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2009 QUARTER 1 REPORT (JANUARY 1 - MARCH 31) KORPORATA ENERGJETIKE E KOSOVES (KEK) NETWORK AND SUPPLY PROJECT CONTRACT NUMBER EPP-I-04-03-00008-00

APRIL 2009

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This quarterly report on the Korporata Energjetike e Kosoves (KEK) Network and Supply Project covers the period 1 January through 31 March 2008. It was prepared by PA Government Services, Inc., under Task Order 4 of Contract EPP-1-00-03-00008-00. The authors gratefully acknowledge the support of the United States Agency for International Development/Kosovo Mission (USAID/Kosovo) in support of 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 PA Government Services Inc. Mr. Arben Nagavci Cognizant Technical Officer USAID/Kosovo Pristina, Kosovo

Masoud Keyan PA Government Services, Inc. 4601 North Fairfax Drive, Suite 600 Arlington, VA 22203 Tel: +1 571 227-9000 www.paconsulting.com

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Table of Contents I. Introduction ........................................................................................................................... 1 II. Progress Since the Last Report ................................................................................................ 2 III. Status of Results Achieved under Performance-based Management System ............................. 25 IV. Proposed Solutions to New or Existing Problems .................................................................. 27 V. Documentation of Best Practices that can be Taken to Scale .................................................. 29 VI. Coordination with Other USAID Implementing Partners and Other Donors .......................... 30 VII. Upcoming Events with Dates................................................................................................ 31 VIII. Appendix A. List of Activities/Deliverables ........................................................................... 32 IX. Appendix B. Performance-Based Management System Results ............................................... 47 X. Appendix C. PR Briefs .......................................................................................................... 56

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I. Introduction This report’s format meets the requirements of Section A.6 (Reports), Paragraph B (Quarterly Report) of Task Order 4 under Contract EPP-1-00-03-00008-00. The objectives and tasks described in this quarterly report are based on the KEK Network and Supply Project’s 2008-2009 Work Plan. Appendix A shows activities completed, benchmarks achieved, and achievements under the Work Plan. Appendix B describes the results of the project’s performance-based management system. The updated project objectives set forth in the Scope of Work for 2008-2009 are: Objective 1: Support to the Managing Director of KEK Objective 2: Increase Collections through Support to the Network and Supply Divisions

to Accelerate Potential Future Private Sector Participation Objective 3: Improve the Institutional Policy and Legal Environment Objective 4: Preparation of KEK Distribution Functions for Privatization Objective 5: Support to KEK Commercialization Objective 6: Anti-Corruption Efforts – The Reduction and Prosecution of Fraud, Waste,

and Abuse Objective 7: Legal and Regulatory Support Objective 8: Normalization of Service to Enclave Communities.

The PA team’s approach to achieving these objectives is based on eleven tasks, each of which is associated with one or more of the project’s objectives, as shown in the table below.

No

Task

Objective

1 2 3 4 5 6 7 8

1 Support Management and Operation to Preserve Assets ● ● ●

2 Amend Distribution Structure and Organization ● ● ● ●

3 Improve Energy Accounting ● ● ●

4 Increase Collections ● ● ● ●

5 Assist KEK in Taking Over and Cleaning Up CCP ● ● ●

6 Assist KEK in Taking Over CAS and Un-bundling Accounting ● ●

7 Support Tariff Applications and Improve Regulatory Compliance ● ● ● ●

8 Improve Internal Controls and Strengthen Internal Audit ● ●

9 Provide Legal Support for Unbundling and Privatization ● ● ● ● ● ●

10 Assist Privatization Transaction Advisor ● ● ● ● ●

11 Support Normalization of Service to Enclaves ● ● ● ●

II.

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III. Progress since the Last Report

This quarter’s accomplishments are detailed below for each task. Task 1: Support Management and Operation to Preserve Assets KEK’s first-quarter financial performance improved significantly over that in the same period in 2008 (Collections vs. EAFS rose from 40% to 51% or from €28.2 million to €41.7 million). However, its Q1 2009 performance deteriorated (Collections vs. EAFS was 51% in Q1 vs. 56.4% in Q4 2008), even though KEK collected €1.3 million more than during the last quarter (€41.7 million vs. €40.4 million). The implementation of the new district structure in the remaining district, Pristina, contributed to higher collection levels. However, the signing and implementation of the new and comprehensive district regulation, which governs the activities and performance of the districts, was delayed, contributing to the fall in Q1 performance. The Acting Managing Director’s cooperation continued to be very positive during this period. The results demonstrate the level of cooperation that PA received from him. However, the sustainability of results and progress in all areas are still affected by stakeholders’ interference in the company’s management decisions and by the lack of a competent Board of Directors and Audit Committee.

General In February 2009, the Government of Kosovo (GOK) appointed a new KEK Board of

Directors. PA developed a Board induction program to ensure that the new Board has a better understanding of their roles and responsibilities and the operation of KEK. PA’s recommendation for the Board’s induction was approved by Minister of Finance. Subsequently, on 3 March, the entire Board attended a training session, developed jointly by PA and USAID’s advisers to the Ministry of Economy and Finance (MEF).

As part of the induction program, the KEK board participated in a two-day session that

included PA presentations giving an overview of KEK, discussing PA’s anticorruption activities, and the tour of the mines, power plants, and network.

The PA team assisted the acting Managing Director (MD) on several issues related to the

company’s management and operations. We received his full cooperation on almost all of our recommendations related to operation, procurement, mining, staffing, and financial activities of the company.

Several meetings were held with the GOK’s MEF and Ministry of Energy and Mines

(MEM) to inform them about KEK’s activities related to the coal production strategy, the €70 million loan agreement for the mine, and the €5.4 million loan for generation. The generation loan agreement was signed in the first quarter; however, the loan agreement for the mine has not been signed.

At the request of USAID’s Mission Director, PA’s Chief of Party traveled to Washington

in February, where he and the Director met with USAID, the US State Department, US

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Treasury, and the World Bank, which provided advice on the best approach for packaging KEK’s mining and generation assets for privatization.

Given the New Distribution Company (Disco) privatization plan and the need for

regularizing minority customers, PA prepared a proposal that addressed the main concerns raised by the minority communities and presented it to the US Mission in Kosovo. PA then prepared an agreement that could be signed by community leaders and KEK that would allow service to be normalized for all customers in the minority areas. The agreement was shared with the Prime Minister’s Senior Adviser, and at his request, a meeting was planned with representatives of the Serbian Government. On 25 March, two PA team members traveled to Serbia, where they met with the Serbian Minister for Kosovo and his deputy. The terms of the agreement were well received by the Serbian Government’s representatives. The Minister agreed that all customers have to pay for electricity and that all minority communities should sign the agreement. In order to encourage the communities to sign the agreement, he requested that KEK show good faith and repair all damaged feeders to minority areas and provide electricity to all communities for ten days. In exchange, he offered to discuss the agreement with the communities and encourage them to sign it. Those present at the meeting also agreed that communities that do not sign the agreement will be disconnected. The terms were accepted by KEK and all feeders were repaired and energized.

The PA team supervised the preparation of the KEK’s Performance to Plan Report for Q4.

The report details 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 then assisted with the preparation of action plans for performance improvement based on the report’s findings.

PA also helped finalize KEK’s 2009 expenditure budget. The division managers justified their budget requests in detail, regardless of their previous-year expenditures, and proposed a new ranking of all operation and maintenance (OPEX) and capital (CAPEX) expenses included in their budgets. PA and the Budget Department revised the ranking of all projects and identified a single “Top Priority” category in the budget consistent with the most conservative scenario of the revenue forecast. The final expenditure budget was submitted to the new Board of Directors.

With PA’s assistance, KEK developed a business plan for 2009 that was presented to the

KEK Board. 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 2009 to 2011. The team also developed procedures for the efficient utilization of the Kosovo Central Bank (KCB) loans to fund the major part of the plan.

KEK, with PA’s assistance, revised the KCB funding needs for 2009-2011, including the cash flow requirements. The document was re-submitted to MEF and was subsequently

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agreed to by all stakeholders.

The PA team prepared new organization chart for the Disco, to be implemented upon the registration of the new company and the transfer of assets and liabilities to the Disco.

Mines The PA team assisted the Managing Director and Executive Director of Mining in

developing an action plan that focuses on high-priority issues and actions to ensure coal production from the new SSW mine in mid-2010.

Given the delay in procurement of the new compact excavators, due to improper

interference by the Procurement Review Board, and the IMF’s concerns regarding the €133 million additional loan from KCB, PA developed a revised mining strategy that was presented to and supported by the World Bank, US Mission and other stakeholders. The revised strategy would postpone the decision for the procurement of Coal Systems II and III, while ensuring that KEK can produce coal by June 2010. KEK adopted the strategy and is moving forward with its implementation.

PA prepared updated capital expenditure requirements for the mines (2009-2012) and

presented its findings to the MEF, MEM, US Mission, IMF, and World Bank. The response to the updated expenditures has been positive, with the exception being the Ministry of Energy and Mining.

PA assisted with decision making process on the removal of 5.5 million cubic meters of

overburden by a contractor using trucks and shovels. The tender was launched and bids are expected in April.

Thermal Generation KEK had purchased a refurbished transformer, which arrived in Kosovo and was

installed on unit A4. However, the transformer failed after 16 hours of operation. The contractor is conducting an investigation to determine the cause of the failure. KEK will not sign off, accepting the transformer as its own, until it is fully tested and operational. Therefore, per the contract drafted by PA, all liabilities for the failure reside with the contractor.

PA prepared a presentation on the reactivation of unit A2; we anticipate that the Chief

Operating Officer will present it to the KEK Board in April.

PA assisted KEK with the tendering process for upgrading the B units’ water treatment system, which must be implemented by mid-2010, before the new LP rotors arrive. PA was not an observer during the evaluation process, and the evaluation was botched; so the tender was canceled based on PA’s advice. A new tender was launched with tighter requirements to ensure that only qualified contractors will be able to participate in the tender.

PA facilitated the third payment to Alstom in order to ensure that the new rotors for the low-pressure turbine remain on schedule in 2010.

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Hydro Generation The final bids for the rehabilitation of the three small hydropower projects owned by

KEK were received in March. PA is providing expert advice during the evaluation of the technical proposals. The winner(s) is expected to be announced in the second quarter.

Capacity Management, Power Purchases, and Energy Trading Given the IMF’s concern over KCB’s ability to fund KEK’s needs in 2009, PA advised

KEK to cut back on imports to the extent allowed under contract in order to save funds for the remainder of 2009. KEK was able to save over €3 million as a result of cutbacks and entering into exchange agreement with Albania.

Network Division (Not Covered in Other Tasks) PA facilitated the:

Creation of topographic maps for the KFOR (NATO peacekeeping force)

Headquarters that show the location of the 10 kV and 6 kV feeders. Similar topographic maps were prepared for the US Army at Camp Bondsteel last quarter.

Issues related to the continued relocation of KEK management from offices in the Toscana Building to new offices in the Electro Kosovo Building.

PA advised KEK’s Network Division and top management on various matters related to

KOSTT (the Transmission, System and Market Operator): Control of the inadvertent flow out of Kosovo caused by KEK’s lack on control of

load and production. Rehabilitation of 110 kV portion of the Palaj Substation. New 35 kV lines to Ferro Niklei’s water pumping station at Bivolac. Keeping Kosovo A generating units running while the Kosovo A power plant’s 220

/110 kV substation is being rehabilitated by Siemens for KOSTT. This involves the re-activation of two 35 kV lines in the area, and the construction of new 10 kV lines.

PA advanced the work of the Network Division and Electro Engineering Inc. (KEK’s outsourced engineering, design and construction firm) on several key projects: Palaj Substation and the line that is a single point of failure in the electricity supply

needed for mining and transporting coal to the Kosovo A and B power plants, and to pump water out of the mines. Two recent incidents of losses on this line and the loss of the substation resulted in a halt in coal production and transport, and dewatering of the mines. The following designs were developed, and contracting is planned for Q2 2009: A new second 110 kV line from the Kosovo A Substation to the Palaj 110 kV

Substation, constructed by looping the existing 110 kV line from Kosovo A to Vallaq (Vaganicë) in and out of the Palaj Substation.

