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is unbalanced progress in the country’s economy. Drawing investments into other spheres of the economy will make it possible to achieve balanced economic growth and improve the employment structure in Azerbaijan.
Demuri CHOMAKHIDZE
D.Sc. (Econ.), professor at the Georgian School of Engineering, advisor to the chairman of the National Commission on Energy and
Water Supply Regulation of Georgia (Tbilisi, Georgia).
GEORGIA: TEN YEARS OF EXPERIENCE IN REGULATING THE ENERGY INDUSTRY
Abstract
This article looks at how regulation of the energy industry took shape and developed in Georgia. It analyzes the need for a regulatory structure in the natural monopoly industries, including in the energy sector, and describes its role and influence on the development of the ener-
gy industry. It provides detailed coverage of the results of regulating the energy industry in Georgia over the past ten years, shows the positive effects of its influence on the development of this sector and of the republic’s national economy as a whole, and formulates tasks for the future.
I n t r o d u c t i o n
Georgia is the third country (after Ukraine and Russia) in which an energy-regulating commission was created after the collapse of the U.S.S.R. It arose on the basis of the Georgian Law on the Electric Power Industry. In April 1999, amendments and addenda were made to this law, and it was renamed the Law on the Electric Power Industry and Natural Gas, while the commission was called the National Commission on Energy Regulation of Georgia (NCER). The creation of this structure was a very important component of the economic reforms and major structural changes in the state’s energy industry.
In August 2007, the Regulatory Commission of Georgia celebrated the tenth anniversary of its foundation. It initially applied only to electric power, but since April 1999 it expanded its sphere of competence to include the natural gas sector.
The formation of the energy-regulating structure coincided with the transition period of the entire economy. During this transition, Georgia’s economy was of a special historical-economic na-
THE CAUCASUS & GLOBALIZATION
ture that had no analogies. It arose on the basis of Soviet socialism, “wild capitalism,” and elements of the mixed economic systems of developed and developing countries, that is, on the basis of different world outlooks.1
In our opinion, the regulation of Georgia’s energy industry, like the economy as a whole, should expediently be viewed precisely with these special features in mind.
The creation of an energy-regulating structure was prompted by different factors, the most important of which was the abysmal state of the electric power industry.
Excursion into History
During the last 30 years of Soviet power, the development of Georgia’s energy industry was characterized by serious qualitative and quantitative shifts. During this time, the rated capacity of power stations increased 4.6-fold, while annual energy production rose 3.8-fold.
The period between 1961 and 1980, when such powerful facilities as TbilGRES, InguriGES, three units of the Vartsikhe hydropower plant, and others went into operation, was a time of relatively intensive power plant construction.
By the end of 1980, the rated capacity of all of Georgia’s power plants reached 4,155 MW, while energy generation constituted 14,687,400 kW/h, which topped the 1960 level 4.3-fold and 4-fold, respectively.
During the next decade (1981-1990), the development of the energy industry noticeably slowed. During this time, power plant capacities increased by only 8.8%, while energy generation dropped as much as 3.1%. In so doing, energy consumption rose on average by 500 million kW/h a year. Correspondingly, the energy deficit also increased. In 1988, it reached 3.6 billion kW/h, which is a record index throughout Georgia’s entire history. In reality, however, the deficit was more significant. Thermal power plants, which largely used imported fuel, accounted for 46.7% of all the energy generated. Between 1960 and 1997, energy production in Georgia decreased by 49.7%, and consumption by 53%. Both hydropower plants and thermal power plants experienced a drop in production.2
Due to the deficit at industrial associations, particularly at large enterprises, restrictions on energy consumption were introduced. The use of existing capacities, as well as the dynamics and structure of energy consumption, perceptibly worsened, and energy losses in commercial networks increased; in 1994, for example, these losses reached 35.4%.
Georgia’s energy industry experienced extreme hardships. Due to the shortage of necessary materials, repair work at energy facilities essentially ceased, and there were difficulties in supplying power plants with fuel. Energy metering and money collection were characterized by low performance, and the available capacities were not tapped to their full potential. Suffice it to say that by the beginning of 1995, only 28.7% (1,800,000 kW) of Georgia’s entire rated energy capacity was in operating condition.
The situation was also aggravated by the fact that natural gas deliveries to the republic had essentially ground to a halt, which meant that electricity had to be used for heating buildings, cooking food, and supplying hot water. The production cycle at some enterprises, as well as at bread-baking plants and bakeries, was also supported by means of electricity. Industrial enterprises sharply decreased, while the population, on the contrary, dramatically increased their energy consumption.
