Legal Eye: A legal gas monopoly?

Broadly speaking, the Gas Directive requires each member state to ensure the operation of an open and competitive market in the production, transmission, storage and distribution of natural gas.

Moreover, as of July 1, 2007, end-users (that means you and me) should have been "free to shop around for gas and electricity supplies ... your current supply companies will no longer be your only choice." Poland has, at least in a formal sense, satisfied this requirement by progressively "unbundling" the state-owned gas monopoly, PGNiG, during the past decade. 

Unbundling

In addition to ensuring choice, each member state must ensure the unbundling of integrated energy companies, meaning that the transmission and distribution of natural gas to the end-user must be conducted by independent entities up and down the supply chain. In particular, energy distributors need to be separate from suppliers in order to guard against any cross-subsidies and distortion to a competitive market. The purpose of unbundling is to "level the playing field" for independent distributors to enter the market.

This does not mean, however, that PGNiG must sell off its assets to a third party. Unbundling, it turns out, may be achieved by simply spinning off different assets into newly created companies that remain wholly owned by the parent company.

Under EU regulations this is perfectly legal. In particular, Art 13 of the Gas Directive provides that "these rules shall not create an obligation to separate the ownership of assets of the distribution system from the vertically integrated undertaking." As long as a newly created subsidiary is independent from its parent company in terms of organization and decision-making, such a structure will satisfy the unbundling requirement.

PGNiG structure

PGNiG was originally established in 1982 as a state-owned entity and it was transformed into a joint-stock company in 1996, with the State Treasury its sole shareholder. In the lead up to EU accession, PGNiG created six wholly owned gas-distribution companies as a first step to unbundle its services, followed by the spin-off of its transmission lines in 2004.

Scope of activities

PGNiG is much more than a gas company, at least according to its articles of association. In addition to extracting, transmitting and selling gas, PGNiG is permitted to produce and sell electricity, petroleum and heat. Additionally, the firm may invest in and operate hotels, travel agencies, museums and mobile phone services.

Independent oversight

PGNiG is subject to control by an independent agency, the Polish Energy Regulatory Authority, as mandated by the Gas Directive. Any price increase, such as the 14-percent increase announced in April, is subject to the prior approval of the regulator. Moreover, the regulator is charged with ensuring that third-party gas suppliers are afforded equal treatment by PGNiG.

Integrating networks

As of July 1, 2007 all formal barriers that previously restricted the supply of energy from one member state to another disappeared. However, according to the most recent Report on the Functioning of Internal Market in Electricity and Gas, "cross-border competition is not yet sufficiently developed to provide customers with a real alternative" to local suppliers. This applies not just to Poland, but to all member states.

Even though Poland has unbundled PGNiG, the condition of infrastructure acts as a deterrent to foreign energy suppliers interested in supplying gas directly to an end user in Poland. Even with the adoption of the necessary changes to Poland's energy regulations, the physical condition of the existing natural gas and electricity transmission networks will prevent full liberalization from being realized anytime soon.

Paul Fogo is a senior attorney with Miller, Canfield, W. Babicki & Partners. fogo@pl.millercanfield.com