Vano MechurchlishviliDepartment of Methodology and Information Provision

27 June -3 July, 2008

Georgian National Energy and Water Supply Regulatory CommissionGeorgian National Energy and Water Supply Regulatory Commission

Area of regulation of the Commission, structure of energy and water supply sectors and legislative

framework

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Primary laws in the energy sectorPrimary laws in the energy sector Law of Georgia on Independent Regulatory BodiesLaw of Georgia on Independent Regulatory Bodies:

Independent regulatory bodies are created to regulate the domain specified by the State and are persons of public law with legal capacity, which have no public control body and which are independent of public bodies. The Law prohibits interference into the competence of both independent regulatory body and commission agents; It is also inadmissible to control activities of a regulatory body or to demand a report on the referred activities.

Law of Georgia on Electric Power and Natural Gas: Specifies rules of carrying out activities in the electric power, natural gas and water supply sector and establishes rights and obligations of both administrative bodies (including the Commission) and subjects of entrepreneurial activities;This Law is not applicable to the transit of electric power and natural gas through the territory of Georgia. It is also not applicable to prospecting, development, processing and collection of natural gas, relationship between producer and supplier of natural gas, as well as extraction or/and production of water from the surface or underground units.

Ministry of Energy of Georgia Georgian National Energy and Water Supply Regulatory

Commission

Electric power and natural gas sectorElectric power and natural gas sector

Order of the Minister of Energy of Georgia and Decree of the Georgian

National Energy and Water Supply Regulatory Commission have equal legal force.

It is noteworthy that the Minister of Energy of Georgia has a right to declare deregulation or partial deregulation.

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Georgian National Energy and Water Supply Regulatory Georgian National Energy and Water Supply Regulatory CommissionCommission

The main functions of the Georgian National Energy and Water Supply Regulatory Commission are: Establishment of procedures and conditions of licensing in the

electric power and natural gas sector, issue of licenses, entry of changes and amendments into them and their invalidation;

Working out of tariff methodologies; Establishment and regulation of tariffs;

Elaboration of the procedures of supply and consumption in the electric power and natural gas sector;

In the sphere of regulation of the Commission, settlement of disputes between entrepreneurial subjects, and also between them and consumers (within its competence);

Control over proper fulfillment of requirements set forth by the Commission and implementation of measures envisaged by law for their violations.

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Ministry of Energy of GeorgiaMinistry of Energy of Georgia

The main functions of the Ministry of Energy of Georgia are: Working on short, medium and long-term strategies of development of the

Energy sector, as well as priorities and various programs, and coordination of their implementation;

Technical monitoring of the Energy sector;

Approval of estimated balances and market rules in electric power and natural gas sector;

Promoting development of scientific research, design and educational policies;

Working out of state policy in the energy sector for the states of emergency;

Most preferred development of renewable energy sources, while facilitating implementation of power-efficient measures.

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Electric power sector of GeorgiaElectric power sector of Georgia

Technical and financial management of the electric power system of Georgia

is implemented by technical and commercial system operators both of which are entrepreneurial subjects of private law and their full titles are as follows:

Technical operator – Georgian State Electrosystem ltd.; Commercial operator – Commercial Operator of the Electroenergetics

System of Georgia, ltd.

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Commercial electric power system operatorCommercial electric power system operator

Functions of a commercial electric power system operator are specified by the Law on Electric Power and Natural Gas of Georgia. Its main functions are:

Creation and maintenance of a common electric power sale-purchase base, including a common registry.

On the basis of obtained information, spcification of the quantity of sellers/ buyers of electric power, electric power sold/purchased by them and presentation of information for a final report.

Purchase/sale of balance electric power output – i.e. making up of an actual difference in implementation of a direct contract on purchase of the electric power balance electric power.

Provision of the electric power system with reserve capacity, as specified by this Law and Rules of Electric Power Market.

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Technical electric power system operatorTechnical electric power system operator

A technical electric power system operator holds dispatch and transmission licenses.

It owns transmission network covering over 110 kilowatt high voltage transmission facilities, and also 35 and 110 kilowatt high voltage transmission facilities (as an exception).