1 See: N. Chitanava, “O gosudarstvennom regulirovanii ekonomiki,” Trudy Akademii ekonomicheskikh nauk Gruzii, Vol. 1, Tbilisi, 2000, p. 79.
2 See: G. Tavadze, D. Chomakhidze, Natural Monopolies and Their Regulation, Tbilisi, 2005, pp. 42, 43, 44 (in Georgian).
THE CAUCASUS & GLOBALIZATION
Consumers found themselves unable to pay, while everyone was supplied with electricity, both those who could pay and those who could not. Money collection on the energy consumed was low not only in the country’s regions, but also in Tbilisi. In order to improve the situation in the energy industry, taxation conditions underwent several amendments,3 but this did not help. The industry’s revenue vacillated as low as 15% to 20%.
Overhaul and maintenance repairs of energy facilities, the introduction of new capacities, the payment of salaries, etc. came to a halt. Industrial enterprises used old, energy-intensive technology. As a result, the industry experienced huge losses.
The situation was also aggravated by the erroneous energy price formation policy carried out. Consumers were supplied with electricity at an artificially low rate. Under such conditions, the industry was in need of major economic reforms.
Tasks and Functions
Against the background of the existing problems, the need arose for the industry to solve qualitatively new tasks. In particular, it became necessary:
—to carry out a rational state policy and make a clear distinction between the regulation policy and economic activity;
—to gradually eliminate state monopoly; establish different types of ownership; create a competitive environment; and attract investments;
—to improve energy supply and decrease its deficit in order to develop the economy;
—to increase energy production and its efficiency; ensure the observance of financial discipline; and improve consumer services;
—to raise the technical and managerial level and increase the profit of enterprises and companies on the basis of stable energy supply.
On 20 November, 2007, the Georgian parliament made amendments to the Law on the Electric Power Industry and Natural Gas, according to which the commission was entrusted with another function—regulating water supply. The structure is now called the National Commission on Energy and Water Supply Regulation.
The interrelations between the structural units of the energy industry have been defined and the legal foundations for introducing market relations into the industry and forming a competitive electricity and natural gas market, and so on, have been created.
The law envisaged streamlining the activity of physical and legal entities involved in the production, transmission, dispatching, and consumption of electricity, as well as in the delivery, transportation, and distribution of natural gas, and ultimately guaranteed development of the energy industry in keeping with market economy principles.
Two departments became responsible for the normal functioning and development of the republic’s energy industry—the Ministry of Fuel and Energy, and the National Commission on Energy Regulation.
This Ministry was responsible for developing and carrying out state policy in the energy industry and for coordinating measures in this sphere. It was also liberated from operative-economic activity and regulation of the industry.
3 See: V. Papava, Political Economy of Post-Communist Capitalism and Georgia’s Economy, Tbilisi, 2002, p. 393 (in Georgian).
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In compliance with the above-mentioned law, Georgia’s NCER has a high independent status, is a non-political sectoral state structure, and is not subordinate to other state structures. It is not financed from the country’s budget, but by the contributions of regulation license holders.
The NCER issues regulatory acts on regulation issues, in particular resolutions, and adopts legal acts in the form of various decisions on specific issues. Resolutions are adopted on the basis of democratic procedures at open meetings of all interested persons—license holders, consumers, persons engaged in consumer rights, and representatives of various government and nongovernmental organizations. They are given the opportunity to express and protect their interests. If necessary, the decisions of the NCER can be contested in court.
The NCER is obliged to review the main vectors of state policy in the energy industry, national security, the economy, environmental protection, and so on. Its main tasks are balancing the interests of both producers and consumers; promoting the development of competition and privatization; and attracting investments.
Results and Trends
The NCER is the first specialized regulatory structure of natural monopolies in the republic. During the ten years of its existence, it has achieved significant results, and positive trends are obvious4:
—there are better opportunities for identifying and resolving the problems existing in the industry; the necessary conditions have been created for its self-financing;
—fair game rules have been established for all entities of the industry;
—state, economic, and regulatory functions have been delineated;
—private investments in the industry have been stimulated; privatization has begun and is continuing;
—the industry has been insured against political interference; tariffs have been more reliably insured;
—favorable conditions have been created for integrating the country into international organizations, opportunities have appeared for obtaining material and moral assistance from them and for them to issue the necessary credit assistance for development of the energy industry.
