INVESTMENT PROCESS IN THE CONSTRUCTION OF HYDROELECTRIC POWER PLANTS IN BULGARIA. GENERAL LEGAL FRAMEWORK. DEVELOPMENT PROSPECTS

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1 INVESTMENT PROCESS IN THE CONSTRUCTION OF HYDROELECTRIC POWER PLANTS IN BULGARIA. GENERAL LEGAL FRAMEWORK. DEVELOPMENT PROSPECTS Adriana Nacheva, Attorney-at-law - Partner The intention of an investor to build a hydroelectric power plant (HPP) is translated into life through a wide range of activities which include, inter alia, the overcoming of administrative procedures to obtain the relevant licenses and authorizations, the implementation of procedures related to the planning, purpose and ownership of the land on which the facilities will be located, the conclusion of contracts to gain access to the electric grid, construction works, etc. This process entails application of rules from diverse branches of law beyond the energy sector, such as property rights, physical planning, contractual relations and licensing arrangements, to mention just a few. It should be noted that alongside the tendency of harmonization of the laws of EU Member States with regard to the use of renewable energy sources (RES), the implementation of these projects is subject to the legislation of the country where the facilities are built in the context of the specific national rules. Therefore it is crucial for the investor to have thorough knowledge of the legal framework of the host state. This paper is intended to outline the relevant legislation and the stages of the investment process of building hydroelectric power plants in Bulgaria. Pursuant to Art. 8 of the Renewable and Alternative Energy Sources and Biofuels Act ( the RES Act ), installations generating electricity from renewable energy sources such as water should comply with the requirements for conducting a feasibility study in accordance with Regulation No. 14 of 15 June 2005 on the technical rules and standards for the design, construction and operation of installations and equipment used to generate, convert, transmit and distribute electricity ( the Regulation ). Hydroelectric power plants are included on the list of installations generating electricity from renewable energy sources in accordance with Art. 127 of the Regulation. Art. 39 of the Regulation categorizes HPPs into afflux, reservoir and pressure-derivation types. The investment plan to build a HPP starts with an administrative procedure for environmental impact assessment, as laid down in Art. 93, para 1, subpara 1 in conjunction with Annex No. 2, subpara 3(h) of the Environmental Protection Act. The competent authority to make the assessment is the director of the respective Regional Inspectorate of the Environment and Water. The assessment covers the scale of the intended construction works and the waste to be generated during works in progress and in the operation phase. It is estimated whether the construction of the hydroelectric power plant would affect the local area, especially in cases of forest stock, farmland, protected zones under the Biological Diversity Act or protected areas under the Protected Areas Act. The competent authority may decide that either: - the implementation of the investment plan will not affect the environment and therefore no environmental impact assessment is needed. This is referred to as assessment under Art. 93 of the Environmental Protection Act. Then the investor may proceed with the next administrative phase to obtain the documents for the implementation of the project; or - the impact on the environment can be properly gauged through further examination and, for this reason, and environmental impact assessment (EIA) is to be commissioned pursuant to Art. 92 of the Environmental Protection Act. In such cases, the investor has to make arrangements for the preparation of an EIA report by means of concluding a contract with an independent expert registered with the Ministry of the Environment and Water. It is incumbent on the investor to make public his investment intention and to hold consultations with the competent authorities, specialized institutions and civil society stakeholders with a view to the EIA decision. It is only after these procedures are duly conducted and documented that the competent authority (the Regional Inspectorate or the Ministry of

2 the Environment and Water) can make the EIA decision and thus authorize the implementation of the investment project. The positive outcome of the procedure under Art. 92 or Art. 93 of the Environmental Protection Act is a prerequisite for opening the next administrative phase of the project, i.e. obtaining an authorization to use the energy potential of water resources for the generation of electricity in a HPP. For this purpose, the investor has to obtain water intake and use authorizations in accordance with Arts. 44 and 46 of the Water Act. The choice of a competent authority depends on the type of water body which will be used (river, dam, sea, etc.). Typically, when the water use at the HPP is intended to involve inland rivers within the territory of Bulgaria, the competent authority is the director of the respective regional basin directorate. In terms of their legal nature, these authorizations are individual administrative acts and therefore the procedure of their issuance, operation and withdrawal is subject to the provisions of the Administrative Procedure Code. The two types of authorization grant different rights to their holders and they are issued at different stages of the investment process. The water intake authorization, for instance, entitles the holder to use the energy potential of water resources to generate electricity in a hydroelectric power plant and to take and divert river waters. This authorization specifies the place of the water intake, the quantity of water which is allowed to be used and the technical parameters of the installation. The water intake authorization may contain some additional modalities specified by the basin directorate, such as commencement date and deadline of construction works, validity term of the authorization, fees charged on the use of water, etc. The availability of this authorization