Non-obvious violations that could cost an electricity supplier dearly!

FEDOTOV & PARTNERS provides legal support to electricity and natural gas market participants during scheduled and unscheduled NEURC inspections. Having supported numerous audits, we consistently analyze the facts the Regulator focuses on and interprets as legislative violations.

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We believe it is more effective for licensees to focus on their documentation before an inspection begins, rather than creating conditions that lead to the discovery of violations.

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For this reason, this article examines several common instances where the NEURC interprets licensee actions as violations of the licensing conditions for electricity supply to consumers (hereinafter – Licensing Conditions).

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We have analyzed NEURC inspection reports issued following scheduled audits of suppliers since the beginning of 2024, identifying several non-obvious violations that could lead to the imposition of penalties on licensees.

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1.  Formula vs. Fixed price for electricity in public commercial offers

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The Regulator interprets the inclusion of only a pricing formula for electricity (e.g., DAM or DAM +) in public commercial offers as a violation of clauses 3.2.8 of Chapter 3.2, Section III of the Retail Electricity Market Rules (hereinafter – REMR), and sub-clauses 10, 22, and 42 of clause 2.2 of the Licensing Conditions.

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In its inspection reports, the NEURC notes that public commercial offers for electricity supply contracts published on licensee websites fail to meet the requirements of clause 3.2.8 of Chapter 3.2, Section III of the REMR. Specifically, these offers do not define the price of electricity. The NEURC inspection commission asserts that the price in public commercial offers must be expressed in monetary terms, rather than as a calculation formula.

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The NEURC justifies its position by citing Article 1 of the Law of Ukraine "On Prices and Pricing," which defines price as the monetary equivalent of a unit of goods. Consequently, the inspection commissions conclude that public commercial offers lacking a specific monetary price for electricity do not comply with the REMR.

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2.  Consumers and imbalance settlement

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The Regulator maintains that when a supplier includes payment for imbalance settlement in electricity supply contracts (or in the pricing formula), or states that the supplier's tariff covers imbalance settlement, it constitutes a violation, as it shifts the obligation to pay for imbalances onto the consumer.

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In its audit reports, the NEURC states that including references to imbalance settlement in the formula violates Articles 56, 57, and 70 of the Law of Ukraine "On the Electricity Market," as well as clause 3.1.5 of Chapter 3.1, Section III of the Retail Electricity Market Rules.

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3.  Including the NEURC regulatory fee in the consumer pricing formula.

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Just as with electricity imbalance settlement, the Regulator considers the inclusion of the NEURC regulatory fee component in the consumer pricing formula to be a violation of Article 60 of the Law of Ukraine "On the Electricity Market," sub-clauses 10 and 22 of clause 2.2, Chapter 2 of the Licensing Conditions, and Article 13 of the Law of Ukraine "On the NEURC."

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The commission's audit reports state that including the cost of regulatory fees in the electricity pricing formula infringes upon the consumer's right to non-discriminatory pricing that reflects economically justified costs, as well as the right to transparent and fair contract terms.

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Given all of the above, it is worth quoting Sun Tzu, who said: "The greatest victory is that which requires no battle".

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We believe this quote can even apply to challenging the unlawful conclusions and positions of regulatory authorities.

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To avoid risks and financial losses, licensees must prepare for inspections in advance. This involves a thorough analysis of operational compliance with current requirements, timely updating of documentation, and adjusting contract terms in accordance with legislative changes and the Regulator's latest positions.

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The team at FEDOTOV & PARTNERS law firm provides a full range of legal services related to analyzing the compliance of electricity suppliers with licensing conditions and successfully supports suppliers during NEURC inspections.