How the Reduction in the Price of Gas Surprisingly Reversed the Revenues of Traders in Favor of the State Operator

How the Reduction in the Price of Gas Surprisingly Reversed the Revenues of Traders in Favor of the State Operator

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With amendments to the Energy Act, the Bulgarian legislator established a mechanism for reducing the prices of natural gas already delivered for a period in the past for the regulated market for end household and business consumers. The reduction in prices for end consumers is due to an agreement reached between the state public supplier Bulgargaz and the Russian supplier Gazprom Export.

However, the legal amendments unjustifiably affect and interfere with the relations on the free market for natural gas. In the free segment of the market there are electricity traders, who negotiate the prices of natural gas and who have not bought natural gas from Bulgargaz in order to be influenced by the agreement reached with the Russian supplier.

In other words, the agreed reduction should be extended downstream only to Bulgargaz's counterparties, but not to interfere with the contractual relations of third parties that have already been completed.

The adoption of the disputed provisions in the Bulgarian Energy Act and the position of the European Commission

Pursuant to the Decision of the European Commission of May 24, 2018 in case AT.39816 - Gas supplies upstream in Central and Eastern Europe - the Russian gas supplier Gazprom Export and the Bulgarian state trade company and public supplier of natural gas Bulgargaz EAD agreed to reduce the prices under a contract for the supply of natural gas, as of August 5, 2019. The mutual agreement reached must be admired given its positive effect on the Bulgarian gas market. In order to spread the effect of the agreed reduction of the prices for the contractors downstream the chain of Bulgargaz EAD, a bill for amendments to the Energy Act was submitted. This established goal is also proclaimed in the reasoning of the bill: “to regulate a mechanism for reimbursement of amounts under contracts concluded between the public supplier Bulgargaz EAD and its customers in relation to the reached renegotiation of the natural gas prices between Gazprom Export LLC and Bulgargaz EAD, in order to have a positive effect on natural gas consumers."

However, the price reduction should only affect the regulated segment of the natural gas market, as it concerns the prices at which the public supplier Bulgargaz EAD purchased natural gas on and then sold it further down the chain.It is in the regulated segment of the market that quantities of gas purchased by the Russian supplier along the chain of legal relations have been delivered - the public supplier sells to suppliers or directly connected consumers, and from there to the suppliers of the end consumers.

Despite the entirely positive expectations, through the already almost established constant practice of the legislator, between the first and the second reading of the bill, the controversial provision of para.17 of paragraph 2, according to which the Energy and Water Regulatory Commission (EWRC) by a decision instructs the transmission system operator to change the prices of natural gas for balancing them retroactively.

The European Commission, which is monitoring the implementation of the commitments in case AT.39816, welcomed the Bulgarian state for the agreement reached in relation to the natural gas supply contract with Gazprom Export, but at the same time expressed serious concerns that the retroactive nature of the amendments to the Energy Act violates the rules for protection of competition on the gas market and raises the issue of unregulated state aid in favour of the state gas transmission operator Bulgartransgaz EAD.

Does the transitional provision in the EA contradict EU law?

As we have indicated, the agreement reached on price reduction has nothing to do with the free segment of the gas market, such as: the purchase / sale price of balancing energy from Bulgartransgaz EAD and the free market contracts in which the regulated price is used as an index for determination of the freely agreed price.Companies that supply gas to the free market are adversely affected by the new law, which undermines the principle of legal certainty.

Due to the retroactive nature of the changes, these companies are placed at a disadvantage when compared to Bulgargaz's customers and this has a negative impact on the number of companies operating on the market and the future development of competition in the sector.This also raises the issue of unregulated state aid in favour of the state-owned company Bulgartransgaz EAD.Under the national law of a Member State, revenues from gas traders will be taken away retroactively and thus a state-owned company will be benefited at the expense of traders.All legal facts under the contractual relations between the parties have been completed, the legal consequences have been executed, and the contracts have been finalised with their implementation - delivery by the traders and payment by the gas operator.

Is the transitional provision of the Energy Act unconstitutional?

The Preamble and art. 4, para. 1 of the Bulgarian Constitution enshrine the principle of the rule of law. Derived from it are the principle of legal certainty, predictability and stability, the principle of prohibition of the actual retroactive effect of legal norms and the principle of protection of legally acquired rights. In its case-law, the Constitutional Court has consistently held that the rule of law is a state of legal certainty, where the content of the legal order is clearly, predictably and unambiguously defined (Decision No. 1 of 2005 on Code of Criminal Procedure No. 8 of 2004, Decision No. 7 of 2005 on cd № 1 of 2005).

The Bulgarian legislator has already once allowed itself to violate the Constitution in the field of energy by introducing a fee for producers of energy from renewable energy sources, when this legal amendment was declared unconstitutional and as a result the state became a defendant in many cases under the Liability for Damages incurred by the State and the Municipalities Act. Then the Constitutional Court ruled with its decision No. 13 of 31.07.2014 on c. case No. 1/2014, according to which: “The Constitution prescribes to the state to build a system of legal regulation of economic activity, which should guarantee all citizens and legal entities with equal legal conditions, both when starting a business and in terms of its organization and implementation."

The revocation of acquired property rights (paid prices for delivered natural gas for balancing) by natural gas traders retroactively for the period August 5, 2019 - March 31, 2020 through the administrative acts of the EWRC, based on the provision of § 2, para. 17 of the Transitional and supplementary provisions to the Act to Supplement of the Energy Act (Promulgated SG, issue 38 of 2020), raises serious doubts about the unconstitutionality of the new law.If the same is declared unconstitutional, then according to the recent Decision № 4 of 14.05.2020 under c.d. No. 9/2019 of the Constitutional Court, it will not be applied to the pending cases before the court, which electricity traders could initiate.

What measures should gas traders take to protect their violated rights and legitimate interests?

Pursuant to the above-mentioned provision of the Energy Act, the Energy and Water Regulatory Commission (EWRC) has issued a number of successive decisions (Decisions No. C-15 to C-22 of May 2020), which in its operative part indicate to Bulgartransgaz EAD in its capacity of the gas transmission grid operator, to amend the natural gas prices for balancing, determined during the period August 5, 2019 - March 31, 2020 in accordance with the Methodology for Determining the Daily Imbalance Fee and the Fee for Balancing Neutrality taking into account the reduced price at which the public supplier sells natural gas.

The decisions are administrative acts published on the Commission's official website, but they are not explicitly communicated to natural gas traders affected by the decisions.Natural gas traders are interested parties, who have not participated in the administrative proceedings before the energy regulator.Therefore, in the absence of a proper notification according to the Administrative Procedure Code (APC), the term for appealing the decisions of the EWRC before the administrative court should not run.If it is assumed that the decisions constitute null and void administrative acts, their contestation as such is not limited in time - according to the APC, interested parties may indefinitely apply to the court for annulment of an administrative act.And the natural gas traders are undoubtedly interested persons - they have already started receiving invitations from Bulgartransgaz EAD for a refund of the prices paid under the balancing contracts on the basis of the reduced balancing price.This affects their property sphere and retroactively deprives them of revenues received in favour of the state gas transmission operator Bulgartransgaz EAD.

Gas traders can also file a complaint for the European Commission, which should contain a precise description of the manner in which the Bulgarian national authorities have infringed European Union law and details of the actions taken so far in relation to the infringement.

By Maria Derelieva and Dobrina Pavlova, Attorneys at Law, Georgiev, Todorov & Co.