Aliona Osmolovska,  Director of Government and Stakeholder Relations at Naftogaz of Ukraine

 

The separation of Ukraine’s gas transmission system from other business operations — known as “unbundling” — is one of prerequisites for the harmonisation of Ukrainian and EU gas law. Both in Europe and Ukraine, unbundling was implemented to ensure equal access to gas transmission systems for all gas suppliers.

The requirement concerns the management of both gas transition and gas distribution systems. No single supplier should enjoy anti-competitive advantages to manipulate access to consumers. The law on the natural gas market requires the unbundling of both Naftogaz and Ukraine’s regional/municipal gas companies.

Unbundling the gas transmission function from Naftogaz was also a prerequisite for a new transit deal based on European rules. This is why Naftogaz handed over its most profitable asset — the gas transmission system — to a new operator. The unbundling of Naftogaz was closely monitored by the European Commission, Energy Community Secretariat, Ukrainian government and parliament, and even by Russia’s Gazprom.

Meanwhile, the unbundling of gas distribution systems from regional gas companies received less attention. This is the only explanation why the unbundling of the distribution business from the supply business of regional gas companies was fake.

What is the difference between true and fake unbundling?

Unbundling of Naftogaz generated $7 billion for the state

On 1 January 2020, Naftogaz transferred control over Ukraine’s gas transmission system to independent national operator Gas Transmission System Operator of Ukraine LLC (GTSOU). The Energy Community Secretariat then confirmed that the Gas Transmission System Operator had been unbundled in compliance with the EU law.

The unbundling ensured stable revenue from Russian gas transit to Europe, contributing $7 billion to Ukraine’s state budget. Even if Gazprom cuts its transit volumes, the company will pay a fixed amount for transmission services over the next five years. The Gas Transmission System Operator earned nearly UAH 45 billion in the first nine months of 2020.

At the same time, Naftogaz has been developing its gas storage business through Ukrtransgaz, the underground gas storage operator. The company increased its revenue by 35% to UAH 1.03 billion in the first half of 2020. Naftogaz paid over UAH 87 billion, out of which UAH 39.6 billion is the remainder of dividend payments for 2019, to the state budget in the first nine months of 2020.

Both new operators — GTSOU and UGSOU — are increasing the range of services they offer as well as the number of customers they serve.

This year, GTSOU has introduced a new short-haul mode — gas transit between Poland, Hungary, Slovakia, and Romania through Ukraine. In this mode, traders injected more than 6 bcm of gas into the Ukrainian GTS.

Ukrtransgaz, as the operator of Ukraine’s underground gas storage facilities, encourages customers to store their gas in Ukraine and use Ukraine’s GTS. One third of gas stocks accumulated in our UGS facilities this year is stored in customs warehouse mode by foreign traders.

Uncompleted unbundling of regional gas companies slows down the gas market

In 2015, new gas suppliers appeared in Ukraine — regional gas supply companies. This was presented as unbundling at the regional level, but unlike the unbundling of Naftogaz, regional gas companies simply established 100% owned affiliates and transferred the right to supply gas to subscribers to those companies.

Despite its artificial nature, this unbundling technically complies with the requirements of the existing legislation, unless the relationship between the regional gas company and its supply company damages the interests of customers or distorts competition among suppliers.

For instance, Naftogaz Group also has a regional gas company in Kirovohrad region and Naftogaz of Ukraine Gas Supply Company. However, none of the customers of this gas supply company who decided to switch to a new gas supplier faced any virtual debts or threats to cut off gas supplies from Kirovohrad gas.

Opening the gas market for households, however, demonstrated that some regional gas supply companies are trying to stop the customer outflow while their parent companies are bullying Ukrainians with the prospect of virtual debts that allegedly arise from ‘temperature adjustments’, along with threats to cut off gas supply if they change their current supplier. 

A vivid example was the story of concealing EIC codes that are needed for a supplier to identify its new customer in the system. An EIC code is usually printed on bills for gas distribution services and is available in the user online account on the regional gas company’s website.

Since 1 July 2020, many regional gas companies have removed those codes from user accounts and ceased printing them on bills. The regulator — the National Commission for State Regulation of Energy and Public Utilities — noted this infringement and obliged regional gas companies to indicate EIC codes again.

Regional gas companies complied with this order in a creative way: some of them indicated EIC codes only in online user accounts while others printed them on the perforated line of the bills.

This is a vivid demonstration of the direct impact of unbundling on the market. Proper separation of the transmission function from supply encourages competition on the market and improves quality of services delivered to customers, while defective unbundling merely extends existing problems and market distortions, making the services delivered by monopolies less convenient and more expensive.