AMCU found no competition violations in Rotterdam Plus approach

The Antimonopoly Committee of Ukraine (AMCU) announced
on Dec. 18 that it found no distortions to competition on Ukraine’s wholesale
electricity market from the Rotterdam Plus approach employed by the state
regulator between May 2016 and June 2019. The committee also determined the
approach didn’t benefit certain market players over others. With its decision,
the committee closed its investigation.

Namely, the AMCU concluded the market share of
electricity producers did not change significantly, while also concluding the
profitability of key power generation companies actually declined in 2017
compared to 2016.

Recall, the new approach to calculate the forecasted
wholesale electricity price was introduced in March 2016, based upon which the
forecasted price for coal-fired thermal power plants was calculated taking into
account the full cost of coal as if it was imported from the ports of
Amsterdam-Rotterdam-Antwerp, while in fact most of the coal was supplied to
plants from local mines.

The power sector regulator justified the need to
introduce the Rotterdam Plus approach by citing the demand of the AMCU to make
pricing of coal – and electricity made from coal – more transparent. The
inclusion of transportation costs from Rotterdam to Ukraine (the Rotterdam Plus
approach) was heavily criticized by various politicians and led to an
investigation by the AMCU and the National Anticorruption Bureau.

Alexander Paraschiy: The
introduction of a new methodology to forecast electricity prices in Ukraine was
indeed a positive move by the power sector regulator. Before March 2016, there
were no rules that allowed for revealing the forecasts of the wholesale
electricity price for the next year. However, the details matter. The filed
complaints against the Rotterdam Plus approach were not based on it shifting
the market advantage of one power producer to another, but in that it was an
excessive markup to the electricity price for all coal-powered plants. Yet this
markup wasn’t backed by logic, in our view. Critics also argued the approach
led to additional costs for electricity consumers. In its ruling, the AMCU did
not study the effect of the Rotterdam Plus approach on power consumers and
power prices, mostly having focused on competition between power generators.

Also, the AMCU’s conclusion that profitability of all
types of power generators decreased in 2017 compared to 2016 does not mean that
the Rotterdam Plus approach was not beneficial for all thermal power plants.
There is no clarity about the sources of information on the issue of “profitability”
and the nature of such “profitability.” If we take the P&L of DTEK Energy
(DTEKUA), one of the biggest beneficiaries of the Rotterdam Plus approach, we
can see that its EBITDA margin increased to 11% in 2016 (the first year of the
approach) from 4% in 2015, and it peaked at 31% in 2017 and 29% in 2018, the
period when the Rotterdam Plus approach was applied for the full year. EBITDA
margin fell to 18% in 2019 after the approach was no longer applied since 2H19.

All in all, we see the AMCU’s conclusions as biased
and reflecting an intense resistance in the top state bodies to continue any
prosecution of DTEK and its shareholder, Rinat Akhmetov.