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Regulatory risks

Elimination of administrative price control

 

In connection with the ruling by the Court of Justice of the EU of September 10th 2015 on the system of regulated gas fuel prices, changes to the regulations on administrative price control were required. PGNiG expressed its opinion that liberalisation of gas prices was the key element of gas market liberalisation. At the same time, the Company emphasised that the process must be conducted in such a manner as to guarantee billing continuity in contracts with customers, as the inability to guarantee continuity of billing is a risk to the Company’s business. In view of the expected removal of tariffs, PGNiG took a number of measures to adapt itself to the new regulatory framework, including:

  • preparation of new framework agreements and individual contracts, as well as an updated product portfolio and price list to meet the customers’ current needs,
  • conclusion of contracts with the majority of key industrial customers, with price-setting mechanisms ready for the post-tariff regime.

In 2017, the process of adapting contract terms to the situation that will exist following the elimination of administrative price control was completed.

 

Obligation to diversify gas imports

 

The Council of Ministers’ Regulation of April 24th 2017 on the minimum level of diversification of foreign sources of gas supplies prescribes the maximum share of gas imported from a single country in total gas imports in a given year. In 2017–2022, the share may not exceed 70%.

 

Upholding of the decision to exempt the OPAL pipeline from the Third Energy Package regime

 

Pursuant to two decisions issued under Art. 36 of Directive 2009/73 of July 13th 2009 concerning common rules for the internal market in natural gas and repealing Directive 2003/54 /EC, Opal Gastransport GmbH, the operator of the OPAL pipeline, benefits from the exemption from the need to grant third-party access to transmission capacity. The infrastructure is used by Gazprom, which controls 50% (under a decision from 2009) and de facto 100% (under a decision from 2016) of the OPAL pipeline’s capacity. As a result of the recent exemption from the third party access (TPA) rule, Gazprom is able to transmit approximately 55 bcm of natural gas annually to the European Union, bypassing the traditional supply routes (the Yamal and Bratstvo gas pipelines).

The exemption decisions adopted by the European Commission and the German regulator Bundesnetzagentur in 2016 allow the Russian gas major to implement its long-term strategy of preventing the development of supply diversification projects in Central and Eastern Europe and thus make the region dependent on Russian gas. In view of these facts, PGNiG, PST, the Polish government and Naftohaz (a Ukrainian gas trading company) filed complaints against the decision of the European Commission to the General Court of the European Union, requesting an injunctive relief in the form of suspension of decision execution. PGNiG and PST also filed a complaint against the German regulator’s decision with a German court in Dusseldorf.

By decisions of December 23rd 2015 and December 30th 2016, the General Court of the European Union and the German court, respectively, granted the injunction preventing Gazprom from using the full capacity of the OPAL pipeline. The injunction was effective for approximately seven months. The General Court of the European Union lifted the injunction on July 21st 2017. As a result, the German court issued a decision to the same effect on July 27th 2017. This opened the door for resumption of additional auctions for the OPAL pipeline capacity and use of the Nord Stream 1 gas pipeline at full capacity, with lower volumes of gas transmitted via Ukraine.

In four proceedings before the General Court of the European Union, on December 14th 2017 one of the complaints filed by PST was found inadmissible due to formal reasons (lack of direct concern). The order is not final and PST has the right to appeal against it. It should be noted that the General Court has not yet issued any ruling concerning the subject matter of any of the proceedings. The proceedings before the German court are also pending.

Winter package (electricity) – Clean energy for all Europeans

On November 30th 2016, as part of the so-called Winter Package, the European Commission announced proposals of new electricity-related regulations. Their objective is to ensure that the European Union is capable of meeting the commitments assumed under the Paris Agreement (COP21) and, after achieving the target, that the EU economy evolves towards a low-emission economy.

Some provisions of the legislative proposals included in the Winter Package pose a significant threat to the PGNiG Group’s operations. First of all, the introduction of the emission limit (the currently proposed level of 550g of CO2 emissions per 1 kWh generated) as a criterion for participation of an installation in the capacity market may constitute a legislative barrier for the PGNiG Group’s CHP plants to enter this market.

Another source of risk is the proposed introduction of binding targets for Member States regarding the share of energy from renewable sources, energy efficiency and individual trajectories to achieve these targets (including sectorial ones). The adoption of binding national targets and trajectories proposed by the European Commission may pose a risk to the growth of the PGNiG Group’s business.

In order to mitigate these risks, PGNiG takes a number of measures to provide support for its requests. In this respect, PGNiG regularly monitors the legislative process carried out both at the Council of the European Union and the European Parliament, and provides professional support for the parties involved. Concurrently, the Company seeks to achieve compromises and a common ground at the IOGP. The steps taken so far have already brought measurable benefits, including the lack of the IOGP’s support for the emission limit as a proposed element of the capacity market design.

 

Draft amendment to Directive 2009/73

The proposed amendment to Directive 2009/73 (forming a part of the Third Energy Package) announced in the third quarter of 2017 is aimed at confirming the applicability of the directive to the infrastructure associated with imports to the European Union, extending as far as the limits of the European Union’s jurisdiction, understood as the limit of territorial seas and exclusive economic zones of Member States. The directive addresses the demands made by some entities operating on the internal market in natural gas, including PGNiG, according to which it is necessary to define the limits of applicability of EU laws. Under the existing legal regulations this is unclear, which disrupts the operation of the internal market in natural gas and adversely affects the integration of Member States.

Since the publication of the proposed amendment to the directive by the European Commission, PGNiG has supported its rapid adoption. The directive will have a positive impact on the internal energy market, ensuring consistency of the legal regime and introducing uniform, transparent and competitive rules applicable to all gas pipelines in the European Union. PGNiG will take steps to clarify some of the provisions of the draft amendment to ensure its maximum effectiveness.

However, considering the complexity of the legislative process in the European Union, there are certain risks that may limit the effectiveness of the directive. It must also be noted that there is a political risk related to the scepticism among some Member States regarding the proposed amendments. There is a risk that some Member States will try to limit the effectiveness of the directive by imposing only illusive obligations on owners of the infrastructure associated with imports to the European Union.

Non-compliance risk

 

PGNiG has an organisationally and functionally separated Compliance unit. The functional separation was effected through the ‚PGNiG Compliance Programme’, adopted by the Management Board of PGNiG on June 30th 2015. In line with the non-compliance risk management model, each area at risk of non-compliance was assigned a dedicated non-compliance risk area manager (leader), who is in charge of ensuring that compliance standards are met.

The non-compliance risk (risk of breach of compliance standards) may arise in various areas, and pertain to: (i) the financial area, in the form of fines, damages, compensations and other liabilities that may arise for the Company, (ii) the Company’s reputation, the loss of which can also have financial ramifications, (iii) the operational area, and (iv) the Company’s value for stakeholders, including shareholders.

As part of anti-corruption measures PGNiG has put in place the PGNiG Group’s Anti-Corruption and Gift Policy, adopted by the PGNiG Management Board and effective as of July 25th 2017.