Impact Report of GEO 114/2018 On Romanian Natural Gas & Power Markets

Impact Report of GEO 114/2018 on Romanian Natural
Gas & Power Markets

February 2019
Impact Report of GEO 114/2018 on Romanian Natural Gas & Power Markets
Content
Content 1
List of graphs and figures 2
List of acronyms 3
Executive Summary 4
1. Context 6
2. Summary of the natural gas market related provisions of GEO no.
114/2018 8
3. Impact of the measures on the national and regional natural gas
markets 9
3.1. Reduction of state budget revenues 9
3.1.1. State budget direct impact 9
3.1.2. Impact on the gas value chain 10
3.1.3. Impact on Small and Medium Enterprises 11

3.2. Security of supply disruption 11
3.3. Potential state aid for industrial consumers 14
3.4. Market competition disruption and discrimination of producers versus suppliers 15
3.5. Failure to provide a sustainable public service for households gas supply 17
3.5.1. Final price of natural gas forecast following GEO 114/2018 application 19
3.5.2. The benefits can still be achieved by the operationalization of the vulnerable
consumer concept 21
3.6. Limitation of free cross-border trading of local gas production 24
4. Short summary of the Power market related provisions of GEO no.
114/2018 26
5. Impact of the measures on the national power market 27
Disclaimer 29
Appendix 1 – The publicly-expressed concerns about the Romanian Natural
Gas market 31
Appendix 2 – Natural gas market related provisions of GEO 114/2018 32
Appendix 3 – Provisions of explanatory note for GEO 114/2018 34
Appendix 4 – Assumptions used for the impact calculation 36
1
List of graphs and figures

Graph 1 - Direct impact on GEO 114/2018 on state budget .................................................9
Graph 2 – Selected social benefits amount for 2017.......................................................... 10
Graph 3 – Perception of the effects of GEO 114/2018 on the SMEs ..................................... 11
Graph 4 – Evolution of the number of gas suppliers on the competitive market during 2012 –
2017 ........................................................................................................................... 15
Graph 5 - Average annual mark-up in retail gas markets for household consumers in EU and
Norway from 2012–2016 and annual mark-up in 2017 ...................................................... 16
Graph 6 – Quarterly average price of natural gas for household consumers in Romania and EU
average during the period referred to by in GEO 114/2018 ................................................ 18
Graph 7 – Evolution of the domestic natural gas price on BRM centralized market and CEGH
during April 2017 – August 2018 .................................................................................... 19
Graph 8 - Impact of GEO 114/2018 on the natural gas retail price for household consumers B1
(excluding taxes) ......................................................................................................... 20
Graph 9 - Impact of GEO 114/2018 on the natural gas retail price for non-household
consumers B4 (excluding taxes) ..................................................................................... 21
Graph 10 - Heating utilities subsidies 2014-2017, by type of subsidy .................................. 23
Graph 11 - Heating utilities subsidies beneficiaries............................................................ 23
Graph 12 - Influence of GEO 114/2018 on the natural gas balance ..................................... 25
Table 1 – The oversubscribed bids in flow RO>HU direction ............................................... 12

Table 2 – The aggregated capacities initially allocated per gas year .................................... 13
Table 3 – Allocated Capacities following the Execution of Step-Back Rights .......................... 14
Figure 1 – Key milestones in the liberalization process of natural gas market .........................7
2
List of acronyms
ACER Agency for the Cooperation of Energy Regulators
ACUE Associations of Energy Utility Companies
AGTM ACER Gas Target Model
BRM Bursa Romana de Mărfuri / Romanian Commodities Exchange
CEER Council of European Energy Regulators
CIT Corporate Income Tax
CNIPMMR National Council of Small and Medium Sized Private Enterprises
EC European Commission
EU European Union
EUR Euro (€)
GD Government Decision
GO Governmental Ordinance
GEO Government Emergency Ordinance
IGM Internal Gas Market
Mn. Million
MWh Megawatt-hour
MS Member States of the EU
NBR National Bank of Romania
NCSP National Commission for Strategy and Prognosis
NERA National Energy Regulatory Authority
PSO Public Service Obligation
RCC Romanian Competition Council
RON Romanian New Leu
SMEs Small and Medium Enterprises
VAT Value Added Tax
VMG Guaranteed Minimum Income
3
Executive Summary
Objective of the study
On December 28, 2018, the Romanian Government issued an Emergency Ordinance

(GEO 114/2018), which affects multiple key sectors of the Romanian economy, but
primarily financial and energy industries. The Ordinance states a large range of
concerns related to various activity fields, as well as the legally binding measures,
presumably able to address these concerns and correct the potential perceived pitfalls.
Within the list of concerns, there are several listed paragraphs related to the natural
gas and electricity markets; likewise, there are also specific measures and regulations
meant to address, correct and/or mitigate these concerns.
It is this study’s intention to assess in detail the particular impact of these measures
on the Romanian natural gas & power markets, focusing on:
 Analysis of these concerns and the facts behind the perceptions;

 Analysis of the likelihood that the new measures and regulations included in
GEO 114/2018 will address and/or solve the disclosed concerns;
 Analysis of the potential collateral impact that the new measures and
regulations might trigger on the national and regional gas and electricity
markets, including the opposite effect to be expected in particular economic
and social areas.
Key findings
1. Reduction of state budget revenues.

The collateral effects of this Regulation would overflow the particular gas
industry impact and generate direct and indirect negative effects on the entire
business environment and society. The reduction of the state budget revenue
with an estimated RON 2.26 bn, equivalent to approx. 17% of the social benefits
paid in 2017 is an example of direct effect.
2. Security of supply disruption

Gas market disruption and over-regulation induce changes in the investment
patterns, review of regional support initiatives, potential cascaded effects on
regional and European integrated transport corridors and hubs. From a
promising role of regional energy security provider, Romania would have to
increase its imports of non-EU gas origin to cover domestic consumption.
3. Potential state aid for industrial consumers

Romanian industrial consumers will benefit from domestic gas prices arbitrarily
set at a capped value, significantly below market quotations; they would
immediately have to account for state aid allegations from their MS peers.
Recent anti-dumping investigations conducted by EU in relation to companies
from third party countries using natural gas at preferential prices (e.g. Russian
Federation, USA, Trinidad Tobago) indicate a serious risk in this direction.
4
4. Market competition disruption and discrimination of producers versus

suppliers
Romanian competitive gas market will eventually cease to exist between April
2019 and March 2022. The restrictions to sell domestic gas at a capped price to
fixed destinations shall render useless trading activities. Competition in the gas
production will decrease, as small independent producers might not be able to
finance their operations at the new price. Domestic gas producers (holders of
supply licenses) will be required to sell their output at a capped price, whereas
other local/ foreign suppliers will be allowed to resell the respective gas volume
to their counterparties (non-household customers) with an unlimited margin.
Domestic gas producers (holders of supply licenses also) will have to pay 2%
on the gas output value, whereas suppliers are required to pay a 2% tax only
on the operating margin and foreign producers/importers will not be required
to pay any similar tax.
5. Failure to provide a sustainable public service for households gas supply
Although household customers’ interest is mentioned at the core of these
regulatory measures, its multiple impact on the final price (e.g. 2% turnover
tax applied to tariffs, recovery of past losses incurred by households’ suppliers)
would result, at best, in maintaining the current final price until February 2022.
However, this would lead either to generate additional losses (in case of NERA
establishing a fixed retail price, which would need to be recovered later anyway)
or to a higher retail price, contrary to the GEO 114/2018 scope. Instead,
Romania should carefully evaluate the proper implementation of the vulnerable
consumer concept, to grant direct financial support to those in need, and avoid
subsidizing households that exceed average income at regional/ national level.
6. Limitation of free cross-border trading of local gas production

Prioritizing local gas delivery to households raises a barrier to the export of
natural gas from Romania to other EU countries. As domestic gas producers are
also required to deliver the remaining volumes from their output to non-
household customers, export availability of Romanian gas origin would equal to
zero. EU investments efforts in the infrastructure on the Romanian territory are
disregarded.
5
1. Context
In 2012 June, Romania has signed and approved1 the Memorandum on the Calendar
for phasing out regulated gas prices. In June 2015, the Memorandum on the Calendar
for the Liberalization of Domestic Production Gas Prices 2 was also approved3.
In October 20164, the Romanian Government has decided to liberalize the purchase
price of natural gas from domestic production based on market conditions starting
April 2017, although regulated supply prices for household customers would continue
to apply until 2021.
Following the adoption of GEO no. 114/2018, domestic gas production price is once
again established outside competitive market rules and mechanisms, for a period of 3
(three) years, between April 2019 until March 2022.
In its “Competition Developments in Key Sectors” 2018 Report 5, the Romanian

