Introduction

A long-awaited and significant decision is expected to be made in near future. The long-term contract on gas transit between Russia and Hungary that was signed in 1996 – and which plays a dominant role in the Hungarian natural gas market – is set to expire this year, as mentioned in Sections 1.1. and 1.2. of the consultation paper entitled "Gas Wholesaler Model Alternatives after 2015 in Hungary"(1) published by the Ministry of National Development. This take-or-pay contract has been the main determining factor in the Hungarian gas market, as most of the national gas supply has been provided under it. E.ON (and previously MOL) – the party to the contract on behalf of Hungary – has thus held a dominant position in the gas supply market, as mentioned in Section 1.1 of the consultation paper referred to above. This contract established a concentration in the Hungarian wholesale market, which led to the emergence of the universal service provider segment. With the expiry of the contract, the opportunity for a more efficient and competitive market will arise; in other words, there is a chance that a less concentrated, multi-participant wholesaler market may develop in near future.

Three gas market models

In late 2012 the government, in its consultation paper mentioned above, published an outline of potential changes to the post-2015 Hungarian gas market model. Three options were set out:

  • a competitive wholesale model based on market mechanisms, characterised by limited regulatory control;
  • a balanced model, including a system of universal service providers with regulated universal service and competition; and
  • a dominant wholesaler model with a unique dominating participant.

Competitive wholesaler model

According to this model, no long-term contract would be signed by a particular domestic market participant; rather, the gas supply would be provided by existing gas traders with international portfolios. This model requires the removal of the universal service sector. Therefore, consumers would buy directly from open market traders. Under this model, the price is driven by market mechanisms and regulatory control is moderate.

The advantage of this model is that competition arising from the presence of numerous participants guarantees competitive prices and diversification of sources. The security of supply is also guaranteed by the presence of several operators. However, the model comes with risks: in particular, there is no explicit quantitative guarantee that market needs will be met. Another possible risk could arise with the intervention of the regulator into market mechanisms in the case of temporary price increases – which could seriously endanger the security of supply.

Regulated universal service with competitive wholesaler model

Under this model, the regulated universal service segment would remain in place and a wholesaler for universal service providers would be chosen through a tender or other transparent means. This wholesaler must possess a gas portfolio (including a long-term contract and short spot market contracts) providing an amount equal to (but no greater than) market needs. On the grounds of this portfolio, the wholesaler supplies gas to universal service providers at a unique and competitive price. The wholesaler's exclusive task is to satisfy the needs of universal service providers; therefore, the amount of its portfolio cannot exceed the expected needs of universal service providers. The wholesaler has the exclusive right and obligation to supply universal service providers, which subsequently supply retail customers. Universal service providers are obliged to supply customers at a regulated price which is set with regard to the wholesaler's market acquisition price. The requirement that universal service providers enter into contracts with the unique wholesaler eliminates the risk of the universal service providers – in speculating on market price movements – taking advantage of cheaper alternatives to the wholesaler's supply.

This model has the advantage of both preserving the multi-participant, competitive gas market and guaranteeing predictable pricing. However, the wholesaler also faces increased financial risks (regarding quantity and price), while the selection of the wholesaler and the obligation to conclude a contract with it may raise legal concerns.

The creation of the wholesaler position is advantageous for both the regulator and universal service providers: the former benefits from enhanced transparency in procurement activities carried out within the wholesaler's regulated framework, while the latter can eliminate the risk of price regulation by accepting the wholesaler's purchase price.

Dominant wholesaler model

This model continues the existing system. A wholesaler is chosen which concludes a significant long-term contract with the Russian party for the satisfaction of all Hungarian gas needs for the long term. Due to the size of the long-term contract, the wholesaler holds significant market dominance. Owing to the wholesaler's dominant position and its requirement to sell, it becomes the determiner of price in the Hungarian gas market.

The wholesaler's long-term contract only partially meets the demands of universal service providers; it mainly supplies open market customers. While the wholesaler is obliged to offer gas supply to universal service providers equal to the amount of their consumption, universal service providers are obliged to enter into an agreement with the wholesaler in order to mitigate the wholesaler's sales risk.

The advantage of this model is that it retains the familiar system and provides a quantitative guarantee for the satisfaction of domestic needs. However, this model is contrary to the endeavour towards increased diversification, maintains Hungary's unilateral gas dependence, incurs a high risk of non-competitive, high prices and is accompanied by interfering regulations.

Industry consultation

In connection with the three proposed models, the Ministry of National Development carried out an industrial consultation via its consultation paper mentioned above, which attracted the remarks of numerous market players. The results of the consultation revealed that the third model was rejected, the second model was the most supported solution and the first model was nominated as the final objective to be achieved.(2)

Present situation

On February 17 2015 the Hungarian prime minister and the president of Russia announced their agreement that the Hungarian party can use – following the expiry of the long-term contract – a portion of the gas which accumulated during the term of the long-term contract but was not taken over by the Hungarian party.(3) Therefore, the question of whether the existing market structure will be changed remains unanswered. However, one thing is for certain: whichever model is adopted (after the residual gas has been used), it will have to take into account the requirements to:

  • provide a safe domestic gas supply;
  • facilitate acquisition of gas by end consumers at the best possible price;
  • guarantee the continued operation of industrial market players; and
  • support the central role of the Hungarian government.(4)

For further information on this topic please contact Lúcia Detvay at Nagy és Trócsányi by telephone (+36 1 487 8700) or email (detvay.lucia@nt.hu). The Nagy és Trócsányi website can be accessed at www.nt.hu.

Endnotes

(1) Nemzeti Fejlesztési Minisztérium (Ministry of National Development) (2012), "Földgáz nagykereskedelmi modell-alternatívák 2015 után Magyarországon Konzultációs anyag" ("Gas Wholesaler Model Alternatives after 2015 in Hungary Consultation Material"), available (in Hungarian) at 2010-2014.kormany.hu/download/3/55/b0000/Konzult%C3%A1ci%C3%B3s%20k%C3%A9rd%C5%91%C3%ADv.doc.

(2) REKK Energiapiaci Tanácsadó Kft (2013), "Földgáz nagykereskedelmi modell-alternatívák 2015 után Magyarországon" ("Gas Wholesaler Model Alternatives after 2015 in Hungary"), available (in Hungarian) at 2010-2014.kormany.hu/download/0/44/d0000/tanulm%C3%A1ny%202013%20m%C3%A1rcius.pdf.

(3) Available at www.kormany.hu/en/the-prime-minister/news/we-have-strengthened-our-cooperation-with-russia.

(4) Supra note 2.

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