Rebellion against gas distribution tariff: is it possible and what is needed to make it cheaper

Lubny City Council decided to create a new utility company to transfer to it the function of distributing gas on the territory of the Lubensky District, where JSC Lubnygaz operates. The reason is the pressure of consumers who are convinced that this can reduce the cost of distribution services.

And similar cases, when a united territorial community wants to take gas networks into communal ownership to operate them cheaper by the community itself, are not rare in Ukraine.

What does the community need to "get rid" of the private GDS operator and independently maintain gas networks, how much it can reduce the cost of gas distribution services, and what legal nuances should be thought about - Kosatka.Media analyzed the Luben networks as an example.

What does the community need to "get rid" of the GDS operator

First of all, as Olga Babiy, a member of the National Commission for State Regulation in the Spheres of Energy and Utilities, explained, to transfer property from state to communal ownership, the city council must decide that it is ready to accept gas networks. And the company that is using them now has to decide that it is ready to transfer them.

For the community to be able to accept the networks, a new GDS operator must be created - in the form of a utility company.

“It is impossible to transfer networks into the air, there must be a business entity. A decision is made "to transfer Lubny  City Council to the management of such and such a communal enterprise without the right to transfer to third parties." According to the law, gas networks are not subject to privatization. These networks have a special status of disposing of such property. That is, the network that is transmitted must be transferred to the KP, "Babiy explained.

Will Lubnygaz just disappear?

The situation with the old GDS operator (in this case, Lubnygaz) will be as follows. As a legal entity, it will continue to exist, but will not be able to provide services. And here the company doesn't have to retain qualified employees, machinery, equipment.

“They will lose their distribution license. They can only provide a service if they have a network in control - this is a basic requirement of the licensed activity. If there are no networks, they do not provide the service. That is if these networks are taken from this company and transferred to another, it does not matter whether Lubnygaz has people and cars - they can no longer carry out this activity. If you do not have a pipe, you are not a GDS operator,” Babiy summed up.

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How to create a public utility company that can conduct gas distribution activities

Thus, the creation of a utility company is a prerequisite to maintain the gas network. The decision on its creation is made by the local community.

To create a public utility company, you need to choose a governing body - a leader and a supervisory board, as well as write a public utility company charter, which will spell out the goals and objectives of the utility company.

At the same time, according to the law "On Cooperation of Territorial Communities," several communities can create a joint utility company.

They must conclude a cooperation agreement regarding the creation of a joint utility company. And write in it:

1) the scope of the public utility company;

2) its name and location;

3) the organizational and legal form of the commercial proposal;

4) the structure of management bodies and services;

5) the amount of funds (property) invested by the local government bodies of the subjects of cooperation for financing (maintenance) and ensuring the functioning of the general commercial proposal, as well as the timing of their introduction;

6) the stages of creating a joint commercial proposal and the responsibility of the parties for the results of its activities;

7) ways of covering the subjects of cooperation by local government bodies for possible losses, shortage of funds and distribution of the received income of the general public utility company;

8) the procedure for the termination of activities and the distribution between the subjects of cooperation of the property of the common public utility company;

9) the procedure for terminating the contract and resolving disputes during its execution;

10) conditions for the exit of one of the subjects of cooperation.

Funding for such cooperation is carried out at the expense of:

  •  local budgets of the subjects of cooperation (i.e. the budgets of the community)
  •  self-taxation;
  •  other sources not prohibited by law, in particular, the state budget
  •  international technical and financial assistance, credit resources.

Funding for cooperation activities starts from the next budget period.

What is needed to obtain a license from NEURC for gas distribution

The next stage - the new public utility company needs to obtain a license to be eligible to deal with gas distribution.

Member of the Council of the Committee of the Ukrainian Bar Association on Energy, Oil and Gas, senior lawyer Sayenko Kharenko Natalya Gutarevich explained that the main requirement for obtaining a license from NEURC to carry out gas distribution activities is that the license applicant provides information on the places and means of carrying out economic activities for distribution of natural gas.