is the first indispensable precondition for the implementation of the further phases of the investment plan to build a hydroelectric power plant. Further on, the water use authorization must be available as of the commencement date of construction works or rehabilitation works, as the case may be. This authorization sets out the terms and conditions for the water run-off, the discharge, the surface water intake and others. This type of authorization is required also when linear infrastructure is built (aqueducts, bridges, transmission grids, power lines, etc.). The water use authorization contains details on the scheme and parameters of that part of the water body (river) which is to be used. It specifies the location of the premises, the water duct, the pond, etc. The authorization may feature some additional requirements of the basin directorate to construction works and to the post-construction phase (e.g. plotting of construction works to check the compliance with the approved parameters). The Water Act reads that the water intake authorization is issued for a term of up to twenty (20) years. This validity term is new as it has been introduced with the amendment to Art, 57, para 1, subpara 3 of the Water Act of 23 June Prior to the amendment, such authorizations were valid for up to ten years. Water intake authorizations issued under the amended law for up to ten years may be renewed in accordance with the new amendment provided that the holder applies for renewal in accordance with Art. 78 of the Water Act. The validity term of the water use authorization is normally the time limit for construction works to be completed as specified in the water intake authorization. If he is not in a position to complete construction works within these time limits, the investor is entitled to request renewal of the authorization in accordance with Art. 78 of the Water Act, proving that reasons beyond his control have prevented him from fulfilling his obligations. In fact, it should be noted that pursuant to the provisions of Art. 78 of the Water Act the holder of a valid water intake authorization has the right to renew the 20-year time limit envisaged in the law for the use of the energy potential of water to generate electricity in hydroelectric power plants. As mentioned earlier, the water intake authorization enables the investor to use the water potential to generate electricity in a HPP but it does not imply that the holder is free to proceed with the physical planning of the site and build the power plant. The availability of the water intake authorization is a step towards the opening of the next administrative phase related to obtaining the required permits to build. To this end, Art. 46a of the Water Act reads that the holding of the authorizations under Arts. 44 and 46 of the Water Act is

3 an indispensable prerequisite for the approval of an investment project and the issuance of a permit to build a HPP in accordance with the provisions of the Physical Planning Act. It must be pointed out that the authorizations issued under the Water Act do not entail the right to carry out construction works; moreover, they give no privilege to their holder in seeking a permit to build. The physical planning of the site of the would-be hydroelectric power plant and the endorsement of the design (technical and/or working phase) follow all the steps in the investment process under the Physical Planning Act, which are mandatory for all investors in construction. Therefore the investor must comply with the requirements of Art. 148, para 4 in conjunction with Art. 161 of the Physical Planning Act to issue permits to build only to the landowner or the person granted the right to build within the property or the person entitled to build in another person s property by force of a special law. The Water Act is the special law concerning the construction of hydroelectric power plants but it does not explicitly envisage the right to build the power plant in another person s property by virtue of the water intake authorization. Hence the investor must become either the owner of the property or holder of the right to build within the property where construction works will be carried out prior to their commencement under the Physical Planning Act. It is precisely this statutory requirement that often causes complications in the investment process. Hydroelectric power plants are typically built outside communities and close to river beds on farmland or in forests. The law allows both natural and legal persons and central and local government authorities to be the owners of such lands. The problem arises when the intended site is owned by the central or local government authorities because of the special statutory arrangements for the acquisition of such land. State-owned and municipal properties in the public domain may not be subject to sale and no right to build may be granted thereon. The only exception is a specific and rather cumbersome procedure under some laws to transfer these state-owned or municipal properties from the public to the private domain. A conditio sine qua non for such a procedure to start is to have the legal grounds of keeping the property in the public domain expired or removed. Municipal properties in the public domain, for instance, may be transformed in accordance with Art. 25 of the Farmland Ownership and Use Act or Art. 14, para 1 in conjunction with Art. 14a, para 2 of the Forests Act, as the case may be. State-owned forest stock may be subject to the procedure under Art. 14, para 1 in conjunction with Art. 14a, para 1 of the Forests Act and in conjunction with Art. 6 of the State Ownership Act. These procedures are not insurmountable but, in all cases, they take quite a lot of time and resources. For this reason, the investor should be meticulous in selecting a site for the HPP and check both the ownership rights and the type of property. The selection of a site might prove rather difficult to the investor, especially when the site with the highest productivity potential turns out to be a state-owned or municipal property in the public domain. In other words, it is advisable to first check whether it would