VZCZCXRO6947
RR RUEHBW RUEHIK RUEHLN RUEHPOD RUEHVK RUEHYG
DE RUEHKV #0801/01 1151027
ZNR UUUUU ZZH
R 241027Z APR 08
FM AMEMBASSY KYIV
TO RUEHC/SECSTATE WASHDC 5426
INFO RUCNCIS/CIS COLLECTIVE
RUEHZG/NATO EU COLLECTIVE
RHEBAAA/DEPT OF ENERGY WASHINGTON DC
RUCPDOC/DEPT OF COMMERCE WASHDC

UNCLAS SECTION 01 OF 02 KYIV 000801 
 
SIPDIS 
 
SENSITIVE 
SIPDIS 
 
EPT FOR EUR/UMB, EB/ESC/IEC - GALLOGLY/WRIGHT 
DOE PLEASE PASS TO LEKIMOFF, CCALIENDO 
USDOC FOR 4321/IEP/OEENIS/NISD/CLUCYK 
 
E.O. 12958: N/A 
TAGS: EPET ECON ENRG PREL UP
SUBJECT: UKRAINE: GOU ANNOUNCES NATURAL GAS PRICE HIKES 
 
 
Treat as Sensitive but Unclassified.  Not for Internet 
Distribution. 
 
¶1. (SBU) On April 14, the Ukrainian Cabinet of Ministers 
(CabMin) published a resolution recommending a 3-5% monthly 
increase in natural gas prices for individual consumers 
beginning in May.  The move was unexpected, as the media and 
most energy experts predicted that PM Tymoshenko would not 
raise household gas prices out of fear that it would greatly 
decrease her popularity.  Tymoshenko, however, opted to make 
small increases in gas prices each month to muffle the 
economic impact on consumers.  In the same resolution, the 
CabMin also approved a 4-6% increase in natural gas prices 
for the chemical industry and 8-12% for all other industrial 
and public sector consumers.  Although the new rates still 
will not cover costs, energy experts and our contacts at the 
European Bank for Reconstruction and Development have 
applauded the move as in important step towards a cost-based 
energy pricing policy.  These experts caution, however, that 
the CabMin move can only be the first step towards a 
long-term energy pricing policy based on sound economic 
principles. 
 
Getting Approval for Gas Hikes 
------------------------------ 
 
¶2. (U) The National Electricity/Energy Regulatory Commission 
(NERC) will need to approve the CabMin recommendation.  The 
Ukrainian press reported that NERC approval is expected 
within a week, once written justification for the increase is 
received from Ukraine's state-owned gas and oil company 
NaftoHaz.  In accordance with Ukrainian Law on Price 
Formulation, the NERC will also need agreement from the 
Federation of Trade Unions of Ukraine before the new rates 
can go into effect (Note: In 2006 the NERC obtained union 
approval for a gas price hike only after months of 
negotiations and delays.  End note.)  Pending the necessary 
approvals, NERC officials hope to increase natural gas prices 
for individual consumers as early as May. 
 
Price Categories based on Consumption 
------------------------------------- 
 
¶3. (U) The GOU uses a four-category matrix for determining 
the price for natural gas based on consumption levels. 
Category 1 pertains to those who consume 2.5 thousand cubic 
meters (tcm) of gas or less per year. The Ukrainian Ministry 
of Fuel and Energy estimates that 89% of households fall into 
this category.   The current Category 1 price is $63 per tcm 
for those households equipped with gas meters, and $69 per 
tcm for households without meters.  If the price hike is 
approved, these consumers will pay $76-$85 per tcm.  Since 
the majority of Ukrainians might be expected to pay $13-$16 
more for gas, the price increases could become an incentive 
for installing gas meters throughout the country.  At the 
other end of the matrix, those who consume between 6-12 tcm 
per year (Category 4) now pay $235-$258 per tcm per year. 
These customers will pay up to $344 per tcm if the NERC 
approves the rate hikes. (Note: Since most urban residents 
obtain heat via district heating and are billed separately 
for heat and gas for cooking, for most people, the price 
rises will affect directly only the small amount consumers 
use for cooking.  However, these price rises will certainly 
affect prices for gas paid by district heating companies and 
they are sure to pass on these costs to consumers eventually. 
 End Note.) 
 
¶4. (SBU) Comment.  During a time of increased political 
uncertainty, the GOU has taken an important step in raising 
natural gas prices to more realistic standards.  Years of low 
prices have created a false sense of security and have 
discouraged energy efficiency.  In addition, gas companies 
and municipal heating districts have accumulated large debts, 
leaving them little funding to modernize their networks. 
The new rates still will not cover costs, and the NERC still 
needs to approve them, but proposing them during a period of 
high inflation and political uncertainty sends a strong 
signal that the current government realizes the days of cheap 
energy are over.  Given the public outcry that accompanied 
the last wave of utility rate increases two years ago, it is 
striking how little comment these changes have aroused. 
There still could be a reaction once consumers get the actual 
bill, or it could be in the current inflationary environment 
consumers are less likely to notice the increases.  End 
comment. 
 
KYIV 00000801  002 OF 002 
 
 
Taylor