The vehicle is a gas distribution system that is legally owned, managed, used or operated by the license applicant/licensee on which the natural gas is distributed.

Place of business activity - the territory of an administrative-territorial unit (region, district, city, village, etc.) where the licensee's gas distribution system is located, to which at least 50,000 points of connection of natural gas market entities belong, on which NEURC decided on the granting of the right to the licensee within its limits to carry out economic activities for the distribution of natural gas.

Consequently, to carry out activities for the distribution of natural gas, an enterprise must own or legally use distribution pipelines.

The company receives a license and the right to carry out gas distribution activities only in the territory where the distribution networks are located, which are legally owned and/or used by the license applicant.

According to the licensing conditions approved by NEURC, the license applicant must submit an application and an exhaustive list of documents.

According to these documents, the commercial proposal must have, in particular:

  • means of carrying out economic activities for the distribution of natural gas and the corresponding material and technical equipment.
  • personnel for the implementation of activities for the distribution of natural gas, including specialists who ensure the implementation of administrative and management, production and technical, planning and contractual, production, legal functions and functions for quality control, industrial safety and labour protection, maintaining and maintaining national standards, building codes and regulations in the field of the oil and gas complex and executive documentation.

Prerequisite: the company is also obliged to organize and ensure the operation of the call centre, the company's website and the consumer's personal account.

At the same time, a tariff for natural gas distribution services should be set (without this, NEURC will not issue a license).

What will Lubnygaz give?

Lubnygaz operates based on a license from NEURC for the right to carry out economic activities for the distribution of natural gas within the territory of the city of Lubny and the Lubensky, Grebenkovsky, Pyriatinsky and Orzhitsky districts of the Poltava region. There is a gas distribution system owned, managed, used or operated by the enterprise (according to the NEURC Resolution No. 848 dated June 29, 2017, containing, however, the names of the production areas of the licensee's activity in the Poltava region until their consolidation in 2020).

Information on the length of distribution pipelines of Lubnygaz JSC in the context of owners as of the end of 2017 is contained in the NEURC Scheduled Inspection Act dated October 25, 2018, No. 352 (hereinafter - the inspection report).

As of the indicated date, 2472, 654 km were in state ownership, 45.021 km of networks were in communal ownership, which is used by Lubnygaz OJSC based on agreements on the provision of property based on the right of economic management.

Own networks of PJSC "Lubnygaz" to 52.31 km and received in 2015 and 2016 free of charge on the balance sheet of the enterprise for acquisitive prescription following court decisions.

According to the information provided on the company's website, Lubnygaz is currently operating 3,808.86 km of gas pipelines, including 2571.09 km of distribution pipelines. The length of gas distribution pipelines of various pressures, which are on the balance sheet, reaches 2206.8 km.

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What about other territorial communities?

On the territory of the Lubensky district, in addition to the Lubensky territorial community, there are 6 more TCs.

According to the Law of Ukraine "On Local Self-Government", the powers of the district council include the solution of issues of management of objects of common property of territorial communities of villages, townships, cities, districts in cities that are under the control of the district council.

Territorial communities of villages, townships, cities, districts in cities can unite on a contractual basis based on common ownership objects of communal property rights, as well as funds from local budgets for the implementation of joint projects or joint financing (maintenance) of communal enterprises, institutions and organizations and create for this is the relevant authorities and services.

Local self-government bodies (including the district council), on behalf and in the interests of territorial communities, exercise the authority to own, use and dispose of objects of communal property rights, including all property operations, can transfer objects of communal property rights for permanent or temporary use. legal entities and individuals.

Therefore, Natalia Gutarevich emphasized, it is important to establish which territorial communities consider it expedient to participate in the creation and operation of such a communal enterprise, and the status of gas distribution networks on the territory of these communities, since Lubnygaz JSC operates in a limited area of the Lubensky district.

