2010 QUARTER 2 REPORT (1 APRIL 30 JUNE) KORPORATA ENERGJETIKE E KOSOVES (KEK) KEK NETWORK AND SUPPLY PROJECT CONTRACT NUMBER EPP-I

Transcription

1 2010 QUARTER 2 REPORT (1 APRIL 30 JUNE) KORPORATA ENERGJETIKE E KOSOVES (KEK) KEK NETWORK AND SUPPLY PROJECT CONTRACT NUMBER EPP-I JULY 2010 i

2 This quarterly report on the Korporata Energjetike e Kosoves (KEK) Network and Supply Project covers the period 1 April through 30 June It was prepared by PA Government Services Inc., under Task Order 4 of Contract EPP The authors gratefully acknowledge the support of the United States Agency for International Development s Kosovo Mission (USAID/Kosovo) for this project. This report was made possible through the support of the American people through USAID/Kosovo. Its contents are the sole responsibility of PA Government Services Inc. and do not necessarily reflect the views of USAID or the United States Government. USAID Mr. Arben Nagavci Contracting Officer s Technical Representative USAID/Kosovo Pristina, Kosovo PA Government Services Inc. Masoud Keyan, Chief of Party PA Government Services Inc. c/o KEK 3 Bill Clinton Street Pristina Kosovo masoud.keyan@paconsulting.com 4601 North Fairfax Drive, Suite 600 Arlington, VA Tel: ii

3 Executive Summary Major Milestones in Quarter 2 Kosova B Feasibility Study The first draft of this study was circulated for comments amongst KEK, USAID and the KRPP Transaction Advisory Team. Security PA began providing security assistance to KEK during this quarter. PA is assessing and making recommendations on security matters that impact the staff working environment, asset management, transportation, site access and the work of the security service provider. We conducted initial visits to all KEK districts, the mine pits, key asset depots, warehouses, and workshops. PA observed the functions, execution of duties, general production, and areas of responsibilities. KEK Disciplinary Code PA finalized the new KEK Disciplinary Code, which was submitted to the Board of Directors for approval. The new Code introduces three important reforms to the existing disciplinary process: 1) the right of managers to take action against the non-performing employees under their supervision (this should be distinguished from misconduct), 2) the abolition of the current practice of establishing three member commissions to adjudicate disciplinary cases, and 3) limitations on the discretion of the adjudicator when determining the applicable disciplinary penalty. While the new Code has been considered by the Board of Directors, it has chosen to defer its approval for the moment. Connection Charging Methodology PA developed a distribution network connection charging methodology and facilitated its review and update by all interested parties in KEK. The methodology was submitted to ERO for comment and approval. This methodology will formalize the manner in which KEK processes customers new connections and connection reinforcement requests. Other Notable Events and Accomplishments Finance PA assisted KEK in preparing its Performance to Plan report for the first quarter of 2010, supervised the execution of KEK s 2010 expenditure budget, monitored the implementation of KEK s business plan for 2010, and revised KEK s funding needs from the Kosovo Central Budget for We also assisted KEK in filing an appeal with the Independent Appeals Board following the partially unfavorable decision of the Kosovo Tax Administration (TAK) Appeals Division in connection with the findings of the audit it performed of KEK s financial statements for the period TAK s Appeals Division did recognize the existence of bad debt (the tax auditors had previously refused to recognize bad debt ), but ruled that the amount of bad debt would be limited to the debt of customers taken to court. It thus refused to include in KEK s bad debt the amounts owed by households that have been warned and disconnected for non-payment and uncollectible amounts from minorities. iii

4 Billing and Collections Collections were higher ( 6.2 million or 17%) in the second quarter of 2010 than in the same quarter in 2009, due primarily to the increased amount of energy available for sale and to an increase in the collection rate. The number of customer payment transactions increased by 38% (167,000 more payments among 611,000 customers) compared to During Q2 2010, the billing rate was 85% and the collection rate was 108%. Thus, overall performance (collection of delivered energy) was 92%. For the same period in 2009, the billing rate was 88%, the collection rate 93%, and overall performance was 82%. Unaccounted for energy (commercial losses) continues to be a major problem. The principal impediment is management s failure to comply with district regulations requiring disciplinary action for employees who do not comply with their job requirements. Internally Displaced Persons (IDPs) IDP Collective Centers represent the final group of consumers south of the Iber River to be regularized. PA has been working constantly since August 2009 with the applicable government ministries and international community to raise awareness of the need to provide funds to cover the cost of electricity provided. Significant progress was made on this issue during Q2. As discussed in the Q1 report, at 16:00 hours on 31 March, Minister of Communities and Return, Sasa Rasic, sent an to KEK s managing director stating that his Ministry would pay for the electricity consumed by the IDP Centers during April. The Ministry made the April payment, the first ever received for electricity consumed by the IDP Centers. On 29 April 2010 a meeting was held with the Minister of Communities and Return, Minister of Labor and Social Welfare, US Embassy, USAID, KEK, and PA advisors. Discussions focused on a presentation PA prepared that KEK s Managing Director sent to all participants entitled KEK s Analysis and Views on Service to IDP Collective Centers. Participants were informed that metering individual residences in the Centers would be impractical and costly to the residents. A single meter for each facility is the only workable solution and KEK and the Ministry would have to closely monitor consumption since several of the facilities have extremely high consumption rates per family. The Minister of Communities and Return also agreed to pay for May consumption and PA prepared a Memorandum of Understanding (signed by KEK and the Ministry) to formalize the agreement. On 07 June, a meeting was held with the same attendees plus the senior advisor to the Prime Minister. Minister Sasa Rasic stated that the government, through his Ministry, would be willing to pay for up to 330 kwh per family per month (this was the amount the government paid for Social Cases in 2009) through 01 October 2010 and possibly until 31 December He stressed that if the 330 kwh limit is reached before the end of a calendar month, KEK should disconnect the facility for the remainder of that month. PA prepared a notice to provide to each household in the Centers. The notices were delivered along with an energy conservation brochure in mid-june. During the third week of June, three of the centers in Strpce had exceeded the 330 kwh per family limit. In accordance with the Minister s instruction, those facilities were disconnected. The leaders of the Centers indicated that residents would be willing to pay for their additional consumption. PA and KEK estimated the additional consumption through the end of the month and the residents of those three facilities immediately paid approximately 1,000 to have service restored. iv

5 Upcoming Events and Activities PA anticipates that the following important events will occur during Quarter 3: Issuing of draft requests for particulars for the Kosova e Re Power Plant transaction, July Development of a draft contract for Ferronikeli for service effective April Submission to the Energy Regulatory Office (ERO) of a proposed regulated tariff for service at 220 kv (which would apply to Ferronikeli if it decides to become a regulated customer in April 2011). The final version of the Kosova B Investment Requirement and Rehabilitation Feasibility Study will be made available. Responses to the request for expressions of interest for the distribution company privatization. Commissioning of the newly refurbished Radavc small hydro plant. Commissioning of two new low-pressure rotors and one generator rotor at the Kosova B thermal power plant. Award of contracts for the construction of the Vaganicë 110/35/20(10) SS and the reconstruction of the Palaj 110/35 kv SS. Receipt of ERO approval of the Network Development Plan and the Connection Charging Methodology. v

6 Table of Contents 1. Introduction / 1 2. Progress Made during Quarter 2 / 2 3. Status of Results Achieved under the Performance-Based Management System / Proposed Solutions to New or Existing Problems / Documentation of Best Practices that can be Taken to Scale / Coordination with Other USAID Implementing Partners and Other Donors / Upcoming Events with Dates / 32 Appendix A. List of Activities and Deliverables / 33 Appendix B. Performance-Based Management System Results / 42 Appendix C. Supporting Documentation / 48 vi

7 1 Introduction This report s format meets the requirements of Section A.6 (Reports), Paragraph B (Quarterly Report) of Task Order 4 under Contract EPP The objectives and tasks described in this quarterly report are based on the KEK Network and Supply Project s 2010 Work Plan. Appendix A shows activities completed, benchmarks achieved, and other achievements under the Work Plan. Appendix B describes the results of the project s performance-based management system. The updated project objectives are: Objective 1: Support for technical preparation of the Distribution Company for privatization Objective 2: Assistance with post-privatization implementation for the Distribution Company Objective 3: Privatization support for the Thermal Power Plant Kosova B. The PA team s approach to achieving these objectives is based on two task areas and eight subtasks, each of which is associated with one or more of the project s objectives. Subtask Task Area 1 1 Support Management and Operation to Maintain Asset Value 2 Prepare Technical and Contractual Documentation for Investor Due Diligence 3 Provide Advisory Support in Privatization Process 4 Strengthen Skills and Technical Capacity of Counterparts Objective X X X 5 Support Management Post-Privatization X Subtask Task Area 2 6 Prepare a Thermal Power Plant Kosova B Investment Requirement and Rehabilitation Feasibility Study 7 Prepare Technical and Contractual Documentation for Investor Due Diligence 8 Strengthen Skills and Technical Capacity of Counterparts X X X X Objective X X X 1

8 2 Progress Made during Quarter 2 A number of important accomplishments were realized in Quarter 2 based on the recommendations, assistance and support provided by PA s resident advisor team embedded at KEK and other shortterm advisors. Subtask 1: Support Management and Operation to Maintain Asset Value 1.1 New Internal Policies and Procedures During Q2, PA prepared several internal policies and procedures, including instructions regarding zero and negative bills and the KEK disciplinary code. These are discussed in more detail later in this report. 1.2 Business Planning and Budgeting The PA team supervised the preparation of the Performance to Plan Report for Q The report contains detailed information on the performance of each of the four core divisions (Mines, Generation, Network and Supply) against the approved key performance indicators (coal production, overburden removal and coal stockpile for the Mines; availability, gross generation, auxiliary consumption, net generation and capital investment for Generation; commercial losses, meter reading, meter installation, meter inspection and calibration for Network; and billing rate, bill delivery, and collection rate for Supply). PA also monitored the implementation of the Division Action Plans for performance improvement based on the findings of the Q Performance to Plan Report. PA supervised the execution of KEK s 2010 expenditure budget, including the commitment of funds based on budget commitment requests submitted by the divisions and reviewed and approved by the Budget Department. We also reviewed procurement procedures and contracting for goods, works and services; the invoicing upon delivery and completion; and the payments of invoices by KEK s Treasury. PA and the Budget Department also regularly reviewed the ranking of all projects in the priority category of the budget to make sure that the total amount in this category is consistent with the actual revenue as directed by the Board of Directors. PA also reviewed the applications and justifications for budget adjustments (mainly the transfer of funds between budget lines) and the use of the Budget Reserve Fund. PA monitored the implementation of KEK s detailed business plan for 2010 consistent with the plan approved by KEK s Board of Directors. We also tracked the implementation of all division actions plans in support of the company s business plan. PA continued to supervise the execution of KEK s long-term investment plan, including all high-priority projects for Mines, Generation, and Network for the period 2010 to The 2

9 team also monitored the procedures for the efficient utilization of the loans granted by the Government of Kosovo to fund the major part of the plan. At the request of Ministry of Economy and Finance (MEF), KEK, with PA s assistance, reviewed its cash flow forecasts related to the loans and electricity import subsidies from the Kosovo Central Budget (KCB) to examine the possibility of deferring some of the payments to The results were communicated to MEF and the final cash flow forecast was subsequently confirmed and agreed by all stakeholders. PA assisted KEK in requesting and obtaining an extension to one of the existing loan agreements with the KCB to accommodate the revised payment schedules of some of the contracts for the supply of goods and services to the Mines funded by the loan. Further, PA helped KEK conclude two new loan agreements for capital investments needed for the Kosova B thermal power plant (TPP), and in connection with opening the new Sibovc South West Mine. 1.3 Billing and Collection The table below summarizes KEK s metering, billing and collections performance for all customers, including those served at 110 and 220 kv. The values are from the monthly report to the Board of Directors. Year 2009 Q Q First 6 Months Ratio of energy billed vs. energy available for sale Percent of money collected vs. billed Percent collected vs. energy available for sale Collected revenue (millions of Euros) Collections increased 17% in Q2 of 2010 and 16% in the first half of 2010 vs. the comparable periods in 2009, primarily due to the increased amount of energy available for sale and the increased collection rate. Unaccounted-for energy (commercial losses) continues to be a challenge for KEK. Improving Performance in District Operations The lack of proper daily management in districts still continues to be an issue. Because of this, PA decided to directly hire its own local advisors to work with district managers. Interviews were held and two candidates were selected, trained and appointed as advisors to Prizren and Mitrovica district managers. The main purpose of this action is to have a daily presence in these districts and to help and instruct district management teams on daily operation activities. In the second quarter, PA continued to visit districts on a regular basis and to help district management teams to implement regulations and policies, disconnect problematic customers, and check the effectiveness of disconnections. PA was involved in the district performance evaluation process, analyzing the weaknesses of different sub-districts, helping management teams and subdistrict coordinators to hold meetings with district staff, conducting training, participating in the signing of community agreements, and proposing new ideas to decrease commercial losses. During this period PA trained 10 people on how to fight commercial losses. 3

