• Applicable Legislation
• Regulatory Framework
• Natural Gas Sector
• Electric Energy Sector
• Thermal Energy Sector
• Oil and Oil Products Sector

The energy sector of Lithuanian mainly consists of the sectors of electric energy, thermal energy, gas and petroleum and its products. Upon restoration of Lithuania's independence in 1990, the energy sector was dominated by the State-owned natural monopolies such as AB Lietuvos dujos (supplier of gas) and SPAB Lietuvos energija (producer and supplier of electric energy). Besides, significant participants of the Lithuanian energy sector were AB Mažeikių nafta, which is the only oil refinery in the Baltic States, and Ignalina Nuclear Power Plant with the RBMK-1500 reactor which is one of the largest power reactors in the world.

In 1994, the first National Energy Strategy was approved by the Government for a comparatively long period - until the year 2015. Later, the Law on Energy established that the energy strategy must be approved by the Seimas and has to be revised every five years. The new Energy Strategy was approved by the Seimas in 1999.

In order to enhance modernisation and competitiveness of Lithuanian energy sector, it was decided to begin gradual privatisation of the monopolistic enterprises. The first major step was made in 1999 when US company Williams International acquired 33% of share capital in AB Mažeikių nafta. On 2 March 2000 the Government approved the outlines of privatisation of AB Lietuvos dujos and on 14 November 2001 the Government gave its consent to the program of privatisation of 34% block of shares of the company. It is expected that 34% block of shares will be acquired by a foreign strategic investor and another 34% block of shares by a foreign supplier of natural gas. In order to prepare the electric energy sector for privatisation, SPAB Lietuvos energija has been reorganised and further steps towards privatisation of AB Lietuvos Energija are expected soon. The new challenges in the energy sector are also conditioned by Lithuania's strategic objective to join the EU. For instance, in the process of EU accession negotiations it has already been decided to shut down Unit 1 of Ignalina Nuclear Power Plant. The periods of the closure down of Unit 2 and the decommissioning of Ignalina Nuclear Power Plant as such are currently being discussed.


Applicable Legislation

1. The 7 July 1994 Law No. I-533 of the Republic of Lithuania "On Municipalities";
2. The 28 March 1995 Law No. I-828 of the Republic of Lithuania "On Energy";
3. The 18 May 2000 Law No. VIII-1693 "On the Reorganisation of Special Purpose Company "Lietuvos energija";
4. The 20 July 2000 Law No. VIII-1881 of the Republic of Lithuania "On Electric Energy";
5. The 10 October 2000 Law No. VIII-1973 of the Republic of Lithuania "On Natural Gas";
6. The 5 October 1999 Resolution No. VIII-1348 of the Seimas of the Republic of Lithuania "On Approval of the National Energy Strategy";
7. The 16 March 1992 Resolution No. 169 of the Government of the Republic of Lithuania "On Expediting of Oil Extraction and Refinement";
8. The 27 December 2000 Resolution No. 1492 of the Government "On Licensing of Import, Export, Wholesale and Retail of Unprepacked Oil Products";
9. The 19 July 2001 Resolution No. 743 of the Government of the Republic of Lithuania "On Approval of the Licensing Regulations for the Transmission, Distribution, Storage and Supply of Natural Gas";
10. The Licensing Regulations in Electric Energy Sector, as approved by the 5 December 2001 Resolution No. 1474 of the Government of the Republic of Lithuania;
11. The List of Services of Public Interest in Electric Energy Sector, as approved by the 5 December 2001 Resolution No. 1474 of the Government of the Republic of Lithuania;
12. The List of Activities in Electric Energy Sector for which an Authorisation is Required, as approved by the 5 December 2001 Resolution No. 1474 of the Government of the Republic of Lithuania;
13. The Conditions of Import of Electric Energy, as approved by the 5 December 2001 Resolution No. 1474 of the Government of the Republic of Lithuania;
14. The 12 January 2000 Order No. 20 of the Minister of Economy "On Approval of the Regulations on Supply and Use of the Thermal Energy";
15. The 26 May 2001 Order No. 147 of the Minister of Economy "On Approval of Rules for Sale of Oil Products, Biofuel, Biooil and Other Combustible Liquid Products in the Republic of Lithuania";
16. The Rules of Trade in Electric Energy, as approved by the 18 December 2001 Order No. 380 of the Minister of Economy;
17. The Rules on Issuing of Authorisations for Activity in Electric Energy Sector, as approved by the 18 December 2001 Order No. 380 of the Minister of Economy;
18. The Rules on Imposing the Obligation to Provide Services of Public Interest, as approved by the 18 December 2001 Order No. 380 of the Minister of Economy;
19. The Rules on Exploitation of Power Stations and Electric Networks, as approved by the 21 December 2001 Order No. 389 of the Minister of Economy;
20. The 5 February 2002 Order No. 43 of the Minister of Economy "On the Approval of the Regulations on Gas Transmission, Distribution, Storage and Supply"
21. The Order of Granting of Free Electric Energy Consumer's Status, as approved by the 5 October 2001 Resolution No. 94 of the State Price and Energy Control Commission;
22. The 16 November 2001 Resolution No. 110 of the State Price and Energy Control Commission "On the Approval of Principles of Recognition of the Status of the Free Customer".

