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From whom gas can be bought. Sellers were imposed on Ukrainians, although the law allows electing them

20 March 2018

If there is a gas stove in a kitchen, then we are already buying “blue fuel”. And buyers should choose a seller. Something like a mobile operator or Internet service provider.

In the Zakarpattia region, many people not only cook, but also heat the dwelling due to the energy of the gas. Thus, more cubes are burnt. So, the free choice could be especially interesting in this case – both for a buyer and a seller. For example, we live in Uzhhorod, but we want to buy gas not from the local Zakarpatgaz Zbut, but, let us say, from LLC Odesagazpostachannia. After all, both companies have experience of work with the population. But is it possible to make such a choice in reality? When, in the end, will customers see at least a few sellers of “blue fuel” for a home?

It will be more expensive to buy from another seller

Since 2015, new rules for gas trading have been operating in Ukraine – the Law On Natural Gas Market entered into force. There are four main links: gas production, its transportation, distribution (this function is performed by oblgazes (regional gas companies) and sellers (this function is performed by gas supply companies that have a corresponding license). In fact, the ability of consumers to choose a gas seller is one of the main novels. Since then, we have been receiving bills not from oblagazes, but from newly created gas suppliers (gazzbuts).

In Ukraine, according to the NEPURC, at the beginning of February, there were 393 companies that have a license to sell gas. State-owned PJSC Ukrposhta is among them. However, while this company orders fuel not for sale, but for own needs. In the Zakarpattia region, according to PJSC Zakarpatgaz, there were 30 gas suppliers as of February.

Companies that sell gas in the Zakarpattia region

But only one of them – LLC Zakarpatgaz Zbut – is now the supplier of gas for the population. Today in the Zakarpattia region, as in other regions of the country, nobody has heard about the precedent of changing the seller of fuel for housing. If you enter the phrase “buy natural gas” on the Internet, we will see many websites with offers. But with the note “The product is provided for enterprises and organizations”. In February, the price per 1,000 cbm ranged from an average of UAH 8,400 to 10,000. In addition, the buyer must pay extra for its transportation and distribution. The population of Ukraine, we recall, now buys gas at a clearly regulated price – UAH 6,957.90 per 1,000 cbm. In addition, “all inclusive” in this price – in fact, the price of gas, the cost of its transportation and distribution, as well as the operator’s margin.

Gas price for the population. Information from the website of LLC Zakarpatgaz Zbut

What prevents gas companies from selling to businesses, go to domestic consumers? “The main factor is the impossibility of wholesale purchases by suppliers of Ukrainian gas at a regulated price (this is UAH 4,942 per 1,000 cbm without VAT and the distribution and transportation tariff) – directly from PJSC Ukrgazvydobuvannia, – Ihor Muzychko, Director of LLC Energo Retail, explains. – At present, according to the CMU resolution, Ukrgazvydobuvannia sells the whole gas resource to Naftogaz, which in turn sells it to gazzbuts. The latter directly supply it to household consumers at a regulated price with a fixed margin of 2.5%. Accordingly, other suppliers, purchasing gas at the market at a commercial price for importers and non-state producers, cannot compete in the price with gazzbuts”.

Realities: the price for the population and religious organizations in Ukraine is lower, but the market one, at which traders sell, is higher. The same Zakarpatgaz Zbut set the price for industrial and other consumers being legal entities at the level of UAH 10,725.84 in February.

Did the Seller Really Change?

Therefore, in today’s realities, specific companies are defined by the CMU as suppliers with specific obligations in different territories (status – ISO). It is these traders who buy cubic meters of gas from NJSC Naftogaz of Ukraine at a regulated and lower tariff, and then supply it to homes in specific regions of the country.

“ISO suppliers are tied to the territory of licensed natural gas distribution activities only as such that they cannot refuse to supply, Roman Nitsovych, an energy expert, project and program manager at DiXi Group Think Tank points out. – In other regions, they can work if they have appropriate contracts. Although in practice, there are no incentives for competition in the territory of “someone else’s” oblgaz”.

In the Zakarpattia region, LLC Zakarpatgaz Zbut is determined as a special supplier, which cannot refuse services. The seller’s margin in cbm of gas, as already mentioned, is about 2.5% – it is 12 kopecks from each sold cbm of fuel. The seller can lower its margin. By the way, earlier, the margin could not exceed 1% of the component in the price of cbm of gas, and only later this share was allowed to be increased to 2.5%.

