Gas unbundling presents complications

SLOVAKIA's natural gas grid operator is facing its first hurdle in complying with European Union liberalization laws. On June 21, Slovak cabinet ministers failed to agree on a plan that would essentially liberalize the Slovak natural gas market.

SLOVAKIA's natural gas grid operator is facing its first hurdle in complying with European Union liberalization laws. On June 21, Slovak cabinet ministers failed to agree on a plan that would essentially liberalize the Slovak natural gas market.

The EU legislation, which requires natural gas companies to unbundle their import, transit and distribution branches, aims to dismantle state-owned monopolies and thus allow customers to choose their own supplier.

The first unbundling model proposed by Economy Minister Pavol Rusko assumed the creation of three new natural gas companies under the auspices of SPP Holding. All of SPP's intangible assets would be transferred to SPP Assets, while the remaining two companies would handle the management of transportation and distribution.

This model included re-appreciating all transferred SPP investment assets to market value, which would significantly boost the accounting value of the new SPP Holding. In this way, the unbundling process would "generate" Sk25 billion (€650 million) in special dividends to the state.

The proposed use of these dividends created major disagreements within the ruling coalition and thus killed the plan.

Rusko proposed that of the €650 million in dividends, Sk16.8 billion (€440 million) would be paid in 2006 to offset the cost of pension reform. By lowering the state's debt, the dividends would serve as an investment stimulus.

A second unbundling model presented to the cabinet assumed creating two new companies: one each for distribution and transport. SPP would transfer all relevant assets to the two new companies.

The ministers did not support either of the models and abstained from voting. The strongest opponent of Rusko's proposals was the Christian Democratic Movement (KDH).

Minister Rusko called the cabinet's move unfortunate and suggested that the KDH was rejecting his unbundling proposals as revenge. (Rusko's party, the New Citizen Alliance (ANO), recently supported the ousting of Education Minister Martin Fronc, a KDH-nominee.)

Rusko said that by rejecting his proposals, the KDH was barring significant development in Slovakia.

The KDH said that Rusko's first unbundling model would increase natural gas prices.

"Rusko submitted a proposal that did not provide the KDH with guarantees that, in the future, the price of natural gas would not rise. The proposal preferred paying out immediate dividends to the owners of SPP. Though the state would benefit (the Slovak National Property Fund owns 51 percent of SPP), it does have other responsibilities and it must keep consumers' interests in mind," KDH deputy Pavol Minárik told The Slovak Spectator.

Minárik rejects the notion that political motives are behind the KDH's rejection of Rusko's proposal.

"In the end, the ruling coalition partners identified with our arguments and not those of Rusko. If he had thought his proposal so perfect and our arguments so weak, he could have persuaded the other ruling coalition partners otherwise. The proposal did not go through, which means that other ministers disagreed with it too," Minárik said.

In fact, the remaining coalition partners did not substantially disagree with Rusko's model. They conditioned their approval based on the KDH's consent.

To the question of what would be the acceptable unbundling option for the KDH, Minárik responded: "An option that would minimize the risks of increasing the price of natural gas."

The KDH also argued that the dividends paid to SPP shareholders would be an accounting profit, money on paper only. To afford dividend payouts, SPP would have to take on a loan.

The Economy Ministry does not think that professional reasons caused the failure of his proposals. Nevertheless, the first unbundling model, which assumed the payment of special dividends, appears to be dead.

"The proposal assuming the payment of special dividends cannot be accomplished due to time pressure. The Economy Ministry cannot prepare another proposal. The only option right now is to try to reach an agreement with the other shareholders on whether the second model is acceptable," the Economy Ministry spokesperson, Maroš Havran, told The Slovak Spectator.

Foreign SPP shareholders, Ruhrgas and Gas de France, both of which own 24.5 percent stakes, must approve the model, which would then be resubmitted to the cabinet with their changes.

It is expected that the foreign shareholders would have preferred the first unbundling model because they would have received special dividends.

According to Havran, both proposals would have complied with EU legislation.

"They are only different ways of reaching the same goal. All the proposals are in line with EU legislation and the country's energy laws," he told The Slovak Spectator.

The Economy Ministry refutes that its first unbundling model failed to address the consequence of increased prices.

"The option assuming special dividends that the cabinet rejected on June 21, included a guarantee from the board of directors, and also the other shareholders, that during the four-year regulatory period, the company would not request the Office for the Regulation of Network Branches to re-evaluate gas prices due to the unbundling process. The argument that the unbundling would have resulted in natural gas price increases is absolutely groundless," said Havran.

On the other hand, the ministry claims that there is no such guarantee in the second model, where assets would remain in SPP.

Havran concluded that the second model provides no guarantee that natural gas prices would stay flat.

"The shareholder could still re-appreciate the assets, and it is highly probable that they would get a higher accounting price and nothing could prevent them from requesting the regulatory office to re-evaluate natural gas prices, which could result in price increases," he said.

If the foreign investors do not agree with the second model, the unbundling process cannot take place. In that case, Slovakia would find itself in breach of EU legislation and could stand trial with the European Court for failing to liberalize its market.

Magdalena MacLeod

contributed to this report.

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