10 PA continues to provide recommendations and encourage the taking of disciplinary actions against employees pursuant to the terms of the District Regulations. In the majority of cases these recommendations have not been implemented by KEK. However, during the second quarter KEK did follow through on the following recommendations that were made by PA: Termination of Contract 17 feeder specialists, 1 coordinator No extension of contract 18 feeder specialists, 1 feeder team leader, 1 sub-district coordinator Final written warning 66 feeder specialists, 5 feeder team leaders, 8 sub-district coordinators Deduction of 20% salary 66 feeder specialists, 5 feeder team leaders, 8 sub-district coordinators, 3 managers. There were still many other recommendations that KEK did not implement, including: Dismissal of the Peja district manager for poor performance. He simply was transferred to a different position. Final written warnings to Mitrovica and Gjakove district managers, who instead received a 20% pay deduction for 1 month. Use of a new software program developed by PA to monitor and evaluate feeder teams. Addressing the zero bill problem in an effective manner. Although this initiative was recommended last year, measures have only recently been taken to reduce the problem. Disciplining employees who do not perform the required number of disconnections as called for in the District Regulations. During the second quarter all feeder teams and sub-district coordinators, more then 700 employees, were tested both in practical and theoretical skills. Most of the tests were prepared by PA and a team member was present for both parts of the testing process. There were also personnel changes as a result of the punishment of district managers. In Peja and Prishtina districts, managers were replaced and Mitrovica and Gjakova district managers had a 20% salary reduction for poor performance. Since the number of zero and negative bills continue to be an issue, PA helped to develop instructions on how to conduct readings and is continually working on this issue by reviewing the procedures in use and by verifying customers with zero and negative bills. While checking the situation and data in the field, PA found many violations and proposed corrective actions to be taken by KEK management. To better illustrate KEK s performance during the second quarter, PA conducted a comparative analysis of the Q2 data of 2010 with data from the same period of 2009 as well as the six-month comparison analysis. Second Quarter 2010 vs. Second Quarter Excluding 110 kv customers, collections ( 36.3 million) were 11% higher in the second quarter of 2010 than in the same period of the prior year, while the number of transactions increased by 16% and reached 610,970. 4

11 Collections (000 ) Number of Payments Thou Euro # of Trnsct Q Q Q Q KEK s progress compared to the second quarter of 2009 is due to an increase in the collection rate. In the second quarter of 2009, the billing rate (amount of Energy Billed as a percent of Energy Available for Sale) was 76% and the collections rate was 81%, producing an overall performance (collection of delivered energy) of 62%. For the comparable period in 2010, the billing rate was 76%, the collection rate 91%, and overall performance 68%. The 6 percentage point improvement results from a higher collection rate (10%) rather than any reduction in commercial losses. Commercial losses are one of the most problematic issues for KEK. The principal causes are an old metering system and the failure to discipline employees who do not perform their responsibilities. Energy Available for Sale Energy Billed EAFS in KWh Billing in KWh Q Q Q Q

12 First Half of 2010 vs. First Half of In the first half of 2010, at the district level, collections were about 7.5 million (11%) higher than in the same period of 2009, while transactions increased by 241,976 or 26%. Collections (000 ) Number of Payments Months Months 2010 Thou Euro Months Months 2010 # of Trnsct In the first six months of 2009, the billing rate for the districts was 72%, the collections rate was 75%, and overall performance (collection of delivered energy) was 54%. For the same period in 2010, the billing rate was 69%, the collection rate 83% and overall performance 58%. The 4 percentage point improvement is the result of an increase in the collection rate (8%) rather than reduction in commercial losses. As noted above, KEK is not making significant progress to reduce commercial losses due to non-compliance with district regulations regarding disciplinary actions that must be taken for non-performance. Energy Available for Sale Energy Billed Months Months 2010 EAFS in kwh Months Months 2010 Billing in kwh 000 Source of Collections The table below displays the sources of collections for the First Half of 2010 in terms of both the number of payments and Euros collected. First Half 2010 # of Payments % Euro (000) % Customer offices 1,022, , KOS-Giro 49, , Bank transfers 16, ,710 8 Payroll deductions 64, ,068 1 Direct debit 3,411-1,145 1 Social Cases 32, ,211 2 Total districts (CCP) 1,189, , Direct (110 kv) customers 12-13, Total collections 1,189, ,

13 Notes: 1. Total Cash Collections (in Euros) balances to Energy Accounting Report to Board of Directors 2. Number of Payments from Payroll Deductions adjusted to eliminate double counting (related to old debt) 3. Payment for 2009 consumption was received for 32,956 Social Case customers in April 2010 The 4.5 million amount is allocated over 12 months The information above is being compiled each month and can be used to measure the impact of the newer payment mechanisms such as KOS-Giro and direct debit. KOS-Giro Payment Mechanism The payment volumes and amounts processed through KOS-Giro since this mechanism was implemented are shown in the following table. Use of the KOS-Giro Payment System Quarter Number of Payments Amount ( 000) Q ,490 1,822 Q ,258 2,158 Q ,339 2,286 Q ,086 3,093 Q ,929 4,320 Q ,029 4,171 Q ,298 3,868 Q ,186 5,592 Q ,563 7,175 Q ,748 5,335 Source: KEK Supply Division Household and small commercial customers participation continues to grow, in both the number of payments and amount collected. The increase in the number of payments during Q2 reflects this fact. The reduction in the amount of money received through KOS-Giro reflects the fact that some of the larger commercial customers are migrating to the direct debit mechanism. Late in 2009 following the Central Bank of Kosovo s approval of Western Union to participate in the KOS-Giro System, KEK decided to allow Western Union to be a KOS-Giro participant. The payments are being processed through the Interbank Transaction System by a commercial bank and all procedures are working properly. The addition of Western Union to the KOS-Giro System is one of the factors contributing to the increased volume of payments given the significant usage of the Western Union system by households in Kosovo. Direct Debit System Additional customers continue to be added to the direct debit payment mechanism since the mechanism was made available to all customers in January More than 1% of the amount collected in the first half came through direct debit. This is the result of KEK s efforts to have several commercial entities with multiple locations (IPKO, PTK, all commercial banks, Kujtesa) enroll all their facilities in direct debit. In addition, all A+ customers are now part of direct debit. 7

14 Minority Issues PA continues to monitor the performance of customers subject to the 133 Community Agreements. The following report summarizes the results from the inception date (second half of 2009) of the various agreements through 30 June MINORITY COMMUNITY AGREEMENTS OVERVIEW OF PERFORMANCE RESULTS As of 30 June Number of Customers 22, Debt Prior to Agreement 34.4 million 3. Number of Bills Issued Since Agreement 260, Number of Payments since Agreement 171, Payment Transaction Percentage 66% [% of Line 4 divided by Line 3] (KEK average = 50%) 6. Amounts Billed Since Agreement (000) 7,133 ( value of Line 3) 7. Amounts Paid Since Agreement (000) 5,315 ( value of Line 4) 8. Payment Percentage 75% [% of Line 7 divided by Line 6] (KEK average = 81%, households 73%) 9. Number of Customers that never paid 2,858 [% of Line 9 divided by Line 1] (13% of total) As the results show, the newly regularized customers continue to pay quite well compared to the rest of KEK s customers. In addition to the minority customers residing in areas with Minority Community Agreements, there are others living in mixed areas that have no agreements. Given the fact that KEK has been more aggressive in disconnecting customers based on their outstanding debt, minority consumers in mixed areas have approached KEK to request that they be provided the same opportunity as other minority customers to have their old debt frozen. Many of these families have been paying for electricity for the past one to two years, but accumulated significant debts in prior years when KEK was not allowed to disconnect them for non-payment. PA developed an individual consumer agreement, which is a variation of the Community Agreement. It requires the customer to pay all invoices since 01 July 2009 and to agree to pay the next 12 monthly bills by the due date (36 bills in the case of non-households). In return, KEK agrees not to disconnect the customer based on debts incurred prior to 30 June This agreement is only available to those consumers that the international community restrained KEK from disconnecting since The customers in mixed areas that have taken advantage of this agreement reside in Fushe Kosova, Vitia, and Prishtina. Internally Displaced Persons (IDP) Collective Centers Collective Centers represent the final group of consumers south of the Iber River to be regularized. PA has been working constantly since August 2009 with the applicable government ministries and international community to raise awareness of the need to provide funds to cover the cost of electricity provided. Significant progress was made on this issue during Q2. As discussed in the Q1 report, at 16:00 hours on 31 March, Minister of Communities and Return Sasa Rasic sent an to 8

15 the KEK managing director stating that his Ministry would pay for April consumption of the IDP Centers. The Ministry made the April payment, the first ever received for the Centers electric consumption. On 29 April 2010 a meeting was held with the Minister of Communities and Return, Minister of Labor and Social Welfare, US Embassy, USAID, KEK, and PA advisors. Discussions focused on a presentation PA prepared that KEK s Managing Director sent to all participants entitled KEK s Analysis and Views on Service to IDP Collective Centers. Participants were informed that metering individual residences in the Centers would be impractical and costly to the residents. A single meter for each facility is the only workable solution and KEK and the Ministry would have to closely monitor consumption since several of the facilities have extremely high consumption per family. The Minister of Communities and Return also agreed to pay for May consumption and PA prepared a Memorandum of Understanding (signed by KEK and the Ministry) to formalize the agreement. On 07 June a meeting was held with the same attendees plus the Senior Advisor to the Prime Minister. Minister Sasa Rasic stated that the government, through his Ministry, would be willing to pay for up to 330 kwh per family per month (the government paid this amount for Social Cases in 2009) through 01 October 2010 and possibly until 31 December He stressed that if the 330 kwh limit is reached prior to the end of a calendar month, KEK should disconnect the facility for the remainder of that month. PA prepared a notice that was delivered to each household in the various Centers along with an energy conservation brochure by mid June. During the third week of June, three of the Centers in Strpce had exceeded the 330 kwh per family limit. In accordance with the Minister s instruction, those facilities were disconnected. The leaders of the Centers indicated that residents would be willing to pay for additional consumption. PA and KEK estimated the additional consumption through the end of the month and the residents of those three facilities immediately paid approximately 1,000 to have service restored. Initiatives Related to Regularizing the Consumers North of the Iber River Discussions continued during Q2 with Serbian officials (State Secretary of Ministry of Energy and Mines, Deputy Minister of Ministry for Kosovo and Metohjia, and EPS) concerning the draft energy services company (ESCO) Agreement that was provided to them in September Observers from the US Embassy Kosovo and ECLO Kosovo also attended. On 19 April, a meeting was held in North Mitrovica to discuss the draft ESCO contract; however, the Serbian participants brought up two old issues that KEK had previously told them were not open to discussion for legal, regulatory, and commercial reasons. One issue related to having the ESCO arrangement pertain to communities south of the Iber River that KEK regularized in PA explained to the Serbian representatives that this would be a step backward since those consumers are paying quite well and there is no business reason to do so. The other issue was the desire of the Serbian side to export energy from Serbia (and possibly elsewhere) to Kosovo. They were told that KEK cannot justify the sole sourcing of imports. Although both of these issues were previously brought up and responded to by KEK, the Serbian side continues to press them. On 28 May another meeting was held between the parties. The Serbian side again brought up the same two issues of the territory to be covered by the ESCO arrangement and the import of power. They still have not yet addressed the technical and commercial aspects of the draft ESCO contract. The two major issues are roadblocks to moving forward with the ESCO arrangement. It is apparent that Serbian Government will not be able to sign the ESCO agreement, given the political environment in Serbia. Therefore, the Serb Government representatives that attend the meetings have been instructed to continue raising the same issues that the Kosovo law does not allow, 9

16 hence stalling any progress. PA believes that the Serbian Government will not sign the ESCO agreement unless it is forced to do so by the US and the EU governments. In order to prevent the same hardship experienced by the electricity customers in the north last winter, this issue has to be resolved by September PA advisers traveled to the north to determine the validity of Serbian propaganda about the construction of a new line from Serbia to Valaqe substation in Kosovo. No sign of line construction activity was observed by the team. Also, PA continues to monitor the water level at Gazivode reservoir/dam to ensure that proper water level is maintained in the reservoir. 1.4 Accounting and Financing The PA team continued to advise KEK on finance and accounting issues, primarily regarding the replacement of some of the modules of the Customer Accounting System (CAS), improving the quality of financial reporting (including the preparation of unbundled financial statements for each of the company s core divisions), and preparing the company for privatization. PA undertook the following activities during Q2: Unbundling of Accounting Monitored the preparation of KEK s unbundled financial statements for FY PA helped with the calculation of the allocation factors based on staff numbers especially in cases where staff reports to one Division for administrative purposes and to a different Division for functional purposes. Introducing Improvements to CAS and Financial Accounting PA assisted with the provision of more training on the new Fixed Asset Module and supervised the data entry and generation of reports during training performed by KEK s Information Services (IS) Division. We continued work on the calculation adjustments to the book values of all assets carried in the General Ledger. These adjustments will be recorded as post-closing adjustments at the end of 2009 [reflected in the opening balance for 2010] in order to eliminate the errors in the accumulated depreciation accounts in the ledger identified by KEK s auditors Deloitte & Touche. PA continued work on the source document database and the replacement of the Accounts Payable and Inventory Modules. Financial Reporting and External Audit PA assisted KEK with finalizing the consolidated financial statements for FY 2009 and took part in the initial review of the statements by the external auditors. Specifically, we advised the Accounting Department on recording KEK s environmental liabilities, estimating and recording provisions for contingent liabilities related to the payment of pensions and recording provisions related to payments for the supply of a transformer, which failed in the process of commissioning. PA participated in all meetings between KEK and the external auditors on the audit of FY