Its main functions are:

In the electric power system of Georgia, having supply and consumption balanced so that electricity parameters (frequency, tension and other) are brought into compliance with established standards;

Provision of the stability, safety and reliability of the electric power system;

Registration of direct contracts and afterwards ensuring their implementation;

Estimation of the actual costs of electric power existing in transmission network for a respective reporting month.

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Structure of the electric power sector of GeorgiaStructure of the electric power sector of Georgia

Ministry of Energy of Georgia National Energy and Water Supply Regulatory Commission

Distribution companiesDirect consumersGeneration units

Low capacity power plantDesigned capacity not exceeding 13

megawatt

Production licensees Retail consumers

Commercial system operator(ESCO)

Technical system operator(sse)

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Electric power wholesaleElectric power wholesale To participate in the electric power wholesale it is necessary to register with the

commercial operator as a qualified enterprise. In accordance with legislation, the following may be registered as a qualified enterprise:

Distributor - holds a distribution license. Direct consumer - consumer of the electric power, who consumes 30 million

kilowatt-hour during a year. Importer – any person, who has a contract on importation or who holds an import

license. Exporter - any person, who is willing to export electricity. Producer:

Power plant, with a designed capacity exceeding 13 megawatt – holding of a production license is required;

Small capacity power plant – power plant with designed capacity not exceeding 13 megawatt - holding of a production license is not required (is deregulated).

Purchase-sale of electric power in Georgia is carried out only on the basis of a contract.

Participants (authorized persons) in the trade in electrical power: producers, importers, exporters, distributors and direct consumers are free to choose a party to a contract on purchase-sale of electric power

On the Georgian electric power market, a choice of a partner depends exclusively on the principles of market economy and on subjects (qualified enterprises) operating in this sector.

To implement a purchase-sale contract (direct contract), it is necessary to undergo registration with a dispatch licensee

Under a direct contract, the parties themselves specify volumes, schedules of delivery and cost of the electric power.

To participate in wholesale trade in electric power, it is necessary to undergo registration with a commercial operator as a qualified enterprise ..

Wholesale electric power marketWholesale electric power market

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National Energy and Water Supply Regulatory CommissionRegulates prices on electric power at the market by establishment

of respective tariffs for services and products:

For transmission services - fixed tariff; For dispatch services - fixed tariff; For commercial system operator - fixed tariff.

For production (mainly marginal tariffs): Regulatory stations – fixed tariff; Newly built stations - fixed tariff; Production licensees - marginal tariff; 13 megawatt and low voltage stations - deregulated (free price

formation).

Capacity system reserve tariff (two-part tariff): Capacity system reserve tariff (readiness tariff) - marginal; Used reserve production tariff - marginal.

A distribution licensee shall deliver distribution services to all types of retail consumers and provide them with uninterrupted supply of the electric power.

Activities of a distribution licensee are fully regulated activities, conditions of services and tariffs on distribution, conduct and sale of the electric power (fixed tariffs) are established by the Commission.

Distribution activities means distribution and sale of the electric power. At the same time, except for a distribution licensee, a low capacity power plant also has a

right to provide retail consumers with electric power supply through a distribution network on the basis of a contract concluded with a retail consumer.

A retail consumer is entitled to select another source of supply of the electric power. In case of purchase of electricity from a low capacity power plant by a retail consumer, a

distribution licensee shall deliver the same type of services as in case of purchase of electricity from him, provided that the services delivered are remunerated.

Difference is only in the final cost of the electric power, which is specified by a contract concluded between a low capacity power plant and a retail consumer.

Retail electric power marketRetail electric power market

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Structure of the natural gas sector of GeorgiaStructure of the natural gas sector of Georgia

Ministry of Energy of Georgia Georgian National Energy and Water Supply Regulatory

Commission

Distribution licensee Direct consumerSupplier

Retail consumer

Transportation licensee

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Natural gas marketNatural gas market To participate in trade in natural gas, it is not necessary to undergo any registration, or

other administrative procedures – a more liberal environment as compared to electric power sector.

