Published: 2015-11-13 09:33:06 CET
Latvijas Gāze
Company Announcement

JSC "Latvijas Gāze": Company’s opinion on Energy Law amendments

The second parliamentary hearing of the amendments to the Energy Law concerning the opening of the natural gas market and the unbundling of the company is due in November.

The position of the JSC "Latvijas Gāze" with respect to the opening of the natural gas market is based on the company’s privatisation 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.

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 privatisation agreements expire.

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.

The current law amendments require to complete the reorganisation 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. It should be borne in mind that the situation of Latvia is more complicated because not only the transmission system but also the Inčukalns Underground Gas Storage Facility needs to be unbundled. Moreover, the company is present on the stock exchange, which requires a certain procedure to ensure transparency and acceptability to all shareholders.

It is important to remind that only shareholders may decide on the company’s reorganisation, 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 JSC "Latvijas Gāze" asks the Parliament to take into account that the market will be opened on April 3, 2017 in any case, to take note of the foreign experience, and to stipulate that the unbundling of the company shall be completed by October 1, 2017 and the unbundled parts shall be sold by December 31, 2018. Such terms are manageable if the state observes the requirements of the Directive and leaves it for the company itself and its shareholders to decide upon the form of transitional period unbundling conceding the formation of a subsidiary. Otherwise it would objectively take even longer.

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% 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.

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 Inčukalns Underground Gas Storage Facility for the Latvian consumers. Currently, during heating season, 100% 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 JSC "Latvijas Gāze" suggests allocating one third of the Inčukalns UGS capacity for the Latvian consumers and introducing a procedure how these reserves shall be maintained.

         Vinsents Makaris
         Phone + (371) 67 369 144
         E-mail: IR@lg.lv