17 Taxation PA assisted KEK in filing a second appeal (with the Independent Appeal Board) against the findings of the Kosovo Tax Administration (TAK) during the audit of KEK s financial statements for the period TAK failed to recognize the bad debt recorded in the books of KEK and confirmed by the auditors Grant Thornton and Deloitte & Touche. Thus, after the adjustments that the auditors made to KEK s financial results (for tax purposes), KEK appeared to owe TAK large amounts of corporate profit tax. This tax was further increased with penalties and charges for KEK s failure to declare it in due time. PA assisted KEK in filing an appeal with TAK s Appeals Division. The Appeals Division issued a ruling in which they recognized the existence of bad debt, but pronounced that the amount of bad debt would be limited to the debt of customers taken to court. It thus refused to include in KEK s bad debt the amounts owed by households that have been warned and disconnected for non-payment and uncollectible amounts from minorities. The ruling of TAK s Appeals Division on the amount of bad debt (which is currently being disputed by KEK) is not consistent with the current law and does not truly reflect the situation in Kosovo. Financing PA assisted KEK in requesting and obtaining an extension to one of the existing loan agreements with the Kosovo Central Budget (KCB) to accommodate the revised payment schedules of some of the contracts for the supply of goods and services to the Mines funded by the loan. Further, PA assisted KEK with concluding two new loan agreements for capital investments need for the Kosova B TPP, and in connection with opening the new Sibovc South West Mine. We monitored the implementation of the loan agreements between KEK and the Government of Kosovo for funding the top-priority capital projects in mining and generation. PA also took part in a series of meetings with the Treasury Department at MEF to finalize the terms of the agreements. Other PA attended meetings on issues related to the financial position and performance of KEK between the CFO and the Privatization Transaction Advisor. We helped KEK s Accounting Methodology Department to develop accounting policies and procedures for recording the reversal of impairment of fixed assets. 1.5 Legal and Regulatory PA continued to provide legal advice and support to KEK s management on a variety of issues, which included: Drafting, negotiating, and finalizing the contracts for the supply of spare parts and installation services in connection with Alstom s delivery of a new generator rotor, and repair of an existing generator rotor for the Kosova B TPP Continuing to advise KEK on its dispute with Turbocare in connection with the purchase of a used transformer for the Kosova A TPP, to include drafting documents for a possible determination of the dispute using an independent technical expert. 11

18 Drafting and negotiating energy import agreements, using the EFET General Agreement and customized election sheet. Drafting new internal KEK procedures in connection with the issuance and monitoring of performance and advance payment guarantees presented by contractors. These procedures were subsequently approved by KEK Managing Director, and are being implemented. Drafting new internal KEK procedures in connection with the sale of surplus electricity to wholesale buyers. It is expected that these rules will be approved by the Board of Directors in Quarter 3. Finalizing the new KEK Disciplinary Code, which was submitted to the Board of Directors for approval. The new Code introduces three important reforms to the existing disciplinary process 1) the right of managers to take action against non-performing employees under their supervision (this should be distinguished from a misconduct), 2) abolition of the current practice of establishing three-member commissions to adjudicate upon disciplinary cases, and 3) limitations on the discretion of the adjudicator when determining the applicable disciplinary penalty. While the new Code has been considered by the Board of Directors, it has chosen to defer its approval for the moment. Preparing the tender dossiers and draft contracts for the re-tendering of the new 110/35/20 kv substation in the vicinity of Vaganicë and for the tendering of the new 110/35kV Palaj substation. Providing legal advice to KEK in connection with its request to the Public Procurement Agency for additional works to be performed by Siemens for refurbishing the water treatment facility at the Kosova B TPP. Continuing to provide legal advice to KEK project managers in connection with the implementation of the contracts for refurbishing two bucket wheel excavators by the original manufacturer, Thyssenkrupp, and also refurbishment of the conveyor belts by Eco Trade, which will be deployed to the new Sibovc SW mine. Continuing to provide legal assistance to KEK s efforts to regularize electricity service to minority communities in the northern part of Kosovo. Continuing to closely monitor the implementation of the GoK s May 2009 decision to proceed with the expropriation of land near Hade village. As previously reported, PA has noted, with concern, that the process is not progressing at the required pace. Quarter 2 saw little improvement on this matter, with a second high-level meeting attended by responsible ministers and municipal leaders yielding no tangible results. Owing to these continued delays, PA drafted a letter for KEK to send to the GoK requesting it to expedite the expropriation process. Providing legal advice to KEK in connection with its post-contractual obligations for the collection of RTK Fees, to include drafting a letter to RTK outlining KEK s interpretation of the Constitutional Court Decision of October Advising KEK on the drafting of several contracts related to the refurbishment of coal system one, specifically the coal conveyor system, which will be used in the new Sibovc South West mine. 12

19 PA provided support to the KEK regulatory staff during Q2 on the following matters: Met with the ERO to discuss comments they had on the Network Development Plan. Based on that meeting, PA advisors are working with the KEK Network personnel to address issues raised and to revise the report accordingly. A request was made to ERO for derogation of a number of requirements of the Distribution Code. Comments were provided to ERO on draft documents prepared by their consultant concerning Certificates of Origin for renewable energy facilities. Comments were provided to ERO on a document prepared by their consultant relating to performance standards. In accordance with the Network and Supply licenses, the licensees are to propose performance standards to ERO for review. The document discussed various options for performance measures. On 07 May, KEK submitted a request to ERO for derogation of Article 7 of the Rule on Disconnection which relates to communal (group) disconnection. KEK previously provided extensive justification to ERO and the Government of the need to disconnect 10/0.4 transformers (or the secondary feeds from those transformers) in those areas where payment discipline is very poor (payments less than 30% of amount billed). At their meeting in June, the ERO Board rejected KEK s request for derogation. PA is working with KEK to determine the way forward on the issue of group disconnections, which are needed to maintain collections at a reasonable level. KEK provided the 2009 unbundled financial statements (unaudited) to ERO. The various licenses require KEK to submit audited financial statements to ERO in an unbundled manner for each licensed activity by 31 March of the subsequent year. ERO routinely grants a derogation of this requirement until 30 June. ERO was satisfied to receive the unbundled statements at this time, with the understanding that audited results will be provided as soon as the external auditor completes its work. 1.6 Internal Audit and Anti-corruption In Q2 the Internal Audit Committee (IAC) engaged in a series of interventions in the day-to-day operations of the Audit Office (IAO), which had and will continue to have a negative impact on the functioning of the Office. Without good reason or justification, the IAC decided to demote the leader of the network and supply operational audit the Principal Operations Auditor. This decision violated the Committee s own Standard Operation Policies (approved at the beginning of the year), which prohibited such interventions. The decision also sent the wrong signal to the remainder of KEK s IAO departments. The Committee further interfered in the daily operations of the IAO by instructing the Internal Audit Officer to reverse his decision to reduce the salaries of those auditors, whose performance was found unsatisfactory during the Q1 performance evaluation. It must be noted that the method of performance evaluation was previously approved by the Internal Audit Committee. PA advised the Committee against both of these interventions, explaining in detail why such actions are detrimental to the effectiveness of the IAO. However, the committee ignored the advice and the decisions were enforced. Despite these failures to provide leadership, the IAC achieved some progress in Q2, including: 13

20 Reviewed the progress of the Annual Internal Audit Plan and concluded that the half-year targets were met, with exception of a few financial audit-related tasks. Reviewed and approved recommendations in relation to changes in chemical specifications for water cleaning for power plants. This decision was further reviewed and supported by KEK s Board, and it will result in both significant quality and cost reduction. Reviewed and approved recommendations related to procurement audits. Among the large-scale audits performed in Q2 were the operational audits of Network and Supply and the audits of Procurement, the results of which are summarized below. IAO completed a comprehensive audit of the Gjilan District and continued selective audits in Pristina, Gjakova and Mitrovica districts. It found the following weaknesses: Low meter reading quality and high number of zero bills up to 17%. Very low performance in meter reading, including inaccurate reading and data entry. Misreporting/falsification and serious underperformance in disconnections. Underperformance in commercial loss reduction. Gross neglect of KEK s approved policies and procedures Districts continuously fail to enforce payment discipline. Even in the few cases when disconnections are being performed, reconnection is done following the payment of a very low amount (sometimes only 2-4% of the customer s debt). As mentioned before, the debt restructuring procedure was found to be very ineffective and a new approach is needed. Extensive data collection and analyses were initiated for a better understanding of the magnitude and specifics of the problem. The design and implementation of a new process to replace current debt restructuring is expected to be completed by the end of the year. Other improprieties discovered during the audits included falsifying seals and ratios of current transformers, illegal connections, and lines. All these illegal acts are causing a significant loss to the company. PA assisted the IAO in reviewing the progress in the implementation of Regulation 66 related to the registration of all customers of KEK. Around 620 new customers were identified and registered, and the registration of several hundred customers was accelerated. The implementation Regulation 66 has a significant impact on the loss reduction efforts in Pristina, since 90% of the customers mentioned above were found in this district. The unsealed meters and measurement installations present another very significant problem resulting in high commercial losses. Based on sample studies performed by the IAO, approximately 20% of the customers meters are not sealed. IAO held a number of meetings with the Supply Division representatives to address this issue. Their estimates of the percentage of unsealed meters was even higher approximately 25-30%. An action plan to resolve the issue is under development and will be finalized in Q3. It will include diverse activities such as a media campaign, legal actions and technical steps for putting the installations in order. District regulations. The most important audit of Network and Supply operations was related to the implementation of the District Regulations. IAO concluded that the performance evaluation of the Network and Supply Division employees completely ignored the District Regulations. Based on the requirements stipulated in the District Regulations: 1. 7 district managers should have been punished for not meeting their targets - none of these punishments have been implemented. 14

21 2. 44 sub-district coordinators should have been punished for not meeting their targets - disciplinary measures have been implemented against feeder teamleaders should have been subject to disciplinary punishments - only 2 were punished feeder team specialists should have been punished - only in 79 cases were some disciplinary measures implemented. This flagrant disregard of the District Regulations encourages underperforming employees and further strengthens the perception of impunity. All IAO conclusions and recommendations have been finalized and submitted to the IAC. HR recruitment process audit. In Q2 IAO received a request from the Kosovo Police to audit the employee recruitment process for the year The basis for this request was a complaint from KEK s Labor Union. The audit has discovered significant deficiencies and violations in the abovementioned process: Lack of procedures regulating the entire process, from vacancy announcement to evaluation and selection of staff. Deficiencies in the application filing and archiving process which create serious complications and in most cases make it impossible to inspect the fairness of the selection. Employment of staff who do not meet the announced qualifications and skills requirements. In all abovementioned cases IAO prepared or is preparing appropriate recommendations and submitting them to IAC and KEK management. IAC reviewed and approved the recommendations of the IAO for the following procurement audits: Procurement of gear boxes the audit was completed in Q1. Procurement of conveyer belt spare parts (better known as the ACDC investigation) The IAC decided to dismiss Procurement Officer Muhamed Selmani and to issue final written warnings to the rest of participants in this procurement. Summary of Audits and Measures Taken to Address the Findings During Q2, the IAO completed 35 audits and investigations. Investigations. 27 new audits were initiated and are expected to be completed in Q3-4. Disciplinary Actions. As a result of the investigations performed by the IAO, 79 KEK employees were proposed for different forms of disciplinary action. Law Enforcement. With PA s assistance, KEK was able to submit 12 cases to law enforcement officials for follow-up action. Customers Inspected. The Operations Audit Function inspected more than 2, 500 customers electric use and metering. Field Enforcement. Under PA s leadership, the Field Enforcement Office launched an extensive campaign for resolving problems related to customers with large debts and high commercial losses. 233 problematic customers were disconnected (with police support in 10% of the cases). 15

