MOLDOVA INCREASES TARIFFS, GAZPROM TO RAISE PRICES

C O N F I D E N T I A L SECTION 01 OF 02 CHISINAU 000089

SIPDIS

SIPDIS

STATE FOR EUR/UMB

E.O. 12958: DECL: 01/30/2018
TAGS: ECON ENRG PGOV PREL MD
SUBJECT: MOLDOVA INCREASES TARIFFS, GAZPROM TO RAISE PRICES

REF: CHISINAU 1520

Classified By: Ambassador Michael D. Kirby for reasons 1.4(b) and (d)


1. (C) SUMMARY: Following Gazprom's price increase on January
1, Moldova was forced to increase tariffs for electricity,
heating and natural gas for power generators and consumers.
Moldova now pays USD 191 per thousand cubic meters (tcm) for
natural gas, up from USD 170/tcm in 2007 (reftel). However,
this price is not fixed for the entire year, and, according
to MoldovaGaz, will increase to USD 213/tcm on April 1, and
to USD 232/tcm in July. Consumer tariffs will be adjusted
following the July price increase - but not following the
April Gazprom price hike. MoldovaGaz has reached a political
agreement with the ruling Communist Party of Moldova (PCRM),
negotiating the current price and a commitment for future
adjustments, but taking into consideration pre-election year
politics. END SUMMARY.

GAZPROM, ENERGY REGULATOR INCREASE PRICES
--------------


2. (U) On January 18, ANRE, the state energy regulator,
increased the price of electricity, heating and natural gas
for consumers and increased tariff rates for electrical and
heating plants. On average, the consumer tariff for natural
gas rose 10% to Moldovan Lei (MDL) 2,775/tcm (about USD 247).
Households consuming more than 30 cubic meters per month
will pay MDL 3,161/tcm (about USD 281) on average.
Electricity prices rose from 96 bani to 98 bani (100 bani
equals one MDL) per kilowatt-hour (kwh) for consumers of
electricity from Union Fenosa's three distribution companies.
Consumers of electricity of the northern, state-owned
distribution companies will now pay MDL 1.08, up from MDL
1.01 per kwh. Major industrial consumers linked directly to
Union Fenosa's 110-volt network will pay 71 bani/kwh, up from
69 bani/kwh. (NOTE: One USD equals MDL 11.25. END NOTE.)
ANRE also increased the tariffs for electricity and heating
produced by Moldova's three state-owned power plants, CET-1,
CET-2 and CET Nord, a move which will help alleviate mounting
debts.


3. (U) ANRE Director Vitalie Iurcu justified the tariff
increases, citing Gazprom's 12.4% price increase for natural
gas supplied to Moldova, a projected 7.8% decrease in gas
consumption for 2008 compared with 2007, and a projected 11%
increase in MoldovaGaz's transportation and distribution
costs because of the expansion of Moldova's gas network.
Additionally, Iurcu explained, MoldovaGaz receives transit
fees denominated in USD. Because of the appreciation of the
MDL relative to the USD, MoldovaGaz's profit from transit
fees are projected to be 11% lower. These profits are used
to subsidize tariffs for natural gas, so subsidies of
gas-generated heating and electricity will decrease as well.
Iurcu acknowledged that ANRE's slow action in 2007, when
tariffs were adjusted in mid-February following Gazprom's
price increase on January 1, 2007, caused MoldovaGaz to
accumulate debts.


4. (SBU) In response to complaints from Union Fenosa that the
new tariffs favored state-owned companies, ANRE explained
that the tariff calculations complied with Moldova's new
methodology, which reduced Union Fenosa's profit rate from
23% to 13%. ANRE also argued that Union Fenosa had better
infrastructure and enjoyed lower technical and non-technical
losses, which lowered their distribution costs by 7.2
bani/kwh compared with state-owned companies. Union Fenosa
complained about government favoritism. Rumors abound that
the ruling Communist Party of Moldova (PCRM) uses the
state-owned energy assets as a source of financing.

MOLDOVAGAZ AND GOVERNMENT REACH PRE-ELECTION DEAL
-------------- --------------


5. (C) On January 23, Ghenadie Abashkin, President of
MoldovaGaz, told econoff that he was pleased with the tariff
increases for natural gas and other segments of the energy
sector, noting that the new tariffs covered his costs.
Abashkin, who previously spoke negatively about ANRE and its
director to econoff, said he had reached a compromise with
the government (GOM) (his minority shareholder) and had
worked with ANRE to set prices and jointly develop a new
tariff methodology. He acknowledged this was not
transparent, since ANRE, according to Moldovan law, is an
independent government entity. Abashkin said Gazprom would
increase the price for natural gas delivered to Moldova two
more times in 2008, according to the formula in the long-term
agreement signed at the end of 2006. He said the price would
rise to USD 213/tcm on April 1, and again to USD 232/tcm in
July. Abashkin said ANRE and the GOM had agreed to increase
consumer tariffs again in the summer (but not in the spring),

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prior to the fourth quarter of 2008, well before the national
elections in spring 2009. Prices are set to increase again
on January 1, 2009, according to the terms of Moldova's
five-year deal with Gazprom. However, it remains uncertain
whether energy regulator ANRE will increase consumer energy
prices prior to the national elections.

COMMENT
--------------


6. (C) It seems that MoldovaGaz, ANRE and the PCRM have
reached a deal, acknowledging the economic necessity of price
increases, but seeking to minimize potential political
negatives with voters prior to the national elections in

2009. Energy-sector companies have long called for tariffs
that allow for full-cost recovery, including adequate profits
that allow for much needed infrastructure investments and
modernization. Price increases for power and heating plants
will help alleviate debts, which have been mounting for
months. END COMMENT.
KIRBY