Expansion of the 110 kV bays at Palaj for the two new 110 kV lines, and a reserve bay for the future 110 kV line from the future Drenas 220/110 kV Substation (5+ years away).

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Expansion of the 35 kV switchgear to handle the future double-circuited 35 kV lines to Bivolac, and expansion of the 35 kV switchgear to handle the future New Kosovo (formerly Kosovo C) power plant construction.

Installation of a third 40 MVA 110/35 kV power transformer.

Development of a new double-circuit 35 kV feed from Palaj Substation to the Bivolac water pumping station used by Ferro Niklei. Water is critical to the operation of the Ferro Niklei plant in Drenas, and is pumped 17 km from Bivolac (near the Kosovo B plant) to the Ferro Niklei plant.

Task 2: Amend Distribution Structure and Regulations

New Structures and Regulations At the end of 2008, the new distribution structure and regulations were implemented in all of KEK’ districts, except Prishtina, and good results were achieved. In Prishtina District, the new structure and regulations were implemented on 1 February 2009, and KEK appointed the Prishtina district manager with PA’s consent. As a consequence of these changes, the following have been achieved in all KEK districts:

Meter readings are now completed in a 5-day cycle, rather than the previous 21-day

cycle. Bills are now distributed within 3 days, rather than 21. District employees who are performing well are receiving bonuses and non-

performers are reprimanded or dismissed. Districts are obliged to perform more disconnections. Feeder specialists are responsible for all energy delivered to their respective feeders.

To determine the impact of the new structure and regulations on the KEK’s performance, PA conducted a comparative analysis of the first quarters of 2009 and 2008, and the last quarter of 2008 and first quarter of 2009 for the six districts that employed the new structure. Based on PA’s analysis, all KEK districts other than Prishtina experienced a drop in performance during the first quarter of 2009, as compared with fourth quarter 2008, as the attention of PA’s advisors was mainly concentrated on Prishtina District. The rest of the districts failed to follow their advisors’ instructions, especially regarding proposed disciplinary measures and dismissals of non-performing employees. Quarter 1 2009 vs. Quarter 1 2008. Excluding eligible customers, collections were about €12 million (46%) more than in the first quarter of 2008, while 148,147 more transactions occurred (54% more than in the first quarter of 2008).

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05000

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1st Qtr 2008 1st Qtr 2009

Thou Euro

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# of Trnsct

KEK’s significant progress, as compared with first quarter 2008, is partially due to improving supply to its customers. In Quarter 1 2008, the billing rate for the districts was 72%, the collections rate 53%, and overall performance (collection of delivered energy) 38%. In the comparable period in 2009, the billing rate was 68%, the collection rate 70%, and overall performance 47%. The overall 9% improvement is the result of a much better collection rate (17% more) rather than effective efforts to reduce commercial losses. Commercial losses are still one of the most problematic issues in the KEK districts. Quarter 1 2009 vs. Quarter 4 2008. KEK’s Quarter 1 2009 collections exceeded those of Quarter 4 2008 by €3.1 million (8%), while there was a 7% improvement in the number of transactions (26,774 more).

33000

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4th Qtr 2008 1st Qtr 2009

Thou Euro

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# of Trnsct

Task 3: Improve Energy Accounting Automatic Meter Reading The PA team tried to restart the automatic meter reading program, which involved equipment from the supplier, Iskra of Slovenia. The equipment has been installed, but KEK has never used it. PA made an effort (Reference file NDQ12009001 AMR Drogodan.pdf) to have the newly re-vitalized Prishtina District team take over the project. Meter Installations Ferizaj Transformer Points: PA continued to assist KEK in installing 600 half-indirect electronic meters (CT rated, direct connect on voltage) at 600 transformer points in Ferizaji District. Although the meters arrived in the summer of 2007, KEK had not committed to install them until encouraged by PA in Q4 2008. KEK purchased the miscellaneous equipment (current transformers, boxes, and wiring); this equipment arrived, and installation began in Q1 2009. PA

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facilitated the involvement of other districts to contribute metering personnel to Ferizaj District so that the installation can proceed rapidly once the material arrives. The installations are planned to be completed by the end of Q2 2009. The meters will allow the calculation of non-technical energy losses for each distribution transformer (serving a region of about 66 customers), rather than for the whole feeder (about 660 customers). Thus, high-loss areas can be better defined and targeted for improvement. KEK Procedures to Improve Energy Accounting The PA team facilitated the monthly publication of the Energy Accounting Report, which was presented to the Board of Directors in Quarter 1 (Reference file NDQ12009002 100409 b March 09 Reporting Package.pdf). Tenders and Proposals Meters for Residential Customer Applications: Bids were received, evaluated, and a contract was awarded in Q1 for a shipment of residential meters. PA acted as observers on the tender evaluation committee. Meters for Commercial Customer Applications: Bids were received, evaluated, and a contract award notice was announced in Q1. An intervener lodged a complaint with the Public Procurement Agency (PPA). PA participated in the bid evaluation as an observer, and in the development of the response to PPA to the intervener’s complaint. Task 4: Increase Collections Billing and Collections: The table below summarizes KEK’s metering, billing and collection performance. The values are from the monthly report to the BOD.

Year

2008

Q1

2008

Q1

2009

Change

Ratio of energy billed vs. energy available for sale 79.8 74.1 71.6 -2.5

Percent of money collected vs. billed 75.6 54.4 71.3 +16.9

Percent collected vs. energy available for sale 60.3 40.3 51.0 +10.7

Collected revenue (millions of Euros) 134.7 28.2 41.7 +13.5

Collection performance improved significantly in the first quarter of 2009 compared to Q1 2008 due to increased controls on meter readings, field verification of abnormal meter reading data, intensified disconnections for non-payment, and the implementation of the new distribution structure, organization, and regulations as discussed in Task 2. Energy billed as a percent of energy available for sale decreased in Q1 2009 compared to the same period in 2008. The Managing Director has informed the districts that performance on this measure must improve significantly and that feeder teams need to devote more effort to reducing commercial losses.

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Source of Collections The table below displays the sources of collections for the first quarter in terms of both the number of payments and the Euros collected.

Total First Quarter # of Payments % Euro %

Customer offices 369,788 91 27,786,116 67

Kost Giro 7,929 2 4,320,4118 10

Bank transfers 10,292 3 5,428,676 13

Payroll deductions 16,390 4 582,993 1

Total districts (CCP) 404,399 100 38,118,203 91

Direct (110 kV) customers 6 0 3,613,713 9

Total collections 404,405 100 41,731,916 100

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)

Q1 2008 3,490 1,822

Q2 2008 5,258 2,158

Q3 2008 5,339 2,286

Q4 2008 7,086 3,093

Q1 2009 7,929 4,320

Source: KEK Supply Division

As expected, household and small commercial customers’ participation is low compared to larger customers. KOS-Giro is proving beneficial for processing payments for customers with multiple locations such as IPKO and PTK. That will continue until the more appropriate direct debit system is fully functional. Later in 2009, a promotional campaign will be developed to increase participation on the part of household and small business customers. A meeting was held with the Central Bank of Kosovo and Raiffeisen Bank to address issues with errors in the payment data transmitted. Although the number of errors is small, it is important that the verification done by the banks is accurate, especially considering that the new direct debit system will have similar data transmission mechanisms. Raiffeisen Bank’s IS and Commercial Departments took responsibility for improving the quality of information and KEK has received good service since that time.

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Direct Debit System PA continues to facilitate progress on the CBK initiative to establish a direct debit mechanism in Kosovo. This would be beneficial to KEK since it provides another opportunity to use the banking system to increase cash flow. During the first quarter PA advisors held meetings with KEK personnel (Supply, IS, and Finance), the Central Bank, and Raiffeisen Bank to discuss how we can move forward together to implement direct debit. Raiffeisen IS personnel informed KEK that they will not go live with the system until June 2009. The KEK IS Department is prepared to process the payments once the system is in place. Change in the Value-Added Tax (VAT) Rate The VAT rate increased from 15% to 16% effective 1 January 2009. Special phase-in rules were applied to industries with cycle billing (electricity, water, heat). The bills to customers for December 2008 consumption that were delivered in early January 2009 contained the 15% VAT rate. Bills for January consumption (delivered in February) contained the 16% rate. Billing for other services (connections, meter testing, etc.) was coordinated so bills for outstanding items as of 31 December carried the 15% rate. All bills issued in 2009 carry the 16% rate. The transition was accomplished with no problems. Social Cases Subsidy PA worked with KEK’s Supply, IT, and Finance Divisions to determine the amount of the subsidy to apply to Social Cases accounts for year 2008. After considering several alternative approaches, a methodology was developed that would utilize almost the entire €4.5 million subsidy included in the Kosovo Consolidated Budget. PA prepared an addendum to the MOU signed by the Ministry of Labor and Social Welfare, Ministry of Finance, and KEK in order to utilize the entire subsidy. In March, representatives of all three parties executed the document, allowing work to continue to post the subsidy to customer accounts. Task 5: Assist KEK to Take Over and Clean Up Customer Care Package (CCP) CCP Cleanup Initiative Using the approach and work plan developed by PA, the cleanup initiative to improve the integrity of CCP customer information moved forward in the first quarter with the implementation of field work. The initiatives included in the plan are:

1. Identify and flag those Serb customers who are currently in CCP. This will allow KEK to analyze the impact of those customers who rarely pay (or have never paid) and who KEK must deal with carefully. This identification will also be helpful in quantifying and disclosing information to potential investors.

2. Implement a self-identification Amnesty plan for those households and entities consuming electricity, but not registered as customers in CCP. PA developed a Public Notice that was given wide circulation in local media and through KEK sources. Although the Amnesty Program was intended to be available only during the month of January 2009, it was extended until 28 February. The number of consumers taking advantage of the program and registering as KEK customers are as follows:

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District # Customers Accepting

Prishtina 1,751

Prizren 290

Peja 384

Ferizaj 515

Gjilan 248

Mitrovica 472

Gjakove 184

Total 3,844

3. Develop reports to be used by field personnel to identify questionable accounts. Using a program developed by PA, the following criteria were used to flag the accounts to be verified in the field:

Customers who never paid Customers who did not pay during a specified time period Customers with a flat rate tariff Customers who were billed based on estimates more than 4 times during any

time period Customers who were billed the same amounts on the meter T1 and T2

during any time period.

See the Information Services Support of CCP section below for more information on this program and its installation in all districts.

4. Conduct field inspections to locate unregistered consumers and identify nonexistent “customers.” PA developed a Field Verification Form to be used by personnel performing the verifications. Using the criteria discussed in #3 above, the number of customers flagged for inspection is shown in the following table along with the progress during the first quarter.

District To be Verified % of Total

Customers

Completed Q1 % of

Completion

Prishtina 48,000 47 1,015 2

Prizren 32,200 43 0 0

Peja 22,000 46 7,000 32

Ferizaj 30,100 55 4,670 16

Gjilan 18,200 44 3,691 20

Mitrovica 24,000 69 2,800 11

Gjakove 8,528 35 1,764 21

Total 185,028 41 20,940 11

The field verification work is expected to be completed by the end of the second quarter.

5. Identify all customer connections. Network personnel are to sketch all connections from every 10/0.4 kV transformer to each connection point. This initiative is discussed in detail in the next section.

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Network Division Subtasks Related to CCP Cleanup Project The program to sketch all 0.4 kV low-voltage secondary networks (the “last mile to the customer’s premises”) was started in Q1 2009. The preparatory procedures were developed in Q4 2008. Information Services Support of CCP PA designed and developed a software package – CUCCP – for analyzing the CCP database and supporting the CCP Cleanup Project. The software issues lists of customers to be included in the field verification forms based on the following criteria:

Customers who never paid Customers who did not pay during a specified time period Customers with a flat rate tariff Customers who were billed based on “estimates” more than 4 times during

any time period Customers who were billed the same amounts on the meter T1 and T2

during any time period Any customized list of customers.

PA prepared administrator’s and user’s manuals for the CUCCP software and provided training on the software in all of KEK’s districts. The training covered the following topics:

Background of the CCP Cleanup Project Introduction to CUCCP Software functionality Analyzing the CCP database Customer selection criteria Field verification forms Reporting tools.

