The unified natural gas transmission and storage system operator JSC "Conexus Baltic Grid” (Conexus) has addressed the Administrative Regional Court challenging the methodology for calculating the return on capital as of 1 January 2021 adopted by the Public Utilities Commission (PUC or Regulator), which has been adopted in a hasty and erroneous manner. Only two workdays were given on the part of PUC for argumentation of the involved parties during the elaboration process of the new method, which could cause significant endangerment of further development of natural gas infrastructure, market competition and stability.
"The rapidly changed rate of return on capital is a negative signal not only to shareholders of the company, but also to any investor who intends to invest assets in Latvian economy", says Jānis Eisaks, Chairman of the Board of Conexus.
Despite it is defined at European and national level, that every effort must be made to facilitate the development and functioning of the gas market so that investors have sufficient stimulus to make the necessary investments in the infrastructure, the decision taken by the Regulator to change the rate of return on capital turns this approach into an empty promise.
Jānis Eisaks continues: "Unfortunately, instead of encouraging investment in the development of gas infrastructure, counter-acts are taking place, jeopardizing the market stability. By reducing rapidly the rate of return on capital, which will result in a reduction in company's profits for ca. €3 million, the long-term sustainability of the natural gas infrastructure of Latvia and the achievement of the national climate targets can be affected, as its maintenance and development requires resources."
Conexus points out that PUC has based on arbitrary assumptions on the commercial activities of Conexus and its indicators in calculating the new rate. For example, the Regulator refers to benchmarking, or the calculation of European average values for the beta factor and market risk premium, but the used studies by the Council of European Energy Regulators are not considered as benchmarking because they do not include data on the storage of natural gas, which is part of the principal activity of Conexus.
Moreover, PUC has not substantiated which national practices are considered to be comparable to the situation of Latvia, particularly because the Latvian market is one of the smallest markets of European Union, while in other places the return on capital is higher, thus creating unequal conditions of competition for the natural gas infrastructure of Latvia on the international scale. The Regulator had to take into account the country-specific indicators and, using the market risk premium rates of other countries, first they had to be aligned and then adapted to the indicators relevant to the Latvian market.
Meanwhile, Article 105 of the Constitution guarantees every Latvian citizen's right to property, which, in the view of Conexus, has been violated with the new methodology of the Regulator. In other words, the cost-effectiveness of the tariffs of natural gas transmission and storage services is limited.