ROA PSRC Resolution No.

125 N Dated September 16, 2005

Attachment Approved by:

Methodologies on Calculation of Tariffs for Electric Energy (Capacity) Delivered by the Power Generation Companies
1. General Provisions

These Methodologies shall define the principles of developing tariffs for electric energy (capacity) sold on the RoA wholesale power market by the electric energy (capacity) generating companies of the Power System: large HPPs (cascades) with 10 MW and above of installed capacity, TPPs and nuclear plants (hereinafter, refer to as the Companies). The tariff development process shall be carried out in two phases: a) Calculation of annual revenue requirement of the Companies; b) Cost analysis, classification, selection of tariff structure and calculation of tariff rates.

2. Calculation of Revenue Requirement

The general revenue, which the companies are allowed to receive through tariffs, is called revenue requirement. It should be sufficient to cover all costs required for reliable, safe and uninterrupted operation of the Companies and to receive a reasonable profit on attracted capital. The revenue requirement (RR) shall be calculated by the following formula: RR = AC + D + AP where` AC allowed annual costs, D annual depreciation of fixed assets AP allowed profit

2.1.

Allowed Costs

The allowed costs should include costs implemented during the settlement year, which are required to ensure normal operation of the Company: a. Operation and maintenance b. Fuel (for thermal and nuclear plants) c. Costs of maintenance of spent nuclear fuel, establishment of decommissioning fund, ANPP safety increasing projects, to be compensated through the tariff d. Taxes (except for the income tax and VAT) and duties and other mandatory payments defined by the RoA Legislation e. Other necessary and justified costs provided for by the RoA Legislation. The allowed costs shall not include costs not related to the licensed activity of the company. For those costs the company shall implement separate calculation.

While submitting a tariff-setting (revision) application, the Company shall present the previous year costs checked by the auditor, the current year actual (predicted) costs and costs envisaged for the settlement year.

2.1.1. Operation and maintenance costs

Operation and maintenance costs shall include the following groups of the companys costs: a. Payrolls of the industrial personnel, including social security fees; b. Auxiliary materials costs, required for operation c. Repair costs, which include costs of repair works carried out both by own resources and by contractor organizations. d. Other operating expenses.

2.1.2. Fuel Costs

The fuel costs of thermal and nuclear plants shall be identified by methodologies developed by the companies and approved by the RoA PSRC (hereafter, refer to as the Commission). Calculation of those costs shall be based on the Power System electric energy and capacity balances for the settlement year developed by the Power System Operator CJSC and agreed upon with the plants, and the planned operation modes of those plants.

2.2.

Depreciation

The annual depreciation costs (D) shall be calculated by linear method based on the initial (procurement) value of fixed assets, which were recognized by the Commission as used and useful for rendering of services, or based on the other amount replacing that value in the financial statements, and the useful life.

2.3.

Allowed Profit

The allowed profit shall be calculated as a product of the profit calculation base (PB) and the allowed rate of return (RR): AP= PB * RR The value of net assets of the company shall be the profit calculation base. It shall be calculated by the following formula: PB = UUNCAV - AD + WC where` UUNCAV the value of non-current assets recognized by the Commission as used and useful for implementation of licensed activities, AD - Accumulated depreciation WC - the amount of working capital allowed by the Commission.

From time to time (but not more than once a year) the profit base should be recalculated to reflect the following: a. Investments on assets recognized used and useful; b. Amendments to the accumulated depreciation; c. Amendments to the allowed value of working capital; d. Changes of currency rates for the cases, when assets have been purchased with foreign currency. The allowed rate of return shall be defined equal to the average weighted value of the companys capital, which represents the average value of borrowed capital and equity, calculated according to the weights of their portions in the calculated capital structure: E rb + BC i rBi i RR = E + BC i where
i

E and rb respectively, the value of equity at the beginning of the settlement year and its allowed (reasonable) rate of return (before taxation); BC rBi respectively, the outstanding remainder of the ith borrowing at the beginning of the settlement year and its servicing cost.

Other methods can also be used to calculate the profit or the rate of return, if those are provided for by the inter-state shares or property purchase agreements or privatization contracts.

2.4.

Costs Recalculation

The basis for identification of settlement year costs shall be considered the 12-months period (pilot year) most close to the settlement year, on which exhaustive and reliable cost data exists. The costs shall be recalculated using the following approaches: a. b. Normalization of costs, in which case costs implemented during the pilot year shall be bring in correspondence with the costs of normal year by excluding the extraordinary circumstances and non-recurrent costs. Well-known and measurable changes, through which predictable changes are considered by bringing the pilot year costs in correspondence with the settlement year realities.

3.

Costs Analysis

During the next phase of the tariff-developing process the companies costs analysis, their allocation by licensed activities, types and rendered services shall be performed. The cost analysis shall consist of the following steps: a. Costs functionalization b. Costs classification. 3

3.1.

Costs Functionalization

This step of the cost analysis process shall be implemented only at thermal power plants in case of electric energy and thermal energy co-generation. In this step each cost element shall be divided between the functional ranges of power and thermal generation. Such division of costs shall be performed by methodologies proposed by the companies and approved by the Commission. From here on by saying costs of thermal power plants ensuring cogeneration of power and thermal energy we will mean costs attributed by approved methodologies to power generation.

