General overview
In energy sector the state regulated activities are electricity supply and gas supply. In electricity supply the dominant role is played by state JSC “Latvenergo” producing more than 90% of the electricity generated in Latvia, providing electricity import, transmission, distribution and supply to consumers. Besides state JSC “Latvenergo” there are more than a hundred small generators and 10 licensed companies operate in electricity distribution/sales. Natural gas supply in Latvia is provided by vertically integrated JSC “Latvijas Gaze”, but in supply of liquefied gas (propane) more than 70 companies compete in the market.
According to primary data of JSC “Latvijas Gaze”, natural gas consumption in Latvia in 2004 was 1621 million cubic meters which is 0.5% less than in the previous year.
Natural gas consumption (data of JSC “Latvijas Gaze”)
According to primary data electricity consumption in Latvia in 2004 compared to the previous year increased by 3.1% and was 5586 million kWh. Total volume of electricity market in 2004 was 6545 million kWh, of which 30% was imported electricity.
Electricity consumption
Electricity supply structure in 2004
Licensing and license supervision
According to the Cabinet of Ministers regulations No.297 On the types of regulated public services, in the energy sector the Commission regulates the following types of energy supply:
1. Generation of electricity and heat in combined heat and power plants with maximal electric capacity above one megawatt;
2. Generation of electricity in power plants with capacity above one megawatt, including hydropower plants, wind power stations, combustion power stations;
3. Transmission of electricity if the voltage is 110 kV and above, distribution of electricity, if the voltage is above one kV and does not exceed 110 kV, and sales of electricity to any consumer if the volume of annually sold electricity exceeds 4000 MWh;
4. Natural gas storage, transmission, distribution and sales for any energy user;
5. Liquefied gas storage and filling into containers, cisterns or cylinders, distribution, sales in any type of container (except oil gas and other gaseous hydrocarbons used as fuel).
By December 31, 2004 79 licenses had been issued in the electricity supply sector including 35 licenses for electricity and heat energy generation in CHP plants, 14 licenses for wind power generators, two licenses for hydropower plants, one license for electricity transmission, 15 licenses for electricity distribution and 12 licenses for electricity sales of which four licenses were issued for CHP plants, one license for distribution and five licenses for sales. Renewed licenses were issued for 22 companies.
In the natural gas supply sector JSC “Latvijas gaze” has one license for each sector of natural gas storage, transmission, distribution and sales.
By December 31, 2004 in the liquefied gas supply sector 25 licenses were issued and are in force for storage and filling, 35 licenses for distribution and 58 licenses for sales of which seven licenses were cancelled in 2004. Three new licenses were issued in 2004 and seven renewed licenses for liquefied gas sales and one license for distribution were issued.
In 2004 it was planned to inspect 34 objects of energy supply companies to check the actual operations of companies and fulfilment of license requirements. All planned companies were inspected according to the schedule. Companies which had submitted documents for alteration of license conditions, license reception or tariff approval or about which complaints were received were also inspected. Additionally, nine more objects were inspected.
Elaboration of tariff calculation methodologies and tariff setting
Electricity
Electricity supply tariff calculation methodologies were elaborated in 2002 and early 2003 and approved in early 2003. These methodologies include:
• Tariff calculation methodology for heat energy generated in combined heat and power plants (CHPs) and for electricity generated by CHPs with capacity above 4 megawatts
• Tariff calculation methodology for electricity generated by hydropower plants
• Electricity transmission network service tariff calculation methodology
• Electricity distribution network service tariff calculation methodology
• Electricity sales end tariff calculation methodology
More detailed information on these methodologies and their principles can be found in the previous annual reports.
In October 2003 the electricity supply tariffs of state JSC Latvenergo were approved, taking effect on January 1, 2004. Simultaneously with these tariffs a special tariff was approved for purchase of electricity from independent local generators. This tariff for independent local generators was challenged in court, and court established that the necessary procedures were not strictly observed during decision making. To avoid further litigation on electricity tariffs, in August 2004 the Commission amended the methodology for calculation of final tariffs for electricity and approved new tariffs for purchase of electricity from independent local generators.
