GTS Independence Act: Nuances from a lawyer

On October 31, the Verkhovna Rada adopted a law to create an independent GTS Operator in Ukraine. Participants of the European market will build treaty relationships with it.

What lawmakers wrote in this draft law was analyzed by lawyer Andrii Vihrynskyi for Kosatka.Media.

The first important issue is whether the newly created GTS Operator will be independent. The previous version of Article 21 of the Law of Ukraine “On the Natural Gas Market” provided for the possibility of participating in the authorized capital of the GTS Operator, along with the state, also of a legal entity (GTS Partner), which must meet a number of requirements (this partner is controlled by the energy-community parties or the USA, the relevant Partner is an EU certified operator with at least 5 years of experience), the lawyer recalled.

The adopted statutory wording of Article 21 stipulates that “The operator of the gas transmission system that is state-owned and not subject to privatization may be exclusively an entity, the owner of 100% of the corporate rights of which is the state or an entity, 100% of the corporate rights of which belong to the state”. So, the possibility of participation in the management of foreign entities is excluded. In addition, a number of prohibitive fuses are established regarding the possibility of other forms of alienation of the operator’s property or shares in its capital by concession, etc.

To date, this norm has become a compromise for representatives of the relevant committee who prepared the document for the second reading, which made it possible to get more than the constitutional majority during the voting, the lawyer said.

“We do not understand what our GTS is worth as a business, because we do not even have the minimum data on the amount of gas that it will transport to the EU for at least 5 years. And to say at the same time about the possibility to attach another company to the management by selling a share in the authorized capital of our operator does not make economic sense. With low volumes of transit, the price of this share is scanty, with the growth of transit, respectively, the cost will increase. In the absence of transit, the presence of a “GTS Partner” will definitely not help us”, said Vihrynskyi.

The profitability and investment payback of the Operator’s activities in accordance with the provisions of the adopted law will provide a number of standards that will determine its relationship with the National Energy and Utilities Regulatory Commission. First of all, the expert explained, the National Commission received the right to develop “rules for the solving of disputes arising between the transmission system operator and the owner of the transmission system”. In addition, the National Energy and Utilities Regulatory Commission will coordinate agreements that provide for the financing of the transmission system operator and are concluded between it and the owner in the person of an authorized state property management entity. Also, The National regulatory Commission ensures that the tariffs set for the operator’s services include the proper level of the rate of return and cover the costs of investments agreed by the Regulator.

“It follows from the provisions of the law that the owner of the transmission system in the person of an authorized state property management entity cannot refuse to finance the transmission system, to which the property was transferred on the basis of economic management, by the operator agreed by the National Commission”, said Vihrynskyi.

Investment costs that are necessary to maintain in good condition and improve the quality of the services provided by the operator will be financed from the state budget. To date, the Ministry will be the mandate holder of the transmission system. And it has no right to refuse in financing. The size of these investments will be agreed by the National Energy and Utilities Regulatory Commission, in particular, guided by the need to ensure the security of the supply of natural gas.

But probably, Vihrynskyi noted that the relevant by-laws would still be developed. And they will shed light on both the tariff level and the operator’s profit level, as well as on the system of relations with the owner.

One of the most interesting provisions is licensing issues for the “new operator”, the lawyer said. In particular, the Law of Ukraine “On the licensing of types of economic activity” is proposed to be supplemented with the following provisions: “If state property objects that are used by the licensee in the course of economic activity subject to licensing are transferred by the management entity... on the basis of economic management to another economic entity, and such a business entity carries out the type of business activity for which it had a license and was certified by an authorized company in accordance with the requirements established by the law on the separation and independence of such a business entity, the business entity has the right to carry out, within a period not exceeding one year, the corresponding type of business activity on the basis of a previously issued license to ensure completion of organizational measures related to obtaining a new license . After this period, the previously issued license is subject to cancellation”.

“This norm is insurance, in case the process of transferring property from today's operator (Ukrtransgaz) to the new Operator is delayed. If it is not possible to obtain a license and pass certification before the end of the calendar year, the new operator will act on the basis of permits issued to the previous operator (an interesting rule, from the point of view that the new operator is a newly created legal entity and not a reorganized or renamed licensee). But in fact, it inherits the license with the acquired property”, the lawyer said.

He noted – it is unlikely that such a practice will be provided for business entities of private law. It remains to be seen whether the energy community will accept this state of affairs. And hope that everyone will be on time.

The Main Legal Department of the Verkhovna Rada noted the following violation, said Vihrynskyi. The presented draft law continues the practice of attributing to the competence of the National Commission the authority to conduct pricing policies in the energy sector, which does not take into account the requirements of paragraph 3 of Article 116 of the Constitution of Ukraine, according to which the provision of a pricing policy is within the powers of the Cabinet of Ministers of Ukraine.

The Constitutional Court of Ukraine in the case No. 1-17 on the National Energy and Utilities Regulatory Commission, established that the formation of a permanent independent state collegial body, which, by its functional purpose, sphere of activity, powers, has the attributes of a central executive body, but is not subordinate to the Cabinet of Ministers of Ukraine and does not belong to the system of executive authorities, is not consistent with the Constitution of Ukraine and contradicts Articles 5, 6, 8, the 2ndpart of Article 19, Articles 85, 106 of “Basic Law of Ukraine”.

In addition, the Commercial Code contains requirements for the main planning documents of state commercial enterprises, which are financial plans that must be approved by the Cabinet of Ministers before September 1 of the year preceding the planned one. This norm does not apply to the operator; an exception is established for them. Their financial plan is developed in the manner determined by the constituent documents, and approved by the owner in the person of an authorized entity managing public property.

“Who can be an authorized entity from the owner? According to the amendments to the Law of Ukraine “On the management of state property”, the subject of management of state property used in the process of transporting and storing natural gas can only be the Ministry or a business entity authorized by the Cabinet of Ministers of Ukraine, whose corporate rights are solely the state or business entity, 100% of the corporate rights of which belong to the state”, explained Vihrynskyi.

As a result, the analyst says, in fact, the Verkhovna Rada deprived the CMU of its constitutional powers. Indeed, according to the current Part 6 of Article 21 of the Law of Ukraine “On the Cabinet of Ministers of Ukraine”, the government can revoke acts of ministries and other central executive bodies in full or in a separate part. At the same time, the new rules determine that the indicated powers of the CMU “do not apply to decisions of ministries and other central executive bodies issued by them in the process of exercising powers to manage corporate rights that belong to the state in the authorized capital of business entities operating on the basis of a license to carrying out activities for the transmission of natural gas, as well as legal entities with corporate rights in such business entities”.

The lawyer agrees with the position of the Main Legal Department of the Verkhovna Rada that this approach does not take into account the requirements of paragraph 9 of Article 116 of the Constitution of Ukraine, according to which the powers of the Cabinet of Ministers of Ukraine include the direction and coordination of ministries and other executive bodies.

“However, such standards have become at the cost of the operator’s operational independence. If we recall the provision on the financial plan, which will be approved, as an option, by the decision of the Ministry authorized to manage, then the CMU will be able to cancel this decision. As well as questions regarding the approval of constituent documents, agreements, etc.”, concluded Vihrynskyi.

Tags: The Cabinet of Ministers, gas, legislation, NEURC, gas transit, GTS

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