There are several institutions that are competent to exercise the regulatory authority over the energy sector.

The Ministry of Economy of the Republic of Lithuania represents the State's interests in the energy sector and implements the objectives of the State's energy policy. The Competition Council the Republic of Lithuania supervises activities of monopolistic and dominant undertakings in the sector. The State Energy Inspectorate under the Ministry of Economy of the Republic of Lithuania exercises technical supervision and control over operation of power generating equipment (electricity, heat, natural gas and liquefied petroleum gas) and issues permissions to start operation of such equipment. The State Enterprise Energy Agency is in charge of drafting of the programmes for economical and efficient use of energy resources, organises their implementation, devises legal, economic and organisational measures for the implementation of national policy of efficient energy use. Vast powers are vested with the State Price and Energy Control Commission ("the Commission"). The Commission is deemed to be an independent body. Members of the Commission are nominated by the Government and appointed for five-year term by the President of the Republic of Lithuania. Once per year the Commission must report on its activities to the Seimas. The main functions of the Commission are as follows:

1. examination of the most important issues of energy economy, including investment;
2. establishment of the principles of pricing in the energy sector, electric energy, district heating, hot water and natural gas price calculation methodologies;
3. examination of the calculations of electric energy, district heating, hot water and natural gas prices submitted by the energy suppliers and approval thereof;
4. control of the fuel and energy quality, its conformity to the standards;
5. control over the trade in energy resources and energy products;
6. issuance of the licences to engage in the activities in the energy sector;
7. consumer protection and examination of the disputes among consumers and suppliers of energy;
8. etc.

The main principles of management and development of the natural gas sector as well as the operation of natural gas undertakings and their relations with the customers in the supply, distribution, transmission and storage of natural gas are established by the provisions of the Law on Natural Gas.

Types of Natural Gas Undertakings

According to the Law on Natural Gas, the natural gas sector is comprised of the following natural gas undertakings:

1. gas production undertakings (i.e. those that carry out the extraction of the gas);
2. gas supply undertakings (i.e. those that carry out the delivery and (or) sale of gas to consumers);
3. gas distribution undertakings (i.e. those that carry out the transportation of gas through the distributing pipeline network with a view to its delivery to customers);
4. gas transmission undertakings (i.e. those that carry out the transportation of gas to customers and into storage facilities through a high-pressure pipeline network); and
5. gas storage undertakings (i.e. those that carry out the function of storage of the gas).

Separation of the above types of the activities in the natural gas sector provides for the possibility to implement the principle of transparency. Vertically integrated natural gas undertakings have to implement separate internal accounting for gas transmission, distribution, storage and supply. Horizontally integrated undertakings, in addition, must implement and maintain separate internal accounting of the activities unrelated to the gas sector. Separate accounting of the costs of the natural gas undertaking allows the Commission to exercise control over the tariffs charged for the natural gas, gas transmission and distribution services.

Licensing

The following types of the activities in the natural gas sector are subject to licensing:

1. transmission of natural gas;
2. distribution of natural gas;
3. storage of natural gas;
4. supply of natural gas for regulated customers.

The licences are issued by the Commission in accordance with the Licensing Regulations for the Transmission, Distribution, Storage and Supply of Natural Gas approved by the 19 July 2001 Government Resolution No. 743. The licences for transmission, distribution and storage of natural gas are issued to the undertakings possessing the gas systems by the right of ownership or lawfully using them on other legal basis. Licences to transmit and distribute gas are issued for performance of the activity within the prescribed territory. Only one gas transmission or distribution undertaking may operate within the territory specified in the licence. However, the exclusive nature of the licences does not prohibit other licensed company from engaging in gas transmission by transit via separate transit pipeline across the same territory.

The licence issued by the Commission provides for the terms of the licensed activity. In case of failure by the gas undertaking to comply with these terms, the Commission may either terminate or suspend the licence or impose a fine.

