Valerii Haponov: Khmelnytskoblenergo should become a European company

Over the past three months, the energy supply company Khmelnytskoblenergo JSC has regularly become a news hero. Team of the estranged acting Director General Oleh Kozachuk through the media announced the attempts of the State Property Fund to change the management of the company, despite its financial success. But without the opinion of the other side, the picture of events cannot be complete. On February 26, the Cabinet of Ministers appointed Valerii Haponov as the General Director of Khmelnytskoblenergo JSC. We talked with him about the development of the situation, the record profit and the future of Khmelnytskoblenergo.

- Valerii Mykolaivych, there is little information about you on the web. I know that you once led Zaporizhiaoblenergo, but that’s all...

- I have been in the power industry for almost 40 years, most of them I spent in Zaporizhia. Indeed, I was the general director of Zaporizhiaoblenergo, headed the territorial division of NEURC in Zaporizhzhia region, and Ukrspetssvet branch in Zaporizhia. For several years I supervised the State Power Supply Inspectorate in Donetsk region.

I was appointed Director of the Dnipro power system of NPC Ukrenergo in 2015. This is the largest trunk enterprise in size, area and capacity: 3 substations of 750 kV, 23 substations of 330 kV to the networks of which Zaporizhzhia NPP, Kremenchuk HPP, Sredniodniprovsk HPP, Kakhovka HPP and Dnipro HPP are connected, it includes five largest thermal power plants of Ukraine and the largest energy-intensive enterprises of Mariupol, Dnipro, Kamensky, Zaporizhzhia, Kryvyy Rih.

I was serving as Deputy General Director of the State Research and Design Institute "NIIPROEKTREKONSTRUKTSIYA" in Kyiv last two years.

 - And why did you decide to go to Khmelnytskoblenergo?

 - My candidacy was chosen by the Cabinet of Ministers. I found the work in Khmelnitsky interesting. I know how to improve certain indicators in the energy company, what new methods to use to optimize its activities. Perhaps the scale in Khmelnitsky is not the same, but the approaches are the same.

- What do you mean when it comes to scale?

- Compare Khmelnytsky and Zaporizhia, it’s like comparing two boxers – both box champions, but one in lightweight and the other in heavy. The number of legal entities and contracts in Khmelnytskoblenergo is 20 thousand, with individuals – 550+ thousand. There were 1 million 900 thousand contracts, of which 67 thousand were legal entities in Zaporizhzhia. There are 6.5 thousand employees there, and 3.5 thousand here. 2800 employees of the highest electrical engineering qualifications worked with me in the Dnipro power system, who daily operated sophisticated high-voltage power equipment.

- You still have to assert your right to take the place of the general director.

 - I have been appointed by the state to perform managerial functions, and I am not going to create excitement and an unhealthy atmosphere in the region. My appearance in the company will take place only after my data, as the head of the enterprise, is entered into the Unified State Register (USR), in accordance with the law.

I have been trying to do this since April 30, immediately after a contract was signed. But, it turned out that since March 12 this year, the state registry has been inoperative. This happens when one of the registrars performs actions on a legal entity and does not finish them, for example, if an incomplete package of documents has been submitted. According to the law, 15 days are given, but in this case all terms were violated.

The State Property Fund, as my employer, sent a complaint to the Khmelnitsky Ministry of Justice.

On May 18, the head of the Central-Western Interregional Department of the Ministry of Justice (Khmelnitsky), on the basis of a complaint from the Fund, seeing the actions of the state registrar as violating the rules of the law, obliges him to stop the procedure for making changes to the documents received by the registrar on March 11 within 24 hours. However, the state registrar ignores the prescription of the management, the state register continues to be blocked.

On May 20, the state registrar ceases operations with Khmelnytskoblenergo JSC. But on the same day, another state registrar from the same Department of the Ministry of Justice receives a new package of documents on changing the company’s QEA from the acting Director General Kozachuk. The papers were again partially filed, which allowed to “suspend” the state register for 15 days, which were supposed to end on June 5.