Under the legislation, participants in the trade in natural gas are: Supplier – any person who purchases or sells natural gas, i.e. a person proceeding

from a contract or other circumstances owns natural gas (with a view of selling it). Transportation licensee – owns and manages transportation network (high

pressure network). Distributor - owns and manages distribution network (high and medium pressure

network). Direct consumer – is directly connected to the transportation network (high

pressure) Retail consumer – is supplied natural gas from the distribution network.

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Structure of the national gas sectorStructure of the national gas sector

Distribution

Direct consumers

Supplier

Retail consumers

Transportation

Supplier

Purchase-sale of natural gas means supply. A supplier has a right to sell natural gas to

another supplier, direct consumer and retail consumer at the price and under terms and conditions specified in a preliminary concluded contract.

Transportation and distribution of natural gas means transfer of natural gas, on request of a supplier, from one to another point and provision of full package of services related to network services (except for the sale-purchase of natural gas).

Natural gas transportation and distribution licensees shall observe instructions of a supplier and ensure implementation of a contract on purchase of natural gas.

If a distribution and transportation licensee is engaged in purchase-sale of natural gas, this will be considered as other entrepreneurial activities. In such case, a licensee has to maintain separate accounting.

Purchase-sale of natural gas in Georgia is carried out only on the basis of a contract.

Participants in the trade in natural gas are free to choose a party to a contract on purchase-sale of natural gas.

On the Georgian natural gas market, a choice of a partner depends exclsuively on the principles of market economy and the good will of subjects operating in this sector.

Under a direct contract, the parties themselves specify volumes, schedules of delivery and cost of the natural gas.

Purchase-sale of natural gas is free from establishment of tariffs, except for in case of retail consumers, where the upper margin of a purchasing tariff is fixed.

Relationship between the parties are regulated by the Rules of Natural Gas Market and Rules of Natural Gas Consumption.

Natural gas marketNatural gas market

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The Georgian National Energy and Water Supply Regulatory Commission regulates prices on natural gas at the market by establishment of respective tariffs for services and products:

For transportation services – fixed tariff; For distribution services – fixed tariff; For supply services – marginal tariff, only for a retail consumer. Consumer tariff – marginal tariff for a retail consumer of a

particular distribution network.

At the same time, Order of the Minister of Energy of Georgia on Deregulation and Partial Deregulation of the Natural Gas Supply should be noted.

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Structure of the water supply sector of GeorgiaStructure of the water supply sector of Georgia

Ministry of protection of the environment and natural

resources

Georgian National Energy and Water Supply Regulatory

Commission

Consumer

Supplier of potable water

Potable water is supplied by a supplier.

Water supply covers operation of the potable water supply system, delivery of potable water and wyalarineba.

Potable water supply system is a complex of water collection, transportation and distribution network (water mains, water reservoirs, open and closed channels, and if required, pump stations and other) used to provide water consumers with water supply.

A supplier is responsible for provision of a consumer with adequate quality water supply, as specified by technical regulations. Also discharge water cleaning installation to attain allowable level. .

Potable water supplyPotable water supply

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The Georgian National Energy and Water Supply Regulatory Commission regulates prices on potable

water by:

Fixed rate tariff on water supply – contains operation costs of water supply, costs of the current and capital repairs and rehabilitation and development, while regarding reasonable and fair level of proceeds on investment.

It should be noted that the Commission was added the function of regulation of water supply from 20 November, 2007. As envisaged by Law, it shall also have water supply tariffs calculated by 1 September, 2009;

Before establishment of new tariffs on water supply, the Georgian National Energy and Water Supply Regulatory Commission will maintain tariffs effective by the date (20 November, 2007) of validation of this Law.

In the Electric Power Sector, an investor may choose between a free market or regulated market at which to carry out activities

Peculiarity of the Electric Power Sector of Georgia

Regulated activities With a view of development of renewable and alternative energy sources and

facilitation of gaining proceeds on investments made to this end, by order of the Minister of Energy, the output produced by a newly built power plant will be subject to compulsory purchase by a commercial system operator, either in full or in part.

The Commission (GNERC) will preliminary establish long-term fixed tariff rates for the referred power plant and its activities will be subject of full-scale regulation.

A newly built power plant is a source of guaranteed reserve.

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Thank you for attention