Ukraine: Law on Certification of the Electricity Transmission System Operator has passed its first parliamentary reading

On 19 February 2021, the Ukrainian Parliament passed in the first reading the draft law On Amendments to Certain Legislative Acts of Ukraine Concerning the Certification of the Transmission System Operator No. 3364-1-д dated 1 February 2021 (the "Certification Law").

The Certification Law is the key element in Ukraine's ongoing electricity market reform. It will ensure the market's liberalisation, efficiency, and transparency and allow further integration with neighbouring European markets.

The Certification Law provides for the option of unbundling the Ukrainian electricity transmission system operator (the "TSO") under the independent system operator (the "ISO") unbundling model and for its certification in accordance with the EU Third Energy Package by the Regulator (after obtaining a positive conclusion of the Energy Community Secretariat on unbundling the TSO).

Certification of the TSO is one of the prerequisites for integrating the Ukrainian Unified Energy System with ENTSO-E and implementing the Third Energy Package in the electricity sector. As a result, if adopted, the Certification Law will bring Ukraine closer towards further integration with neighbouring European markets and, thus, ensure the continuation of the reform, liberalisation, and increase in efficiency and transparency of the Ukrainian electricity market.

Initially the of Ukrainian Law on Electricity Market No. 2019-VIII dated 13 April 2017 ("Electricity Market Law") envisaged unbundling the TSO on the basis of the ownership unbundling model ("OU Model"), which envisaged that the TSO, as a separate legal entity, would own the electricity transmission system assets. However, due to Ukrainian regulatory restrictions, the electricity transmission system assets can only be owned by the Ukrainian state. Thus, the TSO is not allowed to own electricity transmission system assets and can only exercise so-called "economic management right" over such assets (which is neither equal nor compatible with the ownership right). As a result, the Energy Community Secretariat rejected certification of the TSO under the OU Model.

Therefore, the Certification Law proposes amendments to the Electricity Market Law of Ukraine which will open the way for the TSO's unbundling and certification under the independent system operator model (ISO Model), which allows the state to maintain ownership over the electricity transmission system assets and the TSO to operate independently under a set of rules and limitations. The changes also aim to harmonise both the mandatory unbundling rules stemming from the EU acquis on electricity and Ukraine's national regulatory regime for the management of the state property assets and, in particular, the electricity transmission system.

The key provisions and novelties introduced by the Certification Law are:

1. Special requirements for the unbundling and independence of the TSO under the ISO Model, including, among others, the following:
   1. the TSO must be fully owned by the state of Ukraine or by a 100 % state-owned company;
   2. the TSO must have the financial, technical, material and human resources, necessary for performance of its functions; and
   3. the TSO must develop and submit for approval to the Regulator the electricity transmission system development plan for the next ten years and report on its assessment on whether the generating capacities are sufficient.
2. The obligations of the TSO and the state owner of the electricity transmission system assets under the ISO unbundling model, including, among others, the following:
   1. TSO:
      • management of access to and provision of access to the electricity transmission system; and
      • §operation and maintenance of the electricity transmission system and ensuring the electricity transmission system is able to satisfy long-term demand for electricity; and
   2. State owner of the electricity transmission system:
      • provision of all necessary cooperation with and support to the TSO;
      • financing investments envisaged by the electricity transmission system development plan for the next ten years;
      • performance of financial obligations related to the electricity transmission system assets; and
      • provision of guarantees for financing of the development of the electricity transmission system.
3. Independence of the state owner of the electricity transmission system assets under the ISO unbundling model, meaning, amongst other things:
   1. the state owner of the electricity transmission system assets cannot interfere with activities of the management and other bodies of the TSO; and
   2. the state owner of the electricity transmission system assets must develop and implement a compliance programme aimed at preventing discriminatory actions and impacts on the activities of the TSO.
4. Development of the compliance programme and appointment of the compliance officer of the TSO for the purpose of ensuring that discriminatory activities will not be performed by the TSO.
5. The Regulator's supervisory role in unbundling under the ISO model, including supervision over performance of its obligations by the TSO and monitoring relations between the TSO and the state of Ukraine as owner of electricity transmission assets, as well as the Regulator's right to establish tariffs for electricity transmission and for other services related to access and connection to the transmission system grid.
6. The possibility for state authorities to transfer state-owned electricity transmission assets into so-called 'economic management' of the TSO.
7. Independence of the ministry exercising corporate management of the TSO.

However, some of the Certification Law's proposed amendments are only partially compliant with the EU Third Energy Package. For example, the Certification Law does not provide the following Regulator’s powers related to and required to implement the ISO unbundling model:

• for the first ten-year network development plan, to approve the investments planning and the multi-annual network development plan presented annually by the transmission system operator;
• to monitor the use of revenues resulting from the cross-border transmission capacity.

Therefore, additional legislative changes may be required for the TSO's unbundling and certification under the independent system operator model (ISO Model).

For more information on the Certification Law, please contact your regular CMS advisor or local CMS experts: Maria Orlyk, Vitaliy Radchenko, Oleksandra Prysiazhniuk, Taras Chernikov, Maryna Ilchuk, Anatolii Doludenko.

Source:

Text of draft law On Amendments to Certain Legislative Acts of Ukraine Concerning the Certification of the Transmission System Operator No. 3364-1-д dated 1 February 2021 (in Ukrainian).