PIGNiG angry over pricing decision

By : Joe Harper

   Gas monopoly Polskie Górnictwo Naftowe i Gazownictwo’s (PGNiG) may take Poland’s energy regulator to antimonopoly court after its decision to throw out PGNiG’s application to raise end-user prices for domestic consumers.

   Under the existing regulatory system, rises in end-user prices are capped by energy regulator Urzšd Regulacji Energetyki (URE). Annual price caps set by URE were 12.5% until March and about 16% from March-October. PGNiG has been pushing for a more flexible tariff regime so that some of the company’s rising costs could be passed on to the consumer.

   But government fears of energy-driven inflation and a social backlash against higher energy prices will almost certainly make the move unlikely. “This is an entirely political decision by URE, as always in this sector,” said Suzanna Prinsowa, a gas analyst at Gas Matters in London. But other analysts said PGNiG is to blame for the impasse, pointing to the company’s lack of financial transparency, its cumbersome attempts to restructure and delays in organizing a eurobond issue.

   Nevertheless, Prinsowa said the conflict could escalate and ultimately work against PGNiG. “This could drag on for several months and would defeat the object of the exercise,” she said. Other analysts said PGNiG has a month to submit a new application to raise prices for the coming six months.

   The gas price caps were set in March for six months and came up for renegotiation this month. In its first application in September, PGNiG wanted to raise the price of gas to end-users by 23.5-27.6%, depending on whether the gas is high methane or nitric. The company then applied for increases of around 19.6%. PGNiG also wanted smaller companies to pay higher prices, up to 30% more than today, but URE rejected the proposal.

   “The proposed price rises did not defend the end-user against such a groundless level of prices,” URE said last week. URE accused PGNiG of failing to offer any details on how its long-distance fees (an important element in deciding what costs are justified) are calculated.

   “The end-user is entitled to know in advance the network access conditions and fees associated with this access,” URE said. “What’s more, the fees for using the network should be based on justified costs, verified by the president of URE. This lack of distance-fees data makes it impossible for end-users to estimate the real costs.”

   PGNiG’s management immediately lined up against URE’s decision. “PGNiG finds no clarification in URE’s decision about what a justified price level would be,” PGNiG said last week.

   Wiesław Prugar, deputy trade director for gas sales at PGNiG, said URE’s decision would mean losses for the gas monopoly. “URE’s statement is an obvious manipulation of the information,” he said. “The refusal makes the company’s financial position very difficult and will bring losses. It directly hits the Oct. 1 plans to restructure the company.”

   Alongside possible future rises in the price of gas on international markets since the Sept. 11 terrorist attacks in the United States, PGNiG also recently signed two gas import deals, with Norwegian and the other with Danish partners, that put further price pressures on the financially ailing company.

   PGNiG plans to invest zł. 5 billion ($1.1 billion) during the next five years, most of which is earmarked for new underground gas storage facilities. PGNiG has storage capacity of about 1.1 billion square meters and wants to raise this to 3-4 billion within five years. It also said it wants to move into electricity production by building a gas-fired heat and power plant, in partnership with Elektrownie Szczytowo-Pompowe (ESP) power plants and Finish power company Finesco. PGNiG said it plans a two-year program of employment restructuring designed to cut the company’s workforce to 31,000 from about 42,000.

   PGNiG expects to see net profits of zł. 391 million ($93 million) in 2002, against expected net losses of zł. 188 million ($44.7 million) this year. The company has been running losses of zł. 500 million ($119 million) a year on top of its estimated zł. 6 billion ($1.4 billion) debt. Analysts said it urgently needs restructuring and changes in the regulatory environment in which it operates.