Gas giant kicking and screaming against unbundling

Latvia's state-owned power utility Latvijas Gaze has proposed moving the deadline for selling the unbundled transmission and storage entity to the end of 2018, according to a company's announcement to the Nasdaq Riga stock exchange.

Latvijas Gaze is seeking an extension of the deadline set in draft amendments to the Energy Law, which the Latvian parliament is going to pass in the second reading later this month as Latvia prepares for the opening of its gas market and unbundling of Latvijas Gaze natural gas monopoly, as required by the European Commission.

"The position of Latvijas Gaze with respect to the opening of the natural gas market is based on the company’s privatization agreements signed in 1997 where the strategic investors committed to solving the company’s financial difficulties of the time, securing natural gas supplies, and developing the company. The state, in return, committed to granting to the company exclusive rights of gas supply for 20 years and enabling it to operate as a vertically integrated and undivided undertaking, which it considered the most effective form of management. Furthermore, the state promised not to take political decisions with respect to the company," Latvijas Gaze representatives said in the statement.

"The company is well aware of the changes in the European natural gas market over the last decade and has always reckoned with the expiration of its exclusive gas supply rights in 2017. Hence, neither now nor before has the company had objections to the opening of the natural gas market on April 3, 2017 when the privatization agreements expire," the gas company said.

"However, the company has objections to the requirement of the law amendments to unbundle a unified transmission and storage entity from the trade and distribution entity and to sell the unbundled part of the company within a very short time. It should be noted that the unbundling of the company is merely a means to ensure a functioning natural gas market. Much more important is the diversification of supply routes and the very opening of the market, which the company does not object to."

Latvijas Gaze indicates that the proposed legislative amendments require to complete the reorganization of the company (the establishment of a sister company) in just over a year and the sale procedure in nine months. If the amendments to the Energy Law are passed this year, the entire process will be allowed 24 months. For a comparison – in Lithuania the whole process was completed in 40 months, while in Estonia the sale of a company already unbundled six years before took 31 months.

The situation of Latvia is "more complicated" the company argues because not only the transmission system but also the Incukalns Underground Gas Storage Facility needs to be unbundled.

The company notes that only its shareholders may decide on the company’s reorganization, so the state must come forward with such solutions as to enable the shareholders to take well-considered decisions beneficial to all stakeholders. The currently offered deadlines are contrary to these principles, as the shareholders are forced to sell their shares in an unreasonably short time potentially resulting in losses.

"The company also objects to the proposed fine for failure to complete the unbundling and sale of the unified transmission and storage operator within the statutory deadline. The Ministry of Economy suggests imposing a fine of up to 10 percent of the unified transmission and storage system operator’s net turnover. Such a fine is disproportionate because there is a number of objective factors that may hinder the sale," according to Latvijas Gaze.

"A third substantial objection concerns risks of security of gas supply after the market opening. The experience of European countries proves the necessity of a special regulation to ensure sufficient natural gas reserves, as traders and customers are reluctant to maintain natural gas reserves which implies a long-term freezing of funds and additional expenses for storage services. European countries have faced natural gas shortages because of such reasons."

"A specific feature of Latvia is that the consumers can only be supplied with gas if in summer there has been natural gas injected into the Incukalns Underground Gas Storage Facility for the Latvian consumers. Currently, during heating season, 100 percent of the Latvian consumption is covered from the storage. A second option is the Lithuanian interconnection which alone only covers a small fraction of Latvia’s needs because it is also used by Estonia and may be booked for reverse supplies – from Latvia to Lithuania," the gas company says in the announcement.

Latvijas Gaze therefore proposes allocating one third of the Incukalns UGS capacity for the Latvian consumers and introducing a procedure how these reserves shall be maintained.

Latvian lawmakers at the end of October passed in the first reading draft amendments to the Energy Law providing for the opening of the Latvian gas market, which among other tings includes the unbundling of Latvijas Gaze natural gas utility by separating gas distribution and sale from transmission and storage. The Latvian government adopted the draft amendments in September despite objections from Latvijas Gaze.

The Latvian government on March 3, 2015, decided in principle to start the unbundling of Latvijas Gaze natural gas utility, separating gas distribution and sale from transmission and storage, in 2016. The government intends to liberalize the Latvian gas market in line with the EU requirements by establishing Latvijas  Gaze's sister company in charge of gas transmission and storage operations next year and separating the companies' ownership on April 3, 2017, upon expiry of Latvijas  Gaze monopoly as provided for in the 1997 agreement on privatization of the natural gas company.

The draft amendments to the Energy Law have been announced at a meeting of state secretary and now have to be passed by the parliament. The management of Latvijas Gaze has been resisting the unbundling, warning of tariff hikes and international lawsuits.

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 (47.2 pct), Russia's Gazprom (34 pct) and Itera Latvija (16 pct).

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