22 210 cases of electricity theft were discovered and submitted to the Legal and Supply Departments for processing. Field Enforcement Office is currently hiring additional staff, as the volume of work is expected to increase in subsequent quarters. 1.7 Network, Human Resources, Information Services, Public Relations and Communications Network Division Network Development Plan PA updated the 2010 Network Development Plan in response to comments from the ERO. The updates provided additional information on justification and expected benefits related to the proposed projects. Upon receipt of the updated plan, ERO requested more detailed information on specific projects that will include data on performance improvements as computed by power flow analysis. PA is in the process of helping KEK to develop a further update to the Plan that will satisfy the ERO s requirements. Network Division Management PA actively managed and coordinated the implementation of the 2010 Network Division Management and Action Plan. This will be an ongoing and routine activity that will gradually transition to KEK staff. PA developed a job description and assisted in the selection of a Network Division Management Coordinator. During Q2, monthly management meetings were held, draft project plans were developed, project status reporting was formalized, operations performance reporting templates were developed, and operations performance reporting was introduced. The current focus is to assist the Network Division management to become accustomed to concepts of accountability, delegation, and performance measurement and reporting. Metering Strategy PA continued gathering information and analyzing options for an overall metering strategy that balances KEK s challenges, budget constraints, and strategic considerations. The strategy is expected to be finalized in July Operations Support PA worked with KEK staff on several routine operational matters, coaching and assisting in the management and resolution of problems, in order to ascertain adherence to regulations, and ensure timely progress and proper closure. Examples of such matters include: o Reviewed energy consumption at IDP sites and developed recommendations for future actions o Supported wind PPA negotiations and prepared relevant documentation o Supported KEK negotiations with Iber Lepenc to ensure reliable electricity supply to customers in Besi o Assisted the process of asset relocation as required by the new highway construction project. Expert Review and Comment PA reviewed and provided comments on the following ERO documents: o Quality Standards for Electricity Licensees o Rule for the Establishment of a System of Certificates of Origin o Rule for the Support of Electricity for which a Certificate of Origin has been issued and Procedures for Admission to the Support Scheme. 16

23 Regularization Projects PA identified and defined two projects focused on regularizing KEK customers and continues to support KEK in the design, planning and execution of these projects: o Magura 10kV Feeder Regularization This low performing 10 kv feeder was selected and three joint network and supply teams were engaged to regularize the 1995 customers served by the feeder. Now 1352 customers have been regularized. This project is expected to be completed in Q Upon completion and based on measured sustainable performance improvement, similar projects may be planned for other lowperforming feeders. o Regulation 66 Customer Regularization The scope of this project is to regularize several customers in new buildings that were constructed in the recent past without the proper permits and approvals. The scope will include the regularization electricity consumed by common areas and the detection and removal of illegal taps. This project is in the design and planning phase, and execution is expected to begin in July Tendering and Procurement PA assisted KEK with the tendering and procurement processes related to: o Meter boxes o SIM Cards o Simple electronic meters and multi-functional remote read meters o Remote read modems. Connection Charging Methodology PA developed a distribution network connection charging methodology and facilitated its review and update by all interested parties in KEK. The methodology was submitted to ERO for comment and approval. This methodology will formalize the manner in which KEK processes customers new connections and connection reinforcement requests. Vaganicë 110/35/20(10) Substation PA supported KEK in the development of a revised technical specification and other tender documents for the construction of the Vaganicë 110/35/20(10) kv substation. This substation is required to provide stability of supply for customers in the Mitrovica area and the western part of Kosovo, and also to properly regularize customers who are currently served through the Trepca mining complex. The tender was announced on 5 July Palaj 110/35 kv Substation Working in concert with the KEK engineering team, PA assisted in developing draft technical specifications and other documents for the tender. This substation is pivotal to both the mining and transport of coal to the Kosova A and Kosova B generating plants. The final package of tender documents was sent to KEK s procurement office and the tender is expected to be announced in July Prishtina 7 110/20(10) Substation PA supported the KEK engineering team in developing draft technical specifications and other tender documents for the Prishtina 7 distribution substation. This substation will be located next to the 220/110 kv Prishtina 4 transmission station. According to KEK s analysis, the demand in this area of the city of Prishtina is growing rapidly and hence the need for the distribution substation. The technical specifications and other tender documents are expected to be finalized in Q Electric Service Redundancy to KEK HQ The tender for the supply and installation of a standby diesel generator with automatic transfer switch was announced. PA supported KEK in the technical evaluation of bids. Three local bidders applied and none of them qualified based on 17

24 tender requirements. PA will continue supporting KEK in the re-tendering process. Least Cost Generation Plan: A) The revised Long-Term Electricity Demand Forecast for the Kosovo power system developed by PA is in the final stages of review. B) PA supported KEK in preparing the job description, interviewing and testing candidates for a new position of Data Analyst/Long-Term Planner in the Capacity Management Department. As a part of professional capacity building, PA will provide extensive on-thejob training on all aspects related to data analysis and long-term leas-cost generation planning. Loss Calculations PA reviewed the existing Technical Loss Calculation Methodology used by KEK. The approach, accuracy of input data and models, assumptions, and level of detail of the existing methodology as well as the software (GREDOS) used for computations can be improved. PA is in the process of developing a new and improved methodology for loss calculations. This effort is expected to be completed in Q Master distribution plan development Long-term operations, maintenance and capital projects of distribution networks require a Distribution Network Master Development Plan (MDP). PA prepared an initial draft work plan for the development of the MDP. This work plan is expected to be finalized in early Q Information Services (IS) PA recommended additional improvements to the Fixed Asset Module, including: o Calculation of depreciation for tax and regulatory purposes. o Recording internal transfers of assets. o Filtering of journals and virtual posting of journals into the General Ledger Module. o Recording suppliers. o New reporting tools PA finalized the work plan for the implementation of the new FA module. PA participated in the interview process for candidates for the new positions in the IS Department. PA reviewed and discussed the new customer care database structure. PA designed and developed a new performance checklist for the froup of feeders: o By custom selection of feeders o By selection of feeder specialists. PA modified the Tools of Electrical Tree for Kosovo (TETKo) software, modified help and presentation files to include the change, and prepared a new software version which was installed. OPA trained a total of 33 persons in 3 districts on the software. PA designed the following sub-modules of the new Network and Supply Integrated Database (NASID): o Customers and contracts o Services and prices o Double entry accounting o Organized the relationships between the appropriate sub-modules PA prepared a report with structure diagrams of NaSID for review and discussions with stakeholders. 18

25 Human Resources (HR) Division As part of the ongoing development of this division, PA: Provided supervision of and assistance to, the Human Resources Department on drafting job announcements, job descriptions, interviewing, recruitment, implementing disciplinary measures, and preparation of payroll and salary deductions. Supervised and made recommendations to KEK management for job postings, interviews and the recruitment process for various KEK positions. Finalized and obtained approval for the new interim organization structure for the Corporate Services Division for KEK and planned the organization structure for the Corporate Services Division of the future distribution company Kosovo Electricity Distribution and Supply Company (KEDS).This includes the structural units of Human Resources, Public Relations & Corporate Communications, Transport, Facility, Security, IT, Record Management and Corporate Environmental Services and Safety. Reviewed employee lists from the Supply and Customer Care Division, identified those employees who were unassigned and recommended where they should be assigned within the division. Initiated and held monthly meetings between HR and the Supply and Customer Care Division to resolve HR-related issues. Identified and received approval from the Board of Directors for the list of employees at KEK to be made redundant. Provided recommendations for staff optimization in Kosovo A. Held meetings with Ministry of Education representatives on how to proceed with the KEK Training Center accreditation issue; prepared and submitted all requested documents. Implemented and supervised regular recruitment of reserve feeder specialists and initiated the monthly training of newly recruited feeder specialists to create a reserve of potential employees. Reviewed and corrected a variety of inaccuracies in the district organization structure and payroll listings. Reviewed the reorganization of payroll, headcount and job descriptions within the Coal Production Division that resulted from making 120 positions redundant. Reviewed and analyzed all recommended disciplinary measures and bonuses to determine compliance with the KEK District Regulations and oversaw the implementation of these recommendations against non-performing employees. Analyzed the records of persons on unpaid sick leave, identified who was on sick leave and provided recommendations on how to manage the unpaid sick leave benefit and process. Supervised all recruitment for district positions. Supported the North Mitrovica manager in implementing the KEK District Regulations in connection with the punishment of non-performing employees. Security PA began its assistance to KEK on security matters during this quarter. We are assessing and making recommendations on security aspect that affect staff working environment, asset management, transportation, site access and security service provider (BESA security company) deliverables. PA conducted initial visits to all KEK districts, the mine pits, key asset depots, warehouses, and workshops to observe the functions, execution of duties, the general production, and areas of responsibility. 19

26 During Quarter 2, PA: Instituted and held five regular weekly meetings to address day-to-day activities. Guided the development of job descriptions for two key security sector managerial posts. Developed and introduced a functional database system for reporting purposes, monitoring vehicle movement control, and analyzing monthly consumption returns and expenditure outcomes in order to streamline existing processes. Prepared a policy document and recommendations on building evacuation plans for further discussion and development. This document will serve as foundation for district implementation and specific actions. Began verifying documentation for implementing the KEK security sector upgrading process, involving the installation of monitoring devices in Kosovo A and B, and all critical asset warehouses together with re-fencing premises where applicable to secure KEK assets. PA has conducted regular visits to verify needs versus plans and made recommendations for revising procurement and tender documentation. Evaluated and discussed with the security service provider, BESA, the current crucial areas of responsibility for safeguarding KEK properties, staff and installations with an emphasis on performance efficiency, upgrading the company image, standardizing employee equipment, and regulating duty rosters. Began discussions with the KEK security officer and BESA in connection with creating a database system to monitor, regulate and follow up on KEK employees involved in criminal activities. This will be vital to the HR Division as part of its employment processes. 1.8 Management and Operational issues KEK s Board of Directors continues to perform well and support management s actions to improve KEK s performance. Occasionally, the Board has a tendency to micro manage and attempt to act as executives in KEK s contractual issues. PA will continue to monitor the Board s actions to facilitate proper conduct. KEK s Managing Director is performing well and has been very cooperative since early He is under a lot of pressure by both internal and external forces, including the Minister of Energy, to hire individuals, not to disconnect customers, invest in villages tied to politicians, not to terminate poor performing or corrupt employees, restate terminated employees, and to influence tenders and their outcome. Fortunately, he understands that he has full support of the advisers and has resisted all of these pressures to a great extent. He has also been told by the Ministers of Economy/Finance and Energy not to listen to his advisers and make his own decisions, consistent with their instructions, which he has refused to do. The Managing Director has been informing PA about all major issues and asks for advice before taking any action; hence, in general, there has been a good cooperation between him and PA advisers. PA s relationship with the KEK Chairman has been very positive. He recognizes the role and the importance of PA s advisers in improving KEK s performance, and has continuously encouraged cooperation of KEK s Managing Director with the PA advisers and has recognized him for doing so. Lack of support from the GoK, including the Ministry of Energy and Mines (MEM) and MEF, for implementing a comprehensive plan to ensure electricity supply for Kosovo may result in the need to import a large amount of electricity at a cost of over 200 million per year. Given ERO s strategy to not allow any tariff increase, the need for a significant government 20

27 subsidy until new generation capacity is constructed may adversely affect the privatization efforts. PA assisted KEK with communicating this concern to all stakeholders during the quarter in the form of a letter regarding the closure of the Kosova A TPP. There is need to reorganize the mines operation and review the staffing level, given that by 2012 the old mines will be depleted and only the SSW mine will be operational. There is significant pushback at all levels of management to making any organizational and staffing changes in the mines. This was manifested during Quarter 2 when KEK s Coal Production Division sought to evade any redundancies in its Maintenance Department. PA will need to provide significant assistance and guidance to KEK management if any reorganization or rightsizing of the Coal Production Division is to occur. As previously reported, the hydraulic ash transfer project for the A units suffered a setback when the BoD refused to approve 4 million in additional funding to construct ash processing equipment for units A3, A4, and A5. The Board s refusal was predicated on the EU s demand that Kosovo should shut down the A units by Accordingly, the BoD sought guidance from the GoK on whether to proceed with the project. The GoK has yet to provide a formal response. In the same vein, the BoD has also sought guidance from the GoK on the planned overhaul of Unit A3 of the Kosova A TPP, which will occur in the summer of Again, the GoK has yet to provide a formal response. PA will need to press the GoK for an answer during Quarter 3 on both questions. Subtask 2: Prepare Technical and Contractual Document for Investor Due Diligence 2.1 KEK Unbundling Documentation PA has already developed and shared with the DistCo and KRPP Transaction Advisory teams the pertinent agreements. 2.2 Draft Agreements PA has already developed and shared with the DistCo and KRPP Transaction Advisory teams the pertinent agreements. 2.3 Legal/Regulatory PA has already developed a draft regulatory statement that should form an integral part of the transaction documents for the sale of the DistCo and shared this with representatives from the IFC and also the KRPP Transaction Advisory team. During Quarter 2, PA continued to work with Deloitte, a USAID implementing partner, and the legal advisors to the KRPP Transaction on amendments to the three energy laws. PA has been particularly focused on those amendments that aim to provide legal certainty and clarity to KEK and KOSTT s property rights over the assets that comprise Kosovo s energy system, and new provisions that will explicitly make electricity theft a criminal offence. 21