On June 4, information appears that all actions to enter information on the change of leadership of Khmelnytskoblenergo JSC into the state registry were blocked by decisions of Khmelnitsky State District Court and Khmelnitsky Economic Court during the consideration of Oleh Kozachuk’s claim that it was illegal to dismiss him. Although they simply terminated the contract with him, these are different things. Until the decisions of the courts are appealed, the situation froze at this point.

By the way, on June 18, the Anti-Corruption Court, in response to a request from the Fund, ordered NABU to add a criminal case to the registry that was opened on the fact of illegal actions by state registrars.

- How much have you become familiar with the state of affairs in the company?

- I do not have access to the documentation. I can only judge by open sources, and the information that the company submits when it reports to the Fund.

Until March 2016, the company was headed by Oleksandr Shpak, a qualified specialist who is glad for the company and the team. Upon retiring, he left Khmelnytskoblenergo on the list of the most successful regional power distribution companies in Ukraine.

- But, judging by the information in the media, the company managed to get a record profit in 2019.

The consumer has no alternative; he cannot connect to other electric networks. Therefore, the regulator should limit the profit of regional power distribution companies and control the ways of its receipt.

Companies such as regional power distribution companies are not created to maximize profits, but to support the functioning of society in a fixed area.

Kozachuk claims that, he provided a net profit of UAH 85.7 million due to competent management, in 2019. Let's see how he did it. The planned profit of the company in 2019 was about 62 million. In other words, the plan was exceeded by UAH 23.7 million. A little more than a million people live in Khmelnitsky region. It turns out that in 2019 each resident had to pay 23 hryvnias more for the electricity distribution service. But the tariff for DNO is set by the regulator, which means that the profit has come through other channels.

I have the company's financial statements for 2018 and 2019. Analysts usually look at data for at least three years, analyze the dynamics, then the picture becomes absolutely clear, but we will analyze what we have. Firstly, in January 2019, Khmelnytskoblenergo had accounts receivable for goods and services previously delivered to consumers of 170 million, and at the end of 2019 – 56 million. The difference is 114 million. And the profits showed only 86 million.

Secondly, debts for the delivered services are also in the report for 2018. So, the debt on paper was “dragged” in 2019 and received a beautiful profit figure.

I'm not talking about the fact that these 23.7 million could be spent on equipment upgrades, rather than showing as net profit. This would be reflected in the report as costs. And then profit would be within the planned, and more benefits for the enterprise. According to the law, 50% of the earned profit will go to the state treasury in the form of income tax. In other words, 43 million will be “washed out” of the company’s budget before August 6, which could be used for development. It seems to me that there is an excess of authority. The state allowed to earn – work, improve the company. There was an extra penny –reduce losses. Moreover, Khmelnytskoblenergo has issues that need to be addressed immediately.

- For example?

- The current management has practically sold out all the reserves of transformer capacities. Loading of transformer equipment is now more than 50% at some substations. If an accident occurs, someone will have to be disconnected, there is no reserve capacity. It is necessary to quickly bring this into line with technical standards in order to avoid an emergency and not leave people without light.

- Is this the reason why the average duration of emergency outages is the highest in the region – 8.4 hours?

 - One of some. Our neighbors in the Czech Republic, Slovakia, Hungary have digital substations, telemechanized, it is possible to remotely switch. And here only one is digital, less than 50% are telemechanized, most of which still use outdated oil high-voltage switches out of 175 operating substations of 35-110 kV. If something happened, you need to call the brigade, they collect their bags and go there to manually switch it. Usually this happens in bad weather, rain and snow slow down work even more and increase the emergency shutdown time.

Of the nearly 35 thousand kilometers of power lines, more than half, especially 35-110 kV lines, need to be completely replaced. These are losses that need to be paid, and not at the wholesale price, as previously, but at the market price.

It is necessary to modernize the control system. Khmelnytskoblenergo, the only company, which does not have its own premises, employees are dispersed throughout the city.