By 2015, the population of the region had to deal with PJSC Zakarpatgaz in gas issues. With the introduction of the new legislation, oblgazes, in essence, are prohibited from selling fuel directly. They are gas distribution enterprises, the main function of which is to maintain networks. But it would be wrong to argue that oblgazes in Ukraine had exited the sales market. After all, the gazzbuts created in the regions are controlled by the same oblgazes. The only owner of LLC Zakarpatgaz Zbut, as it is known from the dossier of YouControl analytical system, is PJSC Zakarpatgaz. The two organizations are located at the same address and in one territory.

Head Office of Zakarpattia gas companies: on the right – PJSC Zakarpatgaz, on the left – service center of LLC Zakarpatgaz Zbut. Photo by the author

Are gas distributing companies ready to provide gas distribution services to the population to other suppliers, except for their own sales? “PJSC Zakarpatgaz is ready and always fulfills the obligations of DSO (distribution system operator. – Author) in accordance with the licensing conditions. The Company, in full and on time, distributes gas from any licensed supplier specified in the nomination to its customers. At the market of gas supply to commercial consumers of Zakarpattia, there are currently more than 30 supplying companies, including LLC Zakarpatgaz Zbut, mentioned by you. There are no comments from market participants regarding the bias or non-fulfillment of obligations by DSO”, – Yurii Lomakin, Public Relations Specialist of PJSC Zakarpatgaz, stated.

According to YouControl analytical system, Zakarpatgaz is part of Dmytro Firtash’s Group DF. Today LLC Zakarpatgaz Zbut, as it is published on its website, supplies fuel to more than 270,000 household consumers, 610 budget institutions, 3.3 thousand industry and public utility entities, and 522 religious buildings. According to YouControl system, Zakarpatgaz Zbut took the first place in the region in terms of revenues – approximately UAH 2-2.5 billion for 2016. The owner of LLC – PJSC Zakarpatgaz – also entered the TOP 25 companies with the highest level of revenue in 2016, but ranked 11th – UAH 300-350 million.

Customer Service Center of Zakarpatgaz Zbut. Photo by the author

For each oblgaz, the so-called Compliance Programs are in effect – this document also refers to the division of players in the gas market in the following areas: extraction, distribution, and sale. The objective of the program is to enable players in the gas market to act in their own area. “The company, as a gas distribution system operator (i.e., oblgaz. – Author), shall  not carry out supply activities (i.e. does not sell. – Author) and/or natural gas extraction”, the standard Compliance Program requires. In addition, gas distribution companies are prohibited from conducting joint promotional activities with sellers, placing sellers’ logos on their websites and indoors. Gas distribution companies are also prohibited from requiring or recommending consumers to enter into agreements with certain gas sellers.

Do oblgazes violate the Compliance Program? Do they discriminate other market participants who prefer to trade gas? This is controlled by the National Energy and Public Utilities Regulatory Commission (hereinafter – the NEPURC). In response to a request, Viktoriya Morozova, the NEPURC member, confirmed that no violations of the Compliance Program by PJSC Zakarpatgaz, as well as the facts of discrimination against other gas suppliers have been registered.

Did potential sellers of fuel for the population applied to Zakarpatgaz? Yurii Lomakin, a representative of the company, pointed out that there were no appeals. “In accordance with the current Rules for Natural Gas, the GTS/GDS Codes, there is no need for supplying companies to apply to DSOs if they have new customers being consumers, whether they are legal entities or domestic consumers, – Yurii Lomakin said. – The main thing for the companies being suppliers is to agree with the consumer to buy gas exactly from it and to conclude with it the corresponding supply contract. Further, this contract will allow the company being supplier to order nominations for the transportation of the specified volumes of gas to the consumer from the gas transmission system operator (Ukrtransgaz). DSOs only distribute gas in accordance with these nominations provided by TSO”.

Gas distribution plant. It is the service of gas systems that oblgazes should be engaged in, and not the sale of fuel. Photo by the author

State and Private Gazzbuts – Somebody Can Win

After 2015, in Zakarpattia, household consumers being customers of PJSC Zakarpatgaz automatically became customers of LLC Zakarpatgaz Zbut, which, like its parent company, operate under the brand of the Regional Gas Company.