28 PA met with an EU-sponsored consultant to ERO concerning regulatory accounting and reporting, focusing on the upcoming unbundled environment. The consultant was introduced to KEK accounting personnel so he could see first hand the system and procedures KEK has in place at this time. 2.4 Investor Due Diligence PA has already compiled an index to the documents collected in the DistCo data room and provided a copy to the IFC for their review and comment. PA stands ready to assist KEK with responding to any future requests for documents submitted by IFC or investors. Subtask 3: Provide Advisory Support in Privatization Process 3.1 Tender Process Responses The tendering process for the sale of KEDS has not yet started. Accordingly, there are no actions to report for the quarter. It is anticipated that the request for expressions of interest will be published in Quarter 3, and the prequalification process will start at the end of Quarter 3/beginning of Quarter Bid Submission, Evaluation and Award No actions to report for the quarter. Subtask 4: Strengthen Skills and Technical Capacity of Counterparts 4.1 Distribution Company Staff Coaching PA actively supported the Network Division s management staff by assisting with the implementation of the Management and Action Plan. PA also supported routine daily operations of the Network Division by ensuring proper follow up and adequate quality in the resolution of issues. These activities were carried out by PA with the objective of achieving on-the-job training. PA team members provided advisory support to the districts on a daily base, in line with the District Regulation. PA also continued to coach the managers and staff in how to hold meetings, meeting deadlines, communicating expectations, employee motivation and reward, development of the 2010 Action Plan for Supply and Network, and monthly performance monitoring. 22

29 4.2 Coaching on Billing, Managing Customer Accounts and Collection During the second quarter of 2010, PA conducted training sessions for 10 people how to combat commercial losses. 4.3 Training on Management Principles, Customer Service No actions to report for the quarter. 4.4 Privatization Process Workshops PA worked with USAID, USAID implementing partners and the National Association of Regulatory Utility Commissioners (NARUC) in holding a high-level forum in Pristina entitled Public Forum on KEK Electricity Distribution and Supply Privatization: Enhancing the Security of Supply in Kosovo for Economic Growth. PA delivered a presentation on Sustainable Commercial Operations, and provided input and comments on the presentations made by the others. PA also participated in the workshops that followed the high-level forum, which focused on market design and tariff reform in the context of the DistCo privatization and the KRPP Transaction. 4.5 Training of Trainers No actions to report for the quarter. Subtask 5: Support Management Post-Privatization As the tendering process has not yet been initiated for the sale of KEDS, there are no actions to report for this subtask. Subtask 6: Prepare a Thermal Power Plant Kosova B Investment Requirement and Rehabilitation Feasibility Study 6.1 TPP Kosova B Investment Requirement and Rehabilitation Feasibility Study The first draft of the Thermal Power Plant Kosova B Investment Requirement and Rehabilitation Feasibility Study was circulated for comments amongst KEK, USAID and the KRPP Transaction Advisory Team. Some comments were received in late June,are which will be included in the next draft of the report. The analyses indicate that it is feasible, both technically and financially, to rehabilitate the B units at less than half the cost of constructing a new unit. Subtask 7: Prepare Technical and Contractual Documentation for Investor Due Diligence 23

30 7.1 Documentation for Data Room PA continued to provide support and advice to the KEK employee who are the main contact points/coordinators for documentation requested by the KRPP project implementation unit, and the KRPP transaction aadvisors. Further, during Quarter 2 PA attended meetings with Price Waterhouse Coopers (PwC) to discuss the production of corporate and financial data for the data room. 7.2 Asset Sale/Lease and Power Purchase Agreements PA attended meetings with PwC, PB Power and KEK personnel at the Kosova B TPP to discuss the proposed terms of the power purchase agreement that will be introduced after this plant is transferred to the new investor. 7.3 Responses to Tender Process Issues As previously reported, PA s stated position is that all of KEK s existing generation and mining assets, to include the Kosova A TPP either under a lease/ownership or an operations and management arrangement should be included in the KRPP transaction. During Quarter 2, PA developed a draft operations and management agreement for the Kosova A TPP, which will be shared with USAID and the KRPP transaction advisors during Quarter 3. It is likely that there will be further issues to be addressed as and when shortlisted bidders provide their feedback on the existing transaction structure during Quarter 3. Subtask 8. Strengthen Skills and Technical Capacity of Counterparts 8.1 Training on Feasibility Study Methodology A training session was held on the Kosovo B feasibility study methodology on 7 June, when the methodology and draft results were presented to four KEK employees. Subsequently, PA requested feedback on the content of the report from the participants. Given the planned maintenance schedule for the B units in the third quarter, further training will most likely be conducted in Quarter TPP Kosova B privatization Round Table Discussions No actions to report for the quarter. 24

31 3 Status of Results Achieved under the Performance-based Management System Please see Appendix B for a discussion of the progress made this quarter against the planned results under the Performance-based Management System. This section discusses the barriers that are hampering the achievement of better project results. 3.1 KEK Board of Directors In contrast to the previous Board of Directors, the existing Board has shown a willingness to cooperate with PA and displays greater awareness of corporate governance issues and the scope of its role and responsibilities. However, Board members remain vulnerable to manipulation by internal and external parties as well as the other Board members. 3.2 Procurement Kosovo s procurement regulations remain a significant problem. In these circumstances, PA maintains its previously stated recommendation that the EU Procurement Regime for Utilities (2004/17/EC) be applied in Kosovo. This issue will become more pressing with KEK s privatization, since the private investors for both KRPP and KEK DistCo will be subject to Kosovo s current Public Procurement Law. The difficulties posed by the existing Public Procurement Law, and those who implement it, were again evident during Quarter 2. In light of the unscheduled departure of the Head of the Public Procurement Agency (PPA), all requests for approval submitted by KEK to PPA were left unanswered. This inaction and resulting delay were particularly problematic for KEK s request for additional work in connection with the rehabilitation of the water treatment plant for the Kosova B TPP. PA assisted KEK with drafting a letter to the GoK asking that it immediately appoint an acting Head of the PPA so that KEK s outstanding requests could be addressed. 3.3 Employee Issues The approach of Kosovo s courts continues to be a problem, specifically with respect to legal challenges on employment matters. Employees who are dismissed by KEK on disciplinary grounds frequently challenge KEK s decision, request re-instatement, and are granted re-instatement by the courts. This aspect will become increasingly problematic as employees dismissed under the new District Regulations for non-performance contest their termination through the courts. 25

32 As reported in previous quarters, the new Regulations for Operations in KEK Districts provide clear benchmarks for assessing poor or unsatisfactory performance by employees and introduce a zerotolerance approach to serious disciplinary offences. However, as outlined earlier in this report, KEK management has shown itself reluctant to fully enforce the terms of the District Regulations. 3.4 Stakeholder Interference This was one of the barriers to KEK s progress identified in PA s earlier analyses. Stakeholder interference in KEK s operations, coal production strategy, loan for the SSW mine opening, procurement of the new excavators, and many other areas have made the team s task much more difficult. Most recently, the GoK proclaimed its opposition to KEK s practice of collectively disconnecting customers for non-payment on feeders that have less than 30% payment, and proceeded to instruct the Ministry of Energy & Mines to intervene in KEK s operational policies on this issue. Continued USAID support and leadership are appreciated and needed to ensure that stakeholder involvement and interest in KEK can be managed properly. 26

33 4 Proposed Solutions to New or Existing Problems 4.1 Dispute Regarding KEK s Corporate Tax Liability Problem: The Kosovo Tax Administration (TAK) is forcing KEK to recognize and pay taxes on nonexisting revenues from the sales of electricity to minority customers, insolvent companies, and warned and disconnected customers who have not been paying their debt, despite all measures taken by KEK. TAK failed to recognize the bad debt recorded in the books of KEK and confirmed by the external auditors Grant Thornton and Deloitte & Touche during the audits of KEK financial statements for 2005, 2006, 2007 and As a result, after adjustments that the tax auditors made to KEK financial results, KEK appeared to owe TAK large amounts of corporate profit tax. This tax was further increased with penalties and charges for KEK s failure to declare it in due time. KEK filed an appeal of this matter with the TAK Appeals Division on 12 January On 30 April the Appeals Division issued a ruling that recognized the existence of bad debt, but limited the amount only to the debt of customers taken to court and refused to include amounts owed by households that have been warned and disconnected for non-payment and uncollectible amounts from minorities. PA has concluded that this ruling of TAK Appeals Division is not consistent with the current law and does not accurately reflect the situation in Kosovo. KEK filed a second appeal on 7 June with the Independent Appeals Board against the findings for 2005 and Due to the fact that there is as yet no written ruling interpreting the requirements of the law on corporate tax, it is subject to misinterpretation. At the same time the procedure for recognizing bad debt for the purposes of value added tax (VAT) was clearly defined in a ruling by the Minister of Economy and Finance, which was approved by the Government of Kosovo on 8 April 2009 (Decision No. 02/60) and KEK has been using it for more than a year. Proposed solution: PA is pressing for the Minister of Economy and Finance to issue a ruling to stipulate that bad debt for corporate tax purposes shall be calculated and recognized in the same way it is calculated and recognized for VAT purposes. 4.2 Hydraulic Transfer of Ash from the Kosova A TPP Problem: In late March 2010 KEK management submitted a request to the Board of Directors (BoD) for additional funding for the installation of a hydraulic handling system for wet ash from the Kosova A TPP. Specifically, the KEK BoD was asked to approve an increase in funding for the project of approximately 4 million in 2010 and up to another 4 million in 2011, with theses costs to be borne 27

34 entirely by KEK from its own funds. The World Bank is also co-funding this project and the benefits of the project have been outlined clearly in a letter from World Bank dated 15 April The project will not only bring operational benefits to KEK, but will also produce tangible benefits to the inhabitants of Kastriot, Fushë Kosova, and Pristina by reducing air pollution. However, the KEK BoD is concerned as to whether this investment is advisable given on-going Government of Kosovo discussions relating to the date for the closure of Kosovo A. Proposed solution: PA drafted a letter for KEK to send to the POE Unit of the Ministry of Economy and Finance asking the shareholder to confirm that KEK should proceed with this project. It is anticipated that this issue will require further attention in Q3 to ensure that the Minister of Economy and Finance issues a written response confirming that KEK should proceed with the project. 4.3 Overhaul of Unit A3 of the Kosova A TPP Problem: KEK is planning to perform a major overhaul of Unit 3 of the Kosova A TPP during the summer of The cost of the overhaul will be borne entirely by KEK from its own funds. On 17 June 2010, KEK management presented to the BoD the relevant justification for the proposed overhaul and BoD agreed that the overhaul is fully consistent with KEK s duty as the public supplier of electricity to ensure 24-hour supply of electricity to all of its paying customers. In particular, the Board considered the following key points: Applicable operation and maintenance parameters state that the unit must undergo a major overhaul every five years and the last major overhaul was in 2006; thus, this overhaul is critical if the unit is to be operated until 2015, or beyond Failure to perform the overhaul will lead to increased forced outages and repeated failures will in time render the unit inoperable If Unit A3 becomes inoperable, Kosovo will lose approximately 115 MW of current capacity which, based on the unit s current performance, would cost from million per year to import a replacement. Neither KEK nor the Government can afford this The planned overhaul is consistent with the new Kosovo Energy Strategy for the period While the KEK BoD agrees with the request from KEK management for the planned overhaul, they remain concerned as to whether the shareholder views this investment as advisable, given on-going Government of Kosovo discussions relating to the date for closing Kosova A. As there are very significant lead times for the manufacture and delivery of certain parts needed for the overhaul, it is imperative that the procurement process begin immediately in order to ensure the overhaul can be conducted during the planned outage in the summer of Proposed solution: PA drafted a letter for KEK s Chairman of the Board to send to the Minister of Economy and Finance asking the shareholder to confirm that KEK should proceed with this project. It is anticipated that this issue will require further attention in Q3 to ensure that the Minister of Economy an Finance issues a written response confirming that KEK should proceed with the project. 28