Competition Council (RCC) noted, “a major problem of the Romanian natural gas
market, (…), is the lack of predictability and the increased volatility of the legislative
framework between 2012 - 2016”. RCC went further to conclude, “This has led to a
short-term adjustment of suppliers according to regulations, with consequences in
allocating additional resources”.
At the European level, ACER noted in its Market Monitoring Report 2017 - Gas
Wholesale Markets Volume6, released in October 2018, that “MSs should avoid taking
measures that go against the spirit of the Third Energy Package and the interest of the
IGM as they tend to have an immediate, adverse impact on market functioning.
Similarly, they should abolish any remaining barriers to market functioning, such as
market distortive storage regulations, limitations on free cross-border trading of local
gas production: distortive licensing requirements limiting market entry of traders, and
the use of different definitions across the EU for firm capacity”.
1
Memorandum of Understanding between Romania and the European Commission, dated June 22, 2016
2
Price for household customers and producers of heat, only for the quantities of natural gas used for the
production of heat in the cogeneration plants and in the thermal power stations intended for consumption of
the population
3
Romania’s National Report 2017 submitted by the Romanian Energy Regulatory Authority to the European
Commission
4
Government Emergency Ordinance no. 64/2016 for the amendment and completion of the Law on Electricity
and Natural Gas no. 123/2012
5
http://www.consiliulconcurentei.ro/uploads/docs/items/bucket13/id13687/sinteza_en_2018_corectata.pdf
6
https://acer.europa.eu/Official_documents/Acts_of_the_Agency/Publication/ACER%20Market%20Monitori
ng%20Report%202017%20-%20Gas%20Wholesale%20Markets%20Volume.pdf
6
Figure 1 – Key milestones in the liberalization process of natural gas market
Source: Deloitte based on ACUE, „The timing of liberalization of the gas market for the domestic
consumers”
7
2. Summary of the natural gas

market related provisions of GEO
114/2018
The Ordinance provisions addressing and affecting the natural gas market are based
on couple of publicly expressed concerns meant to support the legislative issued
amendments (see Appendix 1). To summarize, the cause of concerns is:
 The perceived unbalance between the trading price of the domestic natural gas
and the retail price gas suppliers are expected to observe for the regulated
markets, allegedly proved by the average trading price between April 2017 –
August 2018;
 Major losses incurred by households’ suppliers, leading to high prices for the
end-users and security of supply disruption;
As stated in the Ordinance, the answer to these concerns is to “establish an appropriate

form of control”, that would presumably protect customers’ interest to benefit from
affordable gas prices.
The Ordinance envisages the following main control mechanisms:
 The domestic gas producers’ sale price shall be capped at the value of 68
RON/MWh until February 2022;
 Domestic gas production shall be allocated with priority to cover 100% of the
households’ gas demand; the remaining local gas output shall be delivered to
suppliers of eligible end-users or directly to eligible end-users (industrial
consumers);
 The household customers that switched to suppliers on the competitive market
are allowed to return to regulated gas prices;
 Households’ gas suppliers shall recover past losses until June 30, 2022;
 Holders of licenses in natural gas sector shall pay a monetary contribution of
2% of the turnover achieved from the activities covered by the licenses granted
by NERA; this can be interpreted as a tax on turnover, even if the Romanian
Fiscal Code does not stipulate it as a fiscal tax;
 Between April 2019 and February 2022, NERA shall establish a basket price for
the imported and domestic gas for non-household customers’ consumption;
 Failure to observe the obligations above would lead to penalties equal to 10%
of the previous year reported turnover.
The full legal provisions to “establish an appropriate form of control” are presented in
Appendix 2.
8
3. Impact of the measures on the

national and regional natural gas
markets
3.1. Reduction of state budget revenues
The foreseen regulatory changes will have collateral impact effects on various areas of
the national economy, either directly – through the reduction of state budget revenues,
or indirectly – through the reduction of economic activity and investment expenditures.
3.1.1. State budget direct impact
Based on the current financial and tax regime applicable to domestic gas production,
the new 68 RON/MWh cap price will induce noticeable losses to the state budget. A
simple calculation based on the existing 2017 production data points to an estimated
yearly loss of up to RON 2.26 bn. The underlying assumptions used for the impact
calculation are presented in Appendix 4.
Graph 1 - Direct impact on GEO 114/2018 on state budget
Source: Deloitte calculations
The RON 2.26 bn. amount equals approx. 17% of the social benefits 7 paid by the
Romanian Government in 2017 and would suffice to cover 100% of some key benefits,
such as:
7
Social benefits are defined by the Ministry of Labor and Social Justice as an additional or substitute form of
individual/household income aimed at ensuring a minimum standard of living, as well as it is a form to
promote social inclusion and increase the quality of life of certain categories of people of whom social rights
are stipulated by law; the total amount of social benefits in 2017 are of 13.37 bn. RON, according to the
9
 Social aid for insuring the guaranteed minimum income (or VMG), including
health insurance contributions corresponding to the beneficiaries of VMG and
the mandatory insurance of dwellings against earthquakes, landslides and
flooding (for families receiving VMG);
 Heating utilities subsidies for electricity & gas consumption; thermal energy
supplied by centralized heating systems; wood, coal or petroleum fuels;
 Back-to-work bonus;
 Family allowance.
The 2017 social benefits payments for the respective categories are presented in Graph
2 below.
Graph 2 – Selected social benefits amount for 2017
Source: Deloitte calculations, National Agency for Social Inspection and Payments, statistic
bulletin for respective year
3.1.2. Impact on the gas value chain
As domestic gas producers would be required to sell their output on the local market
at a capped price for the next 3 years, it is highly likely that their investment decisions
on onshore/ offshore developments will be postponed. This will create, in turn, a delay
in Romania’s natural gas transmission operator Transgaz (TGN) Ten-Year Development
Plan (2018 – 2027), which estimates investments in excess of EUR 1.25 bn in the
respective period.
Indirect impact will result in the loss of economic activity and thousands of jobs for
Romanian construction, services and equipment providers that could have been
potentially involved in the next 3 years in Transgaz projects (based on historical data,
at least 40% of an investment in gas transmission pipelines could be retained by local
contractors).
National Agency for Social Inspection and Payments, statistic bulletin for 2017, available at
http://www.mmuncii.ro/j33/images/buletin_statistic/Asist_sociala_2017.pdf
10
3.1.3. Impact on Small and Medium Enterprises
Small and Medium Enterprises (SME) business areas in Romania perceive a negative
effect on investment expenditures and economic activities slowdown, following the
adoption of GEO 114/2018. The recent survey of the National Council of Small and
Medium Sized Private Enterprises (CNIPMMR) reflected the deep conviction of the
participants that the associated costs of the newly adopted measures will be transferred
to customers (individuals and business) and the result would be an investment
reduction and diminished economic activity (see below). 8
Graph 3 – Perception of the effects of GEO 114/2018 on the SMEs
Source: Press Release, National Council of Small and Medium Sized Private Enterprises, 21 st
January 2019, accessed at: http://cnipmmr.ro/2019/01/21/impactul-oug-144-2018-asupra-
imm-urilor-din-romania/
3.2. Security of supply disruption
A major cornerstone of the EU Energy Union is based on the assumption that no new
artificial energy markets barriers are created by individual Member States. The
decisions to invest both in onshore and offshore project were taken in the light of the
gas liberalization process. Imposing a certain pattern for the trading activities, a certain
fix price for specific national end-users’ categories and adding new general payment
obligations for the local national producers and other market national participants
create a significant risk, for example, to delay the final investment decisions to develop
the new discovered onshore and offshore fields or for the gas to remain undeveloped
and unexplored in the future.
The impact is twofold: it affects both future local market perspectives (until GEO
114/2018, Romania was planning to extend TSO/ DSO networks to accommodate
increasing domestic gas production/ consumption from 2022 onwards 9) and regional/
internal gas market (Romania was perceived as a future net gas exporter and active
participant to the major regional gas transmission projects).
8
Source: http://cnipmmr.ro/2019/01/21/impactul-oug-144-2018-asupra-imm-urilor-din-romania/
9
ENTSO-G Ten-Year Network Development Plan 2018, Final Scenario Report Supply data for Romania
(https://www.entsog.eu/tyndp#entsog-ten-year-network-development-plan-2018)
11
Without the common support of MS and EU contribution to the approved PCIs related
to the European energy transport corridors, the security of supply and solidarity in the
Energy Union shall certainly and negatively be affected with worrisome mid and long
term consequences.
The most important transmission corridor under construction in RO is the BRUA project.
The first phase of the Project has benefited from Romanian and European Authorities
attention and substantial financial aid was provided by EU during the last 24 months
to conclude this gas corridor linking Bulgaria, Romania, Hungary and Austria. The
underlined expectation to diversify the European gas supply with the Black Sea was
included as part of this PCI (Project of Common Interest).
To evaluate the potential economic interest and revenues the extension of this corridor
might generate (Phase 2), the Romanian (RO) and Hungarian (HU) Gas Transport
Operators launched in October 2017 an Open Season tender with a specific, mutually
agreed ambitious calendar to book the Csanádpalota interconnector between RO and
HU for the 2022-2037 period. The initial interest was extremely high and the capacity
was fully allocated on January 15th, 2018 (see below) with an exceptional overbooking
rate on the Romanian to Hungary direction, hence signaling the market expectation the
natural gas produced in Romania will exceed the Romanian market needs and
consequently be available for export.
Table 1 – The oversubscribed bids in flow RO>HU direction
Flow Direction Romania → Hungary