Categories of Customers

The Law on Natural Gas distinguishes two main categories of customers - free customers and regulated customers. "Free customers" are defined as those that are entitled to choose a supplier of natural gas, while the "regulated customers" do not have such a right. The main difference between those two categories is that free customers have freedom to choose the supplier and negotiate the price of the gas purchased. By contrast, the gas prices for the regulated customers are established by the gas undertakings in coordination with the Commission and the regulated customers may purchase gas only from gas distribution undertakings.

In the meantime, the following categories of the customers are entitled to the status of the free customer:

1. power stations;
2. customers consuming more than 15 million m3 of gas annually;
3. customers having direct access to the high-pressure pipelines;
4. distribution undertakings having direct access to the high-pressure pipelines.

The regulated customers are divided into six categories on the basis of the quantities of annual gas consumption. Such a division is relevant for the purpose of the pricing since gas undertakings are entitled to differentiate tariffs according to the categories of the customers.

Access to Networks

The right to use transmission networks is extended to the gas suppliers, free customers, gas distribution undertakings and undertakings transporting gas by transit. The gas suppliers and free customers also have access to the distribution networks.

A gas undertaking owning a network may refuse access to a network only on the basis of the lack of capacity or if this would impede the performance of obligations imposed on the undertaking by the Government. In any case, refusal of access to the network must be objective, indiscriminate and substantiated.

A gas transmission or distribution undertaking, upon request of a customer or another gas undertaking, must enhance the capacity of the network or construct a new gas pipeline if that is economically feasible or if the applicant undertakes to cover a portion of expenses that exceeds the economically substantiated costs of enhancement of the capacity of the network.

Pricing

The following prices are regulated in the gas sector:

1. transmission prices;
2. distribution prices;
3. storage prices;
4. gas prices for regulated customers.

Gas undertakings are entitled to set annually gas transmission, distribution and storage prices, not exceeding the cap provided by the Commission. Gas prices for the regulated customers, not exceeding the maximum price established by the Commission, may be revised by a gas undertaking every six months.

The Commission controls the prices established by the gas undertaking. In case it is established that the prices have been established without adhering to the methodology established by the Commission or are incorrect, the Commission must notify its conclusions to the gas undertaking. If the undertaking fails to implement the request of the Commission, the Commission has the right to unilaterally set the prices.

Contracts with Customers

According to the Law on Natural Gas, relations of gas undertakings with customers and network users must be based on contracts. It is prohibited to transmit, distribute, store, supply and use gas without a contract. The principles of contractual relations are regulated by Regulations on Gas Transmission, Distribution, Storage and Supply" ("the Regulations") approved by the 5 February 2002 Order of the Minister of Economy.


Electric Energy Sector

The main principles regulating the generation, transmission, distribution and supply of electricity, relations between suppliers of electric energy services and their customers, conditions of competition in the electricity sector are established by the Law on Electric Energy.

Types of Electric Energy Undertakings

Before reorganisation of the electric energy sector, Special Purpose Company Lietuvos Energija operated as a vertically integrated natural monopoly carrying out production, supply, transmission and distribution of the electric energy. On 18 May 2000 the Law on the Reorganisation of Special Purpose Company Lietuvos Energija was adopted. Following the implementation of the provisions of this law, the following types of undertakings operate in the electric energy sector:

1. electricity producers (i.e. undertakings generating electric energy);
2. suppliers (i.e. those that carry out delivery and/or sale of purchased or produced electricity to customers);
3. transmission undertakings (i.e. those that carry out the transportation of electricity through the transmission network);
4. distribution undertakings (i.e. those that carry out the transportation of electricity through the distribution network with a view to its delivery to customers);
5. market operator (i.e. the undertaking responsible for the organisation and administration of trade in electricity and payment settlements between producers, suppliers and customers);
6. operators of the transmission networks (i.e. the undertakings that carry out the management of the transmission system and balancing and reserving of generation and consumption of the electric energy);
7. operators of the distribution networks (i.e. the undertakings that carry out the management of the distribution system within the territory of their services).

Similarly to the gas sector, separation of the activities of the generation, transmission, distribution and supply of electric energy provides for the possibility to implement the principle of transparency in the electric energy sector. Vertically as well as horizontally integrated undertakings must keep separate accounts for each type of the activities; such accounts have to be audited and are publicly available. In addition, separation of the accounts allows the Commission to exercise the control over the tariffs established by the electric energy undertakings.