35 4.4 Delays in Expropriation Hade Village Problem: Government Decision No. 08/66 of 29 May 2009 approved KEK s request for expropriation of land in the vicinity of Hade Village, as part of the ongoing development of the new Sibovc South West mine. Subsequently, the Ministry of Environment and Spatial Planning (MESP), in conjunction with other stakeholders - notably KEK, the Municipality of Obiliq, and the Ministry of Economy & Finance (MEF) - formed a Working Group/Committee to implement the terms of the Decision. Given that it has been over one year since the Decision, PA is increasingly concerned at the slow progress of the expropriation proceedings. Indeed, only 22 properties within the Shala neighborhood of Hade Village have been registered and valued; that leaves more than 70 buildings within the affected area that have not been registered or valued. Over the past five months, the Working Group/Committee has been spent significant time considering a variety of demands submitted by Hade residents, which have included the right to be employed by KEK. The vast majority of these demands was not foreseen by the provisions of the Law on Expropriation (No. 03/L-139) and should not be allowed to delay the expropriation process. The land subject to expropriation must be available to KEK s mining operations in the coming months. Failure to comply with this timetable will seriously endanger the development of the new Sibovc South West mine and continuity of coal supply to the Kosova A and B power plants. KEK cannot afford any further delays in this process. Proposed solution: PA is pressing the Minister of Economy and Finance to impress upon all relevant Ministries the urgency of this matter and the need to proceed expeditiously with the expropriation process in accordance with the applicable law. 4.5 Trepca Unpaid Electricity Debts Problem: Over the past seven years, Trepca mining complex has accrued significant debts to KEK arising from non-payment of electricity bills. KEK has been effectively barred from issuing a claim against Trepca for debts accrued prior to 9 March 2006, owing to the Moratorium Decision No. SCR of the same date, which was issued by the Special Chamber of the Supreme Court of Kosovo and which placed Trepca in protective bankruptcy. However, KEK can issue a claim against Trepca for debts accrued after 9 March Proposed solution: PA is assisting KEK with preparing a claim that will be filed with the Special Chamber of the Supreme Court in Q3 for the outstanding debt, which is approximately 6 million. 29

36 5 Documentation of Best Practices that Can be Taken to Scale The following procedures were produced under the project in quarter 2 and are best practices that can be used on other similar projects. Procedures for network maintenance, which contain guidelines related to KEK network operations and maintenance, and outline distribution system operator standard practices with respect to the review and evaluation of maintenance practices. These procedures are expected to improve network performance and overall safety. The Distribution Network Connection Charging Methodology will formalize the manner in which KEK processes customer connection requests. New internal KEK procedures in connection with the issuance and monitoring of performance and advance payment guarantees presented by the contractors. New internal KEK procedures in connection with the sale of surplus electricity to wholesale buyers. 30

37 6 Coordination with Other USAID Implementing Partners and Other Donors The PA team engaged in considerable coordination-related activities with other USAID partners, especially Bearing Point (now Deloitte) and other donors. The following activities were undertaken during Q2: PA continued to coordinate with Deloitte advisors on issues regarding the privatization of DistCo and the KRPP Project. Draft documents were shared with Deloitte for comment before their submission as final. PA cooperated and shared information with the IFC, as the transaction advisor for the DistCo privatization, and also with the KRPP transaction Advisory team. PA continued to maintain regular contact with the USAID Justice Reform Team (NSCS) to discuss efforts to improve judicial processes for the execution of debt cases. PA continued to maintain regular contact with AEAI advisors on a variety of regulatory issues. PA held meetings with USAID contractor Chechi Consulting, which is working on the enforcement of judgments in Kosovo. PA continued to liaise with Deloitte advisors at the Tax Administration on various issues, including KEK s corporate tax and VAT liability. PA cooperated with Deloitte advisors at the MEF on the securing of new credit facility agreements for KEK, and assessing KEK s input for the Mid-Term Expenditure Framework ( ). PA maintained its communications with OSCE, EULEX, UNMIK, Swedish KFOR, and US KFOR on the issue of minority area policies, including internally displaced persons. PA continued to maintain regular contact with the WB, IMF, KfW, EU, UNMIK, EULEX, OSCE and other stakeholders, and has been responsive to their requests. 31

38 7 Upcoming Events with Dates Issuing of draft Requests for Particulars for the Kosova e Re Power Plant transaction: July Development of a draft contract for Ferronikeli for service: effective April Submission to ERO of a proposed regulated tariff for service at 220 kv (which would apply to Ferronikeli if it decides to become a regulated customer): April The final version of the Kosova B Investment Requirement and Rehabilitation Feasibility Study will be made available in July Responses to the request for expressions of interest for the DistCo privatization: August Commissioning of the newly refurbished Radavc small hydro plant: September Commissioning of two new low-pressure rotors and one generator rotor at the Kosova B TPP: July-August

39 Appendix A. List of Activities and Deliverables Nr. Subtask 1: Support Management and Operation to Maintain Asset Value Specific Objectives / Accomplishments Assist with the development and implementation of new 1.1 internal policies and procedures Support business planning and budgeting. Recommend improvements to billing and collection and monitor their implementation in the field on a daily basis. 1.4 Provide support to accounting and financing. Completion Date (End-of-month) Ongoing Ongoing Ongoing Ongoing Major Activities Completed/ Status of Deliverables Developed draft evacuation policy for KEK. PA assisted KEK with the preparation of the Performance to Plan report for the first quarter of 2010, supervised the execution of KEK s 2010 expenditure budget, monitored the implementation of KEK s business plan for 2010, and revised KEK s funding needs from the Kosovo Central Budget for Readings, bill delivery, and disconnections are continuously being monitored by PA. Evaluation of the performance of districts is done each month. PA also assisted KEK in filing an appeal with the Independent Appeals Board following the decision of Kosovo Tax Administration (TAK) Appeals Division addressing KEK s first appeal against TAK s findings of the audit of KEK s financial statements for the period

40 Nr. Subtask 1: Support Management and Operation to Maintain Asset Value Specific Objectives / Accomplishments 1.5 Provide assistance in legal and regulatory affairs. 1.6 Provide active support to Internal Audit and Anti-corruption. Completion Date (End-of-month) Ongoing Ongoing Major Activities Completed/ Status of Deliverables PA continued to provide legal advice to KEK senior management and various project managers on a number of discrete issues during Q2. Assistance in regulatory affairs during Q2 included 1) Network Development Plan, 2) Connection Charging Methodology, 3) Request to ERO for derogation of a number of requirements of the Distribution Code, 4) comments to ERO on draft documents concerning Certificates of Origin for renewable energy facilities, 5) comments provided to ERO on a document relating to Performance Standards, 6) request to ERO for derogation of the communal disconnection provisions of the Rule on Disconnection, and 7) provision of the 2009 unbundled financial statements (unaudited) to ERO. PA assisted the Internal Audit Office in completing 35 audits and investigations. 34

41 Nr. Subtask 1: Support Management and Operation to Maintain Asset Value Specific Objectives / Accomplishments Completion Date (End-of-month) Ongoing Major Activities Completed/ Status of Deliverables PA developed a distribution network connection charging methodology and facilitated review and update by all interested parties in KEK. The Connection Charging Methodology was submitted to ERO for comment and approval. 1.7 Provide support to other functions in KEK on an as-needed basis, e.g., Network, Human Resources, Information Services, Public Relations and Communications. PA recommended additional improvement to the Fixed Asset Module and finalized a work plan for its implementation. PA trained 17 persons on the Tools of Electrical Tree for Kosovo (TETKo). 1.8 Advise KEK top management on other management and operational issues. Ongoing PA finalized and obtained approval for the new interim organization structure for the Corporate Services Division for KEK and planned the organization structure for the Corporate Services Division of the future distribution company Kosovo Electricity Distribution and Supply Company (KEDS). PA provided advice on management and operational issues. Regular meetings were held with MD and with Supply, Network, CFO, and Corporate Services executives. Meetings were also held on an as-needed basis with mine, generation and procurement executives. 35

42 Nr. Subtask 2: Prepare Technical and Contractual Document for Investor Due Diligence in KEK DistCo Specific Objectives / Accomplishments Prepare KEK unbundling documents and related transfer 2.1 papers. Prepare draft agreements between the electricity market 2.2 participants. Completion Date (End-of-month) Per TA s Request April 2010 Major Activities Completed/ Status of Deliverables First drafts completed, save for populating the schedules. First drafts completed. Completed the following deliverables: 2.3 Prepare Legal/Regulatory documentation related to the privatization transaction. Per TA s Request 1) Draft Regulatory Statement. 2) Draft Collection Agreement. 3) Draft DistCo Privatization Law 4) New wording for the draft Energy Law, to address property rights of DistCo/KEK. 2.4 Assist KEK to prepare data for the Investor Due Diligence. Per TA s Request PA has compiled an index to the documents collected in the DistCo data room and provided a copy to the IFC for their review and comment, and facilitated the provision of various documents requested by IFC and the DistCo privatization project implementation unit. 36

43 Nr. Subtask 3: Provide Advisory Support In Privatization Process Specific Objectives / Accomplishments Assist KEK with the timely preparation of responses to all 3.1 technical, legal and financial issues raised during the tender process. Provide active support to the Transaction Advisor during the 3.2 process of bid submission, evaluation and award. Completion Date (End-of-month) Per TA s Request Per TA s Request Major Activities Completed/ Status of Deliverables No action required at this time. No action required at this time. Nr. Subtask 4: Strengthen Skills And Technical Capacity Of Counterparts Specific Objectives / Accomplishments Provide assistance and coaching to the DistCo staff on a daily basis in developing leadership skills, including communicating 4.1 expectations, motivating employees, time management, meeting management, presentation skills, and planning and organization. Completion Date (End-of-month) December 2010 Major Activities Completed/ Status of Deliverables PA actively supported the Network Division s management staff by assisting with the implementation of the Management and Action Plan. 37

44 Nr. Subtask 4: Strengthen Skills And Technical Capacity Of Counterparts Specific Objectives / Accomplishments 4.2 Provide day-to-day coaching on billing, managing customer accounts, and collection. Completion Date (End-of-month) December 2010 Major Activities Completed/ Status of Deliverables PA team members provided advisory support to the districts on a daily base, in line with the District Regulation. PA also continued to coach the managers and staff on how to hold meetings, meeting deadlines, communicating expectations, employee motivation and reward, development of the 2010 Action Plan for Supply and Network, and monthly performance monitoring Conduct training on management principles, customer service and other areas as deemed necessary. Convene round table discussions and workshops on important topics to support the privatization process. Identify potential trainers and train them to deliver all training courses developed and offered by the PA team. December 2010 December 2010 December 2010 No action at this stage. No action at this stage. No action at this stage. Nr. Subtask 5: Support Management Post- Privatization Specific Objectives / Accomplishments Develop and assist with the implementation of a 5.1 transition plan for the Finance and Accounting Function. Completion Date (End-of-month) One month after closing the privatization transaction. Major Activities Completed/ Status of Deliverables Completed 38

45 Nr. Subtask 5: Support Management Post- Privatization Specific Objectives / Accomplishments Develop and assist with the implementation of a 5.2 transition plan for the Legal Function. Develop and assist with the implementation of a 5.3 transition plan for the Regulatory Affairs Function. Develop and assist with the implementation of a 5.4 transition plan for the Human Resources Function. Development and assist with the implementation of 5.5 a transition plan for the Billing and Collection Activities. Completion Date (End-of-month) One month after closing the privatization transaction. One month after closing the privatization transaction. One month after closing the privatization transaction. One month after closing the privatization transaction. Major Activities Completed/ Status of Deliverables Will be defined once a specific Work Plan is developed by DistCo and the incoming private sector investor Will be defined once a specific Work Plan is developed by DistCo and the incoming private sector investor Will be defined once a specific Work Plan is developed by DistCo and the incoming private sector investor Will be defined once a specific Work Plan is developed by DistCo and the incoming private sector investor Nr. Subtask 6: Prepare A Thermal Power Plant Kosova B Investment Requirement And Rehabilitation Feasibility Study Specific Objectives / Accomplishments 6.1 Prepare TPP Kosova B Investment Requirement and Rehabilitation Feasibility Study. Completion Date (End-of-month) Four months after obtaining COTR agreed upon directions from Transaction Advisor and BEO approved Scoping statement Major Activities Completed/ Status of Deliverables The first draft of the study was circulated for comments among KEK, USAID and the KRPP Transaction Advisory Team. 39

46 Nr. Subtask 7: Prepare Technical And Contractual Documentation For Investor Due Diligence Specific Objectives / Accomplishments 7.1 Assist KEK and Transaction Advisors with collating documentation for the data room. Completion Date (End-of-month) Upon request Major Activities Completed/ Status of Deliverables PA provided support to the designated KEK employee who acts as the main contact point/coordinator for documentation requested by the KRPP Project. PA attended meetings with Price Waterhouse Coopers to discuss the production of corporate and financial data. 7.2 Provide assistance and input to the Transaction Advisors in connection with asset sale or lease agreement(s), and power purchase agreement. Upon request PA has developed two draft power purchase agreements for the sale of Kosova B TPP s output and shared these with the KRPP transaction advisors. During Q2 PA attended meetings with the KRPP transaction advisors and KEK to discuss the terms of the PPA that will be used for Kosova B TPP s output. 7.3 Timely preparation of responses to all technical, legal and financial issues raised during the tender process. Upon request PA continued to provide its input to the KRPP Transaction Advisory Team and the World Bank representatives on what assets it believes should be included in the KRPP transaction. 40

