The Legal Manual for Using the Window of Opportunity in the Ukrainian Energy Sector

by Sergii Zheka

The Ukrainian energy sector has been developing steadily over the last couple of years and has seen particularly growing interest from foreign companies wishing to enter the Ukrainian gas and electricity markets. Foreign companies may, of course, participate in the above-mentioned markets without setting up permanent establishments in Ukraine (e.g. trade on the border with Ukraine or store gas in Ukrainian gas facilities). That is what some foreign companies do.

However, in order to be more comprehensively and actively involved in the Ukrainian gas and electricity markets, foreign companies, indeed, have to establish their corporate presence in Ukraine, preferably by incorporating a local company (an LLC in most cases). This allows a foreign company greater opportunities to enter into transactions with local market players, supply gas and electricity directly to a broad range of local consumers, trade on local gas and electricity exchanges (e.g. Ukrainian Energy Exchange (UEEX)), enjoy certain tax privileges envisaged by Ukrainian tax legislation, etc.)

In this context, this article provides a brief overview below of activities in the Ukrainian electricity and gas markets that are permitted and regulated by local law, what licenses are needed to conduct these activities, what activities can be conducted without a license and what the prerequisites and procedures for obtaining these licenses are.

 

Electricity — Regulatory Conditions

Electricity-related license types are provided for by the Law of Ukraine On the Electricity Market. According to the Electricity Market Law, licenses are to be issued for the following types of activities, which may be relevant for a foreign investor:

I. Production of electricity;

II. Transmission of electricity;

III. Distribution of electricity;

IV. Supplying electricity to consumers, and

V. electricity trading.

The licensing conditions are approved, and the licenses are issued by the regulator authority, which is the National Energy and Utilities Regulatory Commission (“NEURC”). License applications may be rejected solely on the limited grounds expressly provided in the law.

While electricity production, transmission and distribution appear rather asset-intensive activities and require lengthy, cumbersome and well-structured preparation (e.g. construction of electricity generating facilities, etc.), supplying electricity and trading it appear as activities that do not require as much investment of time, effort and finance. Hence, it is obviously faster and easier to obtain the electricity supply and trading licenses and, upon doing so, to begin conducting these activities.

Importantly, the license for trading activities is required only if an entity holds no other license for activities on the electricity market. The list of documents required to obtain the trading license is similar to that required for the electricity supply license. For this reason and due to the space limitations of this article, below we will discuss the requirements and procedures for the electricity supply license.

Only Ukrainian incorporated companies can qualify to receive a power supply license. There is no policy or legislation-based prohibitions against non-state-owned companies or foreign-owned companies obtaining a power supply license. A Ukrainian company that qualifies for a power supply license may be incorporated as a limited liability company or a joint stock company, which are the most popular corporate forms, or in some other corporate form. The same relates to foreign companies, as they are free to incorporate local subsidiaries in the form of a limited liability company or a joint stock company in order to apply for power supply licenses.

The law establishes limitation for companies from the Russian Federation: neither Russian residents (companies or individuals), nor Ukrainian or foreign companies controlled by these, can apply for power supply licenses.

The suppliers of electricity may purchase/sell electricity on the market, export/import electricity, conclude agreements with various market players and consumers, etc.

An application for a power supply license must be submitted to NEURC in either paper or electronic form. The following documents need to be enclosed with the application:

I. copy of the passport of the applicant’s CEO;

II. information about means of carrying out power supply activities: owned or leased buildings or premises for customers’ reception and service, corporate web site, means of communication of the applicant with customers (telephone and email address);

III. confirmation that the applicant is not controlled by entities or persons from countries carrying out military aggression against Ukraine (i.e. Russia).

Bilateral electricity trading shall take place based on contracts for the sale and purchase of electricity — the parties are free to negotiate many of the terms of such contracts.

A licensee involved in the supply of electricity generally operates based on the following contracts: (i) a contract for the purchase of electricity on the wholesale market; (ii) a contract with an electricity distributor, and (iii) a contract for electricity supply with consumers.

 

Natural Gas — Regulatory Conditions

The legal fundamentals for the operation of the natural gas market are provided for by the Law of Ukraine On the Gas Market. According to the Gas Market Law, the natural gas market consists of legal relations related to natural gas purchase and sale, supply, and the provision of the services of transportation, distribution, storage of natural gas and the rendering of LNG facility services.

