Friday, April 6, 2012

The regulator and SPP differ in how they see the calculation of gas prices for households

The Board for Regulation decided in appellate proceedings at the end of February to adjust the prices of natural gas for households in the course of 2012. Among other things, the decision assumes a USD/EUR exchange rate in the range of above EUR 1.36. However, for the whole of the first quarter of 2012 the euro did not strengthen so significantly against the dollar.

The current cap for natural gas prices for households, valid from 12 March 2012, is based on more optimistic projections of economic parameters than those expected by the gas company, according to information that the portal requested from Slovensky plynárensky priemysel (SPP).

”The first factor to enter the calculation of the regulated price of gas is the EUR/USD exchange rate. According to the new decision for this year, the regulator anticipated an exchange rate of more than USD 1.36/EUR – in reality, though, the euro is much weaker. This fact has a direct negative impact on the purchase price of gas”, says the statement of SPP for

For the first quarter of 2012 the EUR/USD exchange rate reached a maximum value of 1.3468, and at present is in the range of just under 1.31. Historical data on the EUR/USD values show that the last time the exchange rate came to 1.36 was in the first half of November 2011, since which time the European currency started weakening against the US dollar. A firming of the euro against the dollar didn’t come until January 2012, but the exchange rate approached the value of 1.35 only for a short time at the end of February.

”The second important factor that enters the equation is the price of oil and oil products. At present these are also higher than that forecast by the regulator – FO (fuel oil) projected roughly on the level of USD 665/mt – the expected value is USD 732/mt, GO (gas oil) projected roughly on the level of USD 941/mt – the expected value is USD 1022/mt.,” continues SPP.

Overly optimistic forecasts of the values of economic parameters, as the Board for Regulation defined in its decision, are the cause of why the prices of natural gas for household do not take into account actual costs for the purchase of the commodity, claims SPP. This is because the company purchases the commodity through a long-term contract, which was signed for a 20-year term with the company Gazprom Export. The long-term contract defines the price equation to which the external parameters of the EUR/USD exchange rate and the FO and GO prices are entered.

A different view of natural gas storage

In addition to the costs of the commodity, opinions between the regulatory authority and SPP also differ when it comes to need to store natural gas for households. The regulatory authority ÚRSO in its original decision from December 2011, but also the Board for Regulation in appellate proceedings against this decision, determined justified costs for storage at a value of EUR 0. SPP confirmed for the portal that in January 2012, when Gazprom Export limited supplies of the commodity for Slovakia due to strong frosts, households took off roughly 50% of the gas in underground storage facilities.

Question for EUR 200 million?

Current regulatory practice is the reason why SPP, in its own words, is generating a loss in the households segment: “Disrespecting the principles of fair regulation, taking into account all justified costs linked to the supply of gas in the regulated segment and the right to generate reasonable profit has led to a major loss in the regulated segment of households, which for the 2008-2011 period alone came to almost EUR 200 million. SPP has annually audited financial data in the form of profit and loss statements, which are compiled independently also for the regulated segment of households. SPP presents these statements each year to ÚRSO – so from our perspective we have fully documented these losses”, the gas company informed

Conversely, the regulator has the opposition opinion to the issue. Chairman of the Board for Regulation, Jozef Holjenčík, said in a recent interview for that the alleged losses had never been documented by the company SPP: “About three months ago I hear the standpoint of someone from SPP that it had demonstrated the losses also by an independent auditor’s report. The auditor’s report, however, never demonstrated costs linked to the segment of households. We sent an inspection to SPP, whereby the company had a problem showing the strict division of costs for regulated and non-regulated activities, i.e. costs for households and costs for other activities. The media keeps going on about the losses of SPP, but they never supplement the reports with our comment that the company has not demonstrated the losses”.

Different view of the allocation of costs

In the interview Jozef Holjenčík pointed also to the incorrectly set allocation of costs: “Representatives of SPP still apply the allocation of costs that was set back in 2005 and possibly even earlier. I can say in complete earnest that this allocation was created badly, based on incorrect assumptions. The allocation, for instance, is understood also as the separation of a package of money commercial activities, separation of a package of money for storage, a package for distribution, transmission and so on, plus costs for the commodity, of course. These allocations were set wrongly”.
In reference to the allocation of costs the gas utility states that this is based on precisely determined rules: The allocation of costs for the segment of households is based on the Rules for designation of assets and liabilities, expenses and revenues, which are approved by the regulator each year. The same was true for 2011, when SPP as part of its audited Profit and loss statement used the precisely defined allocation keys, according to which individual costs are allocated to the households segment” concludes Slovenský plynárenský priemysel in its standpoint for

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