CEER Meeting with Regulatory Authorities from New Member States Rome, October 9, 2003

1. CEER Meeting withRegulatory Authorities from New Member StatesRome, October 9, 2003 ENERGY REGULATION AND IMPLEMENTATION OF NEW EU DIRECTIVES Prof. Inna Šteinbuka, chair Public Utilities Commission, Latvia

2. OUTLINE • Regulatory system of public utilities in Latvia • Public Utilities Commission – multi-sector regulator • Legislation framework in energy sector • Energy sector indicators • Electricity sector: - market structure - tariff setting methodology and tariffs - Common Baltic Electricity market • Gas sector: - market structure - tariff setting methodology and tariffs • Regulator and CEER: prospects

3. REGULATORY SYSTEM OF PUBLIC UTILITIES IN LATVIA Ministy of Economy PARLIAMENT Local governments Public Utilities Commission Municipal Regulators • Energy • Telecommunications • Post • Railway • Domestic waste • management • Water supply and • sewage • - Heat supply

4. PUBLIC UTILITIES COMMISSION -MULTI - SECTOR REGULATOR • Regulated public utilities in energy sector: - electricity generation, transmission, distribution and sales - cogeneration - gas (natural and liquid) transmission, distribution, storage, filling and sales

5. PUBLIC UTILITIES COMMISSION -MULTI - SECTOR REGULATOR • Established on July, 2001 • Independent authority: - 5 commissioners appointed by Parliament for 5 year period - decisions can be challenged only by court - funding: duty on net turnover of regulated services

6. REGULATORS’ MISSION • promotion of the competition • protectionof the consumers’ interests • promotion of theinvestment-driven development of the utilities’ providers • determination of the pricing method • approval of tariffs • issuing licencesfor utilities’ providers • quality control • acting as dispute settlement authority, decisions are binding and might be appealed to courts only

7. LEGISLATION FRAMEWORK IN ENERGY SECTOR • Law on regulators of public utilities (adopted on 19th October 2000) • Energy law (adopted on 3rd September 1998): covering both: electricity and gas sectors • Different regulations (secondary legislation) of Cabinet of Ministers

8. STRUCTURE OF ENERGY RESOURCES in LATVIA in 2002

9. ENERGY SECTOR INDICATORS

10. ELECTRICITY CONSUMPTION TRENDS • The consumption of electricity in the Baltic States after the collapse of the Soviet Union has decreased, due to a massive restructuring of the national economies Source: Energy Information Administration / DOE (www.eia.doe.gov)

11. ELECTRICITY PRODUCTION COMPOSITION Source: US Department of Energy / Office of Fossile Energy (www.fe.doe.gov), data for year 2001

12. ELECTRICITY MARKET STRUCTURE • There is a vertically integrated state-owned electricity company “Latvenergo”, and many small generators • The few privatization attempts failed, and in 2000, the parliament decided not to sell any parts of the company • Government is seeking and discussing a proper model for legal separation • Challenge – as imports from Lithuania and Estonia will decrease, alternative suppliers should be selected. Option: construction of additional local generating capacity, which requires investments

13. ELIGIBLE CUSTOMERS • Latvia Threshold 20 GWh annual consumption 20 consumers eligible (market opening – 18% in 2003) • Estonia Threshold 40 GWh annual consumption 11 consumers eligible (market opening – 12% in 2002) • Lithuania Threshold 9 GWh annual consumption 25 consumers eligible (market opening – 26% in 2003; all consumers – in 2010) Latvia: • Concept of eligible customers of electricity from January 1st 2001 • List of eligible customers shall be published by Regulator • No any real deal reported by now • No legal obstacles to open market for all non-household customers from July 1st 2004

14. TARIFF SETTING METHODOLOGY: ELECTRICITY • In January 2003 the Public Utilities Commission adopted new tariff setting methodologies(prior to their entry into force), based on the following principles: • Separation of generation, transmission, distribution and sales • Price cap • Clear cost allocation • Rate of return (7.6% for Latvenergo) • Elimination of cross-subsidies • Beneficial tariffs for eligible consumers

15. COMPARISON OF ELECTRICITY TARIFFS in BALTIC STATES in 2002Average monthly bill* for residential consumers, (with VAT, in EUR) *Calculated at Latvian average level of consumption

16. COMMON BALTIC ELECTRICITY MARKET • Electricity markets of each Baltic country is too small for effective competition • Technical interconnection capacity is sufficient for the market to develop • European Union requirements will change existing generation patterns and role of Estonia and Lithuania as exporters of electricity - in Lithuania – closure of Ignalina nuclear power plant - in Estonia the restructuring of oil-shale-powered thermal power plants • New investments should be encouraged

17. Natural Gas Consumption Trends • The consumption of natural gas in the Baltic States after the collapse of the Soviet Union has decreased, due to a massive restructuring of the national economies Source: Energy Information Administration / DOE (www.eia.doe.gov)

18. STRUCTURE OF NATURAL GAS CONSUMPTION IN LATVIA IN 2001

19. GAS MARKET STRUCTURE • A vertically integrated private enterprise “Latvijas Gāze” holds monopolisticposition in natural gas transmission, storage, distribution and supply • Shareholders of “Latvijas Gāze”: - Ruhrgas Energie Beteiligungs AG“ 28,18% - AAS "Gazprom“ 25,0% - SIA "Itera-Latvija“ 25,0% - "E.ON Energie AG“ 18,79% • 56 enterprises operate in liquid propan gas (LPG) market

20. GAS MARKET STRUCTURE • Latvia could be considered as a non-connected market in the meaning of Article 28(1) of Directive 2003/55/EC having only one main external supplier (market share more than 75%) • Possible derogation from Articles 4, 9, 23, 24 of the Directive • No legal preconditions for eligibility criteria of gas customers • No legal preconditions for third party access (government is seeking and discussing a proper model for amending Energy law for third party access)

21. TARIFF SETTING METHODOLOGY: GAS • In January 2003 the Public Utilities Commission adopted new tariff setting methodologies (prior to their entry into force), based on the following principles: • Separation of transmission, distribution, storage and sales • Price cap • Clear cost allocation • Rate of return (8,4% for Latvijas gāze) • Elimination of cross-subsidies

22. COMPARISON OF NATURAL GAS TARIFFS in BALTIC STATES in 2002Average monthly bill* for residential consumers using gas for everyday necessities (with VAT, in EUR) * Calculated at Latvian average level of consumption

23. COMPARISON OF NATURAL GAS TARIFFS in BALTIC STATES in 2002Average monthly bill* for residential consumers using gas for heating, (with VAT, in EUR) *Calculated at Latvian average level of consumption.

24. Regulator and CEER: prospects • Regulator is interested to become member of Council of Europe Energy Regulators as soon as possible • Contact person: Lija Makare, Head of External relations division, phone +371 7097211, e-mail: lija.makare@sprk.gov.lv

25. Thank you for attention! Address: Public Utilities Commission Brivibas str.55, Riga, LV-1050 Phone +371 7097200, Fax +371 7097277 Internet home page: www.sprk.gov.lv