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    Naftogaz Seeks End to Opaque Ukraine Subsidies

Summary

State Naftogaz has backed the calls to end certain types of subsidy for regional utilities, in line with the Energy Community and World Bank.

by: William Powell

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Naftogaz Seeks End to Opaque Ukraine Subsidies

State Naftogaz Ukrainy has backed the calls to end certain types of subsidy for the regional utilities, in line with the view of the Energy Community and World Bank on so-called public service obligations, it said August 30, referring to a draft law the two bodies submitted to government a week ago.

The current law of Ukraine forces it to sell gas at low prices to regional gas utilities (oblgazy), companies mostly owned by the very wealthy Dmitry Firtash business empire which do not take any risk either for falling or rising demand, or for wholesale market prices, Naftogaz said. At the same time, the operators of the distribution companies can block attempts to control the use of the gas and who buys it.

Gas supplies to the public are a "black box". Oblgazy do not provide accurate information on exactly how much gas any specific consumer has used, nor whether the people who receive subsidies have taken all the gas for which they invoice the state. Naftogaz does not know who gets the gas at a reduced price and how much of it actually gets to the population. This allows the intermediary companies to sell on gas they have bought cheaply, to the highest bidder.

"This sector should become transparent and open to competition. Therefore, we support the changes proposed by the Secretariat and the World Bank," said Naftogaz Group's chief commercial director Yuri Vitrenko.

Naftotaz supports the amendment to the PSO whereby Naftogaz' production subsidiaries sell gas to all willing suppliers in the wholesale market, including gas suppliers on equal terms. The Energy Community and World Bank formula for determining the wholesale price as one of the components of the final price for the consumer can apply, and standard market mechanisms should be introduced to ensure payment for delivered gas, including prepayment, it said, and the restrictive practices that now allow companies to limit switching also must go.

The aim is to destroy the monopoly and foster a competitive market in gas supply for the population, benefiting the final consumer. If gas suppliers cannot meet their obligations to supply gas to the population on competitive terms, Naftogaz will be able to do this on its own, cutting out the middleman, it said.

While Ukraine's gas market is moving rapidly towards the European Union model, there are occasions when the strength of ties between trade, energy and the government become apparent.

 

William Powell