Due to changes in Latvenergo tariffs, tariff proposals were submitted also by other electricity distribution and sales companies which purchase their electricity from Latvenergo. After analysis of these proposals, in March 2004 new electricity distribution and sales tariffs were approved for LLC “Vats”, but in April 2004 new distribution tariffs were approved for LLC “TLA Darzeni”. LLC “Vats” operates a separate substation and a distribution network in Ventspils, providing electricity to 7 significant local companies. LLC “TLA Darzeni” operates in Riga, servicing a distribution network on a former gardening territory in Bikernieku Street and supplying electricity to 50 customers.
Natural gas
Natural gas supply tariff calculation methodologies were elaborated in 2002 and early 2003 and approved in early 2003. These methodologies include:
• Natural gas transmission service tariff calculation methodology
• Natural gas storage service tariff calculation methodology
• Natural gas distribution service tariff calculation methodology
• Natural gas sales tariff calculation methodology
No new decisions were made regarding natural gas tariffs in 2004. From July 1, 2004 the second step of tariff increase took place according to the decision from April 9, 2003. More detailed information on the elaborated methodologies, their principles and the approved tariffs can be found in the previous annual reports.
Liquefied gas
Until 2004 the sector of liquefied gas (propane) supply operated according to the tariff methodology adopted by the Energy regulation council in 1998. The methodology envisaged setting of maximum tariffs enabling suppliers to compete, staying below the maximum tariff. The developing competition and the maximum tariffs approved in 2000 constituted a stable regulatory environment for several years. Market participants did not express any suggestion concerning changes to the methodology or the maximum tariffs.
In the second half of 2004 due to rapid changes in import prices of liquefied gas, the issue of setting new maximum tariffs emerged. Evaluation of the liquefied gas market situation showed, that the existing methodology does not correspond to the market structure, specialisation of service providers and the necessary flexibility in price setting. Therefore a new Liquefied gas tariff calculation methodology was elaborated and approved on November 11, 2004.
The methodology envisages continuation of strict regulation in the distribution of liquefied gas, where distribution networks are used for supply of customers from underground or surface group reservoirs. Customers connected to such networks cannot choose alternative suppliers, therefore the existing suppliers have significant market power. To preclude abuse of market power, liquefied gas distribution service tariffs are set fixed separately for each liquefied gas supplier.
A high level of competition and good opportunities to choose alternative suppliers exist in the liquefied gas retail sector for the delivery of gas in cylinders or by auto cisterns and containers. The available market data show that no market participant has a dominant position, but the observed price fluctuations reflect the prices set by external suppliers. Therefore according to the new methodology the Commission decided to equate the retail price to the price which forms under competition by market participants.
In the liquefied gas wholesale sector six market participants were identified which have significant liquefied gas storage capacities and which potentially can influence wholesale prices in the country or specific region. A maximum liquefied gas wholesale price has been set for these companies. To protect the users the Commission decided to monitor wholesale prices by requesting the five most significant market participants to provide quarterly data on actual prices in the previous period and planned prices for the next period. Using the received data the Commission will decide about the necessary action for regulating the liquefied gas market on the wholesale level.
Promotion of competition and service provider development
Electricity supply
Since July 1, 2004 all electricity users except households have an option to choose alternative electricity suppliers. However, no eligible electricity user has actually changed electricity supplier. Last year when approving new electricity supply tariffs for state JSC “Latvenergo” the Commission paid special attention so that transmission and distribution tariffs would not hinder the potential eligible users to accept the offers of other suppliers. From January 1, 2004 the new tariffs took effect, several companies received licenses only for electricity sales and planned to operate as intermediaries in the supply of eligible users, but there was no real competition.
The inactivity of eligible users is partially explainable by the concentrated generation structure and complicated organisation of cross border energy flows. Electricity generation in Latvia is concentrated in state JSC “Latvenergo” while practically each independent electricity generator separately is quite small to offer serious energy volumes for large eligible users. Moreover, most independent electricity generators sell energy for support tariffs set by the state, thus they are not interested to offer energy to eligible users at competitive prices. Regarding import of alternative energy the potential intermediaries and eligible users face energy export quotas set by some countries, specific balancing conditions and unwillingness of foreign operators to get involved in small volume deals. Moreover, one circumstance hindering the electricity market exists also in Latvia and it is the lack of independence of the transmission system operator.