be possible for the status of the land to be transformed from a property in the public domain into a property in the private domain and then undertake the procedure of obtaining authorizations and permits. However, the search for suitable properties cannot always bring the desired result from the perspective of the investment project and this situation warrants a legislative solution to the issue of facilitating investors, especially in the light of Bulgaria s commitment to increase the share of the consumption and the production of clean energy by 6.6 % within the next 11 years by The following options could be applied to develop the existing legislation along these lines: - to introduce statutory provisions which envisage that the authorizations issued under Arts. 44 and 46 of the Water Act give their holders also the right to build hydroelectric power plants within state-owned or municipal properties in the public domain where the energy potential of water is to be used. For this purpose, the powers of the competent authorities under the Water Act should be enhanced; or - to stipulate explicitly that hydroelectric power plants may be built within state-owned or municipal properties in the public domain upon the granting of concession rights under the Concessions Act. In this case, holders of valid water intake authorizations should be given preference in concluding a concession agreement because they have already been authorized to use the water potential; or

4 - to streamline the existing legislation so that the administrative procedures of obtaining and environmental impact assessment and a water intake authorization include also all the necessary coordination with the relevant government authorities concerning the site of the would-be HPP and to make sure that this coordination is sufficient for the implementation of the investment. The ownership right to a state-owned or municipal property in the private domain may be acquired in accordance with the general principle laid down in the State Ownership Act or the Municipal Ownership Act respectively, i.e. on the basis of a public tender or competitive bidding. A situation might occur in which the investor holds a water intake authorization or a specific location but cannot acquire the ownership rights to the land because a third party is awarded the right to purchase it in a public tender or competitive bidding process. Such a development would thwart the investor s intentions or make the investment much more costly. Some corrupt practices might happen as well. To avoid all these situations, the lawmaker should state it clearly that the authorizations issued under the Water Act give their holders priority right to purchase state-owned and municipal properties in the private domain without any public tender or competitive bidding. The provisions of Art. 62 of the Energy Act are an attempt of the lawmaker to resolve the existing problem. Pursuant to these provisions, when energy facilities are built, including underground and surface hydrotechnical equipment, the competent authority should give the operator the right to build for consideration without any public tender or competitive bidding process to follow. These facilitated arrangements have been envisaged also because of the ongoing liberalization of the energy sector, as well as the principle of security of energy supplies. Regrettably, for the time being, these provisions are not applicable to the investment process in the construction of hydroelectric power planets because of the interpretation that they govern energy undertakings within the meaning of 1, subpara 24 of the Additional Provisions of the Energy Act, i.e. legal entities engaging in the production, distribution or transmission of electricity on the basis of their license. In this connection, the lawmaker should give more explicit wording of these provisions to prevent divergence in the interpretation and hence inapplicability of statutory provisions in practice. Another possible option to avoid the application of the provisions of the State Ownership Act and the Municipal Ownership Act concerning the public tenders and competitive bidding process for the acquisition of the right to build hydroelectric power plants on land which is state-owned or municipal property in the private domain is the establishment of public-private partnership and, more specifically, the incorporation of legal entities where both the public and the private sector have interest. This form of cooperation between local governments and private businesses is still less known and underdeveloped in Bulgaria; however, it offers good development prospects, especially in the construction of energy facilities and in the use of renewable energy sources. As is seen from the above considerations, under the existing Bulgarian laws the acquisition of ownership rights or the right to build a hydroelectric power plant on the selected site by the investor is a mandatory prerequisite for the opening of the urban planning and development procedures and the obtaining of a permit to build a HPP under the Physical Planning Act. In the course of the administrative procedure of obtaining the permits required under the Physical Planning Act the investor has to undertake also some additional interim administrative procedures for the purpose of the land to be transformed from farmland or forest stock into urban properties for the generation of electricity. These procedures are to be completed before the urban development plans are approved and become enforceable. The relevant legislation consists of the Farmland Protection Act and the Forests Act. The choice of a competent authority depends on the size of the plot in the purpose of which is supposed to change. The Farmland Committee at the Ministry of Agriculture and Foods is the competent authority for plots exceeding five hectares. The State Forests Agency is the competent authority for forest stock of up to ten hectares in the public domain, while the Council of Ministers is the competent authority for all properties in the public domain and for properties exceeding ten hectares in the