Licences, Authorisations and Registration

The following types of the activities in the electric energy sector are subject to licensing:

1. activities of the electricity market operator;
2. transmission of the electric energy;
3. distribution of the electric energy;
4. activities of the independent supplier of the electric energy (i.e. supply of the electric energy to free consumers on contractual basis);
5. activities of the public supplier (i.e. activities of a distribution undertaking which is obliged to supply energy to the customers requesting such a service within its service territory).

Certain other types of activities in the electric energy sector that do not require a licence are subject to authorisation. In particular, generation of the electric energy, expansion of the generation capacities, export and import of the electric energy, construction of a direct line (a transmission line between the producer and the customer and complementary to the transmission and distribution systems) require an authorisation. Authorisations are issued by the Ministry of Economy. Authorisation to import electric energy may be issued only to free customers and suppliers, while authorisation to export - to the producers of electric energy and suppliers.

Authorisations for electricity import are granted only on condition that other countries provide equal opportunities for their free customers and suppliers to import electricity from Lithuania and with account of the quotas for imported energy established by the Government or a body authorised by it.

An undertaking holding a licence or authorisation to conduct activities in the electric energy sector is treated as a participant of the electricity market. The suppliers and holders of the authorisations to import or export the electric energy must get registered with the market operator as active participants of electricity market. The status of active participant of the electricity market entitles those undertakings to receive information from the market operator and operator of transmission lines on the planned and actual data of electricity generation, supply and consumption as well as to carry out the trade in electric energy.

Categories of Customers

The Law on Electric Energy distinguishes two main categories of the customers - free customers and regulated customers. Free customers are those that are free to choose a supplier of electric energy and negotiate the price of the electric energy purchased, while the regulated customers do not have such a right. By contrast, the electricity prices for the regulated customers are established by the gas undertakings in coordination with the Commission and the regulated customers may purchase electricity only from public suppliers.

According to the Law on Electric Energy, the status of the free customer shall be granted:

1. from 1 January 2003 - for those customers that have consumed more than 9 million kWh of electricity in the previous year for one site of consumption;
2. from 1 January 2004 the degree of market opening and criteria of the free customer will be established by the Government. The degree of market opening for each subsequent year will be announced in Valstybės žinios (the Official Gazette);
3. not latter than from 1 January 2010 - for all customers.

Trade in Electric Energy

Trade in electric energy and settlements for the purchased energy are organised by the market operator in accordance with the Rules of Trade in Electric Energy. The trade is conducted on the basis of bilateral contracts between producers, suppliers and free customers by using a regulated third party access for transportation of the purchased electricity. Free customers may buy electricity from public suppliers, independent suppliers and producers holding electricity supply licences. Regulated customers may purchase electric energy only from public suppliers. Suppliers may purchase electricity at the auction organised by the market operator or directly from the producers while balancing energy may also be purchased from the market operator.

Producers and suppliers have to maintain a generation level sufficient to satisfy the customers' demand and to ensure deliveries stipulated in the contracts. The producers and suppliers failing to comply with the contracts, load schedules and requirements of the transmission system operator must pay for the balancing energy. The public supplier is obliged to supply electricity to regulated customers. The transmission networks operator, by carrying out the national balancing function, co-ordinates generation levels with the level of demand for electric energy.

Public Service Obligations

The Government has the right in indispensable cases to impose public service obligations on the market operator, transmission and distribution network operators and suppliers. The costs of fulfilling public service obligations may be included in the tariffs charged by the suppliers. Currently, the Government has approved the following public service obligations in the electric energy sector:

1. public and independent suppliers and free customers who import electric energy from abroad must:
   1. buy and sell the electric energy generated from renewable energy sources and waste;
   2. buy and sell the electric energy generated in the process of combined thermal power and electric energy generation production;
   3. buy and sell the electric energy generated by the specified power plants producing electric energy which is necessary to maintain the reserve of the electric energy system;
   4. compensate the costs of safety measures in the nuclear energy sector as well as the costs of handling of nuclear waste;
2. operators of transmission and distribution networks must:
   1. ensure access to the networks and reliable supply of electric energy to all customers that fulfil applicable technical requirements;
   2. ensure high quality of electric energy;
   3. develop infrastructure of the sector.

The following prices are regulated in the electric energy sector:

1. prices for the electric energy and reserve capacity charged by the producers and independent suppliers when producers and independent suppliers have more than 25% of the market share*;
2. prices for balancing energy;
3. public electricity tariffs for the regulated customers;
4. prices for transmission and distribution services;
5. fee for the connection of customers' devices to the network;
6. the purchase price for electricity produced from local fuel, renewable energy sources or waste.

