Georgian National Energy and Water Supply Regulatory Commission

1. Georgian National Energy and Water Supply Regulatory Commission In-process losses in natural gas distribution and transportation systems Dimitri Namgaladze 27 June -3 July, 2008

2. In-process losses of natural gas distribution and transportation system In accordance with the Law of Georgia on Electric Power and Natural Gas (article 5., paragraph 1), the Commission within its competence, adopts a decree on the procedure of calculation of the volume of losses.

3. Total loss of the natural gas (difference between annual volumes of received and sold gas) includes both in-process and commercial losses. • Commercial losses are accounted by such factors as incorrect recording of gas meters, consumption without gas-meters and other. These losses are not reflected in the gas tariff. • Only in-process normative losses are reflected in the gas tariff.

4. In-process losses • Background factors of in-process losses: • Almost in all gas distribution industries of Georgia technical state of gas pipelines is unsatisfactory. El. chemical anti-corrosion protection is no longer any good. • Term of depreciation – 40 years has expired for hundreds of kilometers of the gas pipelines; • Despite reduction in the number of accidents, a certain volume of natural gas is still being lost; Due to the lack of finances, rehabilitation works of the gas pipelines are not duly performed; Gas industries have no emergency stock of spare parts (pipes, closing and regulation valves, insulating and other materials); • Insufficient material and technical base of the gas supply industry; • Gas metering system is not functioning properly and a proper mechanism of settlement with subscribers is not yet in place.

5. In Geoprgia, there is high disparity in natural gas consumption. Namely, in accordance with the data for 2006, the situation is as follows: The Commission has set forth the following marginal allowances for in-process losses bunebrivi for gas distribution licensees: for all gas distribution companies – 5% from the annual volume of recived natural gas; for Tbilis city – 9%. These figures are derived at the session of the Commission on 21 March 2001 relying upon conclusions drwan by the group of experts formed by order of the Chairman of the Commission. The group of experts, apart from the Commission employees, consisted of the scientists from the Technical University of Georgia and Institute of Energy of Georgia, well-known specialists in the Gas sector.

6. Actual losses During the period of regulation in the natural gas sector and as a result of the requirements of the Commission, a downward trend is observed in the total actual losses, both in-process and commercial:

7. 69.9% 63.4% 57.1% 42% 36.8% 32.9% 25.6% 20.9% 36.7% 11% 27.1% 10.5% 17.3% 15.7% 12% - “Tbilgaz” and “KazTransGas Tbilisi” - “Kutaisgazi” - “Samtrediagazi” Dynamics of the actual losses of Some of the distribution licensees (%) for 2003-2007 2003 2004 2005 2006 2007

8. Actual losses of natural gas of the Georgian Gas Transportation Company (%), for 2003-2007

9. At present, there is no methodology in Georgia enabling calculation of the normative losses of gas by the natural gas distribution networks. • The Department of Natural Gas developed draft methodology of estimation of losses on the basis of the following existing methodologies: • “Methodology of estimation of the in-process costs and losses of gas by gas industries within the gas distribution system” (Russia, 2001); • “Methodology of estimation of production and in-process losses in course of transportation of the natural gas by gas distribution networks” (Ukraine, 2003); • “Methodology of estimation of the in-process costs and losses of gas by gas industries within the gas distribution system” (Moldova, 2001).

10. Claims of licensees • Licensees of natural gas distribution claim quite high values of normative in-process losses justifying them by the unsatisfactory condition of gas distribution networks and low consumption. • The Commission does not agree with this argument. At this stage, unsatisfactory condition of the gas distribution network must be considered in normative in-process losses, though only in a small portion. Under normal conditions, normative in-process losses include only inevitable losses under conventional normative leakproofness of gas pipelines and facilities, which has nothing to do with technical condition of the network.

11. Opinion of the Deaprtment of Natural Gas: 1. Given that the Georgian gas distribution networks during a long period of time (4÷8 years) stood idle and that el. chemical protection facilities have become disabled and no repair or rehabilitation works were carried out at the networks, the gas distribution networks appear to be in worse condition than the gas distribution networks of the CIS countries and East Europe. 2. For Georgian gas distribution networks, at this stage application of the methodology of estimation of the normative in-process losses, which is analogous to the methodologies applicable in the CIS countries, does not seem reasonable, as these methodologies work only for high capacity gas distribution networks with maximum loading 3. Distribution licensees receive natural gas from gas meters with a corrector, while ordinarily they distribute it without a corrector. As a result, a certain portion of natural gas remains unrecorded causing damage to industries. Because of this, the industries in their turn, charge additional volumes on customers, in accordance with the formula given in a gas-meter passport. It is unclear whether or not this problem is within the competence of the Commission?

12. At present the Department of Natural Gas works on a new version of the methodology, which implies that: 1. If real, actual in-process losses for the last reporting period presented by a licensee of the natural gas distribution is less than maximal productivity of the gas distribution network, or 5% of the actual maximal productivity during the period of operation of the network, if such figure is not available, then the volume of normative losses totals the volume of losses presented in percentage. 2. If real, actual in-process losses for the last reporting period presented by a licensee of the natural gas distribution is more than maximal productivity of the gas distribution network, or 5% of the actual maximal productivity during the period of operation of the network, if such figure is not available, the gas distribution network is not adequately loaded and the term of operation exceeds the term of operation specified by construction norms and regulations, then the volume of normative losses totals 5 % of the received annual amount of natural gas. 3. After estimation of the volume of normative in-process losses, a licensee of the natural gas distribution shall present a schedule of reduction in losses by years.

13. In-process losses for the system of transportation • The Commission is guided by the methodology of calculation of in-process losses in the system of transportation approved by the Ministry of Energy of Georgia in 1998. • Under this methodology Georgian Transportation Company presented to the Commission a calculation, which was approved. However, the Commission considers that this methodology requires futher corrections and improvements.

14. Thank you for attention