Risks

Poland has no long-term tariff policy for natural gas distribution operators that would outline 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 URE. This solution gives the President of URE much room for discretion in the process of evaluating costs incurred by the Distribution System Operator, its capital expenditures and regulatory value of its assets, which is a source of uncertainty as to the amount of revenue and profit that may be generated.

Key

In view of the growing competition in the sector, there is a risk that PSG’s large customers may opt for reconnecting directly to the gas transmission network operated by Gaz-System. Customers justify their intention to reconnect by the need to cut costs. The departure of some customers would mean a loss of transferred gas volumes and thus also of revenue from sale of distribution services and, as a consequence, the need to cover any resulting excess of costs over revenue, for instance by increasing tariff rates.

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 the use of third-party property by a transmission company, for which fair consideration is due to the owner. 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 Gaz-System, which is its main source of gas supplies. The transmission system’s limited capacity in terms of volume and pressure of supplied gas hinders, or sometimes renders impossible, further development of the gas grid within the PSG’s key areas of operation.

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 carriers used for municipal heating are hardly an incentive (in particular for households) to switch to environmentally friendly gas fuel.

The decline is largely attributable to the improving energy efficiency (thermal modernisation) of buildings, reduced usage of individual gas-fired boilers for heating water and migration. Thermal modernisation of buildings includes thermal insulation of outer walls, replacement of windows, use of condensing boilers, automated control of heating systems and installation of solar panels. All this translates into a decrease in the average volume of gas fuel supplied to small customers and consequently erodes revenue from distribution services. This is a material risk for PSG, despite more than 80 thousand new customers acquired every year (mainly households), as total volumes of gas distributed in the segment have been falling.

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 entry points and/or constructing new gas lines.

The complex provisions of the Construction Law and regulations governing construction projects impose the obligation to prepare extensive project and legal documentation, which is an integral part of any development process. The need to prepare such documentation extend the time needed for project preparation and thus may significantly delay its completion, exposing PSG to the risk of cost overruns caused by potential delays in contract performance as well as the risk of a decline in revenues.