Ukrainian Parliament Brings Natural Gas Market Regulation into Compliance with the Third Energy Package

On 9 April 2015 the Ukrainian Parliament adopted the draft Law "On the Natural Gas Market" No.2250 (the "Law"), which brings Ukrainian natural gas market legislation into compliance with the Third Energy Package. The Law is based on the principles of freedom of competition, protection of consumer rights and safety of the natural gas supply, as well as integrability into the natural gas markets of member-states of the Energy Community including establishment of regional natural gas markets.

The Law is grounded on the draft initially prepared by the Energy Community Secretariat and finalized by the Ministry of Energy and Coal Industry of Ukraine, the National Commission for Regulation of Energy and Public Utilities and National Joint Stock Company Naftogaz of Ukraine ("Naftogaz"). The Law was prepared for the fulfillment of Ukraine's membership obligations in the Energy Community and for implementation of the EU-Ukraine Association Agreement. Principal provisions of the Law derive from the Directive 2009/73/EC of the European Parliament and of the Council concerning common rules for the internal markets in natural gas, Regulation (EC) 715/2009 of the European Parliament and of the Council on conditions for access to the natural gas transmission networks and Directive 2004/67/EC of the European Parliament and of the Council on measures to secure safety of natural gas supply.

The main purpose of the Law is to create the efficient and competitive environment in the natural gas market as required by the European rules. The Law provides for effecient competition, unbundling (separation of transmission from production and supply of gas), operation of transportation, distribution and storage infrastructure, and non-discriminatory access to gas infrastructure in line with commitments of Ukraine as a member of the European Energy Community. Under the Law customers will be able to independently choose a gas supplier. The Law will help to eliminate practices of cross-subsidization and non-cost reflective prices, while providing for an efficient framework protecting vulnerable customers.

Under the Law an operator of gas transportation system (which is owned by the state and cannot be privatized) and an operator of storage facility (which is owned by the state and cannot be privatized) should be (a) a business entity established and owned exclusively by the state, or (b) in case of establishment of a joint venture, a Ukrainian state owned company with 51% equity and a foreign company(ies) with 49% equity. A foreign company should be owned and controlled by residents of the United States of America or the European Energy Community. Additionally, a foreign participant of the operator of gas transportation system should be an operator of gas transportation system in its respective country and such foreign participant should have at least five-year experience in management of gas transportation system in the American or European market.

The Law is to be signed by the President of Ukraine and will come into force from the date following its publication. However, provisions of Sections I-VII should be effective from 1 October 2015, while certain other articles will come into effect from 1 January 2016. The Law of Ukraine "On Fundamentals of the Natural Gas Market Functioning" No. 2467-VI remains effective until 1 October 2015.

Commenting on adoption of the Law Naftogaz's CEO Andriy Kobolev stated that "it is an important step towards Ukraine's integration with the European Union. It transparently opens our natural gas market to investors, stimulates competition and clearly outlines the functions of the State. Importantly, the law also provides state support to vulnerable customers and establishes quality control measures".

For further information please contact Asters' senior partner Armen Khachaturyan
and counsel Yaroslav Petrov.

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