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Activity Data Sheet PROGRAM: Georgia TITLE & NUMBER: A More Economically Sustainable and Environmentally Sound Energy Sector, 114-015 STATUS: Continuing PROPOSED FY 2001 OBLIGATION AND FUNDING SOURCE: $3,860,000 FSA PROPOSED FY 2002 OBLIGATION AND FUNDING SOURCE: $8,000,000 FSA INITIAL OBLIGATION: FY 1996 ESTIMATED COMPLETION DATE: FY 2003 Summary: The purpose of this strategic objective is to support a more economically sustainable energy sector. USAID's emphasis is two-fold: (a) to create a climate that will attract private sector participation and ownership, with subsequent improvements in the management of resources and provision of services; and (b) to improve energy sector efficiency in economic terms, with subsequent increases in capital and operating resources. The current state of the energy sector infrastructure borders on catastrophic failure; internally generated revenues and private investments need to increase before real improvements in services will be provided to customers. Beneficiaries of this objective are the approximately 1.3 million residential household and commercial consumers of electricity and potentially an equal number of natural gas customers. Program Categories include Energy Efficiency, Energy Restructuring and Privatization, Environmental Policy, Legislation & Regulation, and Management of Natural Resources and Bio-Diversity. Key Results: USAID-funded activities focus on four intermediate results: (1) increased private sector participation in the energy sector; (2) legal and regulatory environment more conducive to private investment in the energy sector, (3) environmentally sound laws adopted and implemented in the energy sector, and (4) increased efficiency in the energy sector. Performance and Prospects: This past year has yielded mix results for the energy sector in Georgia. Whereas the number of customers served through privately held distribution companies held constant (480,810), the proportion of electricity generated by private suppliers improved dramatically from 9.3 % to 22.6%, exceeding USAID's expectations. And although revenue collections for electricity supplied improved in Tbilisi and other major urban centers, payments from large, state industrial users and other local distribution companies declined causing a drop from 43% (FY 1999) in the economic basis for delivery of electricity to 40% (FY 2000). Lack of revenues strapped the energy sector during the winter months, as funds were not available to pay for imported gas for electricity generation. Widespread outages occurred on a regular basis. The process of tendering the electricity transmission, dispatch, and the wholesale electricity market under long-term management contracts has been initiated. In addition, the approval of international agreements for transit of Caspian-based oil through Georgia sets the stage for future private investments in the energy sector. These actions, coupled with positive policy actions on the part of the Georgian Government, should contribute to significant improvement in energy services. Energy efficiency - A pilot program for demonstrating energy efficiency was initiated in FY 2000. Projects included weather-stripping, window and door improvements, insulation and energy source conversion. Payback periods have been calculated to be from a few months on some industrial applications to four or five years on residential improvements. As billing and collections of electricity supply improves in Tbilisi and the country as a whole, the interest and the demand for conservation measures is beginning to increase. Tbilisi is expected to be entirely remetered by mid-2001 under the American-owned AES Telasi distribution company system upgrade program. This will further increase the demand for efficiency measures. Under the ongoing electricity and gas sector reform program we will expand the pilot program to include regions outside of Tbilisi demonstrating different types of industrial applications. A major continuing activity will be the development of a new energy efficiency law that will promote incentives to conserve and substitute for more efficient fuel sources. The existing laws are weak and based on penalties, which promote abuse and corruption. The law is expected to be submitted to Parliament this year. USAID proposes to obligate an additional $1 million in FY 2001 to expand the distribution of pilot activities and to support promotion of a new energy efficiency law. Energy restructuring and privatization - Georgia was largely unsuccessful in its attempt to privatize the system of local electricity distribution companies and small hydropower stations this past year. While several anchor investors negotiated for some of the system, none came to closure due to small scales of economy and failure to agree on terms. Further attempts will be made to restructure the systems from 65 micro-distribution companies into two larger packages to make them more attractive. Technical assistance will be provided to the relevant organizations to improve the likelihood of success. USAID continued to supply technical, legal and regulatory assistance to the Georgia National Energy Regulatory Commission (GENERC) as it expanded into gas supply, transmission and distribution. The Commission has been operating effectively for two years, effectively raising the rates to reflect the cost of service. Continued support was also provided to the Wholesale Electric Market. Through the Market, payments are made to local distribution companies for electricity delivered within their areas and the small hydro-generator sites received payment for electricity produced and supplied. Technical assistance continues to develop operating rules for the Market to establish procedures for terminating delivery to those distribution companies and sites that do not pay for electricity consumed. USAID continues to work with the government of Georgia and other donors to establish a management contract for the operations of the Market, electricity dispatch, and electricity transmission. Under such a contract, the Market would be able to move more quickly and decisively to increase revenue generation