Task 6: Assist KEK to Take Over CAS and Un-bundle Accounting The team continued to advise KEK on finance and accounting issues during the first quarter of 2009, mostly related to improving the quality of financial, management and regulatory reporting, and the preparation of unbundled financial statements for each of the company’s core divisions. It also advised on consolidated statements for the KEK Joint Stock Company. The PA team completed the following activities:

Drafted Loan Agreements between KEK and the Government of Kosovo for funding

the top-priority capital projects in Mining and Generation. The team then took part in a series of meetings with MEF and GOK Treasury to finalize the terms of the agreements.

Helped KEK to complete the process of selecting external auditors for FY 2008 and Q1 2009. The team helped with the review of the documents submitted by the bidders and observed the qualifications of the bidders in the first stage of the tender, prepared answers to the questions of the qualified bidders, finalized the detailed terms of reference for the second stage of the tender, developed criteria for evaluating the final bids and

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assisted with contract negotiations.

Prepared updated organization charts for the Finance Division of the new Distribution Company.

Assisted KEK’s Accounting Methodology Department in developing job descriptions for specialists in accounting policies and procedures, announcing the positions, and reviewing and evaluating applications submitted by the candidates.

Assisted KEK in the negotiations with the Kosovo Tax Administration (KTA) of a new agreement addressing KEK’s VAT regime. The agreement was incorporated in a new Administrative Ruling on VAT proposed by the Minister of Economy and Finance in accordance with Article 61.5 of the Law on Tax Administration and Procedures to be approved by the Government of Kosovo. In accordance with the ruling for taxable periods ending after 1 July 2009, KEK will file and pay VAT based on “billing” (accruals) less defined provisions for “bad debt.” Thus KEK will become the first publicly owned enterprise to resolve the VAT issue (billing versus collection) and thus facilitate privatization.

PA assisted KEK in including in the Administrative Ruling on VAT a provision that will allow KEK to use a process known as “Record of Perception” through which it will resolve the issue of VAT owed to Customs for the import of electricity. KEK will report the amount of electricity imported and the VAT due on that import in its monthly VAT declaration, but will be allowed to take a credit on the same VAT declaration for the same amount. KTA will include necessary lines on a revised VAT declaration form for that purpose, and will advise KEK when a revised form is ready for use. Pending the issuance of a revised VAT form, KEK will continue to report its VAT liability in the manner in which it is currently reporting VAT.

PA supervised the implementation of the recommendations provided in the Auditor’s Management Letters for FY 2006 and FY 2007.

PA continued work on cleaning the information in the Fixed Asset module of the computerized accounting system (CAS). The team recommended procedures for verifying the information about the physical locations and conditions of the assets, and developed algorithms for recalculating the depreciation of the assets for the period 2003-2008, taking into account verified information about the capitalization of major maintenance, revaluation, impairment, reassessment of useful life, etc. PA also developed a detailed database structure for a new Fixed Asset Module to be developed by KEK’s IS Division.

PA reviewed and made recommendations on the use of the software package DEPO – an MS Access Database the Network Division developed and implemented in the districts of KEK; it is used for inventory recording reporting and management.

PA assisted KEK in presenting the adjusted VAT for Radio-Television Kosovo (RTK) and the reconciliation of KEK’s books with the records in the tax system of the Kosovo Tax Administration to the auditors for FY 2006 and FY 2007. The auditors approved all adjustments and included them in the final versions of KEK’s audited financial statements for FY 2006 and FY 2007.

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PA continued to supervise the development of all accounting manuals:

Recording post-closing adjustments Recording related parties’ transactions Estimating bad debt for VAT purposes.

PA continued to assist in implementing the recommendations contained in the Auditor

General’s report issued in 2006.

PA assisted KEK in reviewing the updated versions of the CAS manuals submitted by Komtel including General Ledger Manual, Fixed Assets Manual and the Inventory Manual. PA recommended that KEK ask Komtel to revise the manuals in order to render them complete and improve their understandability.

Task 7: Support Tariff Applications and Improve Regulatory Compliance

Proposals on the Rule on Disconnection and Reconnection With assistance from the project’s advisors, KEK submitted proposals to the Energy Regulatory Office (ERO) for modifications to the Rule on Disconnections and Reconnections. The first submittal was made in April 2008. Following a meeting with the ERO, in which the ERO rejected both KEK proposals, KEK submitted its revised proposal in June. After further discussions with the ERO staff, KEK held internal meetings with its working group, with advice from PA staff, and submitted a third proposed revision in September. The ERO then requested that KEK modify its procedures for estimating the amount of “unauthorized use” in order to bill those customers. This amount is called “reclaimed losses” since it is the estimated amount of money owed to KEK from the customer. KEK formed a working group to draft the modifications. PA provided support to the working group in evaluating options. The modifications were submitted to the ERO on 15 December 2008. The ERO responded that they wanted additional changes to the proposed rules, including another method for calculating the reclaimed losses. PA met with an internal KEK working group to develop the revisions, which were submitted once again to the ERO. It is expected that the ERO will approve the new proposed rule in late spring of 2009.

Renewables At the insistence of the Ministry of Energy and Mining (MEM), the ERO requested that KEK develop a “Connection Charging Tariff Methodology” for renewable resources, and particularly for hydroelectric plants. With PA’s assistance, KEK formed a working group to draft the proposed policy. The group drafted procedures and tariffs for connections of small generators. The proposed procedures and tariffs were submitted to the ERO for approval in September and again in early December 2008. The ERO would not accept the proposals until several modifications were made. During this quarter, PA’s advisors provided additional support to the KEK Regulatory Affairs Department, and a working group consisting of representatives from KEK’s Network and Supply divisions. It is anticipated that KEK will submit the proposal to the ERO in late May 2009.

2009 Tariff Filing On the last day of 2008, the ERO sent a letter to KEK requesting a considerable amount of data, most of which were not available since the actual costs, revenues and sales for 2008 were not yet

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posted. However, with PA’s assistance, KEK submitted the data available by mid-January. The ERO sent a second letter with numerous questions about KEK’s responses and KEK’s regulatory staff, with PA’s support, submitted their response. With assistance from by PA, KEK submitted its formal tariff application in mid-February. The tariff submittal complied with the Energy Regulatory Office’s tariff application guidelines and the basic data were submitted in the ERO spreadsheet formats. In addition, PA constructed a new set of spreadsheets that did several things. First, they unbundled each of KEK’s divisions and calculated the revenue requirements (ERO calls them “Allowed Revenues”) for each. Second, the spreadsheets classified the costs and then allocated them to each of the tariff categories using a typical cost-of-service approach. Third, the spreadsheets used the results from the cost allocation spreadsheets and calculated the prices for each tariff element in each of the tariff categories. The cost-of-service spreadsheets showed that the households continue to be subsidized by the larger customers and KEK’s tariff application proposed a movement towards the cost-reflective tariffs. PA also drafted a manual for the spreadsheets that describes: 1) the tariff process, 2) the contents of each of the spreadsheets, 3) the data inputs required (costs, billing and operational data), and 4) the reasoning for the proposed prices for each tariff category. KEK submitted the manual to the ERO. However, during a meeting with the ERO, KEK and the PA advisors, the ERO Board members stated that the ERO would not be using the spreadsheets and that they had not read the manual. Following the tariff application, the ERO issued its “Consultation Paper,” which was their analysis of KEK’s tariff filing. The ERO requested input, via email, from interested parties. They requested input on their “Consultation Paper,” not on KEK’s tariff application. PA provided support to the KEK Regulatory Affairs Department in preparing a response to the Consultation Paper. Since the ERO did not conduct public meetings, KEK requested a meeting to discuss several issues concerning the tariff filing. The ERO stated that they felt that the public had been given the opportunity to participate through the ERO website or could submit letters to them for consideration. It appeared that the ERO had reduced the KEK-proposed amount of Allowed Revenues by a considerable amount and that they intended for any increase to be equal for all customer categories (e.g., no movement towards cost-reflective tariffs). The ERO indicated that they would issue their decision so that new tariffs would become effective on 1 April. Tariff Schedules As stated in the previous quarterly report, KEK and the ERO have no written documentation on the requirements for assigning customers to a particular tariff class, nor is there any documentation of many of the aspects of the tariffs. PA’s regulatory advisor drafted tariff schedules that define each tariff category (e.g., voltage level, type of customer) and provided an Albanian version to the KEK Regulatory Affairs staff for review. These draft tariff schedules were discussed by the PA team and KEK Supply Division staff. Discussions with the ERO staff and Board members also took place, and received a very favorable response. It is anticipated that KEK will submit the final draft to the ERO for approval in mid-2009. Conditions of Electricity Supply/Service Earlier in 2008, PA drafted a document entitled “Conditions of Electricity Supply/Service,” which is meant to provide more details and clarity to the General Conditions of Supply/Service to consumers (these were approved by the ERO in 2006). A KEK working group was formed

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and met numerous times during Quarter 3 to discuss and complete the draft document. Some of the more detailed policies and procedures include collections, connection procedures, and line extension policies and procedures. The Regulatory Affairs Department, supported by the PA team, met with the ERO to present the draft document and explain its purposes. Additional meetings with the ERO were expected, but the workload of the ERO staff did not allow time for the meeting. It is expected that meetings will continue with the ERO in mid-2009 and that a final set of Conditions of Electricity Supply/Service will be completed and then approved by the ERO. Customer Supply Contracts As previously reported, PA assisted KEK in drafting new customer service supply contracts for residential and non-residential customers. These were originally filed with the ERO in March 2008. During the third and fourth quarters, meetings were held with the ERO to discuss the proposed contracts. PA helped KEK in revising the proposed contracts and adding information that the ERO desired. The final revised proposed contracts were submitted to the ERO in September and approval was expected in late 2008; however, the ERO subsequently suggested additional changes. The ERO staff believes that it is necessary for KEK to include a section whereby KEK would compensate customers for “unserved energy.” KEK, with advice from PA, is resisting such compensation, particularly given the current energy situation in Kosovo. Additional discussions with the ERO were held during this quarter and KEK provided the rational for its disagreement with the ERO staff. Additional meetings with the ERO and KEK (with PA’s advisors) will discuss these modifications and it is expected that the final modified customer supply contract will be approved by the ERO in late Spring 2009. Compliance with EU Directives The MEM is charged with reporting to the European Commission Secretariat on Kosovo’s progress in complying with EU Directives. KEK’s Regulatory Affairs Director and staff have been participating in quarterly meetings at MEM, which include a representative from the EC in Vienna. PA has been providing needed support to KEK and attended the meetings in response to requests from the MEM and EC Secretariat. During the fourth quarter, the MEM requested more specific plans from KEK to meet the EU Directives, primarily in unbundling and customer service procedures. In Quarter 1, PA advisors continued supporting KEK in responding and meeting with the MEM representative. License Requirements PA assisted the Regulatory Affairs staff in preparing several requests to the ERO for derogation of some license requirements. Most of these requests dealt with service quality requirements that are, under current conditions, impossible for KEK to meet. Also, PA supported KEK’s staff in completing and submitting the required quarterly reports to the ERO. These reports are part of the license requirements for all divisions of KEK. Power and Service Standards Last year, the ERO held a workshop on Power and Service Quality Standards; PA and KEK personnel participated in the workshop. The ERO formed a working group to investigate the standards it will impose and monitor on the network and supply functions of KEK. Several members of the PA team participated in the first meeting of the working group to provide advice and assistance in the development of the standards, and the monitoring activities that must

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follow. The network and supply licenses have provisions for minimum power and service quality standards; however, due to the current situation, KEK has requested, and the ERO has granted, derogation of these articles in the licenses. PA advisors supported the KEK efforts. The ERO has now decided to hire an outside consultant to provide expertise to the working group. It is expected that this new advisor will be in place during the second quarter of 2009 and that the new service quality standards will be developed and implemented by the end of the year. Customer Metering In 2006, Kosovo laws and regulations stated that billing meters must be owned and maintained by KEK and that customer-owned meters should be acquired, or new meters should be installed by KEK within one year. Obviously, that schedule was not met. PA began assisting KEK in developing an action plan for the acquisition of customer-owned meters, or installing new meters where this was not possible. A working group was formed and a meeting with the ERO was held in Q4 to discuss the procedures that KEK will follow to meet the legal and regulatory requirements. The legality and the objective of the transfer are accepted by KEK and ERO; the issue now is how to compensate the customer for the transfer of metering equipment from customer ownership to KEK ownership. During the first quarter of 2009, the working group did not meet due to the tariff application and the ERO review process.

