Hungary: The Gas Act

Hungary undertook an obligation to the European Union to comply with Directive 98/30/EC by opening up its internal natural gas market as of January 1^st, 2004. Under the current regime, both providers and traders belong to the public utility sector, the private market as such does not exist at the moment. As of January 1^st, 2004 Act XLII of 2003 on Natural Gas ("Gas Act") as the framework law and its accompanying governmental decrees (details of the regulated areas) will enter into force and as far as the eligible consumers are concerned a new, competing market will be created. The most significant changes of the new Act are the following:

• introduction of a new circle of licensee;
• new eligible consumers;
• procedure on how to become an eligible consumer;
• principles of costs sharing of "take-or-pay" agreements – creation of a financial fund

Licensing. A market player will be able to apply for the following types of licences under the Gas Act: transfer of natural gas, storage of natural gas, distribution of natural gas, trading of natural gas, wholesale of natural gas for public utility purposes, public utility service, creation and operation of an organised natural gas market, grid control, access to a cross-border pipeline and distribution and provision of propane and butane gases and their mixture through pipelines. The owner of the licence for transferring natural gas cannot have any other licences except licence for grid control. The owner of the licence for grid control can have licence for access to a cross-border pipeline in order to maintain system balance. The owner of the licence for distribution of natural gas cannot have any other licence listed above from 1^st July 2007. Finally, the owner of the licence for creation and operation of an organised natural gas market will be prohibited from having any other licence listed above.

Eligible consumers. According to the definition of the accompanying governmental decree, the following are eligible consumers: all electricity producers who use natural gas to produce electricity, all consumers who contract for 500m³/hour for at least one month of the year in 2003 and all registered eligible consumers if they purchase natural gas. From now on, natural gas can be provided by eligible consumers. Eligible consumers will be free to choose their natural gas supplier including public utility suppliers. If the purchase contract is concluded under free market conditions, it is the discretion of the parties to set the price of natural gas. Eligible consumers can buy natural gas from traders, gas extractors, or on the stock market or can import it from abroad. The eligible consumer has the legal status of a public utility consumer unless it enters the open market and starts purchasing natural gas from traders. The government will outline the circle of eligible consumers in a governmental decree and maintains the right to review the conditions of how to become an eligible consumer.

Procedure to become an eligible consumer. The eligible consumer can terminate its public utility contract until 31^st October 2003 to take effect when the new Act enters into force (1^st January 2004). If the eligible consumer did not exercise this right, it can terminate the public utility contract until March 31^st of the subject year (which lasts from July 1^st to June 30^th of each year) taking effect as of October 1^st. If the eligible consumer does not terminate the public utility contract, then it can purchase natural gas within the public utility service framework. The eligible consumer can initiate its return to the public utility sector and can conclude a public utility contract to purchase natural gas under a natural gas purchase agreement. The relevant public utility provider must conclude the contract to take effect as 1^st July of the year following the notice to return to the public utility contract. These deadlines are aimed at preventing frequent switching of eligible consumers between the markets, otherwise utilising the price fluctuation of natural gas due to the winter and summer seasons could lead to an exploitation of this competitive advantage which would breach the principle of legal and fair market practice.

Cost sharing of "take-or-pay" agreements. The contract between the public utility wholesaler and public utility provider will have to be renegotiated if an eligible consumer terminates a public utility contract in an area supplied by the public utility provider. If the renegotiations prove to be unsuccessful, the following three options are available:

• the contracted quantity of natural gas is reduced by the amount the exiting consumer contracted for if the consumer has switched to a supplier which is in a structural relationship with or has concerted practices and joint strategy with the public utility wholesaler;
• the contract must be performed if the consumer is in a structural relationship with or has concerted practices and joint strategy with the public utility provider;
• the contracted amount must be reduced by half of the amount contracted by the exiting consumer if the eligible consumer has switched to a trader independent from both the public utility wholesaler and the public utility provider.

If the public utility wholesaler and the public utility provider prove that the exiting of the eligible consumer to the free market causes them unavoidable damage then they are entitled to compensation from a financial fund created to cover economic and financial losses. The operational principles and order of payments to the financial fund must be set in a way that contributions to the fund shall be connected to the annual income from natural gas industry activities of traders, public utility wholesalers and public utility providers.