Awarding of contracts for the supply of electricity for the year 2023 by sectoral contracting authorities

Posted by: 11. 5. 2022
Update: 31/5/2024

Last year started with the collapse of a number of electricity and natural gas suppliers. Traders, who mostly chose the wrong purchase strategy of traded commodities, speculating on a drop in their prices, while the opposite happened, ended the supply of electricity or gas, in violation of the contracts with their customers. At the time of writing this article, more than twenty electricity and gas suppliers are known to have gone out of business, which has further increased the pressure on the capacities of the remaining active electricity and gas suppliers.

Due to the situation on the electricity market (both from the point of view of extremely high electricity prices and from the point of view of the limited possibilities of electricity suppliers due to the termination of the activities of a number of alternative suppliers), a number of customers have so far failed to choose an electricity supplier for 2023.

With regard to the escalation of the several-month-old Russian-Ukrainian disputes, which unexpectedly culminated on 24.2.2022/XNUMX/XNUMX with the start of the Russian army's invasion of Ukraine and subsequent economic sanctions imposed on the Russian Federation by the USA and the European Union, the situation on the energy market has further deteriorated dramatically in recent weeks.

Russia, as a dominant exporter of gas to the countries of Central and Eastern Europe, in response to imposed economic sanctions (or their further tightening) threatens to immediately stop the supply of oil and gas to the European Union.

For several months now, high electricity prices on commodity exchanges have primarily been driven by higher natural gas prices. As a fuel, natural gas is mainly used for the production of electricity in gas and steam-gas power plants and for heating buildings (which would otherwise have to be heated by other means, especially electricity).

A failure of natural gas supplies from Russia would represent a fundamental problem for the entire Central European region, which could realistically translate into a shortage of the commodity - electricity on the market in the entire Central European region, i.e. The Czech Republic, the Slovak Republic, Germany and other countries dependent on gas supplies from Russia.

In such a case, the power outage (i.e. termination of gas supplies from Russia) could only be fully replaced within a few years, but definitely not during 2023.

Due to the uncertainty regarding whether Russia (or the European Union) will proceed to end the supply/absorption of Russian gas to the European Union, or regarding the duration of the military conflict in Ukraine, there is a risk that in the event of a sudden termination of Russian gas supplies to the European Union, there would not be enough electricity on the electricity market in the Czech Republic for the year 2023 and entities that would not have the given commodity contractually secured for the given period, electricity supplies would be terminated, or secured only in emergency mode.

Considering the seriousness of today's situation, especially with regard to the ongoing risk of a sudden termination of Russian natural gas and oil supplies (whether by Russia or the European Union), it is desirable for a number of business entities to secure contractual electricity supplies for 2023 in the shortest possible time.

The subject of this treatise is the analysis of the possibility of the so-called sector contracting authority to select an electricity supplier outside the regime Act No. 134/2016 Coll., on the awarding of public contracts (hereinafter referred to as "ZZVZ"), or the possibility to carry out the procurement procedure in the ZZVZ regime so that the contract with the electricity supplier can be concluded in the shortest possible time.

By sector contracting authority, we mean primarily a public contracting authority when awarding a contract, which the contracting authority awards in the performance of a relevant activity (for the term relevant activity, see below). A sector contracting entity is also a person other than a public contracting entity, if it concerns the awarding of a public contract by a person who performs a relevant activity on the basis of a special or exclusive right pursuant to § 152 ZZVZ or the public contracting entity may directly or indirectly exercise dominant influence over this person.

Relevant activities are defined in § 152 ZZVZ and under them can be found activities in the fields of gas, heating, electricity, water, transport, telecommunications and others.

They are thus subject to the sectoral regime, which is in many respects less strict than the general public procurement regime for public contractors.

Provision § 159 of the ZZVZ states that companies operating in the field of gas, heating, electric power, or coal and oil extraction do not have to enter a supply contract under the ZZVZ regime fuel for production energy. However, the given specific exception will not be applicable to the supply of electricity, which in the vast majority of cases will not be used as fuel for energy production.

Pursuant to § 27 ZZVZ, the contracting authority does not have to enter orders for small-scale supplies, the estimated value of which does not exceed CZK 2.000.000 (excluding VAT), in the ZZVZ regime. However, for sectoral contracts for supplies, the financial limit for the necessity of awarding the contract in the ZZVZ regime is significantly higher.

According to the provisions of § 158, paragraph 1 of the ZZVZ, the contracting authority is not obliged to award a sectoral public contract in the procurement procedure, the estimated value of which does not reach the financial limit set by government order
No. 172/2016 Coll.

Provisions of § 2 paragraph 2 of Government Regulation No. 172/2016 Coll. stipulates that the financial limit for determining the above-limit sectoral public contract for supplies amounts to 11.247.000,- CZK.

However, if this financial limit is exceeded this exception will not apply and contracts for the supply of electricity will have to be awarded as above-limit sectoral public contracts in the ZZVZ regime.