Over the past ten years, both qualitative and quantitative shifts have occurred in the development of the energy industry (see Table 1). Between 1997 and 2007, energy production in Georgia has increased by 13.9%, and consumption by 4.1%. As for natural gas, its use has doubled. In 2007, Georgia had a non-deficit energy balance for the first time during the years of state independence.
Time has confirmed the advantages of a professional sectoral regulatory structure over the principles of centralized management, control, and regulation.
During the period under review, the Georgian NCER adopted such important acts within the framework of its competence for the first time in the country’s entire history as methods for setting and regulating electricity and natural gas tariffs; rules for accepting and considering tariff and license applications; rules for issuing, modifying, and terminating the validity of licenses and their cancellation; rules for regulating direct contracts between energy producers and consumers; procedural rules for considering disputes between entities of the industry; rules effective on the energy market; rules for the delivery and consumption of energy, as well as natural gas, and so on.
4 See: G. Tavadze, I. Kavtaradze, D. Chomakhidze, D. Menabde, Energy Regulation: Theory and Practice, Tbilisi, 2006, pp. 181-183 (in Georgian).
Table 1
Indices of Development of Georgia’s Energy Industry in 1997-20075
Years Electricity, million kW/h Consumption of
Production Consumption natural gas, mcm
1997 7,172 7,508 830
1998 8,088 8,779 846
1999 8,119 8,409 1,022
2000 7,446 7,841 1,198
2001 6,942 7,137 ,880
2002 7,235 7,703 ,812
2003 7,163 7,950 1,009
2004 6,706 7,404 1,231
2005 7,101 7,827 1,440
2006 7,420 7,880 1,881
2007 8,170 7,813 1,684
| In percentages |
2000 of 1997 103.9 104.4 144.3
2007 of 2000 109.7 99.6 140.5
2007 of 1997 113.9 104.1 202.9
The NCER is particularly necessary for setting and regulating energy tariffs. Although during the period under review the increase in tariffs in the republic was much higher than the increase in personal incomes, it should be stressed that if tariffs are not regulated their increase would be even greater. In the event of an acute energy shortage, the market would have responded with a more dramatic increase in prices. It would have been impossible to suppress the desire of companies to raise tariffs. Between 1999 and 2007, electricity tariffs rose in Georgia by 77.7%, and by 75.6% for natural gas (see Table 2). At present, the average electricity tariff in Tbilisi amounts to 16 tetri (10.6 cents) per kW/h, and 50.6 tetri (44.7 cents) per 1 cu m of natural gas.
It is worth noting that during this period the average retail prices on the Georgian consumer market increased at higher rates than on the regulated market. From Table 3 it can be seen that in 2000-2005, the increase in electricity and natural gas prices was kept at a lower level than for various consumer products. The ratio was disrupted somewhat in 2005-2007 due to the abrupt rise in prices for imported gas. The data of Table 3 again show that regulated prices for energy products are rising at a more even rate than market prices.
5 The table was compiled on the basis of data of the Department of Statistics of the Georgian Ministry of Economic Development. The following monograph was used: D. Chomakhidze, Georgia's Energy Balance, Tbilisi, 2007, pp. 95, 164, 335 (in Georgian).
Table 2
Dynamics of Retail Tariffs for Electricity and Natural Gas in Tbilisi (%)6
Years Electricity Natural Gas
1999 100.0 100.0
2000 108.8 86.7
2001 137.7 86.7
2002 152.2 93.6
2003 135.3 93.6
2004 135.3 93.6
2005 133.0 93.6
2006 152.2 118.6
2007 177.7 175.6
Table 3
Increase in Average Prices in Georgia7
in % of 2000
2005 2007
1. Market prices for: 1.1. Bread 135.7 155.7
1.2. Pork 177.4 181.3
1.3. Beef 158.0 183.8
1.4. Eggs 146.4 177.9
1.5. Gasoline 126.2 153.4
1.6. Kerosine 154.9 200.0
1.7. Liquefied gas 135.7 179.5
2. Regulated prices for: 2.1. Electricity 123.2 163.3
2.2. Natural gas 108.0 202.4
6 The table was compiled on the basis of the annual reports of the Georgian NCER. The following monograph was used: D. Chomakhidze, Georgia’s Energy Security, Tbilisi, 2003, pp. 308-309 (in Georgian).
