UKRAINE: RADA ROLLS BACK UTILITY PRICES, BUT WILL IT

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SUBJECT: UKRAINE: RADA ROLLS BACK UTILITY PRICES, BUT WILL IT
STICK?

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1. (SBU) Summary. The Verkhovna Rada (parliament) on September 22
overrode an April presidential veto to pass a law rolling back
residential natural gas and electricity prices to January 1, 2006
levels and putting a moratorium on future increases. The law, if it
comes into effect, would cancel summer price increases of 131% for
residential gas and 56% for electricity. Prime Minister Viktor
Yanukovych has asked the Rada to withdraw the September 22 law and
said that his government would propose next month a "new mechanism"
for utility pricing that would lower consumer prices. For state oil
and gas company NaftoHaz, a Rada rollback or CabMin rate reduction
would worsen its existing financial difficulties. End Summary.

Rada Overrides Veto; Rolls Back Utility Price Increases
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2. (U) The Verkhovna Rada (parliament) on September 22 overrode a
President Yushchenko April veto of a measure to roll back gas,
electricity, and public transportation prices to January 1, 2006
levels and put a moratorium on future rate increases. The law
stipulates that the moratorium would last until the GOU fully funds
pensions and other social payments to the subsistence level. If it
comes into effect, the law, would cancel summer residential price
increases of 131% for gas and 56% for electricity. The law,
submitted by Communist Party leader Petro Symonenko, passed the Rada
on January 19, 2006. President Yushchenko vetoed the measure in
April, saying the Rada had overstepped its constitutional mandate by
trying to set prices. The Rada Economic Policy Committee
resubmitted the vetoed law September 22, and the Rada overrode
Yushchenko's veto with 340 of 444 parliamentarians present voting in
favor.. Among those voting for the override were 183 of 188 Party
of Regions MPs, 100 of 125 BYuT MPs, 30 of 33 Socialists, 20 of 21
Communists and only 4 of 80 Our Ukraine MPs.

Yanukovych Promises Slightly Lower Prices in October
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3. (U) Prime Minister Yanukovych said on September 25 that the
Cabinet of Ministers endorsed the Rada decision and would soon
propose a new price mechanism for setting gas and electricity
pricing that would include rate cuts for residences. Deputy Prime
Minister Volodymyr Rybak, however, announced on September 28 that
the Cabinet of Ministers wanted the Rada to withdraw its veto
override, noting that Ukraine could not afford the 7.2 billion UAH
($1.4 billion) necessary to fully fund the social expenditures
mandated by the law. Rybak pledged that the government would find
ways to cut utility rates. According to press reports, the Economy
Ministry already has drafted a recommendation to the National
Electricity Regulatory Commission to reduce domestic gas prices 18%
for households (from 414 to 339 UAH/tcm) and 24% (from 658 to 498
UAH/tcm) for regional cogeneration plants.

Politics over pragmatism?
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4. (SBU) Comment. The Yanukovych team's apparent reversal on the
price rollback/moratorium law may illustrate a victory of
practicality over political posturing. Even without a rollback, a
slight reduction of residential prices for the balance of 2006 could
bring Yanukovych a political payoff. It would come, however at a
time when state oil and gas monopoly NaftoHaz is facing serious
financial difficulties. Lower residential prices would mean
NaftoHaz will have to rely as much as possible on domestic natural
gas production for household and municipal customers, but they will
have to cover some with imports. NaftoHaz will also have to ensure
that the wellhead price for domestic gas remains low, thus impeding
prospects for investment and modernization in the sector.

TAYLOR