Title: Extending EU Gas Guidelines to Central and Eastern Europe
URL: http://www20.cera.com/eprofile?u=35&m=2184


Overview: A comprehensive reform of gas legislation in Central and Eastern 
Europe is bringing the region in line with the European Union,s Gas 
Directive. This is true both for the countries expected to enter the Union by 
2004)05*Czech Republic, Estonia, Hungary, Poland, and Slovenia--and for 
candidates whose entry is not scheduled before the end of the 
decade--Bulgaria, Latvia, Lithuania, Romania, and Slovakia. In CERA,s view 
current developments regarding the establishment of a legal framework for the 
internal gas market in Eastern and Central Europe look promising from an 
investor,s point of view.

The candidate countries presented a review of progress made in the 
implementation of the EU Gas Directive during a two-day workshop held by the 
European Commission and the World Bank in Paris in November.

Many of these countries have been reforming their energy industries 
throughout the 1990s as part of their transition to a market economy. The 
results have been mixed, particularly in the utility industries. The 1998 Gas 
Directive (adopted in August 2000) now offers a compelling incentive for EU 
candidate countries to transform their gas industries, while providing a road 
map to guide them.

The critical points relevant to harmonization between the European Union and 
candidate countries include the following:

* Legal framework and regulation. The legal framework is the cornerstone of 
enlargement and the yardstick of harmonization in Europe. As a result, in all 
candidate countries in 1999)2000 energy laws were either updated or newly 
established along the principles spelled out in the Gas Directive. Regulatory 
bodies have been created by law and are operating in every country, although 
issues of staffing, financial autonomy, and independence from political 
influence are not uniformly resolved.

* Third-party access (TPA) and long-term take-or-pay contracts. All candidate 
countries agree that TPA is a key to market competition. Therefore, all have 
adopted it or intend to do so in their new legislation. Although the 
Commission favors regulated TPA, the specific approaches to TPA enforcement 
in the candidate countries remain unclear in some cases. In particular, the 
implementation of TPA will have to address the issue of long-term take-or-pay 
contracts with Russia that were signed by all major domestic gas companies 
and somewhat preempt competition. Russian gas is for the most part sold to 
single, traditional state-owned operators that dominate their internal 
markets. A balance will need to be struck between these incumbent dominant 
players and the competitive environment. This is made more complicated by 
their ownership of large volumes of Russian gas supplied in kind in exchange 
for transit rights to West European customers. Article 25 of the directive 
provides for !
a derogation to companies experiencing difficulties stemming from take-or-pay 
obligations. This derogation would apply to the companies of candidate 
countries with historical and commercial links with the Russian gas industry. 
Furthermore, article 26 allows derogations to those member states with only 
one major gas supplier, to those with an ++emerging &#91;gas&#93; market 
status,,, or to those without a direct gas connection to the grid of another 
member state. Most of the candidate countries would in principle be able to 
call on one or more of these grounds for derogation when they join the 
European Union.

* Price cross-subsidies. Residential gas tariffs are artificially low and are 
financed partially through higher rates applied to industrial consumers. In 
various countries, tariff increases and the phasing out of subsidies have 
been scheduled, but such decisions remain politically sensitive to enforce. 
This has recently been emphasized by high gas prices owing to the linkage of 
imported gas to oil prices. All candidate countries have set legal frameworks 
that include the phasing out of cross-subsidies as part of sector reform, but 
the actual implementation will remain politically difficult. As Table 1 
indicates, price rebalancing is already under way in most countries expected 
to enter the European Union by mid-decade, but the legal framework itself 
cannot guarantee the pace of reform. The same goes for candidate countries 
that have only recently introduced EU-complying energy laws and whose entry 
to the European Union is likely to happen in a longer time frame.

* Unbundling. Most countries understand that the unbundling of transmission 
companies from their supply businesses is the second critical element of 
liberalization. To date, unbundling the accounts of these two businesses is 
all that has been adopted by the member states or in the candidate countries. 
In the future, the Commission is likely to press all EU countries for legal 
separation (&structural unbundling8) of the businesses, and candidate 
countries will have to pursue their reform of the gas sector accordingly.

Table 1 gives an overview of the state of play in candidate countries. As the 
table shows, the countries belonging to the second group have only very 
recently undertaken the reform of the gas sector in accordance with the 
Directive, whereas change had been introduced earlier in the countries 
scheduled for the first wave.

**end**

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