In 2004 the Commission worked on the preparation of the license of independent transmission operator. During the preparation of the license draft special attention was paid to the possibility of ensuring real independence of transmission system operator so that division of state JSC “Latvenergo” functions would not be only a formal step but would really contribute to market development and strengthen competition. Preparation of the license of independent transmission network operator was not completed in 2004 because legal acts which specify the operation of the electricity market were in the process of development. Simultaneously Commission’s experts were involved in the preparation of amendments to the Energy Law and development of the Electricity Market Law aiming to adopt European Union directives for the electricity market.
According to Eurostat data Latvia had the lowest electricity tariffs for households and commercial users among the European Union countries in 2004. It was determined by both the relatively low purchasing power of consumers and the significant share of large hydropower plants in the energy generation. The cost price of the electricity generated by hydropower plants is relatively small, neither other electricity sources in Latvia, nor prices of electricity imported from closest neighbours can compete with it. At the same time it must be stressed that the existing level of end tariffs is not an obstacle for the development of the energy supply sector – the most significant companies are financially stable, operate profitably, and extensive investments are made in networks and generation capacities.
Natural gas
In 2004 in the field of natural gas supply the Commission’s experts participated in the preparation of amendments to the Energy Law aiming to adopt European Union directives on gas market development and adjust them to the situation of Latvia. At the moment the goal of amendments to the law is to prepare the legal environment for third party access because it is unlikely that real competition could develop in the market soon. It is determined by dependence on external suppliers – JSC “Gazprom” and LLC “Itera-Latvija” supply gas through networks belonging to Gazprom. Alternative gas supply would be possible if the gas market in Russia would be liberalized or if connections with other EU countries and Norway would be ensured. But the construction of new connections would require significant additional investments which would not be cost-effective at the present end tariff level.
Taking into account the lack of competition in the natural gas supply sector regulation of all consumer tariffs is justified also in the future. The regulatory process ensures greater tariff stability, balancing the interests of the supplier and users. According to Eurostat data in 2004 Latvia had the lowest natural gas tariffs for households among EU countries and one of the lowest tariffs for commercial users (tariffs were still lower in Estonia). However, it was not an obstacle for the natural gas supplier to develop successfully in recent years, increasing operational efficiency, raising turnover and expanding networks, multiplying investment volumes , as well as achieving ever-increasing profits.
Liquefied gas
The Commission performed market analysis in the area of liquefied gas (propane) supply and consulted the Competition Council to ascertain the achieved competition level. The obtained conclusions showed that competition has sufficiently strengthened to review the tariff approval procedure specified before and decrease the administrative supervision of economic activities of market participants. More details on the accomplishments in the liquefied gas sector are available in the section on elaboration of tariff calculation methodologies and tariff setting.
Protection of consumer interests
The Commission has received 96 complaints (claims, applications) concerning energy issues in 2004. The distribution of complaints by energy supply types is as follows:
• electricity supply – 64;
• natural gas supply – 13;
• liquefied gas supply – 2;
• heat supply – 17.
22 complaints (claims) were received from legal persons and 74 from natural persons.
Examining the complaints (claims, applications) received in 2004 it was established that in 46% of the total number or in 44 answers the applicants were given explanations about various energy issues (38 – in electricity supply and heat supply, 6 – in gas supply), 54% or 52 applications were classified as complaints (claims). More detailed distribution of complaints is as follows:
• valid – 11 (electricity supply – 11; gas supply – 0);
• invalid – 21 (electricity supply – 17; gas supply – 4);
• not within competence of the Commission – 20 (electricity supply – 15; gas supply – 5).
The subject of the received complaints (claims) is very different. The largest thematic groups in the electricity supply are as follows:
• issues associated with electricity supply – supply interruption cases, renewal, installation of new connections (34.9%);
• electricity metering and payments – issues of recorded and consumed electricity volumes and unpaid bills, terms of bill payment etc. (11.6%);
• quality of supplied electricity (4.7%);
• various other issues – problems related to the reduction of the permitted load, issues regarding commercial meter status and servicing, electricity network reconstruction issues, fulfilment of license conditions, heat energy issues etc. (48.8%).
The received complaints (claims) in the gas supply sector may be divided into the following thematic groups:
• gas metering and payments – about the application of the average distributed payment, about the accuracy of consumed gas bills (33%);
• maintenance of the gas supply system – issues associated with approval of technical regulations when rebuilding the gas pipe, about elimination of gas transit transmission, about replacement of gas equipment (33%);
• various other issues – about the quality of liquefied gas, about fee for information provision etc. (33%).
