3508-D — yet another lost opportunity to resolve fundamental problems on Ukrainian Gas market. Big victory for ukrainian oligarch Dmytro Firtash

Mark Savchuk

Head of Civil oversight Council of NABU

On July 14, the Verkhovna Rada of Ukraine voted for the draft law "№3508-D", which "must resolve the problematic situation that has developed in the gas market." This refers to the huge debts that Тeplokomunenergo (TKE) organizations, Oblgaz (Ukr. "Regional gas") organizations and Gas-sbut (regional gas suppliers) organizations have accumulated to the state company NAK Naftogaz of Ukraine.

In essence, the law proposes to write off debts that companies I’ve mentioned above have towards Naftogaz. Let's dive a bit deeper into the law and figure out who are the main groups of interest, what are the rough sums of money involved, and what consequences this will have for Ukraine.

Part 1 – Тeplokomunenergo (TKE)

The first part of the "3508-D" concerns Тeplokomunenergo (TKE)

The established tariffs and economically justified tariffs are not always equal to each other. However, for the set period, TKE does not have the right to change its tariffs (for example, in case of a sudden jump in gas prices), it can sell its services only at the established tariffs set by National Commission for State Regulation of Energy and Public Utilities (Ukr. NKREKP). Consequently, debts tend to accumulate overtime.

"3508-D" is proposing to write off the body of the debt (rough estimates UAH 30 billion) and penalties (about UAH 10 billion).

To summarize, the TKE part of the debt is more likely the result of defective functioning of the market than actual corruption (although the corruption element is undoubtedly exists in the TKE market).

Part 2 – Oblgaz

The gas is constantly flowing through the Gas Transmission System (GTS). The system "is always open" so to speak. If an Oblgaz, i.e., a regional gas transport company, "books" 10,000 cubic meters of gas (for example), but in fact takes 15,000 cubic meters of gas from GTS, then the operator will register it as "imbalance." For the past decade, all oblgazes have accumulated almost 45 billion UAH of such imbalances.

According to the official version of various Oblgaz organizations, the imbalances appear due to the "growing consumption of technical gas" (i.e. the gas that is being lost due to transportation), but in fact, this is simply embezzlement. For example, this April, some Oblgaz organizations increased the "technical gas consumption" by a factor of 20, although nothing has changed in their daily operations. Obviously, Oblgaz organizations (70% of them are controlled by oligarch Dmytro Firtash) simply do not expect they will ever need to pay these debts, so they take as much as they need. And, considering that 3508-D is proposing to write off their debts — they seem to be right on point here.

Part 3 – Gaz-sbut

Good rule of thumb is, where you see oligarch Dmytro Firtash — there is a criminal scheme crawling somewhere nearby. There are two components of Gazsbut (Ukr. Gas supply companies) debts:

Temperature Coefficients

The point is that in winter, the gas is "compressed" and, therefore, "a little more" gas passes through a gas counter than under "standard conditions", which is, 20 degrees Celsius. Therefore, Oblgaz organizations use so-called "temperature coefficients" to take into account that difference. These coefficients are already "built in" in the VTV expenses (technical gas consumption) of every Oblgaz organization.

However, there is a problem. The Oblgaz organizations that are under the control of Dmytro Firtash DUPLICATE temperature coefficients and put them into the final gas bill that consumers get in their post-box. This meant that people were overpaying roughly 10% for their gas consumption.

The "temperature coefficients" scheme is so obvious that it has served as a cause for several lawsuits that are being looked at by the Supreme Court of Ukraine. Despite the occasional protests that demand justice, the Supreme Court does not rush to make a decision. After all, there will be no need to make any decisions if the law "itself will write off these debts."

Potential "loss" from the scheme is estimated at UAH 5 billion.

Consumption Rates

Basically, consumption rates regulate "how much a person consumes WITHOUT a gas counter." Although in theory, there should not be such a thing since the rate includes a fee "for installing a gas counter", i.e. everyone in the country MUST have gas counters. Nevertheless, there are hundreds of thousands of such consumers.

During Viktor Yanukovych's presidency, the consumption rates were many times higher than the real gas consumption of citizens. Since 2014, a series of decrees of the Cabinet of Ministers of Ukraine gradually "reduced" the rates. But one of the decrees adopted by the then-Prime Minister of Ukraine Volodymyr Groysman was "accidentally" adopted in violation of the set procedures.

Oblgaz organizations addressed the court and managed to annul the decree. The court did not even have to do any shenanigans. Since the decree was adopted with violations of set procedures, the court simply did its job and annulled the document.

And it means that Oblgaz organizations are now attributing much higher gas consumption rates that were set before the Cabmin decrees came into effect. It is a legal trick that allows Oblgaz organizations to effectively generate lots of fake gas consumption "on paper" that amount to tens of billions of hryvnias.

In total, according to experts, the Gazsbut companies will ask authorities to write off about UAH 24 billion of debts to Naftogaz.

Conclusion:

A small conclusion regarding 3508-D. Although the law DECLARES it will "solve the problem," it does not solve any problems at all. It simply regulates the general rules for writing off the debts (mostly, the fake debts) of market agents to Naftogaz.

In no way, shape or form it addresses the systematic problems of the gas market, the corruption within the market and the general abuse of power that oblgazes exercise over its consumers on a daily basis.

Unfortunately, media almost never covers such laws as 3508-D in detail, explaining that passing such laws will effectively cost billions UAH to taxpayers. 3508-D is truly an example of "top corruption" in Ukraine that allows oligarchs to write off tens of billions of debts to state companies.