5 private domain. Parallel to the procedure of obtaining the permits under the Physical Planning Act, the investor should conclude contracts with the respective electrical distribution company for access to the electricity grid. This is the way to ensure access of the future installations to the Bulgarian energy grid system, as well as transmission and sale of the electricity generated in the HPP. It should be further noted that the construction of a hydroelectric power plant is completed upon the issuance of an operation permit. Due to its complexity and social significance, the construction of hydroelectric power plants may fall in any of the three categories of facilities, depending on their size. Therefore the competent authority for setting the energy facilities into operation is the National Construction Supervision Directorate. In this context and given the lack of specific statutory provisions on this issue, it is important to dwell also on the ownership of the hydroelectric power plants which private investors build in accordance with the requirements outlined above. The fundamental principle of the Bulgarian property law, which has to apply to the implementation of investment projects for the construction of hydroelectric power plants is that the owner of the land is also the owner of what has been built thereon. Thus typically the owner of the power plant built on the land after its purpose has been changed and the ownership rights to its have been acquired by the investor is the company which has invested in the project. Still, it must be noted that Art. 19, para 4 of the Water Act reads that water systems and equipment included in the assets of companies other than water and sewerage operators with equity participation of the state and/or local governments, which have been constructed with own resources or loans contracted by these companies, are the property of the companies themselves. The provisions go on to specify the installations. Indeed, hydroelectric power plants are not explicitly referred to but the legal definition of water systems given in Art. 5 of the Water Act states that the use of water is achieved by means of water systems which include equipment and installations for intake, storage, transportation, distribution, discharge and treatment of water, for the use of water energy and for protection against the harmful impact of water, i.e. hydroelectric power plants are also envisaged. These provisions are interesting for two reasons: (i) this is a specific legislative solution for the establishment of public-private partnership in which the public administration contributes land as an asset in the construction of the HPP, while the private investor takes on the project financing, design, construction works, etc.; and (ii) this is a good example of specific provisions adopted by the lawmaker to facilitate the construction of hydroelectric power plants. There are two more important aspects in the implementation of HPP investment projects which are noteworthy as follows: The generation of electricity is subject to licensing under the Energy Act. The competent authority is the State Energy and Water Regulatory Authority. The license is issued to a Bulgarian legal entity registered in accordance with the requirements of the Commercial Code. The license is issued for a term of up to 35 years. It should be pointed out that an electricity generation license is not required for owners of hydroelectric power plants with total installed capacity of up to 5 MW pursuant to Art. 39, para 4 of the Energy Act. At present, electricity prices are regulated in Bulgaria and the regulatory mechanism is applicable to the electricity generated in hydroelectric power plants. The competent authority is again the State Energy and Water Regulatory Authority. In accordance with Art. 159 of the Energy Act, it is incumbent on public suppliers and end suppliers respectively to purchase the electricity generated from renewable and alternative energy sources and hydroelectric power plants with installed capacity of up to 10 MW. This electricity is sold at preferential prices set by the State Energy and Water Regulatory Authority in accordance with Art. 21 of the Renewable and Alternative Energy Sources and Biofuels Act. The preferential prices of the electricity generated in hydroelectric power plants are laid down in the following decisions of the regulatory authority:

6 - Decision of the State Energy and Water Regulatory Authority No. C-15 of 12 May 2009 on the setting of the preferential price of the electricity generated in low-pressure axial hydroelectric power plants with installed capacity of up to 5 MW. The price is set at BGN 149 net of VAT as from 1 June 2009; - Decision of the State Energy and Water Regulatory Authority No. C-14 of 12 May 2009 on the setting of the preferential price of the electricity generated in afflux hydroelectric power plants with installed capacity of up to 5 MW. The price is set at BGN 199 net of VAT as from 1 June 2009; - Decision of the State Energy and Water Regulatory Authority No. C-04 of 30 March 2009 on the approval of the preferential price of the electricity generated in hydroelectric power plants with installed capacity of up to 10 MW. The price is set at BGN 105 net of VAT as from 1 April These decisions make it clear that preferential prices differ in accordance with the types of hydroelectric power plants. The reason is that the price regulatory authority is guided in the exercise of its powers to set preferential prices and surcharges by the provisions of the Energy Act, the Renewable and Alternative Energy Sources and Biofuels Act and the Regulation on Electricity Prices ( the Regulation ) promulgated in The Official Gazette, No. 62 of This legal framework specifies the criteria to be applied by the regulatory authority in the pricing of clean energy as follows: the type of primary energy source used to generate clean energy (Art. 21, para 2 of the RES Act); the type of technology used in the production process (Art. 19a, paras 1 and 4 of the Regulation). These statutory provisions empower the energy regulatory authority to distinguish between different preferential price levels, depending on the specific energy installation.