Offered Incremental
Aggregated Capacity Booking Rate
Gas year Capacity
Demand (kWh/h/year) (%)
(kWh/h/year)
2022/2023 4,648,063 24,691,482 531%
2023/2024 4,648,063 24,095,592 518%

2024/2025 4,648,063 24,095,592 518%
2025/2026 4,648,063 24,095,592 518%
2026/2027 4,648,063 24,095,592 518%
2027/2028 4,648,063 22,475,925 484%
2028/2029 4,648,063 22,475,925 484%
2029/2030 4,648,063 22,475,925 484%
2030/2031 4,648,063 23,631,294 508%
2031/2032 4,648,063 23,631,294 508%
2032/2033 4,648,063 20,407,321 439%
2033/2034 4,648,063 20,407,321 439%
2034/2035 4,648,063 20,407,321 439%

2035/2036 4,648,063 15,759,258 339%
12
Flow Direction Romania → Hungary

Offered Incremental
Aggregated Capacity Booking Rate
Gas year Capacity
Demand (kWh/h/year) (%)
(kWh/h/year)
2036/2037 4,648,063 15,759,258 339%
Source: Transgaz and Foldgazszolgaltato Zrt., “Gas Transmission Capacity from Romania to
Hungary and from Hungary to Romania”, Joint Report on the First Bidding Round 10
Table 2 – The aggregated capacities initially allocated per gas year
Aggregated Allocated Capacity

(kWh/h/year)
Gas year
Flow Direction Flow Direction
Romania → Hungary Hungary → Romania
2022/2023 4,648,063 3,149,722
2023/2024 4,648,063 3,149,722
2024/2025 4,648,063 3,149,722
2025/2026 4,648,063 3,149,722
2026/2027 4,648,063 3,149,722
2027/2028 4,648,063 3,149,722
2028/2029 4,648,063 3,149,722
2029/2030 4,648,063 3,149,722
2030/2031 4,648,063 3,260,833
2031/2032 4,648,063 3,260,833
2032/2033 4,648,063 3,260,833
2033/2034 4,648,063 3,260,833
2034/2035 4,648,063 3,260,833
2035/2036 4,648,063 3,260,833
2036/2037 4,648,063 3,260,833
Source: Transgaz and Foldgazszolgaltato Zrt., “Gas Transmission Capacity from Romania to
Hungary and from Hungary to Romania”, Joint Report on the First Bidding Round 11
During 2018, the political signals and the legal environment changes including the GEO
no. 114 / 2018 have dramatically altered and switched the market optimism into a
level of pessimistic expectations with immediate and tangible results. At least one of
the successful bidders exercised the step-back rights option and withdrew from the
competition. As a result, the January published report shows a different booked
capacity situation (see below).
10
Available at https://www.transgaz.ro/sites/default/files/uploads/users/admin/ROHU%20OS%20-
%20Results%20of%20Bidding%20Round%201%20-%20EN.pdf
11
13
Table 3 – Allocated Capacities following the Execution of Step-Back Rights
Flow Direction Flow Direction

Romania → Hungary Hungary → Romania
Gas year (kWh/h/year) (kWh/h/year)
Booked capacity Booked capacity
2022/2023 2,979,570 -
2023/2024 3,575,460 -
2024/2025 3,575,460 -
2025/2026 3,575,460 -
2026/2027 3,575,460 -
2027/2028 3,575,460 -
2028/2029 3,575,460 -
2029/2030 3,575,460 -
2030/2031 - 111,111
2031/2032 - 111,111
2032/2033 - 111,111
2033/2034 - 111,111
2034/2035 - 111,111
2035/2036 - 111,111
2036/2037 - 111,111
Source: Transgaz and Foldgazszolgaltato Zrt., Joint Report on Economic Test III Following the
Execution of Step-Back Rights12
A quick analysis of the situation outline the market expectations:
 Lower quantities available for export are foreseen for 2022-2030 period;
 No export quantities are booked for 2030–2037 period;
 Additional considerations are included in the original document with respect to
the failed Economic Test for this tender, requiring a new phase III tender and
eventually a tender close without any assigned capacities in 2019.
3.3. Potential state aid for industrial consumers
Imposing a capped sale price for domestic gas producers, below market quotations, in
their business relationship with eligible end-users (industrial consumers) presents a
cascaded risk to face “illegal state aid” complaint. The 68 RON/MWh domestic gas price
will trigger downstream price effects for derived products like fertilizers,
petrochemicals, etc. The last EU positioning on this issue is dated 2018 / Regulation
1722 where a definitive anti-dumping duty on Russian originated ammonium nitrates
imports was imposed,13 as Russian fertilizers producers enjoyed cheap local gas prices.
12
13
https://eur-lex.europa.eu/legal-
content/EN/TXT/?uri=uriserv:OJ.L_.2018.287.01.0003.01.ENG&toc=OJ:L:2018:287:TOC
14
Similarly, price dumping complaints were raised in 2018 by Fertilizers Europe, alleging
that imports of mixtures of urea and ammonium nitrate (‘UAN’), originating in Russia,
Trinidad & Tobago and the United States of America, are being dumped and are thereby
causing injury to the Union industry.14
Also, it is important to mention that the level at which the price cap was set is lower
than any recent quotations of current either local or regional gas price quotation,
reinforcing the risk of arbitrarily establishing the price cap below market levels. In this
context, the component with the price cap of the basket structure grants an advantage
to non-household customers; therefore, this component could be considered illegal
state aid.
3.4. Market competition disruption and discrimination of producers

versus suppliers
At the end of 2017, there were 93 licensed gas suppliers operating on the Romanian
market (see graph below). The growing number of suppliers (from 43 in 2012) is mainly
attributable to the market liberalization process, which has provided for customers
(both households and non-households) with multiple choices for their gas supply.
Graph 4 – Evolution of the number of gas suppliers on the competitive market during 2012 –
2017
Source: National Regulatory Authority for Energy, National Reports, 2012 - 2017
The GEO 114/2018 will likely contribute to a temporary suspension of the Romanian
competitive gas market between April 2019 and March 2022. Newly introduced
measures will lead to the disruption of market competition and create discriminations
between domestic gas producers and suppliers.
As such, the restrictions to sell domestic gas at a capped price to fixed destinations
(households’ suppliers and non-households) shall render useless trading activities
(supplier – supplier transactions).
14
http://trade.ec.europa.eu/doclib/docs/2018/august/tradoc_157242.init.en.C284-2018.pdf
15
Moreover, according to an ACER/CEER Report15, regulating end-used prices represents

