With this open letter Gazprom (GP) and E.ON Ruhrgas (ER) react to several public statements of members of the Lithuanian Government which included the following wrong and misleading statements about the necessity of Ownership Unbundling in the Lithuanian gas sector and at the same time about AB “Lietuvos Dujos” (LD) and its shareholders. We are forced to communicate in this way since direct and confidential letters to the President, the Government and the Prime Minister of Lithuania as well as one public appeal to enter into direct constructive discussions concerning the implementation of the Third EU Gas Directive have been ignored by the Lithuanian Government so far.
The erroneous public statements made by Lithuanian politicians over the last months, and our responses, are as follows:
1. Lithuania’s energy independence can only be reached if the State controls the transmission grid.
The Prime Minister of the Republic of Lithuania formulated the goal to build energy independence by establishing State control over the transmission grid owned and operated by LD. The goal of the Third EU Directive is to foster investments and to safeguard non-discriminatory access to the transportation grid. Instead the Lithuanian Government uses this EU Directive as a tool for de facto re-nationalization of the gas grid. However, energy independence is not related to ownership rights regarding the transmission grid. Non-discriminatory access to the grid and obligations to connect other systems are already strictly regulated by the Lithuanian State, including tariffs and connection conditions.
2. LD has discriminated against third parties regarding access to the gas network.
There has been free access in Lithuania since 1993. In fact, 60% of the gas transported by LD is owned by other companies that use the gas network owned by LD. In Lithuania fair access to gas pipelines has been ensured by the adoption of EU laws into Lithuanian legislation. In addition, the economic conditions for access to the pipelines have been established by the State regulatory authority. LD has never received any criticism or complaint from the Government, any Ministry or other State institution in this respect. When LD approached Energy Ministry, it was not able to name a singe example of such discrimination.
3. LD did not invest sufficiently. In the last 5 years alone, LD invested 700 million LTL in gas infrastructure; annual investments in new infrastructure increased significantly after privatization by more than a factor of four. All projects the State asked LD in the National Energy Strategy (NES) to deal with, LD was/is implementing in time – just the partly
implemented project Šakiai-Klaipėda is on hold, because the State did not provide the agreed co-financing, yet. In a few weeks a 200 million LTL new compressor station will be commissioned as required by the NES.
4. LD blocks the finalization of the pipeline Šakiai-Klaipėda. LD initiated this project, which, according to the NES, shall improve reliability of gas supply in western Lithuania. The first section to Jurbarkas is already in operation. In this and the ongoing design of the whole project LD invested already ca. 40 million LTL exclusively with own funds. In April 2010 the supervisory board of LD, which includes the Vice-Minister of Energy, unanimously decided to complete the project, subject to partial EU financing, and approved a concrete implementation schedule. However, despite previous confirmations, the State has not yet forwarded any EU funds for this project.
5. LD would neither connect a planned LNG terminal nor allow gas transportation from such terminal via its pipelines.
By law, LD is obliged both to connect such facilities and to safeguard free access to its system. It is obvious that issues of the LNG terminal and the control rights of the transmission system are not related at all. However, basic issues like the terminal’s location and capacity are not decided, yet. Neither ER nor GP will create any obstacle for a Lithuanian LNG terminal as long as it will meet normal economic criteria.
6. LD is reluctant to connect with Poland. In April 2010 the Polish gas transmission operator and LD jointly applied according to EU rules to the EU Commission for co-financing a feasibility study on the PL-LT gas connection. This was a result of the cooperation between the two companies, which LD initiated back in 2009 – long before the plans of the Government regarding LD were announced.
7. Gas prices in Lithuania are too high compared to other EU countries; Unbundling of LDs transmission business will reduce gas prices. LD buys natural gas from GP under a long-term supply contract, which guarantees stable supply over the entire term. LD sells natural gas in a highly competitive environment. For example, 80-90% of the gas currently used in the production of heat and power can be substituted by other fuels without need for further investment. Therefore, the gas price depends on prices of alternative fuels. The price formula has been mutually agreed for a specified period and is regularly adapted to the market conditions in Lithuania. Currently, such review work is being carried out for the time period from 01.01.2011 and takes into account all the factors that are emerging in the fuel markets.
End-consumer gas prices became State regulated (also) for big industrial consumers from 01.01.2008. This total State regulation resulted in higher rather than lower prices. Letting the company work under market conditions would be more beneficial for consumers than total price regulation. According to the latest data published by the EU Commission (EUROSTAT), Lithuanian gas consumers pay ca. 5 to 20% less than the EU average (without taxes).
Unbundling the transmission business would cause high costs, which would need to be included in consumer tariffs, for example: Doubling of the IT and telecommunication systems, installing commercial metering in 65 stations inside the current LD grid, separate premises, asset transfer and other restructuring costs. In addition, permanent operating expenses will increase due to loss of synergy, higher support and maintenance costs, and increased staff numbers.
8. By applying ownership unbundling, the State just implements the Third EU Gas Directive.
Lithuania did not properly review and assess the impact of all 3 alternative solutions available under the Third EU Gas Directive (Ownership Unbundling (OU), Independent Transmission Operator, Independent System Operator) plus the derogation option. Lithuania has not considered the proportionality of its policy choices, in the light of the adverse impact they may have on LD and its shareholders, nor has it consulted with affected parties. Art. 49 of the Directive enables
Lithuania as an isolated market to derogate from the provisions of OU as long as it is an isolated market with only one gas supplier. This solution would be an appropriate way for Lithuania to implement the Directive and at the same time fulfil its obligations towards the shareholders of LD in view of their protected investments.
Moreover, it would give LD, a still fully integrated company, enough time to prepare for later unbundling steps. An overhasty implementation of OU which deeply affects all processes and structures of LD through fully separating the transmission business from the rest of the company could cause disruptions of gas supply. This derogation solution was chosen by other countries like e. g. Latvia and Finland.
9. LDs shareholders have been involved in the discussions on the new gas law. On the contrary, in May 2010, the Government approved the concept for implementing OU without involving either the major shareholders or the company itself – the only ones directly affected – in developing and discussing this concept and its alternatives. Mid of August, GP and ER received a belated invitation to a working group which only discusses the implementation of OU, but not its alternatives offered by the Directive. After several unsuccessful attempts to enter into direct constructive talks with the Lithuanian Government, Gazprom and E.ON Ruhrgas International were forced to notify the Government of the investment dispute in connection with violation by the Lithuanian side of its obligations under international investment protection
instruments. We again call for a halt to the expedited legislative process and for direct and meaningful consultations with the Lithuanian Government to discuss all options for amending the draft gas law with the aim to come to the best solution for all stakeholders of LD, not least the Lithuanian State, LDs customers and foreign shareholders.
Deputy Chairman of the Management Committee,
V. A. Golubev
Member of the Board,
E.ON Ruhrgas International GmbH