Supply price hike highlights Latvijas Gaze tariff proposal

The natural gas monopoly Latvijas Gaze will pay up to 20 percent more for gas supplies according to a new supply deal signed with Gazprom earlier this month, prompting company officials to renew calls for a tariff increase.

The three-year deal covers gas supplies from 2003 to 2005, with Gazprom expected to supply about 1 billion cubic meters in the first year. Prices are expected to rise from 15 percent to 20 percent, said spokeswoman Andra Jesinska. A similar deal with No. 2 supplier Itera is still being negotiated, the company said.

Together, the two Russian firms own a 50 percent stake in the Latvian gas monopoly, while Germany's Ruhrgas and Eon Energie own nearly 47 percent between them.

Russian suppliers link gas prices to those of heavy fuel oil on the world market, the main heating alternative to gas. The specter of war in Iraq has pushed heavy fuel oil prices to roughly $160 per ton, more than double its price when Latvijas Gaze was privatized in 1997.

In Lithuania, the partly state owned gas company Lietuvos Dujos said it too expected an increase in supply prices from Gazprom of about 10 percent.

Latvijas Gaze Board Chairman Adrians Davis told reporters recently that a prolonged war in the Middle East will propel prices even higher.

Latvia's Public Utilities Council has twice rejected Latvijas Gaze's proposals to raise tariffs, which the company says it must do to compensate for increased supply costs.

"In these situations, Gazprom does just as it does in Western Europe. It increases the prices for gas if the price for the alternative increases and I would say that's completely in conformity with the market," said Frank Siebert, vice chairman of Latvijas Gaze's board.

According to Latvian law, the gas company cannot set industrial or residential tariffs before first winning approval from the independent utilities regulator.

Latvijas Gaze is fighting the tariff battle in an international arbitration court. The company's German owners have accused the Latvian government of non-compliance with a 1997 shareholders agreement, claiming it gives the company, not the state, the right to set tariffs for industrial consumers.

Meanwhile, a current proposal, submitted to regulators in September, calls for a 17 percent price hike for industrial consumers, who account for more than 90 percent of gas consumption in Latvia, from 66.77 lats (112 million) to 78.13 lats. Residential consumers would see a 20 percent increase.

Public Utilities Council Chairwoman Inna Steinbuka said the new proposal will be looked at "in the context of the changing situation not only in Latvia, but also globally."

In rejecting previous requests for a tariff hike, Steinbuka said the council considered the company's profit, the soundness of its investment plans and the effect higher gas tariffs would have on the market as a whole and customers' ability to pay in addition to Latvijas Gaze's rising costs.

Indeed, critics of the tariff hike say it would drive up electricity prices as well. The state power utility Latvenergo consumes roughly 51 percent of all natural gas in Latvia.

"Even a small increase will indirectly impact electricity prices," said Roberts Remess, an analyst at the Riga-based Economists' Association 2010.

A council ruling is expected by the end of December.

Lavijas Gaze's profits surged more than 26 percent in 2001 from 8.29 million lats to 10.5 million lats, thanks largely to a cold winter and increased consumption.

But a warmer winter in 2002 has already cut into this year's profits, with the company recording just a 5.7 million lat profit on turnover of 62.3 million lats in the first nine months of the year. Siebert said year-end profits are expected to slightly exceed 5 million lats.

The company also plans to spend 70 million lats over the next decade to modernize its underground storage facility at Incukalns and up active storage capacity from 2.2 billion to 2.5 billion cubic meters, enough to cover 100 percent of Latvia's consumption needs and offer security of gas supplies for the entire Baltic region in the future.

Gazprom also uses Incukalns to store up to 850 million cubic meters per year, and the company said it will likely increase that amount provided service prices remain competitive with the Russian giant's many alternatives in its pipeline network.

Plans are also afoot to increase pipeline construction to Ventspils and Rezekne, all of which is contingent upon signing a long-term supply deal with Gazprom through 2015 and higher tariffs.

Latvia divested itself of all holdings in Latvijas Gaze in 2001, when it sold its last 3 percent of shares for 7.3 million lats.

Praised at the time by the government as one of the more successful sell-offs, the deal has since come under fire from some who say it was rushed without taking into consideration the impact of a private gas monopoly.

"I think it was a mistake and I think the state got what it deserved," said Uldis Osis, director of Riga-based Consortium Consulting. "Everything has been characterized by fighting."