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According to the recent decision of the ERO, Czech consumers have to contribute a much larger share to the operation of the nationalized Net4Gas than before. Since January, ERO has been changing the so-called allocation key, according to which the costs of operating gas pipelines are divided between domestic customers and companies that rent pipes for the transport of gas through Czech territory.
Net4Gas owns almost four thousand kilometers of gas pipelines, three border transfer stations and other infrastructure. The entire network was built mainly as transit, and transit also dominated it for years. The distribution of payments corresponded to this: gas transporters paid almost three-quarters and domestic customers only 27 percent of Net4Gas’ costs. The company’s main income came from its key contractual partner, Russia’s Gazprom Export, which transported gas to other countries through the Czech Republic.
Although Gazprom still has reserved capacity in Czech pipes, it stopped paying Net4Gas for it at the end of last year. And so from January, the distribution of costs for gas pipelines will be reversed: Czech consumers are to pay a full 75.9 percent of them. “It confirmed our assumption that ERO passed on outstanding payments for Gazprom to customers in the Czech Republic,” comments ex-prime minister Mirek Topolánek, today head of the Heating Association, which unsuccessfully lobbied against the change.
According to ERO, the costs of gas transportation will be reflected in the overall growth of the regulated component by ten percent. In addition to the higher burden on Czech consumers, it also logically reflects the increase in the price of gas, which Net4Gas must buy to cover technical losses. But back to changing Net4Gas’ cost distribution between domestic customers and transit.
Unfortunately, it seems that the ERO helped the nationalized Net4Gas despite the fact that the current rules for the distribution of costs between transit and domestic transport were supposed to apply until 2025, when the five-year regulatory period ends. And despite the fact that, according to the European Commission’s 2017 regulation, regulators are supposed to ensure that the risk “associated with insufficient reservation of transmission capacity” in transit pipelines is not transferred to customers in the country through which the pipeline passes.
According to European rules, this risk should be reflected by an appropriate regulated fee, which has probably been the case so far. In any case, Net4Gas was a highly profitable company that earned a record net profit of more than six billion crowns last year alone.
Gas is less of a problem for Czech customers than electricity, so there is not much talk about changing the regulatory rules in its case. The change, however, strengthens doubts as to whether the ERO always proceeds completely uncompromisingly in the interests of the customers it is supposed to protect. And whether he is too soft on the companies he controls. Suspicion is also signaled by another change, made this time to the benefit of electricity customers.
what’s up The ERO initially argued that it had no room to reduce regulatory fees against the proposal published in early November, as it had already reduced companies’ claims by 11 billion, which is on the edge of what the rules for the current regulatory period allow it. On Thursday, however, he issued a decision in which, contrary to the proposal, which was supposed to be the maximum possible, he reduced payments for electricity distribution and system services by another four billion.
He actually achieved this simply: He ordered companies to calculate the inflationary growth of their costs according to a different coefficient than they had done in previous years. While until now the time value of money was determined by the index of industrial producers’ prices, the development of the PRIBOR interest rate will now be the determining factor.
If it is now more favorable for customers, it is worth asking whether this index should not have been used earlier. According to ERO spokesman Michal Kebort, the crisis necessitated the change. “The newly used inflation coefficients better reflect the actual increases in the costs of regulated companies in the current (changing, crisis) situation,” he wrote to us when we asked him for an explanation.
It is possible, however, that a different index was used earlier simply because electricity was cheap, no one dealt with the regulated component of the price, and the distributors, led by a subsidiary of the influential semi-state group ČEZ, were satisfied.
A month ago, regulated electricity fees became a major political issue, the government put pressure on ERO, and thus the energy companies led by ČEZ Distribucí will receive another four billion. And vice versa: When the rise in gas prices is not so politically sensitive, perhaps the regulated entity can be more helpful…
However, I recommend continuing to follow the Net4Gas case. It may yet become a hot political topic. This is because the warnings of critics of nationalization that the purchase of gas pipelines will become unbelievably expensive for Czech taxpayers are being confirmed. The originally announced price is gradually increasing, and not only in the form of shifting a larger part of the costs to domestic consumers.
In September, the state-owned company ČEPS announced that it would pay a maximum of five billion crowns for Net4Gas: three billion immediately and another up to two billion later upon achieving unspecified economic results. A month later, however, the Ekonomický deník came out with the finding that ČEPS had committed to add another 2.9 billion crowns to the announced price of five billion crowns.
This is the money that the current owners Allianz Infrastructure and Borealis Novus Parent took from Net4Gas as a dividend advance. Due to the problems with Gazprom, they stopped paying dividends, but ČEPS is supposed to return the money already collected for them to the company.
Over time, it will also be necessary to pay the debts of Net4Gas, which has issued bonds and taken out loans in the amount of 33 billion crowns. Net debt reaches 27 billion.
So far, rating specialists assess the company’s condition as good. In October, the FitchRatings agency came to the conclusion that Net4Gas is able to repay its obligations next year even if gas transit through the Czech Republic is not resumed. However, the first ten billion debt repayments will occur in 2025, and shifting the greater cost burden to Czech consumers will help keep the company in shape to handle it.
Let us remind you that the Czech gas pipelines have been a wonderful investment for Net4Gas shareholders so far. Ten years ago, when the Borealis and Allianz funds bought Net4Gas, it came to 1.6 billion euros. In the following years, they took 29 billion from the company thanks to the reduction of the basic capital, in addition to that they received over 60 billion in dividends. When the flow of profits from gas transit through the Czech Republic stalled, Allianz and Borealis offered the company for sale.
The bill for their feast is now to be paid by the state company ČEPS, whose main task is the operation of the domestic electricity transmission system. And whose losses, if necessary, are compensated by the state (in February of this year alone, the government sent a subsidy of 22.7 billion crowns to ČEPS from the state coffers). With the active help of the ERO, Czech consumers, who have not received much from the royal profits for the operation of gas pipelines, are also expected to contribute.
Government politicians assure that the nationalization of gas pipelines, which have ceased to be a cash cow, is necessary for the sake of energy security. This is certainly important at a time of growing geopolitical imbalance. The question is whether this deal could not have been less disadvantageous for Czech taxpayers and whether it should have benefited the existing shareholders less.
For the Net4Gas purchase price, we fixed the wrong currency to the correct Euros. We apologize to the recipients of the newsletter.
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