84 complaints (applications) were directly addressed to the Commission (87.5 %), 12 were forwarded from other state institutions (12.5 %), including seven from the Consumer Rights Protection Centre, three from municipal regulators, one from Daugavpils Prosecutor’s Office and one from Problem Prevention Bureau.
The Commission has evaluated and provided answers on 86 complaints (89.6 %), 10 complaints (10.4 %) which were not within the competence of the Commission were forwarded to other institutions including nine to Riga city regulator.
Additional information was requested in 33 cases (34.4 %) to provide more objective answers.
Box 1
State JSC “Latvenergo”
State JSC “Latvenergo” is an energy company which carries out electricity and heat energy generation, provides electricity transmission and distribution services, as well as sells electricity to customers. Latvenergo generates energy in three Daugava hydropower plants (HPP) and two Riga thermal power plants (TPP). The total capacity of generators installed in energy system plants is 2054.1 MW.
In 2004 Latvenergo generated 4264.5 GWh of electricity in power plants which is 62.9% of the total electricity consumption in Latvia and 91% of the total electricity volume generated in Latvia.
In 2004 Latvenergo generated 3039.7 GWh in hydropower plants which is 71.3% of the total electricity generated by Latvenergo, but in Riga TPP – 1 224.8 GWh of electricity which is 28.7 % of the total electricity generated by Latvenergo. In 2004 Latvenergo purchased 326.9 GWh of electricity from independent electricity generators which is 5.2% more compared to 2003.
In 2004 the quantity of electricity consumed by Latvenergo customers increased. The company sold 5572.8 GWh of electricity which is 3.3% more than in 2003.
In 2004 Latvenergo continued its long-term program of asset renewal and development by investing a total of 113 million lats; in 2003 94 million lats were invested.
The largest investments in 2004 were:
- in distribution networks – 41.2 million lats additionally investing in connection objects to satisfy the increasing user demand for additional capacity, connect rural houses without electricity to the electricity network and improve voltage quality;
- in Riga thermal power plant TEC-1 reconstruction project – 39.6 million lats were invested in 2004;
- in the installation project of optical fibre cable to provide “LE telekomunikacijas” business;
- introduction of information system technologies was continued in 2004 according to the Latvenergo IT strategy, development of the existing IT solutions.
Subsidiary “Latvenergo telekomunikacijas” (LT) has implemented several significant projects for the energy system in 2004, as well as prepared to start working as a voice service telecommunications operator and introduced voice telephony service accounting system and established a connection to an international Internet service provider.
Year 2004 saw the completion of the alignment of energy system’s environmental protection work management according to the requirements of the international standard LVS EN ISO 14001 – “Environment management system” which was started in 2000. In 2004 four Latvenergo subsidiaries received quality management system (ISO 9001) and Environment management system (ISO14001) certificates.
Direct investments of Latvenergo in environmental protection activities in 2004 constituted more than 3.8 million lats – these funds were used to fortify the banks of Daugava river, modernize and repair equipment of thermal power plants and hydropower plants, distribution and transmission networks, manage waste and perform annual environmental protection activities.
(Based on unaudited information provided by the company)
Box 2
JSC “Latvijas Gaze”
In 2004 JSC “Latvijas Gaze” continued to be quoted on the official list of Riga Stock Exchange and on the list of Baltic Stock Exchange. The share price grew by 18.2% over the year; the sharpest share price increase happened in the second half of 2004. The turnover of the shares of JSC “Latvijas Gaze” in Riga Stock Exchange was 1.06 million lats in 2004. The value of capitalisation of JSC “Latvijas Gaze” was 259.35 million lats at the end of December 2004. At the end of the previous report year it reached 219.45 million lats.
In 2004 1621 million m3 of natural gas were sold which is 8 million m3 or 0.5% less than in 2003.
According to the unaudited information JSC “Latvijas Gaze” sold gas to consumers and provided services for 121 million lats in 2004 which is 7.3% more than in 2003.
The average number of employees in JSC "Latvijas Gaze" increased a little and was 1270 persons.
23.7 million lats were spent for the capital investment program in 2004 which is 48.9% more than in the previous year. 8.8 million lats were invested in the construction of gas pipelines, constituting 211.6 km of new lines.
(Based on unaudited information provided by the company)
[next section]
[previous section]
[contents]
| 