a market entry barrier and therefore reduces competition due to the following reasons:
 Consumers are not receiving the right price signals regarding their
consumption;
 Suppliers are reducing their investments due to negative mark-ups;
 Suppliers will not enter the market due to the uncertainty related to positive
return on investments.
Against this background, the 2% tax on the suppliers’ operating margin is introduced
in the context of already low mark-ups of Romanian suppliers (see Graph 5 below),
which could determine them to either exit the market or increase the prices in order to
avoid consequent losses.
It is important to mention that the low mark-ups for Romanian suppliers took into
consideration also the long-term import contracts for wholesale gas markets.
Therefore, the positive average mark-up for 2012-2016 and for 2017 is a result of
decreasing gas imports (from 24.3% in 2012, to only 2.4% in 2015). In the context of
increasing gas imports (as described in section 3.6 below) expected in the next 3 years,
suppliers’ mark-ups will return to the negative zone.
Graph 5 - Average annual mark-up in retail gas markets for household consumers in EU and
Norway from 2012–2016 and annual mark-up in 201716
Source: ACER/CEER (2018) - Annual Report on the Results of Monitoring the Internal Electricity
and Natural Gas Markets in 2017 – Electricity and Gas Retail Markets Volume
On the other hand, domestic gas producers (holders of supply licenses also) will be
required to sell their output at a capped price, whereas other local/ foreign suppliers
will be allowed to resell the respective gas volume to their counterparties (non-
15
ACER/CEER (2018) - Annual Report on the Results of Monitoring the Internal Electricity and Natural Gas
Markets in 2017 – Electricity and Gas Retail Markets Volume
16
According to the ACER/CEER Report, the mark-up is defined as “an indicator of the theoretical gross
‘profitability’ of suppliers, as well as an indicator of the level of responsiveness of retail energy prices to
changes in prices on wholesale markets. Mark-ups are not the same as profits, because suppliers have
additional operating costs (e.g. marketing, sales, consumer services, overhead, etc.) in bringing a product
to the market. […]The wholesale prices used by the Agency to calculate mark-ups aim to reflect the
procurement costs of a typical supplier buying a mix of forward and shorter term products in the wholesale
market.”
16
household customers) with an unlimited margin. Moreover, whereas suppliers are

required to pay a 2% tax on operating margin17, domestic gas producers (holders of
supply licenses also) will have to pay 2% on the gas output value. Both circumstances
favor the elimination of small gas producers from the market, as they might not be
able to finance their operations given the price cap restriction and additional burden of
2% on output.
As a conclusion, the choice of Romanian government to return to price control

mechanisms on the gas markets contradicts ACER recommendations, presented in its
latest Market Monitoring Report (issued in October 2018).
“(…) Hence for these MSs, like Bulgaria and Romania, and before integration efforts
could be undertaken, tailored regulation might be needed in addition to what the local
authorities need to do in terms of following the best AGTM practices for gas
market design. They should guarantee fair and non-discriminatory hub operation;
introduce market making and/or gas release obligations; increase transparency by
publishing information relevant for market participants’ commercial decisions in an
accurate and timely way; and set fees and licensing requirements for market
participants that will attract new market entrants.”18
3.5. Failure to provide a sustainable public service for households gas

supply
The implementation of GEO 114/2018 could be argued as relevant due to the natural
gas supply as a public service obligation; however, this specificity has a risk of
deteriorating due to several expected reactions most likely not properly evaluated yet:
 The final price of natural gas applied by suppliers will include the right to
recover past losses (incurred 2018 – 2019);
 The final price of natural gas will include the impact of 2% add-on tax
obligation for each economic entity along the value chain (transmission,
storage and distribution tariffs; mark-up);
 The value of social aid granted to natural gas consumers, as well as the number
of beneficiaries has steadily decreased in the last years, due to the income
increase at national level;
 From the preamble it appears that the measures are aimed at protecting the
suppliers and also covers large enterprises/industrial consumers;
 The benefits sought can still be achieved by implementing the vulnerable
consumer concept.
Lacking explicit reference, it is unclear on which legal provisions are based the
reduction and ceiling of the gas prices and the other associated measures included in
the GEO no. 114/2018. Should these measures be interpreted as Public Service
Obligation (PSO), it remains open for debate whether they fulfill all the relevant
conditions for a PSO compatible with the EU legislation. Accordingly, a PSO should be:
 Clearly defined;
17
Draft Order of NERA on approving the methodology for calculating and establishing the annual monetary
contribution stipulated at article 2 paragraph (3^1) from GEO 33/2007 related to the organization and
functioning of NERA, approved with amendments through Law 160/2012, as it was introduced through GEO
114/2018
18
ACER, Market Monitoring Report 2017 - Gas Wholesale Markets Volume, October 2018
17
 Non-discriminatory;
 Temporary;
 Proportionate (protection of household consumers and SMEs).
For the purpose of this Report, we have undertaken an analysis on the reference period
mentioned in the GEO 114/2018 (April 2017 – August 2018) as the basis for the price
control mechanisms.
First of all, the latest evolution of retail prices of natural gas shows that prices in
Romania have already been significantly lower than the EU average (especially for
households consumers). Moreover, according to the DG Energy third quarter of 2018
report on European Gas market, Romania has the lowest retail gas price for household
consumers in Europe, resulting a differential ratio of 3.3 between the cheapest and the
most expensive retail price of natural gas for household consumers in the entire
European Union.
More specifically, the graph below presents the comparison between Romania and EU
average of retail natural gas prices for households. The data indicates a 50% average
lower level of prices favoring the Romanian consumers. This discount level can further
be improved for specific categories of consumers linked to the “vulnerable consumer
concept” and it does not indicate a need to protect all the household consumers through
a fixed price.
Graph 6 – Quarterly average price of natural gas for household consumers in Romania and EU
average during the period referred to by in GEO 114/201819
Source: DG Energy, Deloitte Calculations
On the other hand, wholesale gas transactions concluded on the Romanian Commodity
Exchange (or BRM) for the reference period do not indicate a significant increase of the
Romanian price. Even if prices were higher in the winter months, graph 7 mainly shows
19
Natural gas prices for household consumers includes all taxes and levies
18
the cyclic evolution of the prices caused by a higher influence of the import price during
these months (as on BRM both domestic and import quantities are traded).
We extended the analysis to incorporate CEGH monthly quotations, as the Austrian gas
exchange represents the benchmark against which gas royalties are calculated in
Romania. The decision to link Romanian gas royalties revenues to CEGH might have
been indeed one of the reasons for the spread between August 2018 and April 2017 (+
8.6 RON/MWh), as the market players sought to close the gap between Romanian
market prices and CEGH prices (used for reference in royalties calculation).
Graph 7 – Evolution of the domestic natural gas price on BRM centralized market 20 and CEGH21
during April 2017 – August 2018
Source: BRM
3.5.1. Final price of natural gas forecast following GEO 114/2018

application
The lower price paid for gas acquisitions by households’ suppliers shall not be fully
reflected in the retail price, as the possibility to recover past losses and the impact of
the 2% turnover tax on the entire value chain will diminish the potential savings on
customers’ invoices.
The graphs below present a forecast of the retail price of natural gas for household and
industrial consumers, considering the provisions of GEO 114/2018. The underlying
assumptions under these evolutions are presented more in detail under Appendix 4.
In this forecast, we considered the impact of the following elements on the retail price,
provisioned in GEO 114/2018:
 Domestic gas producers’ obligation to sell the output at a fixed wholesale price
of 68 RON/ MWh22;
20
Monthly prices with delivery in respective month
21
Monthly prices with delivery in respective month
22
Which is considered at 100% for households consumers due to the compulsoriness to provide natural gas
produced domestically firstly to household consumers
19
 Gas license titleholders’ obligation to pay a monetary contribution equal to 2%

of the turnover (transmission, storage, distribution and supply operating
margin);
 Households’ suppliers’ full recovery of past losses (2017, 2018 and January –
March 2019) through the retail price between April 2019 – February 2022;
 Increasing import volumes needed to cover non-household customers
consumption, associated with the corresponding import price (significantly
higher than domestic gas fixed cap price).
Graph 8 - Impact of GEO 114/2018 on the natural gas retail price for household consumers B1
(excluding taxes)
Source: Deloitte calculation based on NERA historical data and Deloitte assumptions
One particular negative impact of GEO 114/2018 is represented by the option of

household customers to return to regulated market, as many suppliers active on the
competitive market have committed significant investments to offer households
competitive prices for gas supply (often complemented by additional value added
services or even integrated gas-electricity supply packages).
20
Graph 9 - Impact of GEO 114/2018 on the natural gas retail price for non-household consumers
B4 (excluding taxes)
Source: Deloitte calculation based on NERA historical data and Deloitte assumptions
This predicted evolution is based on increasing natural gas production according to

