OREANDA-NEWS. October 30, 2014. “In the past six years the proportion of independent companies in gas production increased from 17.4% to 25.4%”, said Deputy Head of the Federal Antimonopoly Service (FAS Russia), Anatoly Golomolzin at the Round Table on the “Concept of Developing the Domestic Gas Market: Objectives and Solutions”.

“In domestic supplies of natural gas the share of independent organizations is already around 40%, and the share of “Gazprom” – slightly over 60%. It means that the market already does not have the monopolist supplier. It is possible to talk about the company with the dominant position, the share of which, by the way, decreases year by year”, emphasized the speaker. It became possible, particularly, due to structural transformations in the industry. Types of activities were organizationally split off: extraction, transportation, distribution, wholesale and retail sales of gas. For the first time in Russian law the rules for non-discriminatory access to the main gas pipelines and the rules for non-discriminatory access to the distribution gas pipelines were adopted. Continuous control by the antimonopoly authority also guarantees possibility of access of independent organizations to the “pipe”.

The FAS representative stated that “it does not mean that all problems are solved. For instance, when preparing the meeting of the Presidential Fuel-and Energy Commission on gas issues, we, together with the members of the Working Group formed to this purpose, concluded that nobody can identify the level of the market prices for gas. Unlike the market of oil products there are no indices of spot markets of organized (exchange) trading, indices of free prices on the off-exchange market, price indices on comparable foreign markets (the so-called Net Back). Amazingly, there are no economically substantiated tariffs for the gas transportation services that fit the general economic conditions on the market”.

In 2005, FAS Expert Council discussed with the Institute of Energy Research of the Russian Academy of Sciences various pricing options for natural gas and their impact upon economic development. In particular, the Expert Council evaluated the options of:

1) Increasing domestic prices sharply to the level of global prices

2) Constraining price growth behind the inflation rate, and

3) Introducing a two-sector model, with non-regulated prices of independent gas producers and gas suppliers for new consumers, and the regulated tariffs increased stage-by-stage to the level of comparable prices on the external market, adjusted to protect the domestic market (Net Back).

According to the estimates, in the long-term the first and second options would reduce GDP growth rates, while the third option would enable a sustainable growth of the national economy (GDP).

In the absence of sufficient competition on the domestic gas market, an impact of the sales conditions on the external market upon financial and economic performance of “Gazprom” OJSC, underestimated prices on the domestic market in comparison with foreign gas prices, and in comparison with prices on other types of fuel (coal, residual oil) on the Russian market, in 2006 RF Government made a decision to regulate gas tariffs based on a stage-by-stage approximation to the Net Back level. In reality, however, the method is not applied in full yet. The contract prices pegged to the value of the basket of oil and oil products rather than actual European hubs were used as prices on comparable markets. The system of adjusting coefficients neutralized the stage-by-stage tariff-changing pattern. As a result, regulation is reduced to the method of tariff indexing based on macroeconomic constraints. The question of whether the level of the tariff taken as the base is the market level remains open.

The system of gas transportation tariff–setting remains controversial and creates discriminatory conditions for independent market participants. They have to pay for the transportation services via the main gas pipelines according to the tariffs, while for “Gazprom” OJSC the transportation costs are included in the wholesale gas prices. Gas transportation companies (“Transgaz”) incur significant costs leasing core assets from their parent company - “Gazprom”. For independent companies this item affect the tariff level and trends while for the “Gazprom” group of persons it only influences their accounting reporting. The Presidential Fuel-and Energy Commission determined the need to form the common principles of tariff calculations for gas transportation for independent companies and “Gazprom”. It will encourage a transition from regulating wholesale gas prices to regulating the tariffs for transportation services.

The common tariff for gas transportation is a necessary but not a sufficient condition for market pricing. Indices of exchange spot prices for gas that comply with the principles of market pricing established by the law on competition protection and organized trading must be established. It is necessary to form off-exchange price indices of the non-regulated market of direct gas-supply contracts. Sustainable price indices on the comparable foreign markets also must be formed.

To execute the decisions of the Presidential Fuel-and Energy Commission, FAS formed a Working Group with involvement of the Bank of Russia, the Ministry of Energy, SPIMEX, “RDK” clearing company, the group of persons of “Gazprom” OJSC, that supported a set of organizational, contractual, normative legal measures for launching exchange trading with natural gas in October, and then in November and December 2014. The objective is to ensure exchange trading for month, week and day ahead starting already in 2015. Overall, around 35 billon m3 of gas will be sold annually. FAS also drafted amendments to the acts of RF Government, enabling off-exchange prices for natural gas based on exchange registration of transactions by producers extracting over 1 billon m3 per year.

In accord with the Federal Law “On Protection of Competition” and the Government Decree “On Information Disclosure Standards…”, FAS approved the forms, deadlines and frequency of information disclosures by natural monopolies rendering gas transportation services via the main and distribution gas pipelines, which are significant for the market.

A very important work concern devising new versions of the rules of non-discriminatory access to the main gas pipelines and the rules of non-discriminatory access to the distribution gas pipelines, which is now at the final stage. The documents regulate defining free capacities, the procedures for filling applications and establishing contractual relations, the issues of technological connection to gas networks, etc.

Devising the policy on gas storage services is no less esential. Developing the sector of independent gas producers makes the issue of rendering services by the companies operating underground gas storage facilities increasingly more important. Analysis shoews that in different periods of time the level of tariffs for storage services can be higher or lower for the companies included and not included in the “Gazprom” group of persons. In the past five years the tariffs for independent organizations exceeded the tariffs for “Gazprom” organizations by12 - 35%. Independent companies find it necessary to either introduce government regulation of tariffs or decrease their level and peg the indexation rate to the tariff changing rates on gas transportation services. Having discussed FAS Report, the Government Fuel-and Energy Commission recommended ensuring non-discriminatory pricing conditions.

Technical maintenance of house gas equipment has been an issue for a long time, both in terms of poor compliance with the safety standards as well as economic inefficiency of the sector performance. Regional FAS Offices regularly investigate a considerable number of cases on imposing upon consumers and overrating the costs of technical maintenance that are already comparable with the costs of gas. A recent ruling of the Supreme Court on the issue again puts on the agenda the problem of access of not only gas-distributing companies but also other licensed market participants to these activities, developing the segment on the basis of competition, security, reliability and the quality of technical maintenance of house gas equipment. These problems are in the focus of the relevant draft laws.

Qualitative changes take place on the market of liquefied hydrocarbon gases. An analysis proved the oligopolistic nature of the market at the national scale. Conditions should be created for developing competition in this field, particularly, by increasing pricing transparency in exchange and off-exchange trading. FAS and the Ministry of Energy are at the final stage of discussing draft amendments to their joint Order. It will formalize the quantitative parameters of exchange trading liquidity, including the lowest LHG volumes sold by the dominant companies, as required for these purposes, and evenness and regularity of trading. FAS also drafted amendments to a Decree of RF Government regulating obligations to register off-exchange LHG transactions.