and payment transactions. USAID proposes to obligate $3 million in FY 2001 to support the privatization of regional distribution companies and improve the operations of the oversight regulatory agency and market. Environmental policy, legislation and regulation - The newly established State Agency for Oil and Gas Regulation successfully negotiated a production sharing agreement with an American oil company for exploration and production of oil off the Black Sea coast. Training for this Agency is provided through USAID-funded technical assistance. This assistance will also develop operating policy and regulations to ensure the sustainability of the Agency and improve the transparency of its operation. In order to increase the attractiveness of the Tbilisi gas distribution system for privatization, assistance is now focusing on customer meter installation, operational improvements, and increased revenue generation. USAID proposes obligating $1.86 million in FY 2001 to improve policy and regulations that better serve existing legislation. Management of natural resources and biodiversity - Georgia is blessed with abundant water resources and about 60% of the total electric generation is attributed to hydroelectric stations. This past year an activity was started, and will continue with new funding, to apply modern methods to watershed and resource management. Exacerbated by a serious drought during the summer of 2000, water reservoirs are at an all time low level of storage and management for competing uses in energy, agriculture and industry/urbanization is a primary issue. USAID proposes to obligate $1 million in FY 2001 to further the discussions within Georgia and the neighboring countries of Azerbaijan and Armenia on watershed and river basin management. USAID obligations during FY 2001 will include $3.0 million in FY 2000 carryover previously notified under the military relocation program for Georgia. In FY 2002 support for electricity and gas sector reform will continue to improve the opportunities for attracting private investments to the sector. In addition, Georgia will be better positioned to manage the important hydrological resource base and stabilize the energy production sector. A new initiative for energy security in 2002 will specifically address access to energy resources at the household level as well as the national strategic interests. Beneficiaries: Beneficiaries of this assistance are the approximately 1.3 million residential household and commercial consumers of electricity and potentially an equal number of natural gas customers. Possible Adjustments to Plans: No adjustments anticipated. Other Donor Programs: The European Union has committed to fund the rehabilitation of the damaged water release gates at Enguri power station. When this project is completed Enguri will generate an additional 30 MW of power. The World Bank is conducting a loan appraisal of maintenance and rehabilitation work in electric generation, transmission, and distribution systems. Because of the shortage of revenues generated in the sector, many of the international financial institutions have been unable to disburse against their respective credits. EBRD is still in the process of disbursing $60 million to AES-Telasi for its re-metering program for all of AES/Telasi's 350,000 customers. The World Bank, the German Credit Fund (KfW), and the European Bank for Reconstruction and Development (EBRD) have committed to finance a portion of proposed private sector management contracts for the electricity dispatch and transmission functions (currently in the control of state-run companies) and the WEM. Principal Contractors, Grantees, or Agencies: There are currently four institutional contractors working in the energy sector: PA Consulting [training, restructuring, privatization and legal assistance, energy efficiency, and equipment), Deloitte Touche (audit of energy sector companies), the U.S. Energy Association (training in all energy areas), and Development Alternatives, Inc (management of natural resources). FY 2002 Performance Table Selected Performance Measures: A More Economically Sustainable and Environmentally Sound Energy Sector, 114-015 Indicator FY97 (Actual) FY98 (Actual) FY99 (Actual) FY00 (Actual) FY01 (Plan) FY02 (Plan) Indicator 1: Energy provided on an economic basis NA 40% 43% 40% 55% 70% Indicator 2: Percentage of total electric energy provided by private generation companies NA 5% 9.3% 22.6% 25% 30% Indicator 3: Number of energy sector laws, or implementing rules and regulation adopted NA 1 7 9 10 20 Indicator 4: Number of customers served by a privatized electric distribution companies NA 340,000 480,810 480,810 800,000 1,000,000 Indicator Information: Indicator Level (S)or(IR) Unit of Measure Source Indicator Description Indicator 1: SO Estimated percentage of electricity sector costs recovered from consumers PA Consulting Group, Ministry of Fuel and Energy, Georgia Wholesale Electricity Market, Georgia National Energy Regulatory Commission, Sakenergo and the IMF (for inflation data) Sector billed revenues actually recovered, as a percentage of the estimated costs for system operation. Indicator 2: IR Percent (%) of total produced power from privately owned or managed generators located in Georgia Georgia National Energy Regulatory Commission; Georgia Wholesale Electricity Market; PA Consulting Group Percentage of the total gross generation from privatized plants when compared with the national total annual gross generation. Indicator 3: IR Number of laws, rules or regulations Parliament of Georgia, Georgia National Regulatory Commission, PA Consulting Group Number of relevant energy sector (gas, electric and petroleum) laws or implementing rules and regulations adopted by either Parliament or appropriate regulatory bodies Indicator 4: IR Number of customers Ministry of Fuel and Energy, Georgia Wholesale Electricity Market, PA Consulting Group. This indicator tracks the total number of electricity consumers (i.e. customer accounts) being served by privately owned and/or managed distribution companies in Georgian power sector. U.S. Financing (In thousands of dollars)

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