Unmetered Customers In addition to the project discussed above, KEK has been evaluating various options for dealing with unmetered customers. Currently, a tariff category exists whereby these customers pay a flat monthly rate; over 10,000 customers are in this tariff category. Concurrent with the KEK Supply Division’s efforts to clean up the CCP, a plan for eliminating this tariff category is being developed by the regulatory staff with advice from PA. Meetings with the ERO have been held to discuss the issue and the ERO’s letter of 1 December concerning the tariff filing states that the tariff category should be gradually eliminated. An action plan will be developed and implemented during 2009. PA will support both the Supply Division and the Regulatory Affairs Department in this effort. Access to Property Rules ERO requested that KEK and KOSTT develop and submit for approval rules on “Access to Property.” Although access to property is found in the Law on Energy and the General Conditions of Supply, the ERO believes these rules are needed to provide additional details for customers. PA provided assistance to KEK in drafting these rules, which were submitted to ERO in March 2009.

Code of Ethics One of the requirements contained in KEK’s Network License is to submit a Code of Ethics, or Code of Conduct, to the ERO. This requirement had never been fulfilled by KEK and the ERO requested in late 2008 that KEK do so. PA provided assistance to the KEK regulatory staff and the document was completed and is in final review. It is expected that it will be submitted to the ERO in mid-second quarter 2009.

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New Connection Procedures The PA team contributed to the development of KEK’s presentation to the ERO on KEK’s New Connection Procedures for customers. The procedure was modified at the insistence of the ERO and was to be resubmitted during this quarter. The ERO insisted that the document was a “connection tariff methodology” not a “procedure.” Hence, KEK, with PA’s support, modified the documents for submittal. Task 8: Improve Internal Controls and Strengthen Internal Audit

Audit, Anti-Corruption and Revenue Protection KEK’s Internal Audit Unit remains dysfunctional due to serious obstacles created by the previous Board of Director and Internal Audit Committee (detailed information in this regard was provided in the third and fourth quarterly reports of 2008. Therefore, the Financial Audit Function has been completely destroyed. PA took all possible steps to undo the damages caused by the Board and Audit Committee. At the end of the first quarter of 2009, the government appointed an Audit Committee for KEK, which has not yet begun to function. Despite these difficulties, with PA’s leadership and assistance, it was possible for KEK to retain the remaining staff members and lead them to function as a team. It also continued to institute improvements towards the establishment of a comprehensive and efficient control function.

During the first quarter of 2009, PA continued to establish processes for the Revenue Protection (RP) function. The RP staffing was anticipated to be completed by the end of February 2009, but lack of skilled professionals in the market, complication related to the performance of Revenue Protection tasks (personal risks) and low salaries did not allow staffing to be complete, resulting in only three new employees. PA continues to lead KEK’s efforts to add staff through external and internal vacancy announcements and interviewing processes. Under PA’s leadership, KEK has developed a very detailed Annual Audit Plan for 2009. The plan encompasses all areas of the Revenue Protection, Financial Audit, Anticorruption and Technical Supervision Units’ activities, with the aim for all the above tasks to be the Internal Audit Officer’s responsibility. PA initiated negotiations with EULEX’s Chief Prosecutor in order to support investigations and inquiries performed by Internal Audit, to help to speed up investigations in law enforcement offices on submitted material. It was agreed that EULEX Prosecutors’ Office will conduct investigations on IA Units inquiries that it receives from KEK. Several successful meetings resulted in EULEX’s acceptance of materials on three cases investigated by KEK. In all three, criminal cases were opened and the process is on going. KEK also provided the list of its 15 most important cases, which are under investigation by law enforcement b. EULEX promised to establish maximal control over these cases. PA supported KEK in establishing efficient collaboration with the Kosovo Anticorruption Agency. KEK designated a special liaison person for communication with the Agency. Its IA Office presented them with an annual plan for 2009, which was appreciated by the Agency leaders and used as a pattern for all Kosovo publicly owned enterprises. Also, in order to strengthen the relationship, both parties agreed to sign a special Memorandum of Understanding

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(MOU). PA developed a draft MOU that was submitted to the Anticorruption Agency for input. The MOU is expected to be signed in the second quarter of 2009. Improvement on Information Collection and Submission System From the first days of PA’s assistance in the development of a control function, PA tried to establish a special hotline that would enable the public to confidentially and directly provide information to the control units and express their concerns. Due to numerous technical and procedural problems the implementation was delayed; however, a special independent hotline and email accounts were finally activated in the first Quarter of 2009. All necessary procedures were developed so KEK could respond efficiently to the information it received, and a special position was created and an individual was employed and trained. At the same time, KEK launched a media campaign (TV and radio announcements, and special billboards. For the regions that don’t have television or where reception is poor, special leaflets were designed, printed and distributed by KEK along with electric bill. The initial results were impressive: KEK now receives an average of 15 calls a day. In response, the Internal Audit Office has conducted several very successful investigations.

Audits and Investigations Under PA’s leadership, during the first quarter, the Revenue Protection Unit conducted a vast number of inspections to identify sites of commercial losses; to detect, eliminate and prevent theft, and to reimburse KEK for losses. In parallel with daily audits, the Unit began performing night inspections of KEK customers at least twice a week. These efforts resulted in significant success in the fight against commercial losses. Up to 50 investigations and audits were conducted in relation to electricity theft and other illegal activities by customers and KEK employees, including violations and non-compliance with written policies and procedures. Investigations. Currently 32 investigations are ongoing; they are expected to be

completed in the Quarter 2. Disciplinary Actions. As a result of the investigations performed by the Revenue

Protection Unit, 9 KEK employees were proposed for dismissal or disciplinary measures; final written warnings were given to 14 employees.

Law Enforcement. With assistance from PA, KEK was able to submit 10 cases to law

enforcement officials for follow-up action. Network and Supply Operations Analyses and Problem Identification. The RP

continued to analyze Network and Supply operating inefficiencies under PA’s leadership. Following the Prishtina District reorganization in February, the Unit focused on this district. Five extensive system analyses and inquiries were performed in each of the following areas: energy accounting – commercial losses, meter reading, bill delivery, disconnection and payment control. The audit findings indicated a number of serious management failures, as well numerous mistakes, violations and cases of negligence. By the end of first quarter, the findings were incorporated into a comprehensive conclusion and presented to all authorized managers involved in the operations processes. The aim was to demonstrate where they are failing, in which areas they need to concentrate, and what may happen during operations. It is also planned to disclose underperforming

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employees and to impose relevant sanctions. The materials were submitted to the top managers in KEK and a review of this analysis is planned for early April.

District Inspections. In accordance with the Annual Audit Plan, the Revenue

Protection team continued extensive inspections in the districts in order to determine electricity theft, other forms of commercial losses, the efficiency of disconnections, correctness of billing, and the performance of technical and supply staff. Comprehensive inspections were performed in Prishtina and Ferizaj districts, and sample studies and spot audits were performed in the rest of the districts. Comprehensive studies will be performed in all districts by the end of 2009.

Task 9: Provide Legal Support for Unbundling and Privatization The Unbundling/Privatization Process During the first quarter, PA undertook the following steps in support of the unbundling / privatization process: The draft corporate documents for the new distribution company, to include the by-laws and

charter were finalized and sent to the MEF for further action. Follow-up meetings were also held with the head of the Unit at the MEF tasked with oversight of publicly owned enterprises.

PA provided recommendation to the MEF in connection with the corporate governance

structure for the new distribution company, particularly on the question of whether to have one Board of Directors responsible for KEK and the new company or separate Boards for the two companies

PA provided significant assistance to KEK in its request to the Tax Administration for a

declaration that the transfer of assets and liabilities from KEK to the new distribution company will be exempt from VAT and will also not attract any corporate tax liabilities for either entity. PA advisors met with USAID implementing partners at the Tax Administration on several occasions to discuss the matter, and the requested declaration was provided on 31 March 2009.

PA’s analysis of the registration status of KEK-owned land in cadastral records continues.

Further, the documentation collected from the districts will also be filtered to ensure that any residual property rights disclosed in these documents will now be reflected in cadastral records.

With the exception of Pristina District, the process of collecting documents from all KEK

districts relating to the use of land was completed in the first quarter of 2009. Documents from Pristina District will be collected during the second quarter of 2009, and all collected documents will be indexed and placed in the Data Room.

PA advisors provided significant assistance to KEK in its request to the Licensing

Department of the Energy Regulatory Office for modification or transfer of the licenses currently held by KEK’s Supply and Network Divisions in anticipation of the unbundling process.

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PA advisors produced a draft Regulated Power Sales Agreement between KEK and the new distribution company that will enter into force when legal unbundling takes place, and will remain in force until the privatization of either entity.

PA advisors produced two draft documents, which will be required for the legal unbundling

process: 1) a deed transferring assets and liabilities from KEK to the Distribution Company and 2) an agreement between KEK and the distribution company governing the terms and conditions of the unbundling process.

The process of identifying which contracts and legal claims will be transferred to the new

distribution company was completed during the quarter. Corporate Governance With the appointment of a new Board of Directors, PA’s legal advisor provided the new members with an overview of the corporate governance structures of KEK, together with a delineation of the responsibilities and duties between the Board and KEK management. Debt Recovery PA monitored a new pilot project in conjunction with NCSC (a USAID implementing partner in the justice reform sector). The pilot project focused on the enforcement of debt judgments in Gjilian Municipal Court and the Economic District Court, Pristina. The selected cases in the Economic Court, Pristina showed little progress. However, the first tranche of selected cases in Gjlian Municipal Court showed favorable results, with KEK lawyers accompanying debt execution clerks in the field. Based on these initial results in Gjilian, PA is discussing with NCSC the possibility of expanding the project to Prizren Municipal Court in the second quarter. Other Advice to KEK on Discrete Legal Issues PA provided legal assistance on the following discrete issues during the first quarter: Drafting of external auditor contract to audit of KEK’s financial statement for FY 2008 and

the first quarter of 2009. Implementing the $33 million purchase contract for a used transformer for Kosova A power

plant. Procurement for the removal of 5.5 million cubic meters of overburden material by truck

and shovel operations from the Sibovc South West Mine. Procurement for the refurbishment of the water treatment facility for Kosova A power plant. Procurement for the refurbishment and operation of three small hydro plants that are owned

by KEK. Assignment of KEK’s lease and power purchase agreement for Lumbardhi HPP from the

initial operator, Triangle Inc to a new operator, Kelkos Revising the Regulations for Operations in KEK’s districts. Implementation of the Board-approved strategy for the treatment of those services

outsourced by KEK in 2006. Advising KEK in connection with a claim issued by the Kosovo Customs Authority for

outstanding VAT payments on electricity imported by KEK. In conjunction with this issue, PA led efforts to secure a new Ruling from the Minister of Finance that would address the pending Customs claim and also KEK’s future treatment of VAT.

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Drafting the second loan agreement between KEK and the MEF for funding the investment required to open and operate the Sibovc South West mine.

Drafting the contract for the use of KEK’s network infrastructure by a local cabling company.

Drafting the contract for the purchase of 7,500 household electric meters. . Task 10: Assist Privatization Transaction Advisor The tender for hiring the privatization transaction advisor was initially launched in October 2008. However, the first procurement activity ended unsuccessfully, and was re-tendered in March 2009. The new tender is expected to result in a winning bidder being announced in May 2009. In anticipation of this advisor’s appointment, PA has taken the following steps:

A data room has been established in KEK’s Distribution Building and is staffed with a

newly appointed KEK Unbundling Coordinator. Documents collected from the KEK districts have been deposited in the data room, and significant progress has been made in collecting other relevant information, including copies of important contracts, pending litigation, workforce information and billing/collection statistics.

A new external auditor for KEK has been appointed to ensure that audited accounts for

FY 2008 are available in a timely fashion for the privatization process. The external auditor is also being asked to audit KEK’s accounts for the first quarter of 2009 in support of the impending legal unbundling.