In the case of above-limit sectoral public contracts for the supply of electricity, the question is whether the current situation does not authorize the contracting authority to award such a contract in a negotiated procedure without publication (JŘBU).

Although JŘBU formally represents one of the defined procurement procedures according to the ZZVZ, it is, however, an exception to the obligation to award over-limit contracts for supplies in one of the more transparent procurement regimes (open procedure, narrower procedure or negotiated procedure with publication).

The course of the entire negotiation process regarding publication is very informal, it is not bound by any minimum statutory time limits, and according to the mentioned procedure, the contract can be awarded (i.e., a contract can be concluded) within a few days, even to a pre-selected supplier.

In contrast to the procedure outside the ZZVZ regime, the contracting authority must prepare at least formally simple procurement documentation within the negotiation procedure without publication, which must then also be archived, including the related documentation on the selection of the supplier. Otherwise, however, the JŘBU procedure is very similar to awarding a contract outside the ZZVZ regime.

The ZZVZ sets strict conditions for the use of negotiation procedures without publication, which must also be interpreted restrictively.

The legal regulation of proceedings without publication is contained in the provisions of § 63 to § 67 ZZVZ, with specifics in § 162 ZZVZ for sectoral public contracts.

In our opinion, the provision on negotiations without publication, under which the situation assessed by us could be subordinated, is the provision of § 63 paragraph 5 of the ZZVZ, which provides: "The contracting authority may also use a negotiated procedure without publication if it is necessary as a result of an extremely urgent circumstance that the contracting authority could not foresee and did not even cause, and the deadlines for an open procedure, a narrower procedure or a negotiated procedure with publication cannot be met."

In order for the JŘBU to be applied in accordance with the provisions of § 63, paragraph 5 of the ZZVZ, the following three conditions must be cumulatively met:

(i) the use of the JŘBU is necessary as a result of an extremely urgent circumstance;
(ii) the contracting authority could not foresee these circumstances, nor did it cause them;
(iii) deadlines for open proceedings, restricted proceedings or negotiation proceedings with publication cannot be met.

Justification of the fulfillment of all the conditions foreseen by law must be part of the documentation for the public contract in the JŘBU regime.

and (i) Circumstances of extreme urgency

Extremely urgent circumstances are understood to mean a situation of an exceptional nature which, as a result, calls for an immediate solution to the situation that cannot be delayed and in which there is a risk of significant damage, or the emergence of such a threat or danger is imminent.

In general, circumstances of so-called force majeure (vis majeure) in the form of natural disasters and natural disasters, breakdown of energy equipment, war, etc. can be included here.

Due to the outbreak of war in Ukraine, its uncertain development and the resulting risks for the energy market (as described in the introduction), the condition of extremely urgent circumstances can be considered fulfilled.

Ad (ii) Existence of an unforeseeable situation which the contracting authority did not cause by its actions

The given unpredictability must be objective. It is not enough if only the contracting authority describes the situation as objectively unforeseeable. In our opinion, the contracting authorities could not have foreseen today's situation (the situation on the Czech energy market, the war in Ukraine, the imminent termination of Russian oil and gas supplies and, as a result, the imminent insufficient capacity of the remaining energy traders), and therefore could not even avert or respond to it prepare.

Ad (iii) Impossibility of meeting deadlines for open proceedings, narrower proceedings or negotiation proceedings with publication

The last condition presupposes that the public contract cannot be awarded in another type of procurement procedure, namely in an open procedure, a narrower procedure or a negotiation procedure with publication, even with shortened deadlines - see e.g. § 57 paragraph 2 letter b), § 59 paragraph 5, § 62 paragraph 3 ZZVZ.

The contracting authority must always carefully examine compliance with this time condition. Only after it comes to the conclusion that neither the shortening of the deadlines nor other circumstances will contribute to the timely solution of the urgent situation, it can proceed to the implementation of the JŘBU.

In terms of time, it is open management (compared to narrower proceedings or negotiated proceedings with publication) the least time-consuming. Conducting the procurement procedure for electricity supplies (until the conclusion of the contract with the selected supplier) in an open procedure under ideal conditions would require approx. one and a half to two months, realistically at least 3 months. However, this may be too late (due to the ongoing war in Ukraine, the existing risk of ending the supply of Russian gas and oil, and the resulting consequences) for sector contractors.

With regard to the above, it cannot be ruled out that a number of sectoral contracting authorities will meet the conditions for the application of § 63, paragraph 5 of the ZZVZ, and the selection of an electricity supplier for the year 2023 in a negotiation procedure without publication may be an interesting solution to such a situation for them.

The law does not specify to the contracting authority whether, in the case of extreme urgency, it should contact one or more suppliers, or the law does not explicitly assume that only one supplier should be approached. However, with regard to specific situations and the necessity of solving them, it will always be necessary to assess whether there are more potential suppliers at all, and if so, whether it is expedient or not to approach them for reasons of time (which are essential in the case of the use of JŘBU according to this paragraph).