LAW OF THE REPUBLIC OF MOLDOVA

of June 25, 1998 No. 63-XIV

About the Concept of privatization of the companies of electric utility sector

In pursuance of the Law on the Privatization program for 1997-1998

The parliament adopts this ordinary law.

Art. 1. - Approve the Concept of privatization of the companies of electric utility sector provided by the Government which is integral part of this law.

Art. 2. - To provide to the government till October 1, 1998 individual projects of privatization of the companies of electric utility sector in which to provide sources and methods of repayment of debts.

Appendix

to the Law No. 63-XIV of June 25, 1998

Concept of privatization of the companies of electric utility sector

This concept provides privatization on the basis of the Law on the Privatization program for 1997-1998 of eight companies of electric utility sector - joint-stock companies:

"Centrala Electrica de Termoficare nr.1" (Combined heat and power plant N 1);

"Centrala Electrica de Termoficare nr.2" (Combined heat and power plant N 2);

"Centrala Electrica de Termoficare Nord" (Northern combined heat and power plant);

"Retelele Electrice de Distributie", mun. Chisinau (Distribution networks mun. Chisinau);

"Retelele Electrice de Distributie Centru" (Central distribution networks);

"Retelele Electrice de Distributie Nord" (Northern distribution networks);

"Retelele Electrice de Distributie Nord-Vest" (Northwest distribution networks);

"Retelele Electrice de Distributie Sud" (Southern distribution networks).

The concept proves need of restructuring and privatization of the specified companies, represents the purposes, strategy and methods of implementation of privatization.

I. Current situation and need of privatization

Crisis in electric utility sector is consequence of the following factors:

a) low level of collection of payments from energy consumers and thereof chronic receivables most of which part is the share of state-financed organizations and organizations, of agro-industrial and housing-and-municipal sectors;

b) excessive accounts payable of the former State-owned company "Moldenergo" (more than 1/3 annual budgets of the country), especially for gas (80% of accounts payable of the company);

c) implementation of the most part of payments for energy by means of barter transactions and offsets (60-65% of total amount of transactions and transactions) that reduces the actual level of collection;

d) not covering rates for the electrical and heat energy released to both the population, and industrial consumers, the costs necessary for ensuring economic viability of electric utility sector.

It, along with the low level of collection of payments, technical losses and plunders of electrical energy, led to the fact that are long, not covered with receivables, exceed 2/3 total debts;

e) the real rate for energy is much lower in comparison with established because of the numerous privileges provided to various categories of consumers;

f) technical losses and plunders of electrical energy from network (1/4 all the delivered electric power) owing to operation of the obsolete equipment (60% of the equipment are used more than 22 years), rejection of measures for permanent maintenance of the equipment in good repair, and also the insufficient level of monitoring and control of electric power consumption;

g) the lack of transparent systems of financial management and financial accounting generating the hidden losses;

h) repeated reviews of rates for energy for socio-political reasons;

i) restriction with political solutions of opportunities of the companies of electric utility sector to disconnect from network of non-payers that interferes with implementation of normal commercial practice;

j) divergence of management of Moldenergo State-owned company concerning reduction of costs, decrease in cost of electrical and heat energy.

The problem resolution, concerning efficiency of activities of electric utility sector, is possible only in the conditions of its reforming and openness for the competition, attraction and encouragement of investments. These purposes can be realized by restructuring and privatization of the relevant companies begun in 1997.

For 1997 decentralization and corporatisation of electric utility sector were performed.

The Moldenergo state-owned company was divided by the functional principle into the following companies:

3 companies - joint-stock companies which main activities is production of electrical and heat energy ("Centrala Electrica de Termoficare nr. 1", "Centrala Electrica de Termoficare nr. 2", "Centrala Electrica de Termoficare Nord");

5 companies - joint-stock companies which main activities is distribution and sale of electrical energy ("Retelele Electrice de Distributie", mun. Chisinau, "Retelele Electrice de Distributie Centru", "Retelele Electrice de Distributie Nord", "Retelele Electrice de Distributie Nord-Vest", "Retelele Electrice de Distributie Sud");

The state company "Moldtranselectro" including high-voltage networks, dispatch center and Kosteshtsky hydroelectric power station, which is responsible for creation and preserving balance of electrical energy and capacity in electric utility system, transportation of electrical energy on high-voltage networks to the distribution companies and consumers, and also the militarized state company "Scutul Energetic", mun. Chisinau;

6 companies - the joint-stock companies providing additional services. Privatization of these companies is performed according to standard projects according to the procedure, provided for the companies included in appendix 1 to the Law on the Privatization program for 1997-1998.

Corporatisation of divisions of the former State-owned company "Moldenergo" provides establishment between subjects of energy market of the new, commercial relations regulated by National regulation agency in power according to the current legislation.

II. Purposes and methods of privatization

Privatization gives opportunity of the fastest updating of electric utility sector and reliable and effective providing consumers with electrical energy at the reasonable prices determined by the competition.

Main goals of privatization of the companies of electric utility sector are:

a) receipt of the maximum amount of the financial resources necessary for the state;

b) ensuring energy security of the country, increase in reliability and quality of energy products and services;

c) attraction of foreign and local investments for improvement and expansion of the companies;

d) increase in efficiency of operation of electric utility sector and management of its companies by implementation of managerial experience and opening of the sector for the competition.

The strategy of privatization of the companies of electric utility sector is determined by ultimate goals and is based on international experience.

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