Task 11: Support Normalization of Service to Enclaves Much progress was made during the first quarter on normalizing service in minority areas. Network Failures in Minority Areas As authorized by the ERO, Category “C” feeders (based on ERO’s load shedding program) are only to be repaired following the collection of sufficient funds from customers on the feeder affected by the fault. As of early March, a large number of feeders serving minority areas were damaged and since most of those are in Category C, they were not being repaired, as no funds were being provided by the customers. The international community and KFOR were becoming concerned about this situation. PA realized that KEK had no company-wide policy for this situation and each district was using its own interpretation, generally requiring consumers on the feeder to pay the full cost of repairs. PA’s advisors worked with Network and Supply Divisions to formulate a company-wide policy focused on having customers pay their electricity use going forward as opposed to the cost of repairs. PA drafted the “KEK Policy on Network Failures,” which is included as Attachment Q109TS1. The policy was implemented immediately and communicated to KFOR and the International Community. Agreement to Regularize Service PA developed the “Agreement between Community Leaders and KEK to Regularize Electric Service” (Attachment Q109TS2). The purpose is to have minority area consumers who have not paid for 10 years become regular KEK customers. The Agreement focuses on having consumers pay from this point forward and addresses the issue of old debt, which has been a major

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impediment in the past. Once the community leader signs the agreement and residents register and pay each of their next 12 bills going forward, they will not be disconnected for old debt. After much discussion by the international community, KEK was authorized to move forward with the new policy. An Executive Order was written for the Managing Director and PA attended a meeting with him and District Managers, where we explained the process of executing the agreement with community leaders. Discussions with the Government of Serbia On 25 March, PA attended a meeting in Belgrade with Minister Bogdanovic, Ministry for Kosovo and Metohija, and Dragan Petkovic, Deputy Minister. The meeting focused on electricity issues in the Serbian-dominated communities in Kosovo. The Minister was given the new policy on network failures; he was especially interested in having service restored to villages that had been without power for several weeks. PA also reviewed the Agreement to Regularize Service with the Minister and he was generally supportive of the new approach to the minority areas in Kosovo. He indicated that he would like KEK to show good faith and restore electricity service to the villages that are without power. Once the power is restored, the parties can address the longer-term issue of payment going forward in a calmer environment. He also assigned Deputy Minister Petkovic to work with the PA Advisors in the various villages in Kosovo. KEK management agreed to restore all network failures at its expense in order to show good faith. Minister Bogdanovic asked that PA consider community metering as an option. He was reminded that a proposal was developed for Strpce in 2007 and provided to EPS. PA agreed to furnish a copy of that proposal to the minister and consider community metering in light of the current situation. Meetings with Serb-Dominated Villages in Kosovo PA Advisors met with community leaders and residents in Shilovo on 27 March and in Prilluzha on 31 March. The meetings focused on explaining the Agreement to Regularize Service and its benefits to consumers. Other issues also arose such as new policies on network failures, community metering, KEK employment of Serbian personnel, Social Cases Subsidy, value added tax, etc. The community leaders were encouraged to sign the Agreements and move forward with regular service. Joint Initiatives with US KFOR US KFOR has been very supportive of KEK, especially in its dealings with the minority communities. During Quarter 1, PA cooperated with KEK personnel and US KFOR on the following items:

We prepared and delivered to KFOR Headquarters, Film City, Prishtina, a set of topographic maps that shows all the 10 kV feeders in Kosovo and their KEK feeder number. The same set of maps was given to US KFOR Bondsteel last year. These maps help KFOR command and bases understand what areas (regions, valleys, cites) are without power during various phases of the ABC load shedding program.

We provided KFOR with an updated list of KEK personnel they can contact when they have issues or questions. KFOR distributed this list to their personnel in the field.

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PA led a 4-hour briefing and a tour of the mines and generation for the new US KFOR commander at Bond Steel and his staff (12 individuals). General Jones found the tour and the KEK overview very informative and gave PA a Certificate of Appreciation for its efforts in Kosovo.

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IV. 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. Below is a list of barriers that are hampering the achievement of a better result. Memorandum of Understanding There is no MOU between USAID and the GOK/KEK that formalizes PA’s activities at KEK and commits stakeholders to certain actions. It has been 27 months since PA began working in KEK, and it still has no mandate. Even though KEK’s management has not recently challenged PA’s involvement in KEK’s activities, it is advisable to have a simple MOU in place to meet the needs of all involved parties. Furthermore, if the new KEK Board does not perform according to its mandate and is challenged by PA to do its job, it may do the same as the previous Board and ask for PA’s terms of reference in KEK. A draft MOU has been prepared to be used when needed.

KEK Board of Directors The new KEK Board’s qualifications are questionable and even though they have gone through three days of training, it is difficult for them to comprehend what their role and responsibilities are. During the first quarter, due to PA’s efforts, they have been prevented from having an office in KEK or any KEK-provided equipment.

Procurement As reported in previous quarters, Kosovo’s procurement regulations remain a significant problem. In recent procurements, an additional difficulty has been encountered, namely, the ease with which disappointed bidders can file “ungrounded” complaints to the Procurement Review Body, thereby placing the entire procurement on hold for weeks. This development is particularly problematic because the complaints are typically referred to so-called procurement “experts” who render opinions, which frequently lack any reasoning or legal argument. 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 New Kosovo and KEK Disco will be subject to Kosovo’s current Public Procurement Law. 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. In addition, KEK is not aggressive enough in its disciplinary procedures. PA has sought to combat this issue with the introduction of the new Regulations for Operations in the Districts, which provide clear benchmarks for assessing poor or unsatisfactory performance by employees and introduce a zero tolerance approach to serious disciplinary offences. The Regulations also dispense with disciplinary “commissions” and vest responsibility firmly in the District Manager,

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who is also accountable for the performance of his district. While some progress has been made in this direction with employees being dismissed and warnings given, further improvements are needed. Stakeholder Interference This was one of the barriers to KEK’s progress identified in PA’s earlier analysis. 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. Continued USAID support and leadership is appreciated and needed to ensure that stakeholder involvement and interest in KEK can be managed properly.

Outsourcing After considerable delays, the Board of Directors’ decision of August 2007 on the strategy for the seven companies that currently perform services, that were outsourced in 2006, is finally being implemented with the support of the new Board of Directors. However, it is anticipated that there will be considerable opposition to the strategy’s implementation from both within KEK and third parties.

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V. Proposed Solutions to New or Existing Problems

Various problems are confronting the project team. Below, we discuss problems that have not yet been mentioned in this report and provide an update on possible solutions being pursued by the PA team. Up-to-Date Manuals for CAS and CCP Problem: Komtel has failed to deliver to KEK all of the up-to-date manuals that Komtel has already developed for CCP and CAS. Only the updated TR and AP modules have been delivered. Komtel delivered manuals to KEK in previous years, but these older manuals do not reflect the recent changes to CCP and CAS. The absence of these updated manuals prevents KEK from taking over the maintenance and servicing of the CCP and CAS systems.

Solution: The solution is being developed at this time. Security of Metering Installation, Including Time Clocks Problem: Meters and the boxes in which the meters are installed are not securely closed, locked, or sealed. Essentially, every meter box in Kosovo is wide open, and tampering is easy. The consequence of this lack of control by KEK was the €36 million of unaccounted-for energy in 2008 (and repeated every year). KEK has not terminated employees who fail to implement metering control procedures. Therefore, corruption is rampant, especially involving metering errors. Two studies in the past four years have confirmed that time clocks that operate the time-of-use feature of meters are either of inappropriate design, or mis-set, or both. One study indicated that KEK could earn about 14% more revenue if the time clocks were set correctly. Solution: It is most important that an Audit Committee of the KEK Board of Directors support the disciplinary recommendations (including termination from employment) of the Audit Unit of KEK. Only then will it be worth the effort to purchase good meters, to incorporate the time keeping function inside the meter, to correct metering deficiencies, and to lock and seal the metering installations. Value Added Tax (VAT) Problem: KEK’s payment of VAT has traditionally been governed by an MOU between the Ministry of Economy and Finance (MEF) and Kosovo Trust Agency. The MOU allowed KEK to remit VAT based on payments received from customers as opposed to the amounts billed to customers. Several other publicly owned enterprises are also subject to these conditions. This procedure recognizes that KEK has a significant amount of billings to customers that go unpaid. The aforementioned MOU expired on 31 December 2007 and was only replaced in September 2008, with the signing of a new MOU, which re-instates the arrangements under the original MOU, but only until the end of 2008. Therefore, the approach for the 2009 VAT payment remains to be agreed. Solution: In the first quarter of 2009, PA’s advisors expended considerable time and effort in discussing a new Ruling to be issued by the Minister of Finance. The new Ruling will state that for taxable periods ending after 1 July 2009, KEK will continue to file VAT declarations based on amounts invoiced to their customers, but will be required to pay that amount of VAT with

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their tax return, irrespective of whether it has been collected. In conjunction with this new regime, the Ruling will also include extensive bad debt provisions and exempt KEK from liability to pay VAT upon import of electricity. The new Ruling is expected to be issued early in the second quarter. Resolving Issues of Electricity Provided to Minority Areas Problem: Minority areas use over 10% of the energy entering the distribution system, but do not pay for it (this group accounts for less than 5% of the population). This situation has remained unresolved for ten years. Solution: In the first quarter of 2009, PA’s advisors developed an approach toward a long-term solution to this situation: an “Agreement between Community Leaders and KEK to Regularize Electricity Service. This document is the result of extensive background work with the international community and addresses the impediments to resolving these problems, especially the old debt issue and the prohibition against disconnecting minority areas for non-payment. After the international community’s concerns were alleviated by the Agreement, PA Advisors began discussing it with the Government of Serbia and local Kosovo leaders. See Section 2, Task 11 for more information. The Quarter 1 activities set the stage for significant progress to be made in the second quarter.

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VI. Documentation of Best Practices that Can be Taken to Scale

Identification Numbers for Objects (Poles, Boxes, etc.) on the Low-Voltage Network (LVN), and Sketching of the LVN Network The PA team led the development of written KEK Procedures that support work on the cleanup of the CCP database. One procedure created a methodology to assign identification numbers to objects (poles, junction boxes, splice boxes, customer connection boxes, and meter boxes) on the low-voltage (0.4 kV) network (the “last mile” to the customer’s premises). The other procedure established the methodology whereby District personnel sketch (and thus document) the approximately 20,000 kilometers LVN in KEK. These Procedures are being implemented first in Ferizaj District to confirm their integrity, and then will be implemented in the other districts. (Reference file from Q4 2009: ND2008Q4014 364 Procedure Pole Junction Box Meter Box Numbering 29 Dec 2008 Alb Eng LD MH AV TC Accepted v06.pdf.)

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VII. 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 and other donors. The following activities were undertaken during Quarter 1: PA continued to coordinate with Bearing Point advisors on issues regarding the

privatization of KEK and the New Kosovo Project. Draft documents were shared with Bearing Point for comment before their submission as final.

The team continues to maintain regular contact with the USAID Justice Reform Team (NSCS) and met with them on several occasions to discuss its efforts to improve judicial processes for the execution of debt cases.

PA continued to liaise with Bearing Point advisors at the Tax Administration on various issues, including the new Ruling on VAT and a declaration on the tax implications of KEK’s legal unbundling.

PA cooperated with Bearing Point advisors at the MEF on the 2009-2011 budget and potential GOK assistance for the procurement of mining equipment, and the implementation of the Credit Facility Agreements between the Ministry and KEK.

The team liaised with OSCE, EULEX, UNMIK, and US KFOR on the issue of minority area policies.

PA has spent considerable time informing and educating the New KFOR commanders and their staff on energy sector issues, since almost all the staff’s tour of duty is only six months. We have established a good relationship that provides for jointly addressing energy security concerns in Kosovo.

PA continues to maintain regular contact with the WB, IMF, KfW, EU, UNMIK, EULEX and other stakeholders, and has been responsive to their requests.

The PA team continues to liaise with Mr. Les Clarke, Project Team Leader, TERNA & IPA Consortium Technical Assistance Project within KOSTT. The project in KOSTT focuses on KOSTT becoming full member of the Balkan power pools, and moving it from its subordinate position to Electro Privreda Serbia (EPS).

The PA team continues to facilitate cooperation between KEK and KOSTT. Recent work involved increasing the capacity of both networks to deliver power to Kosovo, expanding the Palaj substation, and rehabilitating the Kosovo A power plant’s 220/ 110 kV substation.

