Naftogaz should preserve its position in arbitration following TSO unbundling — stakeholder discussion

Last week, Naftogaz held discussion sessions on possible options to unbundle Ukraine’s gas transmission system. The event was attended by supervisory board chairperson Clare Spottiswoode and CEO Andriy Kobolyev on behalf of Naftogaz...

Last week, Naftogaz held discussion sessions on possible options to unbundle Ukraine’s gas transmission system. The event was attended by supervisory board chairperson Clare Spottiswoode and CEO Andriy Kobolyev on behalf of Naftogaz; by TSO Branch director general Paweі Staсczak on behalf of UTG; by supervisory board member Walter Boltz on behalf of MGU; by Albert Sych (EY) and Paweі Dobrowolski (PwC) on behalf of unbundling advisors; and by representatives of international gas companies and IFOs.

The discussion focused on the advantages and disadvantages of two possible TSO unbundling models in Ukraine — independent system operator (ISO) vs ownership unbundling (OU).

The participants also looked into actions to be taken in the near future to ensure a fully functional unbundled TSO.

In her report, Clare Spottiswoode, who led the first ever unbundling of a state-owned gas company in the UK in the 1990s, described the current situation and suggested possible next steps to deliver the timely and proper unbundling of Naftogaz.

1. Operational independence and financial viability

Naftogaz and Ukrtransgaz continue the separation of business processes related to gas transmission and storage to ensure the full operational independence of a new TSO from both Ukrtransgaz and Naftogaz, which is a key certification requirement for an independent TSO. The new TSO also needs to be capable of covering its costs and funding the investment program to modernize the GTS. Making the new TSO financially viable will require the regulator to ensure tariffs cover both operation and capital costs. The interim tariffs set recently by the regulator are not sufficient, which puts the TSO’s viability at risk. The financial viability of the new TSO will also depend directly on the solution of urgent problems like unauthorized offtake in distribution networks, PSO and other regulatory inconsistencies in the transmission segment.

2. Decisions and actions by other parties

To make the TSO unbundling a reality, external stakeholders —primarily the government and the regulator — need to make a number of decisions and actions.

Considering the circumstances that changed since mid-2016, the government needs to finally decide on the TSO unbundling model. The decision is urgent, as further progress depends on it.

3. Legal framework

Unbundling requires a significant amount of preparatory legal work. Naftogaz has a clear vision of what changes are needed to implement each of the two unbundling models. This vision is supported by the conclusions of legal advisors on the applicability of each model in the context of the new arbitration against Gazprom.

As reported earlier, Naftogaz claims more than USD 11 billion compensation from Gazprom under the transit contract for the periods not regulated by the Stockholm awards. Naftogaz is the only legal entity eligible for filing such claims.

During the meetings of the previous week, the European Commission agreed that the chosen unbundling model must ensure Naftogaz’s eligibility to represent its interests in this arbitration case.

Based on the conclusions of its legal advisors, Naftogaz believes that only the ISO model can enable Naftogaz to proceed with the arbitration.

4. Cooperation with the international consortium

Naftogaz and MGU are cooperating with a consortium of international companies interested in operating the unbundled TSO. A framework agreement is currently being prepared to enable European experts from consortium member companies to join in the creation of a high-quality and EU-certifiable TSO.

5. Underground gas storage facilities

The international consortium members made it clear that they were going to focus on the gas transmission business only. Storage facilities are not interesting to them, being a non-core unprofitable asset with toxic legacy. Naftogaz therefore established a separate storage system operator (SSO) within Ukrtransgaz, which could be unbundled at a later date when its assets have been cleansed and rightsized.

6. Further steps by MGU

As international partners will clearly insist on operational control over the new TSO, MGU’s functions will obviously transform.

It is important that MGU and the consortium now build trust and relationships so that Naftogaz could work cooperatively with MGU to hand over the TSO in future.

7. Negotiating transit with Gazprom and security of supply

Naftogaz is currently responsible for security of transit and security of supply to Ukrainian users. One of the critical tasks during the TSO unbundling process is to ensure uninterrupted operation of the system regarding both transit and domestic transmission.

Naftogaz expects the future TSO to negotiate a new transit contract with Gazprom and counts on support from EU stakeholders in those talks.

As Andriy Kobolyev mentioned at the discussion session, unbundling is impossible without setting cost-reflective transmission tariffs and solving the current problems of imbalance and unauthorized offtake by some heating companies and distribution network operators. Financial viability of the new TSO is one of the key certification requirements. As of now, Ukrtransgaz has accumulated about UAH 30 billion of accounts receivable and continues to do so.

Andriy Kobolyev also believes that TSO unbundling should be delivered regardless of political processes taking place in Ukraine and that by April 2019, Naftogaz and MGU should sign the necessary documents to make the unbundling process irreversible.

Please follow these links to see presentations from the panel discussions: Unbundling update, TSO unbundling.

Corporate Communications Department
NJSC Naftogaz of Ukraine

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