
The reaction from NEURC
The Regulator made urgent decisions to coordinate joint efforts with licensees, in particular:
- an algorithm of actions was developed to determine the nature and extent of damage to the objects of the WSS, and a temporary procedure for their restoration was approved;
- licensees are recommended to review the measures of investment programs regarding their priority and the possibility of financing;
- licensees are allowed to carry out expenses for the restoration of destroyed or damaged infrastructure facilities, liquidation of the consequences of hostilities in amounts outside the limits established by the tariff structures;
- licensees are allowed to account for the justified costs of providing assistance to the Armed Forces, support of mobilized workers, etc.;
- application of fines for untimely settlements with energy suppliers has been cancelled;
- collection of operative information on the economic and technical condition of utilities was organized, and the traditional reporting of licensees was temporarily cancelled.
Owing to operative information and constant monitoring of the situation, the Regulator timely organized an appeal to European partners for help in purchasing reagents for water and wastewater disinfection. International partners provided humanitarian aid, including mobile water purification and distribution stations, backup diesel generators, submersible pumping units of various capacities, mobile laboratories for telescopic inspection of sewage networks, cable products, etc.
Currently, uninterrupted provision of WSS services is carried out 24/7 in the most populated areas of Ukraine thanks to the highly qualified staff of WSS utilities. If it is impossible to provide services with the help of central water supply systems, the utilities ensure the use of backup sources and water supply systems, specialized equipment, individual and group cleaning and disinfection of drinking water, supply of bottled drinking water and water in containers for individual and group use. This, however, does not apply to the zones of active hostilities and occupied territories.
In 2022 and at the beginning of 2023, NEURC’s licensees in the sphere of WSS received funding through payments by consumers according to the tariffs established by NEURC before the introduction of martial law in Ukraine, expenditures of local budgets, as well as financial assistance from international partners.
The Government of Ukraine and the Regulator, in particular, faced the pressing issue of financial support for WSS utilities. This issue was partially resolved in 2022 by directly financing licensees from local budgets. However, not all utilities received such support. In addition, there is a need for funds for sufficient functioning in 2023.
Therefore, today we as the Regulator are looking for new mechanisms that should, on the one hand, improve the social security of the population affected by the war and, on the other hand, encourage all consumers to pay for the services received on time.