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VIII. Upcoming Events with Dates

New Transaction Advisor The Kosovo Government plans to appoint a transaction advisor for the privatization of KEK’s Distribution and Supply business in the next quarter. Minority Areas As discussed in Section 2, Task 11, significant progress was made in the first quarter on resolving issues in minority areas. During Q2, each village with very low payments is being scheduled to sign the agreement. Those that do not will be disconnected. PA is revising the Community Metering methodology in the event that option is needed in the communities of Strpce, Gracanica, or North Mitrovica. Direct Debt Mechanism This new mechanism is now expected to be tested late in the second quarter or early in the third quarter. Based on discussions with CBK and Raiffeisen Bank, the testing will be performed with small customers. Raiffeisen has indicated that in June 2009, its IT systems will be ready to test the process. Legal Unbundling of KEK The legal unbundling of KEK’s Network and Supply functions is expected at the beginning of August 2009. This will be undertaken in conjunction with the creation of a new distribution company, the Kosovo Electricity Distribution and Supply Company. Bids for Meters Bids to KEK’s Procurement Division are due early in Q3 for meters for the substations and industrial customer applications. Workshop for Debt Enforcement USAID’s implementing partner (NCSC) will be running a workshop in July 2009 for the enforcement of debts, specifically for utility companies. Bids for the B Units’ Water Treatment System It is expected that the contract for the water treatment rehabilitation and upgrade would be consummated in the second quarter.

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IX. Appendix A. List of Activities/Deliverables Nr. Task 1: Support Management and Operation

to Preserve Assets Specific Objectives / Accomplishments

Completion Date (End-of-month)

Major Activities Completed/ Status of Deliverables

1.1 Business Plan and Action Plans for 2009 November 2008 Completed.

1.2 Achievement of the Business Plan targets for 2008 – 2009

Ongoing Some of KEK’s targets may not be met due to MEM and BOD interference, changes in the MD, and other stakeholders’ interference.

1.3 Visible leadership by the MD with clear performance expectations from all levels of management

Ongoing Will not be achieved due to continued change and lack of support from the Board, and lack of an MOU for PA’s work at KEK.

1.4 Board-approved 2008 and 2009 Capital and Operation and Maintenance Budgets

December 2008

Completed. The 2008 budget was updated to balance expenditures with projected revenue collection. The former BOD refused to consider approval of the budget. The 2009 Budget will be presented to the new Board for approval.

1.5

A more effective budgeting process for the development of the remainder of year 2008 and all of year 2009 budgets (budgets to be based on the ERO-approved tariff)

December 2008 Completed. The 2008 budget process was enhanced for the 2009 budget cycle, which is under development.

1.6 Apply new cost control procedures. November 2008 Expected to be implemented is Q2 of 2009.

1.7 Ensure that KEK management does not enter into a new agreement with RTK for the collection of television fees.

December 2008 Contrary to PA’s recommendation, in December the KEK BOD approved the extension of the RTK service agreement for an additional 12 months until the end of November 2009.

1.8 Preempt any new encumbrances, liens, or liabilities. October 2009 Lack of an MOU for PA’s work in KEK is adversely affecting PA’s ability to preempt actions.

1.9 Monitor compliance with the Credit Line Agreement with Raiffeisen Bank.

Ongoing Cash flow reports are generated and reviewed for compliance monitoring.

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Nr. Task 1: Support Management and Operation to Preserve Assets Specific Objectives / Accomplishments

Completion Date (End-of-month)

Major Activities Completed/ Status of Deliverables

1.10

Monitor compliance with the Credit Facility Agreements concluded with the Government in connection with the rehabilitation of A5 and opening of the Sibovc SW mine.

Ongoing The A5 loan has already been exhausted, while the drawdown on the Sibovc SW loan is going forward according to the plan.

1.11 Monitor the newly created pledge register at the Ministry of Trade & Industry to ensure no new liens are registered against KEK.

Ongoing This is being checked on a monthly basis.

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Nr. Task 2: Amend Distribution Structure and

Organization Specific Objectives / Accomplishments

Completion Date (End-of-month) Major Activities Completed/ Status of Deliverables

2.1 Implement the new organization structure that provides for clear accountability in Ferizaj

September 2008 Completed.

2.2 Secure appropriate staffing of the organization with skilled individuals in Ferizaj.

September 2008 Completed.

2.3

Implement the pilot project in Ferizaj beginning in September 2008 and have the district fully operational using new procedures by 31 December 2008

December 2008 Completed.

2.4 New district targets being met by conclusion of pilot December 2008 The last district organization was changed in February. Targets were established for 2009, and they will be in effect starting April 2009.

2.5

Assist with implementation of the principles and successful processes and procedures of the pilot project in 3 districts beginning 1 December 2008, and have those districts fully operational using new processes and procedures by 28 February 2009

December 2008 Completed

2.6

Assist with the implementation of the principles and successful processes and procedures of the pilot project in the 3 remaining districts beginning 1 March 2009 and have those districts fully operational using new processes and procedures by 30 April 2009

March 2009 Completed ahead of schedule in February 2009.

2.7 New district targets being met by individual districts as each of them implements the new processes and procedures

May 2009 Future

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Nr. Task 3: Improve Energy Accounting

Specific Objectives / Accomplishments Completion Date (End-of-month)

Major Activities Completed/ Status of Deliverables

3.1 Accuracy and timely meter reading between KEK and KOSTT exchange points that provide for system energy balance

December 2009 On the first day of each month the meters are read, the bills computed, and the data forwarded to the monthly Energy Accounting Report submitted to the Board of Directors.

3.2 Bill customers appropriately for energy they consume. All metered energy to be billed through the Customer Care Package (CCP).

December 2009

Energy billed compared to energy available for sale is part of the monthly Energy Accounting Report to the BOD.

Customers at the land of mines and generation are now metered, and bill processing is being incorporated into CCP. A new, eighth CCP software package (but without the financial portion) became operational by KEK IS at the end of Q4. The Supply Division has assigned the responsible person for this eighth CCP.

The three large customers, whose metering is special, still have hand-calculated bills. The Network Division is working with the Supply Division to have the results of the hand calculations included in CCP.

3.3 Bill customers accurately for sundry items such as meter testing, disconnection, reconnection, new customer connection, etc.

December 2009

The new Chart of Accounts will enable this capability. The Supply Division is re-structuring the bill format to include

this information. Changes in CCP and CAS are being designed to implement this

change.

3.4 Meter purchases to be electronic, with emphasis on anti-tampering features and load profile data recording for large customers and substations.

December 2009

A contract for residential meters was awarded in Q1 2009. A contract for commercial meters was being finalized in Q1 2009 and will be awarded in Q2 2009. The tender for industrial and substation meters is being prepared now and will be advertised for bidding in Q2 2009.

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Nr. Task 3: Improve Energy Accounting Specific Objectives / Accomplishments

Completion Date (End-of-month)

Major Activities Completed/ Status of Deliverables

3.5 Meters, disconnectors, and remote read and control equipment installed on all transformer points serving enclaves.

See Task 11.4, below, for completion dates.

See Task 11.4, below, for the status and comments related to enclaves. Meters with remote reading are being installed in Ferizaj District starting in Q1 2009, and should be operational by end of Q2 2009.

Nr. Task 4: Increase Collections from Customers

Specific Objectives / Accomplishments Completion Date (End-of-month)

Major Activities Completed/ Status of Deliverables

4.1 Improve collections, over the baseline, per PBMS targets for 2008 and 2009

Ongoing Collections in the first quarter were very good. See PBMS status in Appendix B.

4.2 Speed up customer payments by reviewing and enhancing the billing process, payment terms, and other issues

Ongoing Payments have been increasing due to aggressive disconnections.

4.3 Feeder teams to aggressively perform disconnections of customers for non-payment and unauthorized use.

Ongoing

Payments increased significantly in all districts implementing the new structure. Prishtina District was the last to implement the structure in February 2009 and they also experienced significant improvement in collections.

4.4 Feeder teams to have specific collection targets for feeders they are responsible for. Those targets will be rolled up to the district level.

Ongoing Feeder teams now in place in all districts. New District Regulations developed with specific targets for all levels.

4.5 Advance the use of the KOS-Giro payment system. Ongoing Amounts collected from the KOS-Giro system continue to increase. Q1 2009 showed a 12% increase over Q4 2008.

4.6 Implement direct debit system in coordination with the Central Bank of Kosovo (CBAK) and roll out this new capability in Kosovo.

January 2009 Raiffeisen Bank informed CBK and KEK that it will not have the IT systems in place to implement the system until June 2009.

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Nr. Task 4: Increase Collections from Customers Specific Objectives / Accomplishments

Completion Date (End-of-month)

Major Activities Completed/ Status of Deliverables

4.7 Advise KEK and the Government to improve the effectiveness of the Social Cases Subsidy by broadening the base of recipients

December 2008

Efforts in Q1 2009 focused on maximizing the 2008 subsidy to be posted to customer accounts and receiving GOK approval of the amendment to the MOU. Alternative mechanisms have been developed. Work on this task will continue during 2009.

Nr. Task 5: Assist KEK to Take Over and Clean Up

CCP Specific Objectives / Accomplishments

Completion Date (End-of-month) Major Activities Completed/ Status of Deliverables

5.1

Rules defining the responsibilities of KEK IT, Network, Supply and Finance Divisions for the maintenance and operation of the CCP system are developed and adopted (an executive order is signed)

September 2008 Completed

5.2

Rules defining the responsibilities of KEK IT and of the appropriate persons in the Divisions, for the maintenance and operation of the ABC module are approved.

October 2008 Completed

5.3

Komtel contract ends for all work except system changes. Komtel has delivered final versions of “user” manuals and “system administrator” manuals and concluded training.

November 2008 KOMTEL contract ended. Komtel failed to deliver updated manuals.

5.4 KEK IT person responsible for system administration responsibility is assigned.

October 2008 Completed

5.5 KEK Divisional persons responsible for use and operations are assigned.

October 2008 Completed. The Supply Application Software Contact Group to help users resolve problems with procedures, system commands, and data entry requirements is in place and functioning.

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Nr. Task 5: Assist KEK to Take Over and Clean Up CCP Specific Objectives / Accomplishments

Completion Date (End-of-month) Major Activities Completed/ Status of Deliverables

5.6 The tests (“scripts”) that are to be performed on the database in order to perform the analysis are defined.

November 2008 The work plan for CCP cleanup was developed and approved. The Analysis Team developed the flag reports to be used by field teams.

5.7 Automatic and manual corrections to the customer database made in response to detected and identified anomalies are defined.

December 2008 The work plan for CCP cleanup was developed and approved. The Analysis Team developed the flag reports to be used by field teams. Field work commenced using these reports

5.8 Procedures that were created and approved to clean up the CCP data base are implemented.

March 2009

The work plan for CCP cleanup was developed and approved. The Analysis Team developed the flag reports and field work commenced using these reports. Field work is now expected to be completed in June.

5.9 CCP database is cleaned up and the accuracy of all information is verified.

May 2009 Future. July is a more likely completion time.

5.10 All non-existing facilities (customers) are deleted May 2009 Future. July is a more likely completion time. 5.11 “Passive customers” are eliminated. May 2009 Future. July is a more likely completion time.

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Nr. Task 6: Assist KEK to Take Over CAS and

Unbundle Accounting Specific Objectives / Accomplishments

Completion Date (End-of-month) Major Activities Completed/ Status of Deliverables

6.1

Rules defining the responsibilitie of all divisions of KEK for the maintenance and operation of the CAS (HR and Payroll) are developed and adopted (an executive order is signed)

September 2008 Completed.

6.2

Komtel contacts end (and are not renewed). Komtel has delivered final versions of “user” manuals and “system administrator” manuals, and concluded training.

October 2008 Contract ended. Komtel failed to deliver the manuals.

6.3 The KEK IT person responsible for system administration is assigned. KEK Divisional persons responsible for use and operations are assigned.

October 2008 Completed.

6.4 CAS database is cleaned up and the accuracy of all information is verified.

December 2008 Underway.

6.5 New Chart of Accounts is implemented January 2009 Postponed in view of legal unbundling and ERO position on the use of a regulatory COA.

6.6 Assets and liabilities of KEK divided among the new corporations.

March 2009 Underway.

6.7 Balance sheets, income statements, cash flow statements for the mining, generation, network and supply functions are generated.

