In the Czech Republic, gas and electricity transmission and distribution prices are regulated by the national Energy Regulatory Office (“ERO”) based on “regulatory periods”, each subject to a specific set of rules. There have been three such regulatory periods since market liberalization (one three-year and two five-year periods), each laying out the parameters for price-setting applicable during the relevant timeframe.

With a view to achieving a decrease in energy prices for consumers and a reduction in profit margins for energy market participants, the ERO has been working since late 2012 on changing the current methodology, though without success. It recently presented its proposed draft methodology for the next regulatory period (January 2015 to December 2019) for public consultation.

As far as the gas sector is concerned – unlike in the previous regulatory periods – the proposed methodology seems to lack consistency and a systematic approach. The method for price regulation appears incomplete insofar as not all parameters of the pricing formula are defined.

For instance, though the ERO states that profits are to be calculated in a manner similar to the one used in the current regulatory period, it does not further specify which regulatory method should apply (i.e. price-cap, revenue-cap or other regulatory method).

Moreover, the ERO aims at regulating the gas transmission activity by way of an annual evaluation and revision of the parameters. It justifies this approach on the basis of the anticipated instability in the gas transmission market and the impossibility of maintaining a fixed regulation for a period longer than one year.

Despite the ERO’s goals, however, the lack of transparency and predictability in the price-setting mechanism (if approved as proposed) may, in the coming regulatory period, lead to instability, an increase in financing costs and increased risk in the sector as a whole.