NCSP forecast23, which is considered very optimistic by the industry representatives. A
constant or even decreasing domestic production is more likely to follow the adoption
of GEO 114/2018, which would lead to even higher end-user prices.
Based on our assumptions, the analysis indicates that the retail price shall increase for
both customers’ categories compared to 2017/2018 prices. However, in a recent official
position24, the Regulatory Authority stated that the final price for household consumers
will increase neither for electricity (between 01.03.2019 - 28.07.2022) nor for natural
gas (between 01.04.2019 – 28.02.2022). This might lead to the conclusion that either
full recovery of past losses shall not be exercised until July 2022, or that 2% add-on
tax on the turnover shall not be fully passed through the tariffs.
Even if these amendments would be adopted, it would lead to additional losses for
suppliers, which would still need to be recovered at a certain point in time, after
February 2022.
3.5.2. The benefits can still be achieved by the operationalization of the

vulnerable consumer concept
The Romanian legal framework for energy poverty was firstly provided by Law of
electricity and natural gas no. 123/2012 (primary legislation) and NERA regulations
(secondary legislation). Primary legislation defined the vulnerable consumer as the
“final customers belonging to a category of household consumers who, due to age,
23
NCSP forecast on domestic production was done prior to GEO 114/2018
24
29.01.2019 Press Release – Regarding the household consumers’ prices for electricity and natural gas,
https://www.anre.ro/
21
health or low income, are at risk of social marginalization, and in order to prevent the
risk, benefit from social protection measures, including financial measures”25.
However, another definition is provided by Law 196/201626, which defines the

vulnerable consumer as the household customer (individual or family) that is not able
to cover from own budget the heating expenses and who owns revenues between levels
established by law. Moreover, the same law defines the energy poverty as the
impossibility of the vulnerable consumer to cover the minimum energetic needs for
optimal heating of their house during winter period.
Romania has failed to implement any substantial actions in this regard since 2012,
although related provisions - the set-up of a solidarity fund for the financial support of
the vulnerable client (the Law of electricity and natural gas no. 123/2012) and the
introduction of the supplementary gas taxation regime in 2013 – have provided, in
theory, the necessary financial sources to support these clients.
To this date, there is still no coherent and agreed nation-wide data on the actual
number of vulnerable clients or the aggregated value of the actual aid a local/ national
authority have granted to this Romanian citizens’ category.
The limited official data available indicates, however, that both the value and the
number of customers receiving social benefits from state budget to cover their heating
bills are in a constant decline in the last years (see graphs 11 and 12 below).
In the case of social support provided to those customers using natural gas as a heating
source, the overall value granted amounts, in 2017, to only 35.1% (or 42.6 mln RON)
of the total subsidies granted for all sources. At the same time, the number of
beneficiaries have decreased to 91,000 in 2017 from 265,000 in 2014.
Local authorities may grant supplementary aid, on top of the state budget support, but
we could not identify relevant centralized data at the national level to assess the
relevant impact.
In this context, GEO 114/2018 explanatory note ascertains that one of the reasons for
the adoption of the Regulation is given by “an adequate social protection” that should
be granted to the beneficiaries of social aid under the form of heating bills subsidies,
taking into consideration that their revenues (especially of the elderly people) have
increased in 2018. Even so, considering the increased value of social aid and number
of beneficiaries in 2019, the amount collected from the gas producers under the former
fiscal regime would have been sufficient to cover the supplementary expenditure from
the state budget (under the assumption that 2019 data would correspond to 2014 data,
as presented below).
25
Center for the Study of Democracy, 2017, Energy poverty and the vulnerable consumer in Romania and
Europe, available at:
http://www.democracycenter.ro/application/files/4315/1926/3042/Final_report_rezumat_executiv_vizual_f
inal_EN.pdf
26
This law was supposed to enter into force on the 1st of April 2018 but its entering into force was postponed
in November 2018 until April 2021.
22
Graph 10 - Heating utilities subsidies 2014-2017, by type of subsidy
Source: Deloitte based on National Agency for Social Inspection and Payments, statistic bulletin
for respective year
Graph 11 - Heating utilities subsidies beneficiaries
Source: Deloitte based on National Agency for Social Inspection and Payments, statistic bulletin
for respective year
At EU level, best practices indicate that regulated prices could be temporarily available
to assist and protect exclusively energy-poor or vulnerable households.
Preference is given, however, to address energy poverty through social security
systems.
23
In this context, and in order to ensure that proper support is granted to those in need,
Romania should focus on identifying the energy-poor and vulnerable households and
provide direct financial aid to these consumers. This measures would be possible also
considering the fact that revenues under the current gas taxation regime significantly
exceed all subsidies paid for heating utilities from the State budget.
3.6. Limitation of free cross-border trading of local gas production
The GEO 114/2018 provisions create an administratively imposed merit order on the
market, prioritizing Romanian customers (household and industrial end-users) over
clients from other MS, contradicting the current pertinent EU directives in force (Third
Energy Package) or planned27.
In fact, the measures undertaken by the Romanian authorities in December 2018 are
similar with the ones embedded within the legal framework applicable until the entering
into force of GEO 64/2016, framework previously under the scrutiny of the European
Commission.
As such, on July 10, 2014, the European Commission (EC) requested Romania to
remove barriers to exports of natural gas. “By obliging the producers in Romania to
give priority to sales on the domestic market and by submitting gas transactions to
prior control and approval, the Commission considers that the current Romanian legal
framework creates unjustified barriers to exports of gas from Romania and has
requested that the barriers be lifted. The Commission considers that, by creating
barriers to the free movement of goods within the Single Market, Romania has failed
to fulfil its obligations under Article 35 and 36 of the Treaty on the Functioning of the
European Union and under Article 40(c) of the Directive 2009/73/EC of the European
Parliament and of the Council of 13 July 2009 concerning common rules for the internal
market in natural gas.“28
EC has raised the issue of export restrictions again when Romanian officials
contemplated specific changes to GEO no. 64/2016. As the Commission services
indicated, “These export restrictions had led the Commission to initiate infringements
proceedings against Romania (No. 2012/2114). Moreover, President Juncker himself
took note last year of Romania's commitment to take all necessary actions, in
cooperation with all relevant authorities in Romania, for removing as soon as possible
any legal, regulatory and commercial provisions that could be considered as barriers
to physical and commercial gas flows.29”
While the Ordinance does not explicitly forbid gas exports to other MS, the impact of
the merit order established via GEO no. 114/2018 translates into to a severe
limitation of exports (most likely translated into a de facto export ban) as all
domestic gas output would have to be directed to Romanian customers, as further
detailed below.
27
https://ec.europa.eu/energy/sites/ener/files/documents/act_gas_dir_adopted.pdf
28
http://europa.eu/rapid/press-release_MEMO-14-470_EN.html
29
EUROPEAN COMMISSION DIRECTORATE-GENERAL FOR ENERGY, Directorate B - Internal Energy Market
The Director 16.05.2017
24
Our analysis on the availability of domestic gas for export has taken into consideration
the following assumptions:
 Priority allocation of domestic gas to cover households’ current consumption and

storage;
 Remaining domestic gas allocated for non-households consumption;
 Increasing non-household customers gas consumption (+ 5 TWh/ year) due to
68 RON/ MWh capped price;
 Remaining centralized market obligation on market participants;
 Increasing imported volumes to cover non-households consumption.
The results of the calculation are presented in Graph 12 below. Prioritizing local gas
delivery to households raises a barrier to the export of natural gas from Romania to
other EU countries. As domestic gas producers are also required to deliver the
remaining volumes from their output to non-household customers, export availability
of Romanian gas origin would equal to zero and in winter imports will increase
significantly.
Graph 12 - Influence of GEO 114/2018 on the natural gas balance
Source: Deloitte assumptions and Deloitte calculations based on NERA historical data (market
monitoring monthly reports), NCSP projections prior to GEO 114/2018 enforcement
Contrarily to the NCSP projections on domestic natural gas production following an

