Austria: New Gas Market Act - Croatian Gas Market Reform Continues In 2018

The new Gas Market Act came into force on 3 March 2018 (Zakon o tr~iatu plina) 1, with the primary aim of regulating the rights and obligations of participants in the Croatian gas market pursuant to the Third Gas Directive (2009/73/EC). In short, the Croatian gas market was legally liberalised in 2008, and de facto opened in the 2012/2013 gas season with a further gas market reform in 2014 and 2017. A brief outline of the latest amendments to the Gas Market Act adopted in February 2017 can be found here. Despite efforts to open up the Croatian gas market, in 2015 and 2017 the European Commission initiated two distinct infringement proceedings against Croatia for noncompliance with the above Directive.

It was therefore necessary to make changes to the regulatory framework for the Croatian gas market in the segment for households, specifically regulating the rights and obligations of gas market participants, the duties and powers of the national regulatory authority, the mode of booking gas storage capacity, the price-setting mechanism for gas supply as a public service, the designation of a supplier under public service obligation (PSOs) and of a supplier of last resort (SoLR), and the setting of transparent conditions for public tenders to be launched on the gas market.

The Croatian gas market model – what will change?

The following provides an overview of the fundamental changes to the current market model in Croatia:

  • The system of appointing a wholesale gas supplier to other Croatian suppliers with PSOs has been kept until 1 April 2021. However, prior to appointing a (new) supplier in the wholesale gas market, a public tender has to be conducted by the Croatian Energy Regulatory Agency (HERA) by 3 June 2018.  
  • Following the tendering procedure, but by 1 July 2018 at the latest, HERA should appoint a preferred supplier in the wholesale gas market for an additional period of three years (i.e. as of 1 August 2018 until 31 March 2021), which would be obliged by law to supply gas under regulated conditions to other suppliers with PSOs for the needs of household customers. Until then, HEP (through its affiliated company HEP-Gas supply) remains the key wholesale market supplier to other public service suppliers for the needs of household customers. Suppliers with PSOs are free to choose whether to buy gas from the appointed wholesale market supplier or on the market at the market price.  
  • The price regulation of gas supply as a public service is no longer in the hands of the Croatian government, but of the regulatory authority (HERA). Until now, the gas price at which the wholesale market supplier sells gas to other suppliers with PSOs for the needs of household customers was set by the government. Now, however, HERA must determine and publish a reference price for gas. In other words, a price cap mechanism for household customers is to be set up by HERA by the date the tender for the appointment of a wholesale market supplier is launched at the latest. Setting a reference gas price is therefore an important prerequisite for launching the tender for the appointment of a wholesale market supplier. Namely, the award criteria should be the "lowest premium" that is a fixed part of the reference price at which the wholesale market supplier sells gas to other suppliers with PSOs for the needs of household customers.  
  • On 5 March 2018, HERA adopted a Decision on tariff rates for gas supply as a public service for the period from 1 April 2018 to 31 July 2018. Until 1 August 2018, the respective reference price remains the same as in the previous gas year (i.e. the price has been set at 0.1809 HRK/kWh). For the period thereafter, HERA will adopt the Methodology for Determining Tariff Rates for Public Service Gas Supply and Last-Resort Supply, on which a public consultation is now taking place. The new tariff methodology regulates the method for calculating the final gas price for two distinct periods, i.e. (i) an interim period from 1 August 2018 to 31 March 2021 (transitional rules), and (ii) a period after 31 March 2021 (regular rules). The main aim of the new methodology is convergence of the final gas prices for households with market prices.  
  • Once again, a system of regulated retail prices for household customers remains in place. HERA is required to investigate the functioning of the Croatian gas market at least every three years. Based on the new law, HERA must carry out this investigation by 3 March 2019. In light of the results of the investigation, HERA can adopt necessary and appropriate measures to promote effective competition and to ensure the optimal functioning of the gas market. One of these measures is the adoption of a Gas Price Deregulation Plan, where HERA shall ensure adequate participation of all interested parties, and conduct public consultations lasting no less than 15 days. HERA shall adopt the Gas Price Deregulation Plan with the prior approval of the Ministry of Environment and Energy (MZOE). The plan must also be published on the website of HERA. It follows from the above that the new law provides for the possibility of the deregulation of gas prices at the retail level, though no specific deadline is foreseen. Further, it seems that HERA's decision for complete deregulation still depends upon government approval.  
  • Suppliers with PSOs for the needs of household customers shall be appointed for a three-year term on the basis of a public tender. For the period after 1 April 2021, HERA is obliged to conduct a public tender and appoint gas suppliers with PSOs by 31 December 2020 at the latest. However, existing gas suppliers are no longer required by law to act as a supplier with PSOs, meaning that a supplier with PSOs must notify HERA about its decision to cease supplying gas to households under regulated conditions. In that case, HERA shall appoint a new supplier with PSOs following a public tender procedure. At the moment, such PSOs are placed on a total of 35 distribution system operators (DSOs) in Croatia.  
  • Suppliers with PSOs are required to directly or indirectly book (through the appointed wholesale market supplier) gas storage capacities necessary for their supply of gas to households. Up until now, existing suppliers with PSOs could not directly book storage capacity. Namely, as of 1 April 2017 the existing wholesale market supplier (HEP) has been awarded 60 % priority for booking storage capacity with the UGS Okoli. Unlike now, however, it will be possible for suppliers with PSOs to directly book storage capacities in accordance with the Regulation on Criteria for the Acquisition of Protected Customer Status in the Event of a Gas Supply Crisis until the end of the gas day 31 March 2021.

Final remarks

Although key market players are calling for the full liberalisation of the Croatian gas market, the deregulation of gas prices for household customers has been postponed yet again in order to protect final (household) customers from the excessive market gas price. Nevertheless, as a result of increasing liberalisation in recent years, competition among gas suppliers active in the Croatian market (out of a total of 54 licensed gas suppliers, some 45 are active) has increased. Final (household) customers have also started exercising their right to switch suppliers. Furthermore, the already initiated consolidation, takeover and merger processes within the gas distribution and gas retail sector (currently a total of 35 companies are licensed as DSOs and act as gas suppliers with PSOs) are expected to intensify in the upcoming period.

Following the entry into force of the new Gas Market Act on 3 March 2018, further implementing regulations (such as, inter alia, General Conditions of Natural Gas Supply, the Distribution Network Rules, the Rules on the Gas Market Organisation, the Transportation Network Rules, tariff methodologies, etc.) still remain to be adopted within a very short deadline, i.e. by 3 June 2018. Therefore, gas market participants are eagerly awaiting simpler and improved rules of the game.

Footnotes

[1] Published in the Official Gazette of the RoC 'Narodne Novine' No. 18/2018 on 23 February 2018.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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