“The so-called “gazzbuts” – pseudo gas suppliers, the overwhelming majority of which belong to Group DF – are unnecessary intermediaries in the gas market for the population, do not bear the responsibility and risks associated with the gas supply, and do not create additional value for consumers”, – this is how state National Joint Stock Company Naftogaz of Ukraine spoke about the activities of gazzbuts.

“Naftogaz of Ukraine may start direct supply of gas to the population at any time and in any region of Ukraine at the price that should not exceed the price of current suppliers, on which the CMU imposed specific obligations”, the Regional Gas Company parried.

From words to actions: in 2015, LLC Gas Supply Company Naftogaz of Ukraine, which, according to YouControl analytical system, belongs to the subsidiary enterprise Gas of Ukraine, was established from the ground up. It, in turn, is a structure of NJSC Naftogaz of Ukraine. In July 2017, the company obtained a license for gas sales, and from September of the same year, it started selling it to household consumers in the territory of licensing activities of PJSC Kirovogradgaz. The latter, by the way, does not belong to Group DF, and, according to YouControl, Naftogaz of Ukraine owns half of the shares. Since November 2017, Gas Supply Company Naftogaz of Ukraine has started selling fuel to household consumers in the territory of licensed activities of the gas distribution company PJSC Kyivgaz.

It should be noted: the gas supplier of Naftogaz is not mentioned in the CMU Resolution No. 187 as such that cannot refuse to supply in the territories of the mentioned areas. Instead, the subsidiary company Tsentrgaz of OJSC Kirovogradgaz and subsidiary company KyivgazEnergy of PJSC Kyivgaz are determined in it as such that have the ISO status.

Will the supplier of Naftogaz offer its services to consumers of other regions? We can conclude that in the coming months no. The company claims that this requires amendments to the existing legislation. “The main current risk for the activities of the Company is the inability to achieve a certain share of the presence in the natural gas market due to the existence of significant and unreasonable advantages of the existing suppliers of natural gas that are affiliated enterprises with the Gas Distribution System Operators in the licensed territories of such DSOs, Olena Osmolovska, Deputy Corporate Communications Director at Naftogaz of Ukraine, tells about obstacles in the work of the gas trader. – During the activity of the Company, there were some obstacles caused by certain imperfections of a number of provisions of the Rules for Natural Gas Supply. The analysis of certain provisions of the Rules for Natural Gas Supply and the Standard Agreement for Natural Gas Supply to Household Consumers gives grounds for acknowledging the existence of protectionist features in these documents in favor of existing suppliers of natural gas affiliated with gas distribution companies. Today, gazzbuts occupy a monopoly position in the market of gas sales to the population and, of course, will not welcome the emergence of new players in this market”.

Concerning the work specifically in the Zakarpattia market, in parallel with Zakarpatgaz Zbut, Olena Osmolovska, Naftogaz Spokeswoman, says: “Simultaneous work in the region of these companies is possible, but their competition for the consumer is practically impossible. The fact is that the price, at which Naftogaz is obliged to supply gas to gazzbuts, is regulated. It makes it impossible to compete and keeps gazzbuts monopolists in gas supply”.

Director of LLC Zakarpatgaz Zbut Viktoriya Tomynets stated in her comments to the author that the mentioned CMU Resolution No. 187 (which refers to specific sellers with the ISO status) determined the ability of all suppliers to enter into contracts with NJSC Naftogaz of Ukraine for the purchase of gas at the same price as for suppliers with specific obligations, and sell on the same terms with a trade margin of 2.5%. However, according to her words, the number of willing to sell gas to household consumers, at least in the Zakarpattia region, has not increased.

DiXi Group expert Roman Nitsovych places emphasis on the prospect of selling gas to the population by various companies: “Such an opportunity exists only theoretically. Indeed, ISO suppliers indicated in the annex to the CMU Resolution No. 187 only “have no right to refuse” to the consumer, any entity with the license to supply, having a contract with a household consumer, may become an ISO supplier. But there are several factors that make such an option impossible in practice. The first is the government-regulated price and limited margin; the second is the necessity of opening special accounts; the third – cash gaps through long-term subsidy reimbursement; the fourth – the need to create its own base of customers”.