July 2009 2006 and 2007 have been produced and submitted to USAID.

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Nr. Task 7: Support Tariff Applications and Improve

Regulatory Compliance Specific Objectives / Accomplishments

Completion Date (End-of-month) Major Activities Completed/ Status of Deliverables

7.1 Complete the KEK tariff filing for 2009 December 2008

KEK submitted the formal tariff application in mid-February, which was on the ERO’s time schedule. Using the spreadsheets developed by PA’s advisor, the tariff application proposed changes to move each tariff category towards more cost-reflective tariffs.

7.2 Complete and obtain ERO approval of the “Connection and Charging Procedures for Embedded Generators and New Customers”

October 2008

Connection charging procedures for small generators were submitted to the ERO for approval on 15 September 2008. Similar procedures for new customers were submitted to the ERO in early December. The ERO rejected the submittals and revisions are under way.

7.3 Complete and obtain ERO approval of the disconnection rules

October 2008

Proposed disconnection rules were submitted to ERO for approval. The ERO requested changes to KEK’s procedures for estimating the amount of “un-authorized use,” which were submitted on 15 December 2008 and then rejected again by the ERO. Additional work is underway to re-submit the rules in May 2009.

7.4 Complete and obtain ERO approval of the “Conditions of Electricity Supply”

March 2009 The draft document is being reviewed internally by KEK

7.5 Develop a tariff for sales of electricity to small communities (minority areas)

November 2008 Initial data for tariff design are being obtained. Internal discussions have delayed this; a different approach may be designed and implemented.

7.6 Assistance to the Regulatory Affairs Department in its support of the privatization of KEK

Ongoing Continued training and miscellaneous support are being provided

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Nr. Task 8: Improve Internal Controls and

Strengthen Internal Audit Specific Objectives / Accomplishments

Completion Date (End-of-month) Major Activities Completed/ Status of Deliverables

8.1 Ensure that KEK has a well staffed and equipped Internal Audit Department.

November 2009

Due to the obstacles described above, only the Revenue Protection Unit has made a considerable contribution towards improvement. By the end of Q2 2009 this Unit is anticipated to be completely staffed if qualified candidates can be attracted. As for the rest of IA Units, progress will solely depend on the new Audit Committee of the KEK Board.

8.2 Assist with the development of audit plans and procedures, and monitor the performance of regular audits of all internal controls, checks and balances.

Ongoing Plans for 2009 audits (both monthly and quarterly) were developed. Daily monitoring of audits and of all internal controls checks and balances were performed this quarter (see the note above).

8.3 Provide strategic and tactical guidance in conducting audits and investigations.

Ongoing Daily guidance during investigations and audits was provided.

8.4

Advise Internal Audit on methods and techniques to protect KEK’s revenue, including the use of special equipment, the use of software for the calculation of technical losses, technical design standards, process redesign methods, etc.

Ongoing

The KEK Internal Audit and Anti-Corruption Unit received advice and recommendations from PA during each audit and investigation process. PA provided regular training on using best international practices for calculating technical and commercial losses.

8.5

Press for conclusion of a Memorandum of Understanding between KEK, the Police Service (KPS) and the Ministry of Interior, that will increase the level of support provided to KEK by the KPS and improve coordination between KEK and KPS’s Economic Crimes Unit on fraud cases.

November 2008 PA produced a draft and presented it to relevant ministries and the Chairman of KEK’s Board. However, no action has been taken to date.

8.6 Assist with the introduction of procedural refinements to KEK procurement procedures to create safeguards against corruption

December 2008 In process.

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Nr. Task 8: Improve Internal Controls and Strengthen Internal Audit Specific Objectives / Accomplishments

Completion Date (End-of-month) Major Activities Completed/ Status of Deliverables

8.7 Assist with the enforcement of the new cost control procedures.

December 2008 In process.

Nr. Task 9: Provide Legal Support for Unbundling

and Privatization Specific Objectives / Accomplishments

Completion Date (End-of-month) Major Activities Completed/ Status of Deliverables

9.1 New corporation(s) established and registered, together with relevant corporate documentation (e.g., bylaws, charter)

November 2008

New corporate documentation completed in draft and submitted to the Ministry of Finance. It is now up to the Government to proceed with registration of the new company. .

9.2 Applicable Licenses (ERO, ICMM, etc.) are transferred to new corporation(s).

December 2008 to February 2008

KEK has submitted a request for modification of three licenses to the ERO, and is awaiting a substantive decision.

9.3 Conclusion of applicable documentation transferring assets and liabilities to any new corporation(s).

January 2008 Compilation of the requisite lists and collection of the underlying documentation is underway.

9.4 Conclusion of any contractual arrangements post-unbundling between the corporations (e.g., use of shared services and electricity off-take agreement).

December 2008

The following documents have been prepared in draft form: 1. Regulated Power Sales agreement between KEK and the new Distribution Company 2. Deed transferring assets and liabilities from KEK to the new Distribution Company 3. Agreement governing the unbundling process.

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Nr. Task 9: Provide Legal Support for Unbundling and Privatization Specific Objectives / Accomplishments

Completion Date (End-of-month) Major Activities Completed/ Status of Deliverables

9.5

Finalize new Employment Regulations for KEK employees that are in line with international best practices and include a new disciplinary procedure and ethics code. Assist with the implementation of the approved Regulations through in-house training and seminars.

October 2008

The draft Employment Regulations have been finalized and presented to KEK’s Acting Managing Director for his approval. There have also been minor changes made to the draft Employment Regulation in the first quarter of 2009 in order to address the issue of overseas business expenses.

9.6

Continue to work with the Government and other stakeholders on the proposed amendments to the Provisional Criminal Code that would expressly state that electricity theft is a criminal act.

Ongoing PA continues to lobby for this amendment; however, no action has been taken by the competent bodies to date.

9.7

Monitor the progress and contents of all draft and pending laws that may impact on KEK, particularly: the Labor Law, Law on Contested Procedure, Law on Obligations, Energy laws, Law on Mines & Minerals, and the Law on the Treatment of Illegal Construction. This may include lobbying the Government and other stakeholders for certain amendments that will be beneficial to KEK’s operations and its future privatization. .

Ongoing

PA continues to monitor any new laws that are passed for their impact on KEK. By way of example, in the past quarter, the following laws were reviewed by the PA team: Law on Expropriation, the Law on the Joint Use of Buildings, Law on Integrated Prevention Pollution Control, Law on Amendments to the Tax Procedures, and amendments to the VAT and Income Tax laws.

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Nr. Task 9: Provide Legal Support for Unbundling and Privatization Specific Objectives / Accomplishments

Completion Date (End-of-month) Major Activities Completed/ Status of Deliverables

9.8 Advise KEK on the implementation of new laws, to include the Law on Publicly Owned Enterprises, and Law on Business Organizations.

Ongoing

With the appointment of a new Board of Directors, new members were provided with an overview of the corporate governance structures of KEK, together with a delineation of the responsibilities and duties between the Board and KEK management.

9.9

Propose further amendments to the Law on Public Procurement, to incorporate elements of EU Directive 2004/1, which provides rules for procurement activities in the utilities sector.

October 2008

PA has indicated to USAID that the need for reforming the Procurement Law will become more pressing with privatization. In the absence of any reform, the new private investors for KEK Distribution and New Kosovo are likely to be subject to the current restrictions imposed by the Public Procurement Law.

Nr. Task 10: Assist Privatization Transaction

Advisor Specific Objectives / Accomplishments

Completion Date (End-of-month) Major Activities Completed/ Status of Deliverables

10.1 Assist with defining the structure of the privatization deal and the drafting of the share purchase agreement

TBD Provided recommendation on the structure of the deal for new Kosovo.

10.2 Advise on the development of a distribution privatization law

TBD Future work.

10.3 Assist with the refinement of the market structure to support the privatization transaction.

TBD Future work.

10.4 Assist with the development of a new licenses for the newly registered distribution company

TBD Future work.

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Nr. Task 10: Assist Privatization Transaction Advisor Specific Objectives / Accomplishments

Completion Date (End-of-month) Major Activities Completed/ Status of Deliverables

10.5 Support the transfer and registration of the assets of the new POE(s).

TBD Future work.

10.6 Assist with the preparation of the Information Memorandum.

TBD Future work.

10.7 Assist with the creation of a “data room.” TBD A data room has been established and significant progress has

made in collecting the relevant material.

10.8 Review the draft Information Memorandum and provide comments, as necessary.

TBD Future work.

Nr. Task 11: Support Normalization of Services to

Minority Areas (Enclaves) Specific Objectives / Accomplishments

Completion Date (End-of-month) Major Activities Completed/ Status of Deliverables

11.1 Develop KEK’s internal position on community metering and prepare a white paper and recommendations.

September 2008 Completed and submitted to USAID and MEM in 2008 Revised approach developed in 2009 focusing only on the three larger communities of Gracanica, Strpce, and North Mitrovica.

11.2 Participate in meetings with the stakeholders and the ERO on the issue of community metering.

October 2008

Primary meeting being arranged. Meetings were held with US KFOR and the mayors in their communities during Q4. Meetings were held in Q1 2009 with Government of Serbia and various enclaves in Kosovo. New approach to community metering is being reviewed with an expectation that a way will be found for the larger enclaves to accept community metering if they do not want to register as individual customers.

11.3 Submit written proposal on community metering to the ERO and obtain approval.

Within one week of agreement by the stakeholders.

Underway.

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Nr. Task 11: Support Normalization of Services to Minority Areas (Enclaves) Specific Objectives / Accomplishments

Completion Date (End-of-month) Major Activities Completed/ Status of Deliverables

11.4 Develop a community metering project, to include procurement and installation of all the necessary equipment

Within 3 months of approval to work in the enclaves, and receipt of all metering materials.

May not be needed since customers in minority areas are indicating that they prefer and will accept individual metering and customer contracts.

11.5 Oversee the installation and start-up program for community metering.

December 2009 May not be needed; see Item 11.4, above. USAID funding for this material has already been transferred to other aspects of the project.

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X. Appendix B. Performance-Based Management System Results

1. Key Indicators (Reported Quarterly)

No. Objectives

Supporting

These

Results

Task

Reference

Supporting

These

Results

Definition of Indicator

and Unit of Measure

2006

Actual/

Calcula

tion1

2007

Actual

2008

Target

2008

Actual

2009

Target

Status

1 1, 2, 3, 5, 6,

7, 8, 1 through 6,

and 8 Reduce commercial losses as compared with previous year (ratio of commercial losses vs. energy available for sale)

31% 30% 25% 20% 10% 25.9% for Q1 2008 28.4 % for Q1 2009

2 2 1, 2, 3, 5, 6,

7, 8 1 Reduce technical losses (ratio of technical losses

vs. energy delivered to distribution) 18.2%3 17.4% 17% 16.6% 16.5% 18.2% for Q1 2008

18.2 % for Q1 2009

3 1, 2, 5, 6, 8 1 through 6,

and 8 Ratio of energy billed vs. energy available for sale

69.1%4 69.9% 75% 79.8% 90.0% 74.1% for Q1 2008 71.6% for Q1 2009

4 1 through 6,

and 8 Ratio of revenue collected versus billed 74.2% 76.6% 80.0% 75.6% 89.0% 54.4% for Q1 2008

71.3 % for Q1 2009

5

1,.2, 3, 5, 6, 7, 8

1 through 6, and 8

Revenue collected as a percentage of value of energy available for sale [ratio of revenue collected vs. billed] x [ratio of energy billed vs. energy available for sale]

51.3% 53.5% 60% 60.3% 80.0% 40.3% for Q1 2008 51.0 % for Q1 2009

6 1 and 4 Ratio of debt collected vs. claimed5 Not Av. 23.48 % 30% 17.5% 35% 23.5% for Q1 of year 2009

7 1, 2, 3, 5, 6,

7, 8 1 through 8,

and 11 Collected revenue in Euros €96mm €110.8

mm €116m

m €135 mm

€140 mm

€28.2 million for Q1 2008 €41.7 million for Q1 2009

1 Due to KEK’s quality of information and calculation methodology, upon further review, the 2006 data used as Key Indicators 1 and 2 had to be revised. The updated numbers are shown in the status section for the two

items in bold.