There is not enough capacity to support the work of the business sector. A new production has appeared in the north – a ceramic factory, tourism is actively developing, infrastructure facilities are being built and electricity is needed everywhere. But there is no opportunity to increase electricity supply: no one thought about development, did not buy new transformers, did not shift the network. Although there are many promising opportunities.

For example, if a new consumer wants to join the networks, he pays a special connection fee, standard or non-standard. Let's talk about non-standard: a large residential building, complex, factory. This is a very expensive service even officially, more than UAH 2000 per kW.

Not to mention that there are many corruption schemes when energy companies, not having received money “in the pocket”, find a lot of reasons not to connect the facility. For example, the connection point is 300 meters away, but they say that the nearest one is two kilometers away. And they say: “if you share money, then we will reduce your connection costs”. This pushes investors away and impedes the development of local business.

I will give an example from my experience in Donbas. There is a small town in the Luhansk region. The mine then almost did not work, there is no other job. A Finnish company, a world manufacturer of paints, came and wanted to build a plant in this city, and they needed to be connected. The sum was15 million for non-standard connection, then they will be given technical specifications. And they quit because at such a connection price the project became unprofitable and inefficient.

The following scheme has been operating in Romania since the 90s,: if you want to have electricity on your site in 2-3 days, then the first 3 months you pay triple the cost per kW. And then you will be switched to a usual tariff. If you are ready to wait, you get accession at the appointed time, for which you do not pay anything.

If we remove the connection fee, business will come from neighboring regions. This should be one of the priority areas.

This goes against our current NEURC regulations. But you need to look for new ways of development. Now we have a surplus of electricity in our system, we need to create the most favorable conditions for increasing the level of consumption.

- One experiment is already being carried out in Khmelnitsky region – a pilot project on the transition of electric networks to a voltage of 20 kV. The main argument is the successful experience of European energy companies. At the same time, energy experts believe that such a transition is not justified either technically or financially in the Ukrainian realities. Which side do you support?

- Switching to 20 kV is beneficial for regional power distribution companies: the higher the voltage, the lower the loss. In addition, this is a good option if there is no additional area for the expansion of substations. But for the implementation of the project it is necessary to change the entire power grid: cable lines, the old ones will not withstand the increase in voltage, introduce modern digital technologies for control, protection, update emergency automation. This is justified where it is impossible to build new networks due to the already existing dense infrastructure.

In my opinion, it is now more relevant to replace all the switches from oil to vacuum, change the recorders, digitalize the networks, make them remotely controlled, and introduce automated systems for the commercial accounting of electricity for Khmelnitsky region.

 - One of the most relevant topics for all regional power distribution companies is the transition to RAB-tariffs. In your opinion, is this reform realizable in Ukraine and what should be the rates for old and new assets?

 - Until we put things in order on the market, deal with defaults, until civilized investors come to us, I would not be in a hurry to introduce RAB tariffs.

Yes, the transition to a new system is necessary to modernize distribution networks and improve the quality of customer service. But you need to remember about consumers: the transition to RAB-tariffs is an additional tariff load.

More optimal way, in our conditions, is to attract long and inexpensive loans by the company, to take advantage of the joint-stock company in attracting financial instruments for the development of the company, such as IPO, issue of targeted bonds, and additional issue of shares. But it is needed to unlock the company's right to dispose of its assets, and this is possible only after privatization.

I have preliminary agreements with several foreign companies. They are ready to send their specialists to us in order to evaluate our business processes and draw up an audit report, which, in their opinion, needs to be changed. Based on these studies, it will be possible to develop a 5-year, 10-year, 20-year development plan for the company.

We are striving for a European power system, and I want Khmelnytskoblenergo to be one of the first companies that will meet European requirements and standards.

Bringing business processes, standards, methods of the enterprise to European standards and modernizing networks according to the European model will allow to attract leading European investors (system operators) to Ukraine, who are able to give a decent price during the privatization process.

Tags: electricity, regional power distribution company

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