7 Data of the Department of Statistics of the Georgian Ministry of Economic Development.
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The commission took active part in carrying out economic reforms in the Georgian energy industry, in forming a wholesale energy market, in developing competition in the industry, and in introducing market economy principles.
If the commission did not exist, instability and chaos, producer and consumer discontent, a convergence of operative-economic and regulation functions, and a decrease in the inflow of capital for the acquisition of energy resources and investments in the industry would be blatantly ob-
Tasks for the Future
In the near future, the NCER will be faced with new tasks. Water supply regulation is on the agenda. In November 2007, the Georgian parliament made more amendments to the Law on the Electric Power Industry and Natural Gas. According to the decision adopted, the commission should draw up a method for calculating tariffs and regulating water supply tariffs.
Water consumption regulations must also be drawn up. The commission has a steadily increasing amount of work to do. At present, Georgia’s main water supply funds and infrastructure are functioning under difficult conditions (particularly in the regions). At the present stage, along with supporting projects for rehabilitating the industry, the commission is also responsible for protecting the interests of water consumers. The tariff system should create favorable investment conditions and ensure not only restoration of the industry, but also its future development. Ongoing privatization also needs to be encouraged and a competitive market formed. The tariffs should be fair; and different categories of subsidizing water consumers and suppliers are impermissible.
Moreover, several problems of the energy industry must be resolved. In compliance with the law, the commission must bring the existing regulatory legal base and energy delivery and consumption regulations (capacities) up to par, make efforts to rationalize energy regulation and improve tariff methodology, as well as create a liberal and competitive environment in the industry. Improving the financial state of the energy industry, fulfilling licensing conditions for license holders, ensuring monitoring of the reliability of energy supply to consumers by distributing companies, and, consequently, the commission’s better performance, as well as ensuring it carries out all the functions entrusted to it, are top priority issues.
The efficient implementation of economic reforms, both in the mentioned industries and throughout the country as a whole, largely depends on the commission’s successful functioning.
C o n c l u s i o n
During the ten years of state energy regulation in Georgia, significant qualitative shifts in the industry’s development have become a reality. State, operative-economic, and regulatory functions have been delineated; precise and fair rules of the game have been established for all entities of the industry; private investments have been stimulated; service quality has been improved and it has become possible to pay for the energy consumed; the necessary conditions have been created for selffinancing of the industry; opportunities have increased for identifying and settling the existing unresolved problems, protecting energy consumer and producer rights, developing competition, raising energy efficiency, and integrating Georgia into international organizations; and both the energy industry as whole, as well as the tariffs for its products have become more insured against political interference.
! See: G. Tavadze, D. Chomakhidze, op. cit., p. 62 (in Georgian).
vious.8
As a result of the measures carried out, electricity generation in Georgia increased between 1997 and 2007 by 13.9% and consumption by 4.1%, while the use of natural gas doubled. In 2007, the country had a non-deficit energy balance for the first time during the years of state independence. During the period under review, the growth rate in consumer prices for regulated energy products was lower and more even than market prices for unregulated products. Nevertheless, several problems (improvement of the existing regulatory legal base, improvement of tariff methodology, ensuring monitoring of the reliability of energy supply, and so on) related to rationalization of the industry’s regulation have still not been resolved.
Fakhri MURSHUDLI
Graduate student,
Research Institute of Economic Reforms, Ministry of Economic Development of the Azerbaijan Republic
(Baku, Azerbaijan).
AZERBAIJAN BANKING SYSTEM: CHALLENGES AND PROSPECTS OF GLOBALIZATION
Abstract
This article explores the development problems of the Azerbaijan Republic’s banking system in the context of financial globalization. The author analyzes its current state, focusing on its successes, objective difficulties and unresolved problems. He describes the main manifestations of globalization processes in the world banking services market and pays much attention to problems that may be encountered in these conditions by the domestic banking sector,
particularly after Azerbaijan’s accession to the WTO. The author examines the consequences of foreign bank entry in the national market and proposes concrete measures for its protection. Based on a case study of the International Bank of Azerbaijan (IBA), the country’s leading bank, he identifies the specific features of the transnationalization of banking activities (cross-border banking) and outlines the ways to implement this strategy on a national scale.
I n t r o d u c t i o n
In the 21st century, faced with the growing challenges of globalization, Azerbaijan has entered a stage of active reform in all spheres of social life marked by strengthening political stability, progressive development of the national economy, advances in living standards, and the country’s con-