Who and how should approve the transfer of gas networks

After both sides - the current operator of the network and the OTG, which plans to create a new public utility company to service it, agree on the transfer - the government takes over. Because such a transfer is a matter of a separate decision by the Cabinet of Ministers and compliance with procedures.

Considering the prospect of unilateral amendment/termination of agreements, according to which the networks are transferred to the economic management of Lubnygaz JSC or are operated by it, Natalya Gutarevich noted that the form of the agreement for the economic management of the components of the gas distribution system (except for gas networks, is state property), defined by Appendix 4 of the Code gas distribution systems (NEURC Resolution dated September 30, 2015, No.2494).

The Inspection Act notes that the selectively verified contracts for networks in communal ownership correspond to the form defined by the Code of Gas Distribution Systems.

“According to the specified form of agreements, unilateral change of its terms is not allowed, such an agreement may be terminated ahead of schedule by mutual agreement of the Parties or in case of liquidation of the operator of the gas distribution system. Termination of the contract in other cases is carried out in court, "- said the lawyer.

And what will the new public utility company get from Lubnygaz?

According to the agreement on the operation of gas distribution systems or their components between Lubnygaz JSC and the Ministry of Energy and Coal Industry of Ukraine, the Ministry of Energy has the right to initiate amendments to the agreement or its termination in case of amendments to the legislation on the conditions and procedure for the operation of the property. All changes and additions to the agreement are formalized by additional agreements. This agreement is terminated in the event of:

  • conclusion by the parties of another agreement, the subject of which is the use of the relevant state property,
  • cancellation of a license to carry out economic activities for the distribution of natural gas,
  • ahead of schedule by mutual agreement of the parties or by a court decision,
  • the bankruptcy of Lubnygaz - from the date of recognition of Lubnygaz bankrupt,
  • deciding on the liquidation of Lubnygaz by decision of the participants - from the date of such a decision.

“The possibility that the operating company, on its own initiative, will agree to amend contracts / terminate contracts and early return the network, which it uses legally, looks doubtful. Consequently, the grounds for termination of the contracts under which Lubnygaz JSC operates gas distribution networks must be justified. The transfer of gas distribution networks from state ownership to communal ownership can be considered as a potentially justified basis, which, however, with a high level of probability will be challenged by the current asset holder of the networks in court, which is a long-term and unpredictable process, ”said lawyer Natalya Gutarevich.

“The transfer procedure can take a long time. To ensure it, you need to prepare all the documents that accompany this property. It must be assessed, there must be project documentation. Ideally, this procedure can last 3 months, but in the most imperfect case it can take forever, ”noted Olga Babiy.

How the new public utility company will set the gas distribution tariff

The natural gas distribution tariff is calculated following the Methodology for determining and calculating the tariff for natural gas distribution services. And largely depends on the volume and cost-efficiency of the enterprise in the implementation of economic activities.

The main factors that objectively affect the size of the tariff are:

  1. The number of consumers, their volume of gas consumption and the territory of service (administrative costs per consumer decrease with an increase in the total number of consumers, which affects the general tariff of the enterprise).
  2. The cost-effectiveness of an enterprise for carrying out natural gas distribution activities.

“Therefore, it is most expedient to carry out preliminary economic calculations of how the creation of a commercial enterprise and its service to consumers in the Lubensky district will affect the reduction of the tariff for gas distribution services,” the lawyer noted.

Besides, to obtain a license, such a public utility company must be provided with the necessary means of carrying out activities for the distribution of natural gas (gas pipelines).

There is one more significant "but" - where to get the money to "start" the work.

“When an enterprise receives an integral property complex or property, and this complex is sufficient for carrying out economic activities, the enterprise turns to NEURC and it sets a tariff for them. Theoretically, they will be able to work from the moment they start their activity at the expense of the tariff. But for what money the PUBLIC UTILITY COMPANY will live during the first month - this is a question for the owner who will create this company - how he will ensure the economic activity of this enterprise,” Olga Babiy clarified.

How can the tariff for distribution in public utility company change?

