Property rights crisis in the distribution segment of Ukraine's natural gas market
Authors:   State Organization “Institute for Economics and Forecasting, NAS of Ukraine”, Yuhimets Roman 
Published: December 2024

During the time of independent Ukraine's existence, the authorized state bodies have not developed effective mechanisms for the use of state-owned gas distribution networks by private operators. Despite the state being the de facto owner of these networks, it was unable to receive appropriate compensation for their operation, and no incentives were created for the modernization of the networks. Meanwhile, private operators were motivated to consistently report a decrease in the value of such assets. Another complex issue, in terms of the efficiency and fairness of managing the gas distribution system, is the ownership of networks built with consumer funds and transferred to gas distribution network operators for operation. The lack of clear understanding regarding the ownership of gas transportation networks results in significant wear and tear of the networks and substantial production and technical losses. Gas transmission operators are not interested in making significant investments in the renewal and development of networks, as they do not own them, and there are no other obligations that could incentivize such activities. The state does not receive any income from the use of state property by economic entities. In the context of the Russian-Ukrainian war, the issue of property rights and further investments in the development of gas distribution networks has once again come to the forefront. The need to adapt the energy system to the new challenges of the war necessitates the formation of a decentralized model of the national energy system. In the gas sector, this means that at the local level, local self-government bodies will need to take the initiative in implementing small energy projects to meet the energy supply demands of the local population, such as the construction of various types of gas cogeneration plants. The construction of such projects will require the adaptation and development of the existing gas distribution networks to meet new requirements. The formation of a new decentralized model of the national energy network is impossible without resolving the old problems related to the ownership rights of gas distribution networks and establishing a market-based tariff setting for the operation of these networks.
The article analyzes the theoretical prerequisites for the emergence of the property rights crisis in the distribution segment of the natural gas market based on the theory of property rights. Through retrospective analysis, the main flaws in the state energy policy in the management of state-owned gas distribution networks are identified, which led to the current property rights crisis and increased transaction costs among entities in Ukraine’s natural gas market. Based on the obtained results and taking into account foreign experience in the privatization and regulation of the economic activities of gas distribution operators, the author proposes various ways to address the problems of managing property rights for the distribution gas networks.