The following activities with natural gas are subject to licensing:

I. transportation,

II. distribution,

III. storage,

IV. supply, and

V. rendering of LNG installation services.

The distribution of natural gas via state gas distribution systems can be performed only by undertakings belonging to the state sector of the economy. Even though the government is starting the liberalization of transportation and storage of natural gas, these activities are in practice still monopolized by large state-owned companies. As to the rendering of LNG facility services, the licensing conditions for such activity have not been approved yet.

Companies that plan to conduct the supply of natural gas should obtain a Gas Supply License issued by NEURC. The Gas Supply License entitles its holder to supply natural gas directly to a consumer at the price agreed with that consumer, except for cases when special duties are imposed by CMU on gas suppliers (generally, state and municipal enterprises) to ensure public interests.

Importantly, the import of natural gas into Ukraine and its export, as well as gas trading activities and storage of foreign natural gas in Ukrainian gas storage facilities are not subject to licensing.

Only Ukrainian legal entities, such as Ukrainian incorporated companies, qualify to apply for and receive a Gas Supply License. These companies cannot be controlled by residents of the Russian Federation. The same as in the case of the power-related licensed activities, there is no policy or legislative based prohibition against non-state-owned companies or foreign owned companies obtaining a Gas Supply License. A Ukrainian legal entity that qualifies for a Gas Supply License may be established in the form of a Ukrainian registered company, for example, as a limited liability company or a joint stock company.

A Ukrainian company applying for or holding a Gas Supply License may be established by a foreign company in order to obtain the license, subject to the exception specified above. In this regard, a limited liability company is one of the most convenient corporate forms for local corporations. A public joint stock company or a private joint stock company may also be considered; however, these forms are subject to many securities and capital markets related regulatory requirements, thus, these are fewer flexible entities to operate.

Private individuals registered as individual entrepreneurs in Ukraine may in principle also apply for a Gas Supply License, given that they are neither residents of the Russian Federation nor controlled by such residents.

An application for a power supply license must be submitted to NEURC in paper or electronic form. The following documents need to be enclosed with the application:

I. a copy of the passport of the applicant’s CEO;

II. information about means of carrying out power supply activities: owned or leased buildings or premises for customers’ reception and service, corporate Web site, means of communication of the applicant with customers (telephone and email address).

A licensee involved in the supply of gas generally operates based on the following contracts (i) a contract for the purchase of gas from a gas owner; (ii) a contract for gas transportation with the operator of the gas transportation system; (iii) a contract for gas supply with consumers; and (iv) a contract for gas storage with the operator of gas storage facilities.

 

Procedural rules for license application review

The application procedure is identical for all of the above licenses and is stipulated by the Law of Ukraine On the Licensing of Types of Business Activity. The application procedure is based on a paper or electronic application. Once the license application is submitted, NEURC is required to pass its decision within 10 (ten) business days after receiving the license application and the supplementary documents.

NEURC may reject the license application without investigating its merits, if:

I. the application file does not contain all the required documents;

II. the application/at least one of its supplements is signed by a person without the proper authority;

III. the submitted documents do not comply with statutory requirements;

IV. the application was not submitted in a timely manner;

V. there is no information about the applicant in the Unified State Register of Legal Entities, Individual Entrepreneurs and Public Associations (Corporate Register); or

VI. the Corporate Register contains information on the pending liquidation of the applicant.

An applicant whose license application was rejected on the above grounds, may reapply to NEURC after removing all the deficiencies revealed by NEURC.

NEURC may refuse to grant a license on the following grounds on merits:

I. the applicant does not meet the licensing requirements;

II. the application package contains inaccurate information;

III. a court decision exists, which prohibits the applicant from performing the relevant activities.

In general terms, the applicant may reapply to NEURC after the licensing conditions have been met (item (i) above) or three months after the application was rejected on the basis of item (ii) above. The license is issued by NEURC for an indefinite term

On obtaining the license, the license holder should, of course, comply with numerous requirements applicable to the relevant type of electricity or gas license. The requirements are stipulated, inter alia, in the relevant licensing conditions issued by NEURC.