increasing trend, there have been indications from industry representatives 30
supporting the idea that considering the implementation of GEO 114/2018, keeping
constant the current production levels could be considered the best-case scenario. In
this respect, a sensitivity analysis considering constant production was performed; the
results show that considering all other parameters constant (e.g. final consumption of
natural gas), the imports on natural gas could increase to almost 46 TWh in 2022,
required only to cover the domestic demand.
30
For example, in the report presenting the results for Q4 2018, Petrom (one of the two main natural gas
producers in Romania) mentioned the following: “Recent regulatory instability has led us to revisit our growth
investment plans, while we seek clarity on the Romanian investment climate. (...) Our focus remains on
extracting the highest value from the existing Upstream portfolio, thus we estimate the daily average
production decline to be contained at around 5% yoy, excluding portfolio optimization”
25
4. Short summary of the Power

market related provisions of GEO
no. 114/2018
The Ordinance envisages the following changes to the power market mechanisms:
 Household customers will benefit from regulated electricity prices in the period
between March 1, 2019 – February 28, 2022;
 The household customers that switched to suppliers on the competitive market
are allowed to return to regulated electricity prices;
 Households’ electricity suppliers shall recover past losses until June 30, 2022;
 Power generation companies are required, based on the fuel type, to deliver a
certain % of their output to cover households’ consumption;
 Failure to observe the obligations above would lead to penalties equal to 10%
of the previous year reported turnover.
The full legal provisions related to the power market are presented in Appendix 3.
26
5. Impact of the measures on the

national power market
The Ordinance has brought significant changes also to the Romanian power market.
Abolished at the end of 2017, regulated electricity prices for households’ customers
have been re-introduced, accompanied by the obligation of certain power generation
companies to deliver electricity to households’ suppliers at regulated prices. This
obligation, in addition to the one of selling 100% of the available quantity of electricity
on OPCOM31, creates a barrier for investments in the power generation market.
The subsequent secondary legislation adopted by NERA has established that the
obligation to deliver electricity for households’ consumption shall apply to:
 Producers who commercially hold/operate dispatchable nuclear and/or hydro

units/groups (to allocate up to 65% of their generation to cover households’
suppliers demand);
 Producers who commercially hold/operate dispatchable co-generation
units/groups benefiting from the bonus support scheme;
 Producers who commercially hold/operate dispatchable thermoelectric
units/groups, other than those that fall under the provisions of lit. b).
NERA has further approved that the regulated prices applicable to the producers shall
be established under different conditions. Whereas, co-generation units would benefit
from a price settled at 90% of the average Day Ahead Market quotations,
hydro/nuclear/gas power producers would receive a price equivalent to the justified
costs plus a 5% profit margin.
The above price formation mechanism would lead to a maximum contribution from
hydro/nuclear units, leaving smaller volumes available for the competitive market –
where non-households customers buy their electricity. This, in turn, would determine
a higher price available for this type of customers, influencing their costs and
subsequently, their products/services prices.
Moreover, as both hydro and nuclear producers have stated, the foreseen level of the
regulated prices combined with the obligation to deliver the output corresponding to
the maximum threshold (65%), would lead to the reduction of state budget revenues
(loss of dividends) with more than RON 1 bn 32.
In addition to the losses mentioned above, the provisions of GEO 114/2018 contradict
or conflict with the following regulations/plans at the EU and national level:
31
Obligation stipulated in Law 123/2012
32
According to the observations received by NERA from Hidroelectrica and Nuclearelectrica, on the Draft
Order for approving the pricing methodology for electricity sold by producers on the basis of regulated
contracts and the quantities of electricity from the regulated contracts concluded by the producers with the
suppliers of last resort, synthesis available at:
https://www.anre.ro/ro/energie-electrica/legislatie/documente-de-discutie-ee/proceduri-
oper-regl-comerciale/proiect-de-ordin-pentru-aprobarea-metodologiei-de-stabilire-a-
preturilor-pentru-energia-electrica-vanduta-de-producatori-pe-baza-de-contracte-
reglementate-incheiate-de-producatori-cu-furnizorii-de-ultima-instanta&page=1, accessed on
11th February 2019
27
 Directive 72/2009/EC of 13 July 2009 of the European Parliament and of the

Council concerning common rules for the internal electricity market;
 The constitutional freedom of exercising the economic activity with the purpose
of obtaining profit (the provisions of art. 45, art. 53 and art. 135 of the
Romanian Constitution);
 Achieving the 2030 European target for renewable energy (as the new
regulation would discourage current and future investments in the hydro-power
sector especially).
From the gas market regulations perspective, one particular situation may arise with
significant consequences for domestic gas producers that also own/ operate gas-fired
power plants.
Gas-fired power plants could be required to deliver electricity on the regulated market
(an obligation it has to fulfill, otherwise associated penalty would rise to 10% of the
turnover). This obligation might come on top of the other obligations to deliver
domestic gas to households’ suppliers and non-households customers, forcing the
producer to purchase gas from import (especially in winter time).
28
Disclaimer
The work was undertaken on an independent basis by Deloitte, which was requested
to act based on its own resources and expertise, as well as publicly available
information. Deloitte work excludes taxation, legal, accounting, auditing, technical,
environmental protection and any industry, corporate or other type of specialized
matters. Therefore, the Study may not be suitable for any purpose other than the
purpose set out herein.
Deloitte prepared and delivered the Study on the basis that it is for the Client’s benefit
and information. Accordingly, Deloitte does not accept or assume responsibility to any
party other than the Client in connection with this Report, for any judgments, findings,
conclusions, recommendations or opinions that Deloitte has formed or made. Should
any third party choose to rely on or refer to this Analysis, they do so by their own
responsibility.
Our Analysis is meant to be a reasonable, objective starting point for rationally

discussing the impact of implementing the provisions stated under GEO 114/2018.
Before taking any action that relies on the information included in this Study,
consultation of competent professional legal or other relevant assistance has to be
assured. Decisions based on the information presented in this Study are the sole
responsibility of the party who takes that decision.
The information contained herein is of a general nature, not intended to address the
circumstances of any particular individual or entity. Although we endeavor to provide
accurate and up-to-date information, we do not guarantee that such information is
accurate as of the date of reception or that it will continue to be accurate in the future.
The information contained in this Study is selective and can be subject to update,
expansion, revision and amendment. It does not claim to contain all of the information
that any interested third party may require. Any statements, estimates and forecasts
contained in this report reflect various assumptions of the expected results,
assumptions that may or may not prove to be correct.
The input data was collected from publically available sources and Deloitte’s own
private data and panels of experts, while the forecasts have been projected based on
the historical data and our assumptions regarding the evolution of the industry. Deloitte
had no access to confidential data or information containing professional secrets, thus
being in full compliance with the provisions of the Petroleum Law no. 238/2004, the
Methodological norms of application of the Petroleum Law, approved by G.D. no.
2075/2004, Law no. 182/2002 concerning the protection of classified information and
national standards for the protection of information classified in Romania, or any other
applicable legislation.
The contents, analyses and conclusions contained in this Report do not necessarily
reflect the individual opinions of the participating experts. A wide range of sometimes-
opposing viewpoints and opinions were expressed, which made it possible to study in
greater depth and contrast the fundamental issues covered by the Study.
29
It has been assumed that all information obtained from public sources is complete and
accurate and has not been independently audited or reviewed nor has its reliability,
accuracy or completeness been verified by reference to sources, information or
evidence by Deloitte. Thus, Deloitte expressly disclaims any and all liability for any
errors or omissions that such information might contain or that could have occurred
within the conclusions and results included in this document.
30
Appendix 1 – The publicly-expressed

concerns about the Romanian Natural
Gas market
1. “Taking into consideration that, consequent to entry into force of the