2 Given the updated information, the target for Key Indicator 2 needed to be revised to 1% below 2006 actual/ calculated for 2007 (17.2%) and for 2008 it should be 1% below the 2007 number (16.2%).

3 The “First Year Work Plan” presented 2006 actual as 15%. The higher figure of 18.2% above is the result of restating 2006 results with the same methodology used in years 2007 and 2008.

4 The “First Year Work Plan” presented 2006 actual as 61.78%. The higher figure of 69.1% above is the result of restating 2006 results with the same methodology used in years 2007 and 2008.

5 Under Kosovo law, executing judgments for debt is the sole responsibility of the courts. Accordingly, this target will ultimately depend on the cooperation of the courts and their willingness to work with and support KEK.

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2. Milestone Indicators

Task

Perform-

ance or

Impact

Indicators Definition and Unit of Measure Reporting

Frequency 2008 Target 2009 Target Status

Task 1

Performance Indicators

PA will have issued all required reports during the first six months that will have recommended improved planning, capital and operating budgeting, and accounting and financial systems in KEK, and will have designated baseline and targets to measure PA’a progress on accomplishment of the task objectives, including training.

Quarterly Support KEK management

Improve KEK management capabilities

Reports, recommendations and targets were developed and are under implementation

Impact Indicators

The MD will have implemented the enhanced organization structure with skilled individuals along the lines PA recommended. KEK operations will have become noticeably smoother due to increased management capability of the MD and her team. This will be indicated by the ability to formulate improved business processes at KEK. Private sector participation strategy in Network and Supply is

communicated to stakeholders and potential investors, while basic requirements for investment attraction have been instituted.

Quarterly Improve KEK management

Limit future distribution- and generation- related demands on the KCB to higher-than-anticipated supply costs, unplanned CAPEX, emergency

situations or payments for customers that are not permitted to be disconnected

KEK’s performance has improved in all areas: mines, generation, and collections. And the MD has communicated the results to stakeholders and public.

Task 2

Performance Indicators

PA will have implemented the pilot project in Ferizaj Quarterly Complete Ferizaj pilot project

Roll out Ferizaj pilot project to all districts

Ferizaj pilot was implemented on September 1.

Impact Indicators

KEK will have implemented the enhanced organization structure and organization in the pilot district and billing and collection rates will have improved substantially

Quarterly Improve Ferizaj financial performance

Improve KEK financial performance

Significant improvement in collection was achieved in September - December.

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Task

Perform-

ance or

Impact Indicators Definition and Unit of Measure

Reporting

Frequency 2008 Target 2009 Target Status

Task 3

Performance Indicators

The PA team will have completed its activities for improvement in energy accounting including: recommendations on the functional interface between Network/Supply and Transmission/Market Operator and resolving disputes between KEK and KOSTT, including the agreements reached in KEK-KOSTT contract and monitored their implementation; created the KEK metering projects and assisted KEK in moving forward with implementing this program.

Quarterly Improve energy accounting

Recommendations submitted to KEK in line with the deliverables timeline.

Underway, as reported in Appendix B.

Impact Indicators

KEK will have implemented the recommendations made by PA within one month of PA presenting the recommendations; KEK will meet the targets of the Network action plan and the loss reduction targets approved by the Board of Directors; and Network and Supply will be working towards common goals.

Quarterly Recommendations submitted to KEK in line with the deliverables timeline.

Reduce unaccounted for electricity to 10%

Underway, as reported in Appendix B.

Task 4 Performance Indicators

PA will have completed its activities in this task to improve the operation of KEK Supply with a view to improving its managerial and financial performance in billings, collections, and customer

service. PA will have developed an action plan for Supply to implement the recommendations; success will be measured based on PBMS indicators, and PA will have monitored KEK Supply in implementing the plan.

Quarterly Achieve reduction of the average use of electricity by households by 10%

due to demand response at the end-user level to the enforcement of collection and disconnection policies

Improve the financial performance of KEK by striving to achieve a collection ratio of

80%

Billing and collection results are good based on PBMS measures shown in Appendix B.

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Task

Perform-

ance or

Impact Indicators Definition and Unit of Measure

Reporting

Frequency 2008 Target 2009 Target Status

Impact Indicators

KEK Supply will have implemented the recommendations made in this task and will have created a schedule for increasing collections over the next three years. KEK will achieve the collections target as shown in Appendix C

Quarterly Debt recovery rate is 30% of the debt claimed

Debt recovery rate is 35% of the debt claimed

Billing and collection results are good based on PBMS measures shown in Appendix B.

Task 5

Performance

Indicators

PA will have completed its activities in this task, developed an action plan for KEK to implement the recommendations; success will be measured based on the efficiency and effectiveness of operation of CCP.

Quarterly Take over CCP Tasks 5.1, 5.2, and 5.5 completed. Rules developed and CCP team in place. Work plan to perform cleanup developed and is being implemented in each district

Impact Indicators

KEK will have adopted the rules and regulations for the operation and maintenance of CCP by the Network, Supply, Finance and IT divisions, and will have taken over the operation and maintenance of CCP and cleaned up the CCP database.

Quarterly Clean up CCP database

Tasks 5.1, 5.2, and 5.5 completed. Rules developed and CCP team in place. Work plan to perform cleanup developed and is being implemented in each district.

Task 6

Performance

Indicators

PA will have completed its activities in this task, developed an action plan for KEK to implement the recommendations; success will be measured based on the efficiency and effectiveness of operation of CAS (including HR and Payroll).

Quarterly Clean CAS database Develop new asset register. Produce opening balance sheets for DISCO and GENCO.

Underway.

Impact Indicators

KEK will have adopted the rules and regulations for the operation and maintenance of CAS by all KEK divisions and the IT Division, and will have taken over the operation and maintenance of CAS and cleaned up the CAS database. The new Chart of Accounts will have been implemented and financial statements of all KEK functions generated.

Quarterly Un-bundle KEK financial accounting

Improved Regulatory Reports

KEK IT has taken over the KEK IT support with limited support from outside contractor.

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Task

Perform-

ance or

Impact Indicators Definition and Unit of Measure

Reporting

Frequency 2008 Target 2009 Target Status

Task 7

Performance Indicators

PA will have completed its activities on this task, developed an action plan for KEK to implement the recommendations; success will be measured based on the approval of the tariffs and proposed regulations.

Quarterly File for new tariffs File for new tariffs 2009 tariff filing was completed.

Impact Indicators

KEK will have filed for new tariffs and rules, and ERO will have approved them.

Quarterly Obtain ERO approval Obtain ERO approval Several filings regarding various rules are pending ERO approvals.

Task 8

Performance Indicators

PA will have assisted KEK’s Internal Audit Department, to address all forms of loss or theft, excessive costs, fraud and embezzlement. Indicators will measure the results of this effort.

Quarterly Establish a fully operational Internal Audit function in KEK

Support the continued strengthening of Internal Audit

Structural formation, staffing processes are on going. Daily tuition and training are on going. Fifty investigations were completed in Q1 and 22 investigations are underway.

Impact

Indicators

KEK will have achieved significant results in fighting losses, fraud and embezzlement. Measurable results in adherence to procedures will be shown within KEK, which will begin to improve the image of KEK to its customers and to the community.

Quarterly Improve internal controls

Substantially reduce fraud and embezzlement

9 employees have been terminated due to misconduct in Q1. Facts of electricity theft, corruption, bribery identified, and many cases have been filed with the prosecutor.

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Task

Perform-

ance or

Impact Indicators Definition and Unit of Measure

Reporting

Frequency 2008 Target 2009 Target Status

Task 9

Performance Indicators

PA will have drafted documents required for the agreed unbundling strategy, to include incorporation documents for new corporation(s), documentation transferring assets and liabilities to any new corporation(s) and contractual arrangements post-unbundling between the corporations. Other indicators include: a) presenting to the KEK Board of Directors, new Employment Regulations for KEK employees; and b) focusing on successfully enforcing debt judgments for non-payment of

electricity against a select number of defendants.

July, October, January

Documents submitted to KEK in line with the deliverables timeline.

Documents submitted to KEK in line with the deliverables timeline.

Draft Employment Regulations completed. Draft Regulated Power Sales Agreement has been produced. Pilot project with NSCS for judgment debts is underway in Gjilian and the Economic Court. Draft Corporate documentation for the New Company completed and submitted to the Ministry of

Finance.

Impact Indicators

New unbundled corporation(s) have been created and all relevant contractual and corporate documents have been concluded. New Employment Regulations have been adopted and are being implemented. Prioritized civil cases are being processed more effectively by the courts and debt judgments for non-payment of electricity are actually

being enforced by the courts.

July, October, January

All documents and recommendations have been accepted and adopted by KEK in accordance with the deliverables timetable. Debt recovery rate is

30% of the debt claimed

All documents and recommendations have been accepted and adopted by KEK in accordance with the deliverables timetable. Debt recovery rate is

35% of the debt claimed

Draft Employment Regulations remain the subject of internal discussion and comment. Incorporation of the new company pending with the Government.

Debt recovery rate is 23.5% of the debt claimed for Q1 2009

Task 10

Performance Indicators

PA will have assisted the privatization Transaction Advisor with defining the structure of the privatization transaction and the preparation of an Information Memorandum.

Quarterly Support of the privatization of KEK distribution network and supply to a competent strategic investor

Support of the privatization of KEK distribution network and supply to a competent strategic investor

Plans have been prepared to assist the transaction adviser once he is on board.

Impact Indicators

Information Memorandum Issued, privatization deal structure identified

Quarterly Privatization is underway

Information Memorandum is

issued

TBD

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Task

Perform-

ance or

Impact Indicators Definition and Unit of Measure

Reporting

Frequency 2008 Target 2009 Target Status

Task 11

Performance Indicators

PA will have implemented the communal metering project.

Quarterly Recommendations submitted to KEK in line with the deliverables timeline.

Recommendations submitted to KEK in line with the deliverables timeline.

Underway, as reported in Appendix A.

Impact

Indicators

Electric services to enclaves will be provided and billed based on communal metering.

Quarterly Recommendations submitted to KEK in line with the deliverables timeline.

Recommendations submitted to KEK in line with the deliverables timeline.

Underway, as reported in Appendix A.

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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

Status

1. 1,2 &3 Number of people who received training in technical energy field

0 231

Target 60 (M=42 and

W=18) Actual 54

(M=54 and W=0)

60 (M=48 and

W=12) Actual 0 (M=0and

W=0)

Q1 2009: PA conducted no technical energy training

2. 1,2 &3 Number of people who received training in energy-related business management field

0 149 Target 100 (M= 70 and

W=30) Actual 69

(M=61 and W=8)

Target 60

(M=30 and W=30)

Actual 43 (M = 40 and

W =3)

Q1 2009: PA conducted training for 40 (M), and 3 (W). 6 Legal, 10 Regulatory, 12 Revenue Protection, and 15 District Operations. Total of 43

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4. Contextual Indicators - Impact (Reported Quarterly) No. Task

Order

Objective

Reference

Definition of

Indicator & Unit

of Measure

FY 2006

Actual

FY 2007

Actual

FY 2008

Actual

Q4 2008

Actual

FY 2009

Target

Actual

FY 2010

Target

FY 2011

Target FY 2012

Target

Status

1. 1&2

Percentage (%) of served demand (ratio of “un-served energy” to “supplied energy plus unserved

energy”) based upon data provided by the KEK Capacity Management Department.

12.92 % 10.24 % 14.70 % 9.24 %

Target 11.01 % +/- 2 %

Actual

Q1 2009 8.80 %

10.72 %

+/- 2 %

10.44 %

+/- 2 %

10.19 %

+/- 2 %

Due to increased imports and improved availability of Kosovo A and B Units, consumed energy increased

13.1 % over Q1 2008, and unserved energy decreased to 8.80 % for Q1 of 2009 versus 16.62 % for Q1 2008.

Note: The Fiscal Year (FY) runs 01 October of one year to 30 September of the following year; Q4 is the fourth quarter (October through December) of the

calendar year. Reference file: NDQ12009004 12 05 09 Update Annual Reduction Factor for FY 2008 and 2009 Extended WC2.pdf.

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XI. Appendix C. PR Briefs This section contains a list of information developed in Quarter 1 for public communications/ information: Tariff filing and tariff increase Amnesty program for unregistered customers Notice for disconnection of communities that have not paid for electricity in the past.