UKRAINE: KYIVITES FACE HOT WATER CUTOFFS AS GAS DEBTS

UNCLAS SECTION 01 OF 02 KYIV 002439 SENSITIVE SIPDIS DEPT FOR EUR/UMB,EB/ESC/IEC - GALLOGLY/WRIGHT DEPT ALSO FOR EUR-IO/EX/PMO DOE PLEASE PASS TO LEKIMOFF, CCALIENDO E.O. 12958: N/A TAGS: ENRG EPET ECON UP SUBJECT: UKRAINE: KYIVITES FACE HOT WATER CUTOFFS AS GAS DEBTS ACCRUE Treat as Sensitive but Unclassified. Not for Internet. ¶1. (SBU) Summary. Thousands of Kyivites woke up to no hot water on December 12. For now, the cutoff has not affected the center of Kyiv, but is focused on outlying residential areas characterized by high-density block apartments. Kyivenergo, Kyiv's largest heat producing company, reported it was forced to shut down two of its largest Combined Heat and Power Plants (CHP) after its natural gas supplies were cut off for lack of payment. Kyivenergo blamed the city of Kyiv for its inability to pay, claiming that the city did not give it the subsidies it normally receives to cover costs and pay for gas. The Mayor's office has neither acknowledged nor denied that it stopped paying the subsidies, but argued that any cutoff was illegal and that the city planned to sue Naftohaz, which separately had announced it would continue to cut natural gas supplies needed for heat production to utility companies until paid their debts. Other Ukrainian press reports indicate that the City Council had delayed the payment of subsidies to prove to the public that it was finally necessary to increase utility prices at least 35% in Kyiv. Wherever the truth may lie, the incident shows that the economic crisis is making it increasingly difficult for all players in Ukraine's badly mismanaged gas sector, where heating services are ultimately sold to households below cost, to pay their debts. Looking forward, it can be expected that heating cutoffs related to unpaid gas debts will be a common occurrence in Ukraine this winter. End summary. Heat and Hot Water in Kyiv -------------- ¶2. (SBU) Local heating companies use natural gas to heat the hot water that is pumped through a large pipeline network to schools, businesses, and apartment complexes. There are 7 regional super-boilers and 43 support boilers in the Kyiv region. The same hot water piped from the CHPs is used at distribution centers to heat water that is supplied to faucets in each building. If cold water is piped from the CHPs, this would most likely cause the pipes to burst when it reaches freezing temperatures. Gas Debts and Hot Water Cutoffs -------------- ¶3. (SBU) Existing rates for municipal utility services are not 
sufficient to cover all costs, including the purchase of natural gas, so the Kyiv City Municipality provides subsidies to Kyivenergo to compensate for the gap between costs and revenues. Reportedly, Kyiv City delayed transferring money to Kyivenergo in November, thus preventing heat suppliers from buying necessary amounts of gas for December from gas supplier Gas Ukraine, a subsidiary of Naftohaz. According to Kyivenergo Technical Director Yuri Gladyshev, Kyiv City owed his company UAH 347 million or $45 million. Government Reaction -------------- ¶4. (SBU) Kyiv City Mayor Leonid Chornovetskiy has not yet made any official comments about massive hot water cutoffs in Kyiv or the next steps. The Kyiv City Administration press office told us unofficially that cutting off hot water supplies during the winter season was a crime and Kyiv City would most likely pursue criminal proceedings against Kyivenergo or Gas Ukraine. Ukrainian President Viktor Yushchenko urged Mayor Chornovetskiy to take due measures to pay off the debt and urged the Cabinet of Ministers to provide necessary assistance to Kyiv City to help restore hot water supply in Kyiv as soon as possible. ¶5. (SBU) In the meantime, Naftohaz Ukraine repeatedly warned municipalities throughout Ukraine that their debts had reached UAH 1.25 billion or $164 million. On December 12, Naftohaz's Deputy Chairman Volodymyr Trykolych said rising debts forced Naftohaz to cut off gas supplies to 60 local utility companies and supplies would not be restored until the debts were paid. Some LES Staff Affected -------------- ¶6. (SBU) Several LES staff that reside on the East Bank of the Dnipro River in Kyiv have reported they are already without hot water. No American staff have reported a hot water outage in their apartments to date. ¶7. (SBU) Comment. While a lack of hot water is not uncommon in some outlying areas of Ukraine, cutting off supplies to the residents of Kyiv in the middle of winter on the basis of payment arrears is KYIV 00002439 002 OF 002 unheard of, and a sign of how serious the gas debt situation in Ukraine has become. Naftohaz's current drive to collect hundreds of millions of dollars in debt from municipal heating companies is related to the over $2 billion debt that Naftohaz owes Russia for gas. This example shows why Naftohaz is perennially in debt and in need of direct financial support from the GOU: a misguided system which supplies the population with heating and hot water at far below cost creates a cascading system of debt and non-payment which ultimately finds its way to Naftohaz, which in turn weakens Ukraine's gas monopoly in its negotiations with Russia. End comment.