47 . Nr Subtask 8: Strengthen Skills And Technical Capacity Of Counterparts Specific Objectives / Accomplishments Conduct training on the methodology to evaluate performance, characteristics of the new technology and the methodology for economic and financial analysis used in the Feasibility Study. Convene round table discussions on important issues raised during investor Due Diligence (see Subtask 7) to support the TPP Kosova B privatization process. Completion Date (End-of-month) Three months following the completion of the Feasibility Study Three months following the completion of the Feasibility Study Major Activities Completed/ Status of Deliverables No action at this stage. No action at this stage. 41

48 Appendix B. Performance-Based Management System Results 1. Key Indicators (KI) (Reported Quarterly) No. 1 Objectives Supported by These Results Task Reference Supported by These KI 1, 2, , 2, , 2, 3 1 Definition of Indicator and Unit of Measure Reduce commercial losses as compared with previous year (ratio of commercial losses vs. energy available for sale) Reduce technical losses (ratio of technical losses vs. energy delivered to distribution) Ratio of energy billed vs. energy available for sale 2006 Actual/ Calculation 2007 Actual 2008 Target 2008 Actual 2009 Target 2009 Actual 2010 Target Q Actual First Half 2010 Actual 31% 30% 25% 20% 10% 21% 15% 15.4% 23.8% 18.2% 17.4% 17% 16.6% 16.5% 17.7% 16.4% 15.4% 16.6% 69.1% 69.9% 75% 79.8% 90.0% 79.3% 85% 84.6% 76.2% 4 1, 2, 3 1 Ratio of revenue collected versus billed Revenue collected as a percentage of value of energy available for 5 1, 2, 3 1 sale [ratio of revenue collected vs. billed] x [ratio of energy billed vs. energy available for sale] 74.2% 76.6% 80.0% 75.6% 89.0% 81.4% 86% 108.5% 91.3% 51.3% 53.5% 60% 60.3% 80.0% 64.5% 73% 91.8% 69.5% 6 1, 2, 3 1 Collected revenue in Euros 96 M M 116 M 135 M 140 M M 155 M 43.4 M 91.9 M 42

49 2. Milestone Indicators Subtask Description Milestones Reporting Frequency Status 1 Support Management and Operation to Maintain Asset Value 2010 Business Plan approved by the BOD 2010 Budget approved by the BOD Tariff filing for 2010 Performance against the budget Draft audited financial statements Billing and collection reports to the BoD Unbundled financial statements Credit facility agreements Internal audit summary report Quarterly Completed. Completed. Completed, but no tariff increase ordered by ERO. Report completed and submitted to the BOD. Completed. Provided. Completed. Completed. Completed. 43

50 Subtask Description Milestones Reporting Frequency Status Prepare Technical and Contractual Documentation for Investor Due Diligence Provide Advisory Support in Privatization Process Strengthen Skills and Technical Capacity of Counterparts Draft legal unbundling agreement Draft KEK/DistCo (KEDS regulated power sales agreement Draft KEK/DistCo, deed transferring assets & liabilities from KEK to DistCo Briefing paper - transfer of 110 kv system to DistCo/KEK Draft full requirements electricity service agreement between DistCo and New Mine/Generation Co. Draft regulatory statement Draft collection agreement between DistCo and GoK/MEF Draft DistCo Privatization Law Draft share purchase agreement between GoK/investor Draft index of data room documentation. Create DistCo asset registers and compile asset ownership documentation Timely preparation of responses to all technical, legal and financial issues raised during the tender process. Quarterly Quarterly Completed Completed. Completed. Completed. Completed. Completed. Completed. Completed. Ongoing. Completed. Ongoing. Ongoing. Per training indicators Quarterly See training indicators 44

51 Subtask Description Milestones Reporting Frequency Status Support Management Post-Privatization Prepare a Thermal Power Plant Kosova B Investment Requirement and Rehabilitation Feasibility Study Prepare Technical and Contractual Documentation for Investor Due Diligence Strengthen Skills and Technical Capacity of Counterparts Producing transition plan for the Finance and Accounting Function. Producing transition plan for the Legal Function. Producing transition plan for the Regulatory Affairs Function. Producing transition plan for the Human Resources Function. Producing transition plan for the Billing and Collection Activities. Feasibility study report, including technical and financial feasibility for rehabilitation and potential efficiency improvement of Power Plant B, investment requirements, recommendation, and implementation schedule Timely preparation of responses to all technical, legal and financial issues raised during the tender process. Quarterly Quarterly Quarterly No action at this stage. The first draft of the study was circulated for comments among KEK, USAID and the KRPP Transaction Advisory Team. Ongoing. Per training indicators Quarterly See training indicators 45

52 3. Training Indicators - Performance (Reported Quarterly) No. Task Order Objective Reference Definition of Indicator & Unit of Measure 2006 Actual/ Calculation 2007 Actual 2008 Target Actual 2009 Target Actual 2010 Target Actual Q Actual 1. 1, 2 &3 Number of people who received training in technical energy field Target 60 (M=42 and W=18) Actual 54 (M=54 and W=0) Target 60 (M=48 and W=12) Actual 36 (M=32and W=4) Target 40 (M=35 and W=12) Total 99; M= 92, W = 11 Men Women Total Q Q Q Q Total Year 2010 No. Task Order Objective Reference Definition of Indicator & Unit of Measure 2006 Actual/ Calculation 2007 Actual 2008 Target Actual 2009 Target Actual 2010 Target Actual Q Actual 2. 1, 2 &3 Number of people who received training in energy-related business management field Target 100 (M= 70 and W=30) Actual 69 (M=61 and W=8) Target 60 (M=30 and W=30) Actual 261 (M = 196 and W =65) Target 40 (M=150 and W=50) Actual 36 Total 18; M= 17, W = 1 Men Women Total Q Q Q Q Total Year

53 4. Contextual Indicators - Impact (Reported Quarterly) No Task Order Objective Reference 1. 1&2 Definition of Indicator & Unit of Measure Percentage (%) of served demand (ratio of unserved energy to supplied energy plus unserved energy ) based upon data provided by the KEK Capacity Management Department. FY 2006 Actual FY 2007 Actual FY 2008 Actual FY 2009 Actual % % % 6.86 % FY 2010 Target % Q Actual 4.54% Q1+Q2 4.29% Note: The Fiscal Year (FY) runs from 1 October of one year to 30 September of the following year; Q2 is the second quarter (April through June) of the calendar year. 47

54 Appendix C. Supporting Documentation 48

55 Energy Accounting Report Quarter 2 Flows Into KOSTT: ENERGY FLOWS - THROUGH TRANSMISSION YTD - June 2010 (All flows in MWH) Flows Out Of KOSTT: A&B Generation PP Kosova A KOSTT delivery to Direct 354,816 S Gross 2,847,525 R Gross 889,646 Customers (3) 354,816 Aux (on-site only) 241,690 R Aux (on-site only) 83,580 Net 2,605,835 Aux at PP Kos. A in excess of Net 32,267 PP Kosova B Ujmani HPP Connect Trans. 70,252 R Gross 1,957,879 KOSTT delivery to LOMAG 139,296 N Aux (on-site only) 158,110 Total 139,296 Aux at PP Kos. B in excess of Net 52,654 Kosova Coal 0 R Coal production 3,855,134 Overburden production 4,090,457 KOSTT Delivery to 7 Districts s/s 2,338,213 N Interconnections In Net Import 220,264 1,722,552 R (In-Out) Interconnections Out 1,502,288 R Losses 64,026 Total In: 4,398,639 (% of Flow In) 1.46% Total Out: 4,334,613 49

56 Flows In To KEK (Gross) ENERGY FLOWS - DSO including 220 and 110 kv YTD - June 2010 (All flows in MWH) Flows Out Of KEK Distribution Customer Billing (by CCP) Delivery From KOSTT Flow Through non 110 kv Residential 941,758 S KOSTT delivery to Direct Customers (3) 354,816 *S Delivery to 7 Districts and LOMAG 2,477,509 Commercial 249,961 S KOSTT delivery to LOMAG 139,296 N Small Hydro Inflow 23,955 Industrial (35&10KV) 130,978 S Total 2,501,464 Public Lighting 4,804 S KOSTT Delivery to 7 Districts 2,338,213 N Total 1,327,501 Total 2,832,325 Allocation of Losses N Small HPP Connected in Distribution MWH Euro (000) Lumbardh 21,926 N Technical Losses KOSTT delivery to Direct Customers (Billed but Radavc 2,029 N 110 kv Xfrmer to 10 kv 189,020 6,069 not in CCP) 354,816 *S Total 23, kv from ESTAP 226,012 7,292 Total 415,032 13,361 KEK Internal Use: % of Total Technical Losses 16.59% KEK Mines 44,059 N % of Technical Losses at 7 Districts 17.52% Aux for Gen in excess of Net 84,921 Unaccounted for Energy Losses 526,168 28,424 Distribution (Self Consumption) 3,493 S (Energy component of commercial losses) 21.03% Total 132,473 Total 941,199 41,785 Minorities (% Flow Thru Non 110 kv) 37.63% N. Mitrovice (Unbillable) 100,291 N S Average Wtd Trf (Euro / MWH) 54.0 N Cost of purcheased losses 33.7 (Euro / MWH) from 01 April 10 as per ERO tariffs order. Total 100,291 Total In to KEK (Gross) 2,856,280 Losses Total 941,199 Total Out: 1,915,081 Note: 1) Cost of purcheased losses is 33.7 (Euro / MWH) from April 10 as per ERO tariffs order. 50

57 RESULTS BY DISTRICT YTD - June 2010 (Energy flows in MWH, Monetary amounts in 000 ) Energy Billed Key Performance indicators Input to KEK Technical Losses KEK Internal Use: Minorities Unbillable & Uncollectable Energy Available For Sale (EAFS) MWH (000) Collections (000) Billed as % of EAFS Collection As % of Billed % Collected Versus EAFS % Energy Accoun. Versus Input to DSO. Responsible Area N N S N/S Calculated S S S Calculated Calculated Calculated Calculated Prishtinë 732, ,889 1, , ,250 28,670 27, % 88.12% 60.91% 73.95% Prizren Pejë Ferizaj Gjilan Mitrovicë Gjakovë Sub TOTAL 328,089 75, , ,959 13,026 12, % 85.57% 69.18% 85.26% 269,496 52, , ,352 9,856 9, % 85.38% 58.44% 74.63% 295,048 53, , ,010 11,401 9, % 78.17% 57.07% 77.95% 198,613 29, , ,338 8,859 7, % 80.25% 68.26% 87.32% 326,375 50, , , ,464 6,768 4, % 68.53% 41.19% 78.56% 214,203 39, , ,128 7,803 7, % 85.33% 60.25% 76.07% 2,364, ,293 3, ,291 1,846,630 1,327,501 86,383 78, % 83.56% 60.07% 78.05% % of Technical Losses at 7 Districts 17.52% Land of Mines & Generation (Energy delivered and billed to tariff customers is included in PR Dis.) Sub TOTAL % of Total Technical Losses Direct Customers billed but not in CCP TOTAL 136, , , % 0.00% 0.00% 94.85% 2,501, , , ,291 1,853,672 1,327,501 86,383 78, % 83.47% 59.78% 78.97% 16.59% 354, , ,816 14,247 13, % 94.54% 94.54% % 2,856,282 2,208,488 1,682, ,630 91, % 84.91% 64.68% YTD - June 2010 Customer Billing Energy Billed Collection Customer Debt per month (000') MWH % EURO % EURO % January 380,804 July 384,758 Household 941,758 56% 52,541 52% 44,443 48% February 384,508 August 384,758 Commercial 249,961 15% 23,580 23% 26,004 28% March 388,157 September 384,758 Industrial & Others 135,782 8% 10,265 10% 8,096 9% April 384,826 October 384,758 (3) Direct Customers 354,816 21% 14,247 14% 13,331 15% May 384,686 November 384,758 Total 1,682, % 100, % 91, % June 384,758 December 384,758 Notice: 1) Column P 'Collections (000)' might be subject to changes because of later adjustments due to payments done through bank accounts (including Kos Giro).; Note: 1) The energy billed to tariff customers located at LOMAG is included in Prishtina District. 2) Customer debt accumulated in a given month is equal to the difference between billing and collection for this month. 51