The tariff for natural gas distribution services is calculated using the formula:

where TB is the planned annual tariff revenue of the enterprise for the distribution of natural gas for the planned period. W rozp. - total planned annual ordered the licensee's natural gas distribution capacity. And the projected annual tariff revenue is the sum of the total projected cost and projected profit.

In simple words, the tariff includes all costs incurred by the company for carrying out gas distribution activities, plus the expected income, divided by, roughly speaking, the size of the gas network to be serviced (that is, the length of the networks and the number of subscribers).

At the same time, there are several sources of profit in the calculation of the tariff, but the costs are much higher.

In particular, we present the most significant of them.

Expenses in determining the planned tariff revenue:

  • material costs: the cost of gas for production and technological costs and standard-specific losses and own needs;
  • labour costs;
  • general business expenses: maintenance of the management apparatus and personnel, maintenance of fixed assets, payment for professional services, payment for communication services; payment for settlement and cash services and other services of banks; purchase of fuels and lubricants; cost of materials (fuel, electricity, repair costs, other material costs);
  • depreciation deductions;
  • a single contribution for compulsory state social insurance;
  • payment to the GTS operator for the volume of ordered capacity;
  • verification and repair of meters;
  • costs of replacing gas meters and/or creating an exchange fund of meters.

The planned profit includes:

  • making investments related to licensed activities for the distribution of natural gas, including production investments;
  • repayment of the principal amount of loans and/or loans raised for the implementation of the investment program;
  • the direction of part of the net profit for the payment of dividends;
  • financing of compensation of expenses (losses)
  • payment of income tax.

Details of all costs and profits - in the above methodology.

Probably, the utility company will not yet have old debts, including bank debts. And he will be able to give up part of the income, in particular the pledged profitability (since it is planned that its goal will be not to make money). However, a low-profit utility company is ineffective, which means it is a potential bankrupt.

Besides, all of the above expenses, such as salaries and maintenance of the farm for the normal operation of the enterprise, will be fair for the utility company as well as for the private operator of the GDS.

Does the community have enough money?

According to Tamara Romanenko, head of the financial department of the executive committee of the Lubensky City Council of the Lubensky District, 2020 was a rather difficult year due to the pandemic and quarantine measures, both in terms of expenditure and revenues. We had to cut both the development budget and unprotected items of expenditure.

According to her, the total fund was executed for UAH 346.2 million, the special fund for UAH 21.2 million. The general fund received UAH 235.3 million of its own tax and non-tax revenues. The main source of the general fund of the city budget - tax and collection on income of individuals, amounted to UAH 141.9 million in 2020. The unified tax was collected 35 million.

For comparison - the planned annual tariff revenue of Lubnygaz, on the basis of which NEURC calculated the tariff for gas distribution to its consumers (and which is one of the highest in Ukraine) - UAH 404.748 million.

That is, the GDS PUBLIC UTILITY COMPANY-operator created instead of Lubnygaz will have to significantly reduce all costs for the operation of the enterprise to get a lower tariff. After all, while these costs are approximately equal to the entire city budget.

Even if we take into account that all 7 OTGs, on the territory of which Lubnygaz operates, will agree to finance the newly created PUBLIC UTILITY COMPANY, and assume that their budget is approximately the same as in the Lubensky City Council, it is unlikely that each of the communities will be ready to spend on financing only this enterprise more than 15% of the total budget.

The general impression of the situation with Lubnygaz and the cheaper new PUBLIC UTILITY COMPANY for network maintenance is that while there is no free access to detailed information on the strategy for creating this PUBLIC UTILITY COMPANY, the definition of the territory of its licensed activities, the amount of material and technical means necessary for the enterprise to carry out licensed activities and their plan security, an indicative list and the amount of expenses of the future licensee, noted lawyer Natalya Gutarevich.

Therefore, the creation of such a PUBLIC UTILITY COMPANY is potentially possible, however, the achievement of the goal of its creation - a decrease in the current tariff for gas distribution services - remains questionable.


Tags: gas, NEURC, pipeline, gas distribution station, DNO

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