The Story of a Gas Network with the Happy End

27.07.2020

The Association of European Businesses

Commercial real properties, such as warehouses, industrial and office buildings, are very often heated by natural or liquefied gas-fuelled boilers. The gas is brought to the boiler houses along gas consumption networks that, up to the point of connection to the gas lines of the gas-distribution organisation, also usually belong to the owners of commercial real properties. We have found that such owners often tend to forget about Russia’s special legislative requirements on their gas networks and there can be unfortunate consequences if these are ignored. Let’s take a look at these requirements, their possible adverse impact and how to avoid this. 

What must unprofessional owners of gas networks bear in mind? 

Gas consuming lines leading to buildings are hazardous industrial facilities (HIF) if the pressure of the natural/liquefied gas in them exceeds 0.005 Mpa. Depending on the pressure in the pipe, they may be included in HIF hazard class II or III. The boiler house of a building (whether it is part of the building or a separate unit) may also be classed as an HIF, depending on the quantity of hazardous substances inside it. 

Remember that operation of HIF of hazard classes I, II and III requires a licence. 

Operation of an HIF without a licence might entail liability under Article 171 of the Russian Federation Criminal Code for engaging in unlicensed business, should such actions be associated with deriving large or very large income or cause major damage1. The potential scale of criminal liability in this instance ranges from fines to a five year prison term. The limitation term for imposing criminal liability is six years from when the crime was committed, meaning from when a licence was eventually obtained. The licence requirement for operating an HIF and its consequences fully apply to owners of gas networks and boiler houses attached to HIF. 

Another point is that the owner of an HIF has to observe special industrial safety rules, including: registering the HIF on a special register, concluding an agreement with an emergency rescue service and an HIF-owner civil liability insurance agreement, and so on.

Оperation of gas networks and boiler houses that are HIF in breach of the industrial safety rules, such as without a licence, might be suspended or discontinued through an administrative or civil-law procedure, which will adversely affect the gas supply (and, as a consequence, the heat supply) to the real property. 

Who is responsible for observing the safe operating rules? 

It is the owner of HIF gas networks and boiler houses that is responsible for obtaining a licence and observing the industrial safety rules. This means the person that either owns the HIF or holds it on other legal grounds and that uses the HIF, possibly the owner or lessee of the HIF. It is important for the given person to possess and be able to use the HIF.  

What mistakes are made in operating gas networks and boiler houses? 

Owners of HIF gas networks and boiler houses often make the mistake of hiring an organisation to exercise operational control over the state of the lines and the boiler houses, maintain and repair them, thinking that they have thus handed over the HIF “for operation” by a professional organisation so they do not need an HIF operating licence themselves. This is a common misconception: unless full possession and use of the HIF is handed over to the “operating” organisation, it is not deemed to be its holder. In this case, the true owner of the HIF remains responsible for its operation so the HIF operating licence is needed by this entity, not the engaged “operating” organisation. 

The second most common error is to lease the HIF gas networks and boiler houses fictitiously to third parties. This means the lease is not intended for transferring them into actual possession and use for gaining benefits. For instance, such a lease does not provide for possession of the gas service lines and boilers to be transferred. Or there is no true economic purpose behind such a lease: the subject is leased out but the lessee does not use it. In contrast, a real lease for property must have an economic purpose (for example, a boiler house and gas networks are leased out, the lessee operates the boiler house and supplies hot water to the HIF owner). Sham leases are concluded, often at a nominal price, merely for the sake of appearances and without any intention of creating legal consequences. Their purpose is to conceal actual operation of the HIF by its owner, making them sham agreements and, as a consequence, transactions that are null and void (Art. 170 of the RF Civil Code). If this is the case, there is a risk that the entity actually possessing the HIF (i.e. its owner) might be recognised as de facto operating a HIF  without a licence. 

There is a third common mistake: lease of the gas pipelines and boiler house to an entity lacking an HIF operating licence (even if this is a true lease and the lessee actually uses the leased HIF). The HIF owner is responsible for what happens to the HIF and must manage it to the benefit of the person entitled to use the HIF, otherwise the HIF owner might also, alongside the lessee, be held liable for making improper use of the HIF. 

What are the possible solutions?

Holders of gas networks and boiler houses classed as HIF are recommended to follow these rules:  

  • Ensure that the owner of the gas networks and boiler houses has a licence for operating HIF and complies with the industrial safety rules. These matters should be handled before or at the time operation of the gas service lines and boiler houses is launched, depending on the procedure for obtaining the requisite permits. 
  • If it is decided to lease out the HIF gas networks and boiler houses, make sure that the lessee has an HIF operating licence for the given address or that it obtains such a licence in the near future. Remember that lease of gas networks and boiler houses must have a business purpose, clearly presupposing subsequent conclusion of heat supply agreement(s) by the lessee of the facilities as a heat supply organisation. 
  • If your company purchases gas networks and boiler houses as part of other properties, after acquiring the title to these and until your company obtains an HIF operating licence, we recommend having the seller of the property retain possession and use of these assets, and concluding  a temporary heat supply agreement with them. As an alternative, if the period for obtaining the licence coincides with the end of the heating season, operation of the gas networks and boiler rooms could be suspended until the HIF operating licence is obtained and observance of the other industrial safety rules ensured. 

1 Art. 171 of the RF Criminal Code provides for liability for doing unlicensed business producing an income of over RUB 2.25 m or causing harm of over RUB 2.25 m.

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