Cabinet, Naftogaz in tough talks on household gas prices

18 April 2019

Ukrainian Prime Minister Volodymyr Groysman threatened to fire Naftogaz CEO Andriy Kobolyev in case the company does not lower natural gas prices for households as of May. “Either Naftogaz sets the price below UAH 8.55 per cubic meter from May 1 and reports on that by Apr. 24, or I initiate the dismissal of its head,” Groysman told journalists at the weekly Cabinet meeting on Apr. 17.  The possibility to reduce gas prices for households emerged owing to a decrease in EU-based prices for gas, which resulted in Ukraine’s retail prices for industrial consumers falling below household levels. Pointing to these lower industrial gas prices, the Cabinet approved an Apr. 3 resolution obliging Naftogaz to set household prices at the industrial level.

 

However, Naftogaz press service claimed the state enterprise is unable to reduce natural gas prices because it is required by law to hike them as of May. It referred to another Cabinet resolution, approved in October 2018, that prolongs imposing public service obligations (PSO) on Naftogaz and foresees a 15% price hike for gas that Naftogaz sells to suppliers for households since May 1. To resolve the situation, Naftogaz suggests that the Cabinet amend the October resolution instead of issuing a new, contradictive one. The October resolution was adopted as a compromise with the IMF (following more than a year of negotiations) and is among the cornerstones of Ukraine’s cooperation with the fund.

 

Later on, Ukraine’s Energy Ministry explained to Interfax-Ukraine that Naftogaz won’t violate the October resolution if it reduces gas prices in May, as required by the April resolution. “The legislation does limit the number of Cabinet acts that regulate PSO,” the ministry said.

 

Currently, Naftogaz has published a wholesale gas price for supplies to residential consumers at UAH 6.23/cm in April and UAH 7.18/cm since May (without VAT). For large industrial consumers that prepay for gas, the company offers it at UAH 5.99/cm in April.

 

Alexander Paraschiy: It looks logical if Naftogaz starts selling natural gas to households at the price it has set for industrial consumers (which is the price based on the cost of imported gas, meaning such an operation won’t be loss-making for Naftogaz). However, the government’s decrees look contradictive indeed, which puts Naftogaz management under the risk of criminal penalty in case it goes ahead with the price cuts. Another concern of Naftogaz is that under the October resolution on the PSO, the company has to sell PSO-related gas not directly to households (except for those of one region), but to private gas suppliers. This limits the ability of Naftogaz to control the final price for households in most regions of Ukraine.

 

The Cabinet is unlikely to change its October decree on PSOs unless it gets IMF approval. At the same time, Groysman wants to appear as a public advocate, shaken by Volodymyr Zelenskiy's emergence on the political scene and himself preparing for the October parliamentary elections. Given the Cabinet has significant leverage over Naftogaz (with unilateral power to dismiss its top management), the state enterprise will have little choice but to obey Groysman’s demands. Though, such decision may demand additional regulations from the government.

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