"In my opinion, the lack of real funds from the state to finance benefits and subsidies, which today exceed 50% of planned annual gross income in the Company, restrain the process of real monetization, and thus make it impossible to develop the natural gas market of “household consumers”, Viktoriya Tomynets, Director of LLC Zakarpatgaz Zbut, says. – Subsidies have not been funded for six months or more. Benefits and subsidies debt exceeds UAH 500 million, and in summer it amounted to over UAH 800 million. Knowing the perfect nature of the debt for gas consumed by the population, NJSC Naftogaz of Ukraine regularly files lawsuits for recovering tens of millions hryvnias of fines (in particular, penalties) from the Company for untimely calculations. Taking into account the above, I think that the talk that NJSC Naftogaz of Ukraine is seriously intending to sell gas to the final consumer is unlikely in the current circumstances”.

And what if the Cabinet of Ministers with one new resolution takes away the ISO status from regional gazzbuts and transfers it to the supplier of Naftogaz? “Theoretically it can. Although a much better way out will be the abolition of the list of ISO suppliers with anchorage to the territory of the licensed activity of oblgazes and the opening of real opportunities for any market player with a supply license to participate in ISO supplies”, Roman Nitsovych said.

The Public Relations Department of Regional Gas Company commented on the hypothetical option of depriving their gazzbuts of the ISO status and granting it to Gas Supply Company Naftogaz of Ukraine: “If only NJSC Naftogaz of Ukraine supplies gas to the population, it will strengthen the monopoly to a critical level. The transit of gas, its extraction and supply will be concentrated in one pair of hands. It is not profitable either for consumers or for other market participants. In fact, the market will be closed for all suppliers who are not affiliated with NJSC Naftogaz of Ukraine. And added: “The RGC Group is expecting that the further prospect of the development of the domestic gas market is its liberalization. The main condition for progress in this direction is the elimination of the monopoly of NJSC Naftogaz of Ukraine in the market for gas supplies to the population. Lack of monopoly and equal access to resource conditions will lead to the emergence of new entities in the market. Only then consumers will be able to choose the supplier not only by the price, but also by the level of service”.

Free Gas Market – Obstacles Exist

Although RGC representatives publicly say that they are ready to compete, and the NEPURC does not find any significant violations of the Compliance Program, some gas market players still emphasize some of the advantages, which regional gazzbuts already have.

“The need to form a financial security by a supplier – gazzbuts do not form it, which accordingly creates a competitive advantage for them (costs of suppliers for a financial security are up to 1% of the cost of gas, which at a market average margin of 3% is a very important factor that reduces the profitability of this business, – Ihor Muzychko, Director of LLC Energo Retail, says. – At present, we have an unregulated mechanism for exchanging information between DSO and suppliers regarding the actual volumes of gas consumed by each household consumer (the so-called allocation) – since the Codes impose the obligations to keep metrological records on DSO, the supplier must receive information on the volumes of actually consumed gas directly from it. At the moment, oblgazes and miskgazes (city gas companies) provide this information to their subsidiaries (gazzbuts) directly through shared metering and billing systems. Only, this is in violation of the License Terms and the requirements of the Program of Compliance. It is possible to resolve this issue by introducing daily balancing on a special electronic platform that will be accessible to all suppliers without any restrictions. Daily balancing is provided by the GTS Code and should be carried out by Ukrtransgaz, which has repeatedly postponed the date of its introduction. The NEPURC did not also introduce the procedure, which would regulate this issue completely”.

The Director of Energo Retail also says that the existing transportation contracts between the miskgazes and oblgazes and PJSC Ukrtransgaz do not correspond to the standard agreement provided for by the GTS Code, which is concluded with other suppliers. This greatly simplifies payment for gas(instead of two contracts and bills, they pay only one) for consumers (customers of regional gazzbuts – Author), but puts other suppliers who will try to sell gas to the population and heat suppliers in unequal conditions. “The solution of this issue is possible only with the introduction of the separate payment for the cost of gas and tariffs for its distribution and transportation for household consumers, as it is now in the market of industrial consumers”, – Ihor Muzychko summarized.

“In order to bring new players to the market, it is necessary to monetize the subsidies, to cancel the administrative regulation of gas prices, to remove unnecessary intermediaries and to establish uniform rules for all, – Olena Osmolovska, a representative of Naftogaz, says. – The regulatory documents of the Energy Community, which we have committed to adhere to, require such actions from us”.

