Cabinet takes on major gas utility split for 2016

Government ministers at Tuesday’s Cabinet meeting ruled in principle to start the unbundling of Latvijas Gaze natural gas utility in 2016, with the goal of separating gas distribution and sale from transmission and storage.

The government intends to liberalize the Latvian gas market in line with EU requirements by establishing a sister company to the utility to be in charge of gas transmission and storage operations by next year and fully separating the companies' ownership by April 3, 2017.

Mario Nullmeier, vice-chairman of the Latvijas Gaze board, said at the government meeting that the company's situation is unique in the region because its privatization contract is in effect until April 2, 2017, and that any ruling about Latvijas Gaze should be consistent with the privatization agreement and the Latvian Constitution.

Latvian Economics Minister Dana Reizniece-Ozola vowed to take the gas company's objectives into account in liberalizing the gas market and to implement the reform "carefully".

The Economics Ministry was tasked with preparing the required legislative package by June 1, 2015, so that the planned Latvijas Gaze could be unbundled as planned.

Latvian Prime Minister Laimdota Straujuma voiced pleasure with the Economics Ministry's resolve to draw up the legislative package by June 1.

The ministry is also charged with notifying shareholders and potential investors about the government's decision.

According to the ministry's representatives, the underground gas storage facility in Inčukalns will be separated from Latvijas Gaze by establishing an integrated transmission system operator, which would also have storage infrastructure at its disposal. This means that in Latvia's case, the transmission system operator would combine transmission and storage functions.

The Economics Ministry does not expect the unbundling of Latvijas Gaze to have a significant effect on gas tariffs, because the company's administrative costs affecting the unbundling process make up only 1-2% of the tariff.

Latvijas Gaze will be given about a year to prepare for the transmission system's technical separation.

The company will also have several months for the transmission system's legal separation from Latvijas Gaze, specifically, the creation of a separate sister company with technically separated and clearly defined transmission and storage assets. The sister company's shareholders will be Latvijas Gaze shareholders, whose stakes in the transmission system operator's capital will be proportional to their stakes in Latvijas Gaze.

Under the ownership separation plan, the transmission system operator would be owned by an entity unrelated to Latvijas Gaze or its shareholders, or the state.

The Latvijas Gaze management said in its findings about the Economics Ministry's report that the new company that would be established in the unbundling process might start operations no sooner than in July 2019.

The gas company's management also said that only Latvijas Gaze shareholders have the authority to decide on the company's reorganizations and that the Latvian government, which at the end of 2014 owned 117 of the company's 39.9 million shares, cannot decide the issue unilaterally.

Latvijas Gaze is engaged in purchasing, transportation, storage and distribution of natural gas. The company is quoted on the Secondary List of the NASDAQ Riga stock exchange. The company's key shareholders are Germany's E.ON Ruhrgas International, Russia’s Gazprom and Itera Latvija.

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