58 52

59 Unserved Demand Report Quarter 2 TABLE 1. Actual FY 2008 (October September 2008) [MWh] Served demand (Gross Consumption) 388, , , , , , , , , , , ,584 Un-served denad (Load shedding) 59,015 74, , ,529 93,087 58,668 49,117 45,878 64,010 33,903 70,233 30,421 USAID Fiscal Year PUD SubTot. 4,876,692 SubTot. 840,406 1,378,813 1,435,918 1,042,328 1,019,633 Calendar Year PUD Q1+Q2+Q3+Q4 260, , , , Quartrely PUD 15.89% 16.62% 13.24% 11.66% 4,922, ,855 PUD = UD / (UD + SD) * 100% 14.70% 12.84% TABLE 2. Actual FY 2009 (October September 2009) [MWh] Served demand (Gross Consumption) 424, , , , , , , , , , , ,296 USAID Fiscal Year PUD SubTot. 5,182,199 Un-served denad (Load shedding) 43,814 45,297 55,898 74,681 35,229 46,737 34,202 24,363 23,923 35,292 40,192 24,410 SubTot. 484,038 1,424,487 1,624,181 1,059,559 1,073,972 Calendar Year PUD 145, ,647 82,488 99,894 Q1+Q2+Q3+Q Quartrely PUD 9.24% 8.80% 7.22% 8.51% 5,280, ,202 PUD = UD / (UD + SD) * 100% 8.54% 6.86% TABLE 3. Actual FY 2010 (October September 2010) USAID Fiscal Year PUD [MWh] Served demand (Gross Consumption) 447, , , , , , , , ,084 SubTot. 4,344,735 Un-served denad (Load shedding) 22,184 22,184 5,805 19,372 32,979 18,508 25,645 18,542 11,385 SubTot. 176,604 1,523,076 1,653,826 1,167,833 2,821,659 50,173 70,859 55, ,431 Quartrely PUD 3.19% 4.11% 4.54% 4.29% Q1+Q PUD = UD / (UD + SD) * 100% 3.91% Table notes: Unserved Demand is 4.54% in Q compared to 7.22% in Q ) The data for above table are provided by the KEK Capacity Management Department. 2) Consumption is defined to be "Input to Distribution + Trepca + Newco FeronikeliProduction + Sharri + Kosova Thengjilli + TS Palaj&Bardhi Drenas + Self Consumption + Kosova A PP SS, note that these numbers will be different from the numbers for the "Input to Distriution TOTAL" from the Energy Accoutning Reports to the KEK Baord of Directors. 3) Consumpiton in the future is based on the energy forecast that KEK has already prepared as part of the KEK business plan process. 4) Data not available is indicated as "n/a" in the cell. 5) The data are arranged based on USAID Fiscal Year (that is FY 2009 starts on 1 October 2008 and ends on 30 September 2009) 6) The Consumed Energy includes the transmission losses of KOSTT (which are a little over 2%). 53

60 Training Information Quarter 2 The following are the details of the 103 persons who received training in the technical energy field during Quarter 2 of Training Topic: Disconnection instructions Training Date: April 2010 Trainer: Gela Kereselidze Trainees: No Name Gender 1 Esat Hoxha M 2 Besart Shabani M 3 Agron Rudi M 4 Avdi Mustafa M 5 Vebi Jonuzi M 6 Ismet Hajdini M 7 Remzi Murseli M 8 Nexhat Uka M 9 Xhevdet Haliti M 10 Naim Sejdiu M 11 Musa Nimani M 12 Asllan Ferizi M 13 Hajdin Geci M 14 Xhavit Geci M 15 Mehe Zymberi M 16 Nezir Ahmeti M 17 Nuhi Dibrani M 18 Edmond Osmani M 19 Gazmed Gashi M 20 Hamdi Kerolli M 21 Bajram Gashi M 22 Albert Thaqi M 23 Asim Gashi M 24 Daut Zejnullahu M 25 Elbasan Rama M 26 Behexhet Hetemi M 27 Kujtim Abdullahu M 28 Refik Hoxha M 29 Nazif Kajtazi M 30 Faton Uka M 31 Xhevdet Shala M 32 Gazmend Jakupi M No Name Gender 33 Ramiz Mehmeti M 34 Valon Ibishi M 35 Besim Voca M 36 Musa Ismajli M 37 Ruzhdi Sadiku M 38 Shaban Ibishi M 39 Isa Shosholli M 40 Gezim Ferati M 41 Kenan Xhekovic M 42 Fazli Ibishi M 43 Osman Abrahi M 44 Izet Kurti M 45 Enver Muharremi M 46 Nexhat Uka M 47 Skender Shabani M 48 Nexhat Ademi M 49 Jakup Jakupi M 50 Burhan Nici M 51 Nazif Mehmeti M 52 Gazmed Peci M 53 Mustafa Rexhepi M 54 Armend Xhaka M 55 Fatmir Feka M 56 Fadil Tahiri M 54

61 Training Topic: Commercial losses Training Date: 09 & 11 June 2010 Trainer: Gela Kereselidze Trainees: No Name Gender 1 Safet M 2 Izet Kurti M 3 Ramadan Rexhepi M 4 Gazmed Jakupi M 5 Lulzim Raka M 6 Islam Mehmeti M 7 Naim Bislimi M 8 Salih Haliti M 9 Hajriz Shabani M 10 Xhavit Zariqi M Training Topic: Using TETKo software for management purposes Training Date: April, May, June 2010 Trainer: Davit Gharagedyan Trainees: No Name Gender 1 Ramadan Ahmeti M 2 Armend Ymeri M 3 Sherif Maliqi M 4 Sevdije Mu F 5 Ragip Hoda M 6 Hakif Matoshi M 7 Ismet Latifi M 8 Ibadete Tahiraj F 9 Mejreme Ismajli F 10 Xhevahire Dushullovi F 11 Luljete Nuhi F 12 Selvete Hasani F 13 Blerina Meholli F 15 Rrahman Ismajli M 15 Aferdita Syla F 16 Emina Bejiq F 17 Drita Zeneli F 18 Lendita Azemi F 19 Idriz Ibraj M 20 Jetmir Morina M 21 Hasan Muhaxheri M 22 Jakup Smajli M 23 Namik Bajraktari M Training Topic: Kosovo B Feasibility Study Methodology Training Date: June 2010 Trainer: Masoud Keyan Trainees: No Name Gender 1 Remzi Shahini M 2 Luigj Ymeri M 3 Shefqet Avdiu M 4 Besnik Haziri M 55

62 The following are the details of the 18 persons who received training in energy-related business management field during Quarter 2 of Training Topic: General principles of distribution company management and importance of control implementation Training Date: 22 April 2010 Trainer: Givi Jgarkava Trainees: No Name Gender 1 Flamur Bllacaku M 2 Hyrmete Mydyti F Training Topic: Methods of auditing energy distribution performance Training Date: 26 April 2010 Trainer: Shalva Rukhadze Trainees: No Name Gender 1 Agron Uka M 2 Mentor Krasniqi M 3 Alban Ceku M Training Topic: General principles of electric distribution companies and importance and problematic issues of KEK Training Date: 05 & 21 May 2010 Trainer: Givi Jgarkava Trainees: No Name Gender 1 Arber Mulaku M 2 Isa Hajra M 3 Bujar Jupaj M 4 Flamur Bllacaku M 5 Fehmi Vojvoda M 6 Artan Shkreli M 7 Fatos Ceku M Training Topic: Key points of sample study performance audit in the field Training Date: 26 May 2010 Trainer: Shalva Rukhadze Trainees: No Name Gender 1 Mentor Hyseni M 2 Agron Uka M 3 Isa Malsiu M 4 Ilir Zeqiri M 5 Ibrahim Ibrahimi M 6 Halit Bekteshi M 56

63 Energy Accounting Report Quarter 1 Flows Into KOSTT: ENERGY FLOWS - THROUGH TRANSMISSION YTD - March 2010 (All flows in MWH) Flows Out Of KOSTT: A&B Generation PP Kosova A KOSTT delivery to Direct 170,492 S Gross 1,478,926 R Gross 465,147 Customers (3) 170,492 Aux (on-site only) 118,095 R Aux (on-site only) 45,773 Net 1,360,831 Aux at PP Kos. A in excess of Net 15,546 PP Kosova B Ujmani HPP Connect Trans. 47,247 R Gross 1,013,779 KOSTT delivery to LOMAG 78,953 N Aux (on-site only) 72,322 Total 78,953 Aux at PP Kos. B in excess of Net 36,773 Kosova Coal 0 R Coal production 1,847,763 Overburden production 1,517,140 KOSTT Delivery to 7 Districts s/s 1,410,949 N Interconnections In Net Import 291,553 1,052,712 R (In-Out) Interconnections Out 761,159 R Losses 39,237 Total In: 2,460,790 (% of Flow In) 1.59% Total Out: 2,421,553 57

64 Flows In To KEK (Gross) ENERGY FLOWS - DSO including 220 and 110 kv YTD - March 2010 (All flows in MWH) Flows Out Of KEK Distribution Customer Billing (by CCP) Delivery From KOSTT Flow Through non 110 kv Residential 512,447 S KOSTT delivery to Direct Customers (3) 170,492 *S Delivery to 7 Districts and LOMAG 1,489,902 Commercial 129,867 S KOSTT delivery to LOMAG 78,953 N Small Hydro Inflow 7,558 Industrial (35&10KV) 67,560 S Total 1,497,460 Public Lighting 2,801 S KOSTT Delivery to 7 Districts 1,410,949 N Total 712,676 Total 1,660,394 Allocation of Losses N Small HPP Connected in Distribution MWH Euro (000) Lumbardh 7,558 N Technical Losses KOSTT delivery to Direct Customers (Billed but Radavc 0 N 110 kv Xfrmer to 10 kv 125,306 3,922 not in CCP) 170,492 *S Total 7, kv from ESTAP 135,161 4,231 Total 260,466 8,153 KEK Internal Use: % of Total Technical Losses 17.39% KEK Mines 22,423 N % of Technical Losses at 7 Districts 18.33% Aux for Gen in excess of Net 52,319 Unaccounted for Energy Losses 380,893 20,576 Distribution (Self Consumption) 2,328 S (Energy component of commercial losses) 25.44% Total 77,071 Total 641,359 28,728 Minorities (% Flow Thru Non 110 kv) 42.83% N. Mitrovice (Unbillable) 66,355 N S Average Wtd Trf (Euro / MWH) 54.0 N Cost of purcheased losses (Euro / MWH) 31.3 Total 66,355 Total In to KEK (Gross) 1,667,952 Losses Total 641,359 Total Out: 1,026,593 58

65 RESULTS BY DISTRICT YTD - March 2010 (Energy flows in MWH, Monetary amounts in 000 ) Energy Billed Key Performance indicators Input to KEK Technical Losses KEK Internal Use: Minorities Unbillable & Uncollectable Energy Available For Sale (EAFS) MWH (000) Collections (000) Billed as % of EAFS Collection As % of Billed % Collected Versus EAFS % Energy Accoun. Versus Input to DSO. Responsible Area N N S N/S Calculated S S S Calculated Calculated Calculated Calculated Prishtinë 448,071 72,575 1, , ,090 18,292 14, % 80.41% 50.93% 69.37% Prizren Pejë Ferizaj Gjilan Mitrovicë Gjakovë Sub TOTAL 198,807 49, , ,459 8,125 6, % 81.20% 60.00% 80.37% 160,973 32, ,571 80,489 6,158 4, % 78.75% 49.30% 70.13% 171,111 32, ,998 90,560 6,803 5, % 75.68% 49.31% 71.69% 111,425 17, ,084 74,584 5,328 4, % 74.41% 58.99% 82.50% 202,365 32, , ,277 54,735 4,024 2, % 64.61% 34.24% 76.01% 127,061 24, ,173 64,760 4,758 3, % 80.99% 51.33% 70.56% 1,419, ,209 2,327 66,355 1,090, ,676 53,488 42, % 78.00% 50.95% 73.36% % of Technical Losses at 7 Districts 18.33% Land of Mines & Generation (Energy delivered and billed to tariff customers is included in PR Dis.) Sub TOTAL % of Total Technical Losses Direct Customers billed but not in CCP TOTAL 77, , , % 0.00% 0.00% 96.59% 1,497, ,467 77,069 66,355 1,093, ,676 53,488 42, % 77.85% 50.74% 74.56% 17.39% 170, , ,492 7,135 6, % 93.15% 93.15% % 1,667,954 1,264, ,167 60,622 48, % 79.53% 55.56% MWH % EURO % EURO % January 380,804 July 388,157 Household 512,447 58% 32,690 54% 23,874 49% February 384,508 August 388,157 Commercial 129,867 15% 14,399 24% 13,760 28% March 388,157 September 388,157 Industrial & Others 70,361 8% 6,401 11% 4,628 10% April 388,157 October 388,157 (3) Direct Customers 170,492 19% 7,135 12% 6,204 13% May 388,157 November 388,157 Total 883, % 60, % 48, % June 388,157 December 388,157 Note: 1) The energy billed to tariff customers located at LOMAG is included in Prishtina District. YTD - March 2010 Customer Billing Energy Billed Collection Customer Debt per month (000') Notice: 1) Column P 'Collections (000)' might be subject to changes because of later adjustments due to payments done through bank accounts (including Kos Giro).; 59

66 60