This year over a thousand of the country's largest buyers won the right to shop for natural gas on the free market. But eight months into the year they are still buying it from the former state-run monopoly and paying more for the privilege.

"The situation here defies economic logic," said Jiří Gavor, an industry analyst who tracks the market and is familiar with RWE Transgas, the dominant supplier. "The market is facing a paradoxical situation when wholesale customers who are supposed to enjoy lower prices than retail customers [end up paying more]."

Angry because the rates are so high, 11 of those buyers, who purchase over 15 million cubic meters (529.7 million cubic feet) of gas annually, have filed a complaint with the Energy Regulatory Office (ERÚ) asking it to review their contracts with Transgas and its distribution companies to determine fairness.

Heat producer MVV Energie went a step further. Earlier this month, it asked the Anti-Monopoly Office to investigate whether Transgas is abusing its position as the dominant player on the market and warned that if the gas giant's rates are not reduced to reflect the Czech market it will be forced to hike prices of household heat and hot water to cover costs.

One-shop market

In spite of the government's attempt to liberalize the natural gas market by giving the country's largest buyers the freedom to shop for deals, the buyers found no suitors on the market except their current supplier.

"You can look for [new suppliers] for as long as you want, but this year there is no other supplier on this market. And it is still a big question if there will be one starting next year," said Vlastimír Kontrik, economic and sales director at Energetika Vítkovice, an Ostrava-based supplier of a variety of energy products to corporate customers.

Last September, Energetika Vítkovice approached several possible suppliers, both in the Czech Republic and abroad, according to Kontrik. None of them had the capability to put a solid offer on the table, forcing Vítkovice to turn to Severomoravská plynárenská, a distribution company controlled by Transgas, for its needs.

MVV Energie ran into similar problems.

"The possibility to choose a supplier is in line with the law but does not exist in reality," said Václav Hrach, company executive manager. Though one foreign supplier was willing to deliver gas at a fair price, it wanted to leave the gas at the border, leaving further transportation up to the buyers — too costly for MVV Energie because Transgas controls the equipment and storage rates are not subject to regulation.

"This is not interesting to us because Transgas is in control of the whole gas industry, including transit and final distribution," Hrach said. Transgas also controls all the gas storage space. Storage space prices are not subject to regulation so Transgas can charge what they want and often make it expensive for third parties to use them.

Growing pains

RWE Transgas denied accusations of abusing its market position, and said recent price increases are a result of soaring oil prices on international markets. Its long-term purchasing agreements with producers contain a clause that calls for an increase in natural gas prices when oil prices rise. Oil prices have soared to over $64 a barrel this year, pushing natural gas prices higher.

"The Czech gas market is in the first stage of liberalization and we are convinced that some of the problems hinge on the fact that our customers and potential competitors are still getting ready for the new conditions," said Transgas' spokesman Martin Chalupský. "These are growing pains of the liberalization."

According to industry analyst Gavor, Transgas' reasoning has some ground because the largest buyers were the first ones to feel the impact of the dramatic increase of natural gas prices on international markets.

"The ERÚ buffered the effect of this increase for small customers by artificially keeping the price down while large customers felt the effect to the full extent," he said.

However, Blahoslav Němeček, deputy chair and regulation director at the ERÚ, indicated that his office is concerned about the effect the increase in prices of natural gas is having on large clients.

"There is a number of issues in the contracts between Transgas and those customers that are not quite in line with the law," Němeček said. The ERÚ suspects that Transgas may be breaching the pricing law that forbids dominant market players to abuse their position, Němeček added.

The liberalization of the Czech natural gas market mandated by the European Union began this year. It allowed customers who buy 15 million cubic meters of gas or more a year to choose their own supplier. Starting in 2006, any company will be entitled to shop for new suppliers, and in 2007 the market will be open to households.