The Distribution segment is regulated by a combination of Polish and EU laws. The laws of key importance for the natural gas distribution segment include:
As a natural monopoly, the distribution activity of Polska Spółka Gazownictwa Sp. z o.o. (PSG) is regulated by tariffs, imposed by the President of the Energy Regulatory Office, calculated in accordance with detailed rules specified in the Tariff Regulation.
On December 17th 2014, the President of the Energy Regulatory Office approved Tariff No. 3 for Gas Fuel Distribution Services and LNG Regasification Services, effective from January 1st to December 31st 2015. The average charge rates for distribution services increased by 3% relative to the previous year’s tariff.
On December 16th 2015, the President of the Energy Regulatory Office approved an amendment to Tariff No. 3 and extended its term until June 30th 2016.
On February 16th 2015, the President of the Energy Regulatory Office approved a new Distribution Grid Code, in effect as of March 1st 2015. The new code specifies the detailed rules of cooperation with the operators of other distribution systems and regulates in detail the rules for managing system limitations in the event of any discrepancies between gas fuel supply or offtake and transport forecasts prepared by the operators of distribution systems.
PSG makes consistent efforts to limit potential threats and to mitigate attendant risks and their negative consequences. Some of the key identified risks relate to:
In Poland, there is no tariff policy applicable to companies engaged in natural gas distribution that would include detailed rules and methodologies for determining the level of regulatory revenue acceptable to the regulator. The prevailing practice consists in determining short-term tariffs based on annual negotiations with the President of the Energy Regulatory Office. In 2015, PSG approached the President of the Energy Regulatory Office with its proposal of a “Long-Term Strategy with respect to Regulation and Tariffs at PSG for 2016−2018”. Due to the lack of final solutions and regulations concerning the ‘socialisation’ of costs of the LNG terminal, any final arrangements with the Energy Regulatory Office concerning the proposal have been postponed until 2016.
By setting tariffs, the President of the Energy Regulatory Office, citing social considerations, limits the growth of regulated revenue which is the basis for calculation of charge rates for gas fuel distribution services. This extends the period in which PSG may earn a full return on the capital employed in its activities based on the approved tariff.
Amid growing competition in the sector, major customers may want to reconnect to the transmission network operated by OGP Gaz- System S.A. to reduce costs. The departure of some customers would mean a loss of distributed gas volumes and thus also of revenue from sale of distribution services, and, as a consequence, would cause the need to cover any resulting excess of costs over revenue, for instance by increasing tariff rates.
More and more frequently, PSG is facing excessive financial claims raised by the owners of land where the gas network was developed in the past. Transmission easement serves as a basis for determining the extent of use of third-party property by a transmission company, for which relevant consideration is due to the owner. Furthermore, land owners raise compensation claims for extra-contractual use of land by the company. The owners’ claims give rise to additional, frequently considerable costs, and thus may adversely affect the financial performance of the segment.
PSG’s distribution network is connected to the transmission system operated by OGP Gaz-System SA, which is its main source of gas supplies. The transmission system’s constraints in terms of the volume and pressure of gas supplied hinders, or sometimes renders impossible, any further development of the gas grid over a major part of the company’s catchment area.
The strong competitive position of substitute energy sources (coal, wood) in some areas where PSG operates hampers growth in demand for natural gas as a fuel.
Continuing low prices of coal, hydrocarbons (fuel oils, heating oils) and other energy sources used for municipal heating are hardly an incentive (in particular for retail customers) to switch to environmentally friendly gas fuel. In this situation, support to the company’s plans to increase its revenue from sale of distribution services comes from local authorities, which implement various programmes aimed at reducing emissions from sources below 40m, in which financial support is offered to those willing to change their heating system. Among institutional customers, decisions to switch to a different fuel for heating purposes are made based on an analysis of the economics of such change, taking into consideration a possible reduction in staff costs.
The decline is largely attributable to the improving energy efficiency of buildings, reduced usage of individual gas-fired boilers for heating water, and migration.
The growing competitiveness of natural gas may encourage its use for power generation purposes, which would increase the distribution volumes and revenue from PSG’s core operations. In the event of a sudden increase in demand for natural gas, the distribution network may be unable to handle supplies due to its limitations, which can be removed by expanding the distribution system’s exit points and/or constructing new gas lines.
Probability that the risk will materialise:
Risk materiality level