The Commission has also enacted separate methodologies for calculation of transmission and distribution prices as well as public electricity tariffs for the regulated customers. The maximum prices for the transmission and distribution services are determined by the Commission for a three year period and are revised annually. Basically, the Commission annually revises only that portion of the maximum price the calculation of which is based on the factors that are beyond the control of the undertaking (e.g. inflation, variable costs etc.). Transmission and distribution undertakings are free to establish transmission and distribution prices, however, they may not exceed the maximum price established by the Commission. Maximum public electricity tariffs are established by the Commission for the period of one year. Public suppliers are allowed to differentiate public electricity tariffs according to customer groups, electricity consumption, time of consumption (i.e. day or night period) as well as on other objective grounds. Principles of differentiation must be approved by the Commission.

Contracts with Customers

The principles of contractual relations of electric energy undertakings with customers (either free or regulated) have been established by the Procedure for Supply and Consumption of the Electric Energy approved by the 29 December 2001 Order of the Minister of Economy. Electric energy may be supplied only if a contract between the customer and the respective network operator is concluded.


Thermal Energy Sector

In comparison to the natural gas and electric energy sectors, the reform of the thermal energy sector is not so advanced. On 3 December 2001 the Government approved the concept (outlines) of the Law on Heating. It is expected that the new law will help to implement the principles of decentralisation, competition, efficiency and economic planning. The outlines of the law implies that the thermal energy sector will be regulated similarly to the natural gas and electric energy sectors.

Currently, the management of thermal energy sector to the great extent is within the competence of local municipalities. According to the Law on Municipalities, local municipalities are responsible for organisation of the heat supply. Basically, the municipalities control the majority of thermal power plants, steam shops as well as companies operating transmission and distribution networks. Some municipalities, in order to ensure modernisation of local heating sector, leased the heating companies to foreign investors.

Power plants, steam shops as well as network operators must calculate the tariffs in accordance with the methodology and regulations approved by the Commission. However, the so - calculated tariffs must be approved by the municipality and co-ordinated with the Commission. Municipalities may subsidise the heat and hot water supplied to certain categories of the customers.

Relations of suppliers of thermal energy with customers must be based upon contracts. It is prohibited to supply thermal energy and hot water without a contract. The principles of contractual relations have been established by the Regulations on Supply and Use of the Thermal Energy approved by the 12 January 2000 Order of the Minister of Economy.


Oil and Oil Products Sector

Regulation of Oil Works

The regulation of forecasting, prospecting, exploration and exploitation of oilfields is established by the 16 March 1992 Government Resolution No. 169 ("the Resolution"). The Resolution sets forth that oil works may be performed by domestic or foreign legal and natural persons having obtained an oil work licence and the right to lease an oil field. The licences are issued by way of tender subject to resolution of the Government upon co-ordination with the Ministry of Environment and recommendation of the Oil Works Licence Commission, except for oil forecasting activity that is licensed by the State Geology Office.

Pursuant to the Resolution, the owner of the licence has the exclusive rights to prospect for new oilfields and explore and exploit the existing ones in a particular area. The scarceness of oil resources in Lithuanian onshore and offshore entrails of the earth, along with an exclusive nature of licensees' rights, pre determine very restricted entry into the oil work market. Therefore, the licences and the rights thereunder may be transferred to the third entities upon permission of the Government. The validity of the licence is not restricted in time, but the oil works should be performed according to the timetables set forth in their implementation plan.

Certain additional conditions for performance of oil works apply in case that investment of foreign capital is involved. The Resolution requires to ensure that national workers and specialists have a preferential opportunity to be employed in such companies. In addition to this, performance of oil works should be carried out using domestic material resources, services and technical equipment. However, the latter may be imported if there are no relevant resources in Lithuania or when the import is economically substantiated or necessary for introduction of new technologies.

Commerce in Oil and Oil Products

In accordance with the Law on Energy, engagement in import, export, wholesale and retail of certain kinds of unprepacked oil and oil products in Lithuania are subject to licensing in a manner prescribed by the Government. Currently, a licence must be obtained for the mentioned activities in respect of:

1. aviation gasoline;
2. jet fuel;
3. gasoline for cars (with octane range from 76 (80) to over 98);
4. liquid gas for cars;
5. diesel fuel;
6. fuel for in-house heaters and other type of gasoline;
7. fuel oil.

* It is worth mentioning that for the meantime Ignalina Nuclear Power Plant produces approximately 70% of the electric energy in Lithuania.