LAW FIRM DIRECTORY

Industry Sectors | Energy

YAROSLAV PETROV,

He was born in 1983 in Torez, Donetsk Region. He got his legal education in Donetsk National University (LL.M in the field of Commercial Law, 2006), in Stockholm University (LL.M in the field of international arbitration, 2007). He completed an annual course in international business management at Nebraska University in Omaha, USA (2004). In 2009, he obtained his license to practice law. He joined Asters LF in 2010, having previously worked with CMS Cameron McKenna, and Baker & McKenzie ILF. He specializes in the areas of energy law (oil, gas, power, renewable energy, energy efficiency) and settlement of disputes (international commercial and investment arbitration). He is Secretary-General and a member of the Ukrainian Arbitration Association’s Management Board. He is the LCIA YIAG regional representative. In Ukraine, he is recommended by conducted international professional research, namely The Legal 500, IFLR1000 2016, Chambers Europe and Expert Guides.

Playing privately

"In comparison with the state monopolist, private gas importers and suppliers find themselves in harsher conditions",
—Yaroslav PETROV, Counsel at Asters Law Firm, says

– The Law of Ukraine "On the Natural Gas Market" has been in force for over a year now. How is the practical implementation of its provisions coming along?

— During the year of operation of this rather innovative law, market players had time not only to work under new the conditions, but also to reveal some of its shortcomings.

The most important thing is that we now have a code of laws corresponding to European legislation, since its provisions were developed with the support of the Energy Community Secretariat and its adoption was based on the requirements on implementation of the Third EU Energy Package within the membership of Ukraine in the Energy Community. Ukraine has fulfilled this requirement.

In addition, the subsidiary legislation enabling this law to come into effect was developed, videlicet: Gas Transmission (GTS) and Gas Distribution Systems Codes, Gas Storages Code and the Rules of Natural Gas Supplies to the Consumers.

These documents have a number of practical problem aspects and now gas market players are working closely with the National Commission for State Regulation of Energy and Public Utilities (NCREU) and Ukrtransgasprom in order to improve these legislative initiatives.

There are also non-government initiatives. I, for example, take part in the activities of the working group at Kyiv Energy Research Institute and am its secretary. Within this group, we, together with market players, have developed recommendations that need to be implemented to improve this legislation.

 

— In what areas were the difficulties encountered?

— Firstly, there are difficulties in implementing provisions concerning unbundling of Naftogaz, which is one of the Third Energy Package requirements and provides for sharing of GTS operator functions and those of gas extraction, distribution and supply. This means that it is necessary to remove Ukrtransgaz, which is the Gas Transmission System Operator, from the control of Naftogaz. The Naftogaz Unbundling Plan, approved this summer by the Cabinet of Ministers of Ukraine, provides for establishing two new state companies, which will govern GTS and gas storages. Carrying out unbundling is a complex issue and it cannot be implemented in the near future, since its implementation is closely associated with the arbitration dispute between Naftogaz and Gazprom.

Apart from this problem, hindering global implementation of the Law, there are a number of practical barriers against its normal operation. The terms of the Law and the GTS Code on financial support and reserve stock became one of these barriers. Requirements for the reserve stock are high enough (50% of the monthly volume of gas supply), and it is hard for the companies, wishing to operate on the market, to fulfill them. In September, in order to solve this issue, the Law was amended and the amendments came into effect on November 1 of this year. These amendments establish that the size of the reserve stock shall not exceed 10%.

It should also be stated that there are initiatives on amendments to the GTS Code: it is proposed to change the amount of financial support charge for the purposes of balancing the system, increasing it from 20% to 60% of the monthly supply volume, which will actually bring it to the same terms that were in place before the change of the reserve stock. As you can see, there is confrontation on the issue of reserve stock and financial support of gas supply.

 

— And what about the achievement of the main objectives of the Law? Can we talk about progress in the entry of European gas traders onto our market?

— One of the barriers against engagement of European companies — gas importers is the high rate for entering the Ukrainian GTS system. International companies wishing to supply gas in Ukraine find that they have to pay quite a high price for entering the system, exceeding several times similar rates in European countries. At the same time, the rate for entering into the Ukrainian system from Russia is comparatively small, i.e. in this situation Gazprom is in a better position.

Neither has the second task – to ensure free competition on the natural gas market – been  implemented yet. Harsher conditions are established for private gas suppliers in comparison with those for the state monopolist – the Naftogaz company, which is provided with certain preferences (for example, it is exempt from paying VAT when importing gas). Naftogaz has also taken measures to restrict the market: the company has bought up the entire annual volume of the transmission capacity of the Slovakia pipeline bordering Ukraine and, as a result, other companies wishing to supply gas through this pipeline, have to repurchase separate capacities from Naftogaz, otherwise they can only count on the remaining small  capacities that are available.

There are also difficulties with the customs clearance of gas.

But the main thing is that market players are aware of these problems and they work on them. But, despite all the difficulties and shortcomings, as a whole, the Law has positive tendencies. Since last year, more than 20 companies have been importing gas into Ukraine and today we do not purchase gas from Gazprom, all the gas comes from Europe, i.e., in terms of import, Naftogaz is not a monopolist.

 

— The Ukrainian Parliament recently adopted the draft law on the energy market in the first reading, which is aimed at implementing the new energy market model in Ukraine within two years. Please tell us about the main changes that are anticipated.

— This Law is also very important. It is planned to adopt it this year or at the beginning of next year. It should replace the law "On Principles of the Functioning of Electricity Market in Ukraine" No. 663-VII, dated 2013, which also was one of the components of implementation of European legislation. It was supposed to come into force in 2017, but it will not happen, because the new Law, which you have mentioned, is to be adopted instead of it.

The new Law on the electricity market is also based on European Directives and Regulations, and fully corresponds to the EU Third Energy Package and has been jointly developed with the Energy Community Secretariat.

It provides for many changes, which will help to reform the market. The main thing is that the outdated system of the wholesale energy market establishing that all manufacturers shall sell energy on the wholesale market, after which the wholesale market shall sell energy to suppliers and they to customers, will be eliminated. Accordingly, the very wholesale market formed the wholesale price of energy, and this price was not always the market price.

This Law creates separate markets allowing the widening of this branch: bilateral agreements market, day-ahead market and intra-day market, balancing market, complementary services market and retail market.

Now, the Law is being prepared for the second reading. The amendments to the text of the Law were submitted after the first reading: there are significant changes to the provisions on  renewable energy; a lot of controversial issues were connected with balancing, compensation for imbalance, etc. So far it is difficult to say what the Law will be like after it has been  adopted, but we can assume that it will be as close as possible to European requirements, since the Energy Community Secretariat supervises its adoption.