1. UPDATE ON REGULATION Prof. Inna Šteinbuka, Chair Public Utilities Commission of Latvia Meeting of Nordic –Baltic Energy Regulators November 10, 2003 Vilnius, Lithuania

2. HIGHLIGHTS Public Utilities Commission – multi-sector regulator Key indicators and trends Gas Market structure Electricity Market structure Main achievements Gas tariffs Electricity tariffs Future challenges and activities

3. PUBLIC UTILITIES COMMISSION - MULTI - SECTOR REGULATOR Established in July, 2001 Independent authority: - 5 Commissioners appointed by the Parliament for a 5 year period - decisions can be challenged only by the court - funding: duty on the net turnover of regulated services

4. PUBLIC UTILITIES COMMISSION - MULTI - SECTOR REGULATOR Regulated public utilities in the energy sector: - electricity generation, transmission, distribution and sales - cogeneration (above 1MW) - gas (natural and liquified) transmission, distribution, storage, filling and sales

5. PUBLIC UTILITIES COMMISSION - MULTI - SECTOR REGULATOR Commission positioned itself as a strong stakeholder in the energy sector Staff recruiting and organizational optimization completed During this year institution has significantly strengthened its capacity by intensive training activities and applied cases

6. KEY INDICATORS AND TRENDS Year 2002 Increase of GDP - 6.1% Increase of electricity demand - 3.5% Increase of natural gas demand - 0.4%

7. Gross natural gas consumption in Latvia (mln m³)

8. Structure of natural gas consumption in 2002

9. Gross electricity consumption in Latvia (mln kWh )

10. Structure of electricity consumption in 2002

11. GAS MARKET STRUCTURE Vertically integrated private companyLatvijas Gāze is the only actor in natural gas transmission, storage, distribution and supply Shareholders of Latvijas Gāze: - Ruhrgas Energie Beteiligungs AG 28.18% - JSC "Gazprom 25.0% - LLC "Itera-Latvija 25.0% - "E.ON Energie AG 18.79%

12. GAS MARKET STRUCTURE Latvia could be considered as a non-connected market in the meaning of Article 28(1) of Directive 2003/55/EC having only one main external supplier (market share more than 75%) Possible derogation from Articles 4, 9, 23, 24 of the Directive No legal eligibility criteria of gas customers yet adopted Amendments to the Energy Law are under discussion (introduction of third party access in gas industry)

13. ELECTRICITY MARKET STRUCTURE Vertically integrated state-owned company Latvenergo dominates the sector The few privatization attempts failed, in year 2000 the Parliament decided not to sell any parts of the company Governments decision on legal separation of TSO has been put on hold Elaboration of the new Electricity Market Act is on the agenda of the Government

14. ELECTRICITY MARKET STRUCTURE ELIGIBLE CUSTOMERS Threshold of 20 GWh annual consumption with 20 consumers eligible (market opening – 18% in 2003) Concept of eligible electricity consumers introduced from January 1 st 2001 Each year the Regulator publishes a list of eligible consumers No actual deals reported by now No legal obstacles to open market for all non- household customers from July 1 st 2004

15. MAIN ACHIEVEMENTS New principles of tariff design adopted : Separation of generation, transmission, distribution and sales Price cap Clear cost allocation Economic depreciation Rate of return (7.6% for Latvenergo; 8.4% for Latvijas Gāze) Elimination of cross-subsidies New gas and electricity tariffs adopted

16. Average natural gas tariffs from July 1, 2003 in LVL/ 1000m³ (at HSFO FOB ARA above 140 USD/t) increase Up to 0.5 thousand m383.65 25.3% 0.5 – 25 thousand m379.56 19.2% 25 –126 thousand m378.60 18.4% 126 – 1260 thousand m377.40 16.6% 1260 – 12600 thousand m376.20 19.1% 12600 – 20 000 thousand m3 73.79 17.1% 20 000 – 126 000 thousand m3 66.58 12.3% Above 126 000 thousand m3 61.17 10.4% Fixed monthly payment – 0.65 LVL per month 1 LVL = 1.55 EURO GAS TARIFFS

17. ELECTRICITY TARIFFS New tariffs take effect on 1 January 2004 Extensive consultations organized with customers and society prior to the adoption of the new tariffs Reduced cross subsidies among customers groups Service tariffs differentiated depending on the connection point in the grid

18. Average electricity sales prices for captive customers * (LVL/KWh) presentnewchange 110 KV line0.02460.01914-22% 6-20KV bus bar 0.02460.02376-3.4% 6-20KV line0.02910.029150.2% * Excluding VAT and including load component 1 LVL = 1.55 EURO ELECTRICITY TARIFFS

19. Average electricity sales prices for captive customers * (LVL/KWh) presentnewchange 0.4 KV bus bar0.02910.0323711% 0.4 KV line0.03440.44628% households0.0330510.3813615% * Excluding VAT and including load component 1 LVL = 1.55 EURO

20. ELECTRICITY TARIFFS

21. FUTURE CHALLENGES AND ACTIVITIES Further elimination of cross-subsidies Enforcement of quality related measures New tasks of the Regulator resulting from the new electricity and gas directives –reconsideration of public service obligations in the light of universal services –market facilitation and supervision

22. Thank you for attention! www.sprk.gov.lv The home page of Regulator