Government Emergency Ordinance no. 64/2016 provisions amending and
completing the Electricity and Natural Gas Law no. 123/2012, the selling price
for the natural gas, both for competitive and regulated market, is based
on market demand and supply and obligations have been set for natural
gas producers and suppliers to trade a certain percentage of the natural
gas via the centralized trading markets of Romania
2. taking into account the evolution of the average selling price of natural
gas by domestic producers on the centralized market during the April
2017 - August 2018 interval,
3. based on the legal and de facto status, it is necessary to establish appropriate

forms of control of the natural gas prices called for by domestic producers for
the period starting on 01.04.2019 and ending on 28.02.2022,
4. taking into consideration the absence of such measures will create a risk for
the suppliers to accumulate considerable losses which will generate
significant price increases for end-users on one hand and, will severely
affect suppliers' financials and their capability to meet their customers’ natural
gas demands, hence jeopardizing the security of natural gas supply, on the
other hand”33
33
Emergency Ordinance no. 114/2018 regarding the establishment of measures in the field of public
investments and fiscal-budgetary measures, the modification and completion of some normative acts and
the extension of certain deadlines
31
Appendix 2 – Natural gas market

related provisions of GEO 114/2018
Art. 61 – Law no. 123/ 2012 (…), is amended and completed as follows:
12. Following Art. 124, par. 1 of the Law no. 123/ 2012, three new paragraphs shall
be added (11, 12 and 13) with the following content:
(11) Between April 1st, 2019 and February 22 nd, 2022, all producers, including their
legal subsidiaries and/or affiliates of the same group of common economic interest with
extraction and sales activities of gas originated from the Romanian territory must sell
to suppliers and final eligible customers the entire production of natural gas arising
from the current internal production at 68 RON/MWh. During this period and based on
NERA regulations, the producer must first sell to the commercial suppliers in order to
cover the entire demand of the household customers from the current production and
the existing gas storage quantities.
(12) All producers, including their legal subsidiaries and/or affiliates of the same group
of common interest with extraction and sales activities of gas originated from the
Romanian territory will no longer conclude sales agreements for gas to be delivered in
Romania for prices higher than 68 RON/MWh. The difference between the 2018 and
2019 suppliers’ acquisition prices uncovered by the current prices in effect shall be
recovered, according to NERA regulations, until June 30, 2022.
(13) The acquisition price paid by suppliers for the current domestic gas production
required to meet the end customers’ demand cannot exceed the 68 RON/MWh
threshold regardless of the Seller.
13. Following Art. 174, par. 7 of the Law no. 123/2012, a new paragraph (7 1) shall be
added with the following content:
(71) By way of exception from paragraph 7, the household customers who already
exercised their eligibility option are entitled to return to the regulated supply.
14. Following Art. 181, par. 8 of the Law no. 123/2012, a new paragraph (9) shall be
(9) By way of exemption from the previous paragraphs 1 to 8, for the interval
01.04.2019 – 28.02.2022 only, in accordance with the internal regulations, NERA will
establish a specific mix structure of imported and domestic natural gas for non-
household end customers’ consumption.
16. Following Art. 195 par. 41 of the law no. 123/2012, a new paragraph (42) shall be
42 By way of exemption from the provisions of Art. 8 par. 2 of the Government

Ordinance no. 2/2001 regarding the legal regime of the offences, modified,
supplemented and approved via Law nr. 180/ 2002, the offence underlined by Art. 193
32
item 43 will be sanctioned with a fine of 10% of the reported turnover of the year
preceding the application of the contravention sanction.
Art. 78. Government Emergency Ordinance no. 33/2007 on the organization and
functioning of the National Regulatory Authority for Energy, published in the Official
Gazette of Romania, Part I, no. 337 of 18 May 2007, approved with amendments and
completions by Law no. 160/2012, as amended and supplemented, shall be amended
and completed as follows:
1. Article 2 paragraph (3) shall be amended to read as follows:
(3) The level of the tariffs and contributions provided for in paragraph (2) shall be
established annually by an order of the NERA President, except for the financial
contribution levied by the license holders in the field of electricity, electric and thermal
energy in cogeneration, natural gas, and shall be published in the Official Gazette of
Romania, Part I.
2. In Article 2, after paragraph (3), a new paragraph (31) is inserted, with the following
content:
(31) The monetary contribution levied from the licenses titleholders in the field of
electricity, electricity and thermal energy in cogeneration for the electric power
component and natural gas equals 2% of the turnover achieved by them from the
activities covered by the licenses granted by NERA, turnover calculated according to
the NERA regulations approved by order of the NERA president with the approval of the
National Strategy and Forecasting Commission.
33
Appendix 3 – Power market related

provisions of GEO 114/2018
Art. 61. - Law on Electricity and Natural Gas no. 123/2012, published in the Official
Gazette of Romania, Part I, no. 485 of 16 July 2012, as amended and supplemented,
shall be amended and completed as follows:
1. In Article 22, a new paragraph, paragraph (11), shall be inserted after paragraph
1 with the following contents:
“(11) For the period between March 1, 2019 – February 28, 2022, for household
customers supplying of electricity is under regulated conditions, by NERA.”
2. In Article 22, paragraph (2), point d) shall be amended and shall have the
following content:
"d) to approve and publish the tariffs applied to domestic customers by the suppliers
of last resort for the period of 1 March 2019 – 28 February 2022. "
3. In Article 28, after the b) point, the following point b1) is inserted with the
following contents:
“b1) to deliver to the suppliers of last resort, between March 1, 2019 and February 28,
2022, the required electricity ensuring the consumption of household customers for
which regulated tariffs are applied, in accordance with the regulations developed by
NERA;".
4. In Article 28, point c) shall be amended and shall have the following content:
"c) to offer publicly and non - discriminatory on the competitive market all remaining
electricity available after the fulfillment of the obligation stipulated at point b 1).”
5. In Article 55, paragraph 1 shall be amended and shall have the following
content:
"Article 55. - (1) Suppliers of last resort are obliged to ensure the supply of electricity
in quality conditions and at prices that are reasonable, transparent, easily comparable
and non-discriminatory according to NERA regulations, with due respect the provisions
of Art. 22 paragraph (1) and (11), for the following categories of clients:
a) the final customers who, at the date of entry into force of this law, did not
exercise their eligibility;
b) household customers and non-household clients with a minimum number of
employees of less than 50 and an annual turnover or a total asset value in the annual
balance sheet not exceeding € 10 million"
6. Article 63, paragraph (3) shall be repealed.

7. In Article 75 paragraph (1), point c) shall be amended and shall have the
following content:
34
"c) Regulated tariffs / prices for the supply of electricity to customers provided for in
Article 55 paragraph (1), in compliance with the provisions of Art. 22, until they are
removed. "
8. In Article 174, a new paragraph shall be inserted after paragraph 7), with the
following contents:
“(71) By way of exception from paragraph (7), household customers who have
exercised their eligibility right have the right to return to regulated supply.”
35
Appendix 4 – Assumptions used for

the impact calculation
 Natural gas domestic production 2019-2022 – forecast based on National
Commission for Strategy and Prognosis prior to GEO 114/2018 implementation;
expected production is considered constant in a sensitivity analysis following the
opinion of industry experts considering that domestic production could even
decrease in the future following the adoption of this regulation;
 Final natural gas consumption (total households and non-households
consumers) following the increase of domestic production and an additional 5
TWh consumption in 2019, equivalent to increase in production of chemical
fertilizers (reaching historical values);
 Technological consumption of natural gas follows the increase of final natural
gas consumption;
 Quantities of natural gas for storage and from storage assumed to follow the
same increase as final natural gas consumption;
 Forecasts of natural gas imports calculated as a difference between natural
gas production and the total consumption (including technological
consumption), adjusted with the balance from storage (storage out – storage
in);
 Acquisition price of natural gas forecasted as:
o Import price of natural gas  Deloitte assumption for 2019, considered
constant afterwards (117.2 RON/MWh);
o Domestic price of natural gas  fixed at 68 RON/MWh between April
2019 – February 2022;
 Wholesale price of natural gas for households consumers between April
2019 and February 2022 was considered at 68 RON/MWh (as stipulated in GEO
114 / 2018), while for non-households consumers it is calculated as weighted
average between domestic production price and imports price (weighted with
production quantity minus households consumption and import quantity
respectively);
 Forecasted retail acquisition price of natural gas for households
consumers is calculated as a sum of:
o Natural gas acquisition recognized price: historical data estimated
based on official public information from Romanian authorities; 2019-
2022 estimated at 68 RON/MWh;
o Balancing cost: estimated between 2019–2022 at 5.2 RON/MWh;
o Supply services fee: increasing yearly by 2% from 2019 until 2022,
starting from 4.16 RON/MWh in December 2018;
o Supply losses: calculated as difference between wholesale price of
natural gas for households and natural gas acquisition recognized price
multiplied by final natural gas consumption of households for 2017, 2018
and January-March 2019; this losses are divided by the total natural gas
consumption between April 2019 and February 2022 and added to the
retail price (RON/MWh);
36
 Forecasted retail acquisition price of natural gas for non-households