The MP of Ukraine Viktoriya Voitsitska, in her study, noted that the obstacle to change supplier is the inconsistency or contradiction of the rules of various documents. As one example, the MP cites the Rules for Natural Gas Supply, which state that the supplier’s change may occur if the customer does not have overdue debt. However, in the Standard Agreement already, it is stated that the consumer shall have the right to terminate a contract with the existing supplier in the absence of the debt. That is, the word “overdue” is absent. “Given that natural gas supply is a continuous process, the consumer’s debt for the received natural gas arises from the first second of the next gas day”, – Viktoriya Voitsitska summarizes. Thus, as you can see, the existing gas supplier has a formal pretext to “hold” a customer. “The current procedures create a situation where at least for ten days no one will provide the gas supply service – a new supplier will not yet have the right to do so, and nothing will be oblige the previous one to do so, which will make it difficult to change the supplier during the heating period”, – Viktoriya Voitsitska warns.

Representative of the Ministry of Energy and Coal Industry Oleksandr Lisnichenko, during a round table organized by DiXi Group on the issue of changing the supplier, said that in order to open the market of household consumers, the issues of gas prices need to be addressed first. According to him, the ministry supports the idea of ​​removing the exclusive right of Naftogaz to exclusively dispose of gas of Ukrgasvydobuvannya. “This is necessary to open the market for all suppliers who are ready to supply gas to protected consumers of ISO”, – Oleksandr Lisnichenko summarized.

Experts from the gas industry also articulated proposals: to increase the trade margin of gas sellers to 5-10%; place the prices, which are relevant for a consumer, from all suppliers on the Regulator’s website; to develop clear criteria for entities on which specific obligations are imposed, as required by the Law On Natural Gas Market (Part 5, Article 11).

What Will April Bring to Us

On April 1, the current CMU resolution on suppliers with the ISO status expires. If the Government does not approve a new document, it means that the market will automatically become free, and therefore market factors will affect the amount of the gas price for the population. We can assume that it is unlikely that the Government will neglect this issue. Thus, in the coming days, the CMU will have to decide what’s next – or the effect of the current rules will be continued, or there will be changes, including, perhaps, the amount of the gas price. Its increase for the population has long been demanded from Ukraine by the International Monetary Fund. Naftogaz and its Ukrgasvydobuvannya do not like that cubes for household consumers are sold to gazzbuts at a lower price than the market one – in January, they applied to the Cabinet of Ministers for reimbursement of the costs of the gas provided to ISO suppliers. The information about the rise in gas prices for the population, followed by its further refutation, regularly appears in the media.

But what really appeared is the January draft new CMU resolution on the specifics of gas trade from the Ministry of Energy and Coal Industry. Roman Nitsovych, an energy expert, highlights innovations among positive features of this document: the ability to directly buy gas for ISO supplies from state-owned companies producing gas; sale on the stock exchange of all gas of state producers, which is not reserved for supply to the population and religious organizations; definition of heat energy producers is specified; a more attractive margin for suppliers – up to 10%.

However, according to Roman Nitsovych, there are a lot of minuses. “The price of gas is determined on the basis of the injection period of the previous year, which increases the gap between regulated and market prices, increases the risks for suppliers”, the expert explains. – We also see a short period of contracting – consumers will not physically have time to conclude agreements with alternative suppliers, and the latter will not have time to conduct appropriate campaigns for the conclusion of agreements. The draft resolution still contains the requirement to open special accounts, which are not required by the Law On Gas Market. The Ministry of Energy and Coal Industry is also entrusted with forming a forecast gas balance and determining the amount of gas for ISO supplies. And this creates risks for administrative intervention, manual regulation”. The fact that the regime of ISO and regulated prices is proposed to be extended until 2021 was also classified by Roman Nitsovych as a minus of the document.

In February, a new idea of the Cabinet of Ministers on the gradual increase of gas prices for the population by 2-3% quarterly became known.

February documents also refer to several new versions of the gas sales model for the population and religious organizations.

Thus, despite the fact that the gas trade in Ukraine is conducted de jure in a new way, there is a risk that de facto everything can remain like it was – that is, owners of the dwellings will not be able to freely choose their gas supplier in the near future. At present, the fate of this issue depends on what the members of the Cabinet of Ministers will decide, and whether the authorities will dare to raise the price of gas for the population.

Yaroslav Hulan

The investigation was conducted within the framework of the USAID Transparent Energy project. The author’s position may not coincide with the position of the US Agency for International Development and DiXi Group Think Tank

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