3.2.

Costs Classification

The costs shall be classified by two groups: fixed and variable. Fixed costs are those costs, which the companies perform regardless of the amount of delivered power. These are, generally, the costs of maintenance of fixed assets and other costs, which should be reimbursed regardless of the amount of delivered power. Variable costs are those, which shall vary depending on the amount of delivered power and these changes can be conventionally considered in direct proportion to that amount. These costs shall include the fuel costs (at thermal and nuclear plants), a part of main equipment repairing costs, which can be put into dependence from their working hours. In some cases, if the companies apply the payrolls bonus system, then a part of the payroll can be classified as variable cost. The fixed assets depreciation costs can be partially included into the variable costs, considering dependence of their useful life from the working hours (working potential) and therefore the amount of generated electricity. The part of the allowed profit of companies, which is required to service the borrowed capital, shall be classified as fixed costs, and the other part that provides for return on equity and income tax, shall be completely or partially classified as variable costs. All companies shall be required to present their principles of costs classification and corresponding justifications for coordination with the Commission. 4. 4.1 Tariff Development Selection of the Tariff Structure

Tariff structure for different electricity generating companies is different. Selection of tariff structure depends on the Power Sector requirements and on the capacities (which can include generation of electric energy, ensuring of reserve capacities, operation under synchronous compensator mode, frequency regulation and etc.) to render necessary services by the given company for meeting those requirements. 4

Taking into consideration the type of services to be rendered to the Power System by the companies, as well as their metering capacities and preferences, one-part or multipart tariffs may be applied to those services. Basis for the tariff rates calculation are the classified amounts: fixed (Ef) and variable (Ev) expenses allocated between different services. Tariff structure, types of services to be paid through tariff rates and costs allocation principles between those service types shall by approved by the Commission upon submission by the companies. 4.2 Service Measurement Units

Service units are physical amounts to which payment rates shall be applied: a) b) c) d) Measurement unit for the delivered electric energy (kW/h); Available capacity contractual unit (kW); Generation unit for reactive energy under synchronous compensator mode (kVaR); Frequency automatic regulation unit (kW).

In case of provision of other services of the Power System, characterizing and measurement units of those services can also be applied. 4.3 Tariff Rate Calculation

4.3.1 One-part Tariff System One-part tariffs shall be defined for those generation companies which operating modes are not regulated by the System Operator. These are hydro power plants not having daily regulation, wind plants and other renewable energy plants which do not provide other system services except for generation of electric energy. Usually, service measurement unit in one-part tariffs is electric energy measurement unit (kW/h). In case of one-part tariff application, there is no cost classification and tariff is calculated as the ratio of the required revenue (RR) of the company and electric energy (Wde) delivered to the Buyer during a year:

T=

RR Wde

Estimated amount of electric energy delivered during a year shall be determined pursuant to the following formula: Wde = Wgen - Wlon Where: 5

Wgen - Estimated amount of electric energy annual generation (kW/h) Wlon - Amount of electric energy (kW/h) consumed for the losses in the plant system elements and for the own needs.

Estimated amount for annual generation is accepted as equal to the designed average multiyear generation of the plant. In case, for objective reasons, there were deviations from the designed indicators during the operation, the company must submit to the Commission new calculation made by the professional licensed company regarding the average multiyear generation. Electric energy calculation consumed for the losses in the plant system elements and for the own needs shall be implemented in compliance with the methodology developed by the companies and approved by the Commission. 4.3.2 Two-part Tariff System Services to be paid by the companies in two-part tariff system are electric energy delivery, the measurement unit of which is kW/h and contractual available capacity, the measurement unit of which is kW. Two-part tariffs shall be applied to those companies which participation in the electric energy and capacity balance is instructed by the System Operator on instant basis. These are hydro power plants having daily regulation and hydro cascades, thermal power plants, the operation of which is not only stipulated by thermal energy consumption, and nuclear power plant. Electric energy rate (TRw) of two-part tariffs shall be determined by the following formula:
TR w = EV ( AMD / kW / h) Wde

Where: EV - the companys variable costs calculated as a result of the cost calculation;

Wde - the amount of delivered electric energy (Wde) depends on the companys participation in the electric energy balance of the settlement year and is calculated by the System Operator during the System annual modes planning. Capacity rate of the two-part tariffs (TRN) shall be determined pursuant to the following formula: TR N = Ef
12 t =1

N at

Where: Ef - the companys fixed costs calculated as a result of the costs classification;

Nat - the companys contractual available capacity in the tth month of the Settlement Year. The amount of contractual available capacities shall be determined in compliance with the Principles for Establishment of the Electric Energy (capacity) Sale/Purchase Contractual Capacities in Two-Part Tariff System adopted by the Commission. 4.3.3 Multipart Tariff The companies which apart from electric energy and capacity provide other services ensuring stable operation and electric energy quality of the system can make those services calculated and paid through individual tariff rates. In this case, for tariff rates calculation, the need to allocate fixed and variable costs between all provided services by defining annual costs made by the company for each service, in accordance with the methodology coordinated with the Commission becomes apparent. Each service tariff rate shall be determined as the ratio of annual costs made for that service and annual number of services made.