consumers is estimated based on an average mark-up between 2019-2022 of
9% over the wholesale price of natural gas;
 Distribution tariffs:
o For household consumers: historical data estimated based on NERA
information; forecast for 2019 covers a 2% increase in tariff compared
to the value of December 2018 and kept constant until 2022, based on
increasing distributed volumes;
o For non-household consumers: historical data based on market experts
increasing distributed volumes;
 Transmission tariffs:
o For household consumers: historical data estimated based on NERA
increasing transported volumes;
o For non-household consumers: historical data based on market experts
increasing transported volumes;
 Storage tariffs:
o For household consumers: historical data based on NERA information;
forecast for 2019 covers a 2% increase in tariff compared to the value
of December 2018 and kept constant until 2022, as well as an increase
equivalent to 1 RON/MWh due to the foreseen application of NERA Order
on approving the methodology for establishing regulated tariffs for
underground storage of natural gas34;
o For non-household consumers: historical data estimated based on
market experts information; forecast for 2019 covers a 2% increase in
tariff compared to the value of December 2018 and kept constant until
2022, as well as an increase equivalent to 1 RON/MWh due to the
foreseen application of NERA Order on approving the methodology for
establishing regulated tariffs for underground storage of natural gas35;
 Impact on state budget revenues was calculated stating from 2017
production (NERA annual report for 2017) and covers:
o Tax on supplementary revenues – calculated by difference between
a liberalized price of approximately 90 RON/MWh36 and the new price
stipulated in GEO 114/2018 of 68 RON/MWh (calculated for 2017 natural
gas domestic production);
34
Draft available at: https://www.anre.ro/ro/gaze-naturale/legislatie/documente-in-discutie-
gn/metodologii-tarifare1387356881/proiect-de-ordin-pentru-aprobarea-metodologiei-de-
stabilire-a-tarifelor-reglementate-pentru-prestarea-serviciilor-de-inmagazinare-subterana-a-
gazelor-naturale, accessed on 11th February 2019
35
Draft available at: https://www.anre.ro/ro/gaze-naturale/legislatie/documente-in-discutie-
gn/metodologii-tarifare1387356881/proiect-de-ordin-pentru-aprobarea-metodologiei-de-
stabilire-a-tarifelor-reglementate-pentru-prestarea-serviciilor-de-inmagazinare-subterana-a-
gazelor-naturale, accessed on 11th February 2019
36
Calculated as weighted average price for natural gas from internal production with delivery in the same
month, posted by BRM, for 2018
37
o Royalties37 – impact calculated based on the effective tax rate of

7.7%38, considered constant until 2022; the calculation of impact
assumes the implementation of a new methodology for calculating
royalties at the reference price of 68 RON/MWh compared to current
methodology for establishing the reference price based on Baumgarten
price (121 RON/MWh CEGH Q1 2019);
o CIT – impact calculated based on income tax rate of 16%, excluding the
tax on supplementary revenues and royalties impact (RON/MWh);
o VAT – impact estimated assuming 40% household and other
consumption with a value added tax rate of 19%;
o Dividends – impact calculated considering a state share participation of
approximately 70% in Romgaz and 21% in Petrom.
37
Based on NAMR Order 32/2018 on the approval of methodology for establishing the reference price for
natural gas extracted in Romania
38
Represents the effective tax rate of royalties for 2017 according to Deloitte Study “An overview on royalties
and similar taxes”, April 2018, available at:
https://www2.deloitte.com/content/dam/Deloitte/ro/Documents/Redevente%20si%20alte%
20taxe_3%20Aprilie%202018.pdf
38
Deloitte refers to one or more of Deloitte Touche Tohmatsu Limited, a UK private company limited by
guarantee (“DTTL” ), its network of member firms, and their related entities. DTTL and each of its member
firms are legally separate and independent entities. DTTL (also referred to as "Deloitte Global") does not
provide services to clients. Please see www.deloitte.com/ro/about to learn more about our global network
of member firms.
Deloitte provides audit, consulting, legal, financial advisory, risk advisory, tax and related services to public
and private clients spanning multiple industries. Deloitte serves four out of five Fortune Global 500®
companies through a globally connected network of member firms in more than 150 countries and territories
bringing world-class capabilities, insights, and high-quality service to address clients' most complex business
challenges. To learn more about how Deloitte's approximately 263,900 professionals make an impact that
matters, please connect with us on Facebook or LinkedIn.
© 2019. For information, contact Deloitte Romania
39

Impact Report of GEO 114/2018 On Romanian Natural Gas & Power Markets

Uploaded by

Document Information

Original Title

Copyright

Available Formats

Share this document

Share or Embed Document

Sharing Options

Did you find this document useful?

Is this content inappropriate?

Copyright:

Available Formats

Impact Report of GEO 114/2018 On Romanian Natural Gas & Power Markets

Uploaded by

Copyright:

Available Formats

Impact Report of GEO 114/2018 on Romanian Natural

Gas & Power Markets

3.1.2. Impact on the gas value chain 10

3.1.3. Impact on Small and Medium Enterprises 11

List of graphs and figures

Table 1 – The oversubscribed bids in flow RO>HU direction ............................................... 12

ACUE Associations of Energy Utility Companies

AGTM ACER Gas Target Model

BRM Bursa Romana de Mărfuri / Romanian Commodities Exchange

CEER Council of European Energy Regulators

CIT Corporate Income Tax

CNIPMMR National Council of Small and Medium Sized Private Enterprises

EUR Euro (€)

GEO Government Emergency Ordinance

IGM Internal Gas Market

MS Member States of the EU

NBR National Bank of Romania

NCSP National Commission for Strategy and Prognosis

NERA National Energy Regulatory Authority

PSO Public Service Obligation

RCC Romanian Competition Council

RON Romanian New Leu

SMEs Small and Medium Enterprises

VAT Value Added Tax

VMG Guaranteed Minimum Income

On December 28, 2018, the Romanian Government issued an Emergency Ordinance

 Analysis of these concerns and the facts behind the perceptions;

1. Reduction of state budget revenues.

2. Security of supply disruption

3. Potential state aid for industrial consumers

4. Market competition disruption and discrimination of producers versus

6. Limitation of free cross-border trading of local gas production

In its “Competition Developments in Key Sectors” 2018 Report 5, the Romanian

Figure 1 – Key milestones in the liberalization process of natural gas market

2. Summary of the natural gas

As stated in the Ordinance, the answer to these concerns is to “establish an appropriate

The Ordinance envisages the following main control mechanisms:

3. Impact of the measures on the

3.1.1. State budget direct impact

Graph 1 - Direct impact on GEO 114/2018 on state budget

Source: Deloitte calculations

Graph 2 – Selected social benefits amount for 2017

3.1.2. Impact on the gas value chain

3.1.3. Impact on Small and Medium Enterprises

Graph 3 – Perception of the effects of GEO 114/2018 on the SMEs

3.2. Security of supply disruption

Table 1 – The oversubscribed bids in flow RO>HU direction

Flow Direction Romania → Hungary

2023/2024 4,648,063 24,095,592 518%

2025/2026 4,648,063 24,095,592 518%

2026/2027 4,648,063 24,095,592 518%

2027/2028 4,648,063 22,475,925 484%

2028/2029 4,648,063 22,475,925 484%

2029/2030 4,648,063 22,475,925 484%

2030/2031 4,648,063 23,631,294 508%

2031/2032 4,648,063 23,631,294 508%

2032/2033 4,648,063 20,407,321 439%

2033/2034 4,648,063 20,407,321 439%

2034/2035 4,648,063 20,407,321 439%

Flow Direction Romania → Hungary

Table 2 – The aggregated capacities initially allocated per gas year

Aggregated Allocated Capacity

Table 3 – Allocated Capacities following the Execution of Step-Back Rights