Russian Watchdog Rises to New Role as Tariffs Regulator
Russia's Federal Antimonopoly Service (FAS) keeps a close eye on antitrust legislation in both crude oil and oil products trading and has recently taken charge of regulating the country's tariffs, including those for oil pipelines. In the second part of an interview with Nefte Compass, FAS deputy head Anatoly Golomolzin talks about the problems the agency is facing and how it is tackling them (NC Dec.22'16).
Q: FAS recently took on the new function of being the country's tariff's regulator. Since then, debates over tariffs, including those with Transneft, have intensified. Why have such issues come to the fore?
A: Actually, FAS earlier had an experience as a tariff regulator: we were the tariff regulator when we were the antimonopoly policy ministry. At the ministry, I was in charge of the issues of tariff regulation in transport (railway, ports, airports) and communication. Tariff regulation and deregulation measures of that times have contributed to the development and upgrade of not only regulated industries, but also to the growth of the economy on the whole. Later, when the function of tariff regulation was passed to the Federal Tariff Service in 2004, I was on the regulator's board. Moreover, FAS is an executive body that controls non-discriminatory access rules. We have developed those rules, which are approved by the Russian government. So we already had tariff regulation experience and were already controlling natural monopolies, including Transneft, under the antitrust regulation when we actually became in charge of the issues in 2015. As far as current tariff decisions are concerned, there are two areas -- crude oil and petroleum products transportation. If we talk about the former, this is the area where parameters are understandable and predictable. Tariff regulation is carried out on a long-term basis. The government has approved the order, which sets a plan for tariff setting until 2025. The increase in tariffs is linked to the inflation rate. Tariffs rise at the inflation rate minus 10% to 2018 and to the level of inflation starting from 2018. When setting the tariff, fundamentally changing macroeconomic conditions can be discussed, which could serve as the basis for the scrapping of this long-term plan. However, we find no grounds to amend it. We had such a discussion last year, but it finally stopped quickly after FAS made its final decision. Now there are new debates. The company has the right to declare its interests. The final decision is made in the prescribed way by the FAS board.
A: This decision was taken on Dec. 20.
Q: Was it a decision on the tariffs for the Transneft pipeline system as a whole or for individual pipelines?
Q: Transneft started pumping crude oil via the Zapolyarye-Pur-Pe pipeline using a not-yet-approved shipping tariff as the company and FAS have yet to agree on the size of the tariff. How is this possible?
A: If the rate is not set, the pumping is based on contracts with companies. When the rate is set, shipping fees would be recalculated according to the accepted rate.
Q: Is it possible to avoid tariff disputes in the future?
A: There are different interests between those who provide services and those who consume these services. The regulator should find a proper balance of interests.
Q: FAS raised the issue of the deregulation of the petroleum products transportation sphere. Where do the discussions stand now?
A: In the petroleum products sphere there currently exists a flexible tariff policy. Tariffs are set not linked to Transneft costs, but to the rail transport environment. But the tariff situation is changing for railway transportation. There is a tariff corridor, within which Russian Railways might change tariffs for railway shipments. Tariffs are partly deregulated -- such as services for providing railway wagons -- and rates are flexible. Besides, there are a number of other ways for petroleum products shipments, including road transport. This segment is constantly expanding, partly because the railroad doesn't work very well. The share of Transneft in the market of transport services is insignificant compared to Russian Railways. It is comparable to road transport -- it is 10%-15% in the domestic market and nearly 50% for export, taking into account combined shipments. The law on natural monopolies says that in this situation, the regulator does not have the right to restrain the transfer of natural monopolies to a competitive market. So there are now all the prerequisites to deregulate this segment.
Q: When could it happen?
A: This question is now on the agenda. This issue is significant in terms of institutional changes, so we should discuss it at the government level. After this, a final decision on the deregulation of tariffs for pipeline shipments of light petroleum products will be made. We think that this will happen during 2017.
Q: Does it mean that Transneft will establish tariffs itself?
A: Yes, but with the understanding of the market and its reaction. The company has no market power to influence the situation unilaterally. This will be an agreed rate. Transneft already has agreed tariffs for oil shipments. It is common practice to help develop pipeline construction, expand the narrow parts.
Q: Another question on the agenda is about giving Transneft a new status as the operator of commodity supplies. What is the plan?
A: This is the question of changing Transneft status and expanding it. It would be not only a products transportation company, but also the operator of commodity supply. We are changing its role for the exchange trading. We have exchange-trading and petroleum products supplies are made from each refinery on two bases: rail and pipeline. And this gives additional flexibility when there are repairs or a halt at one of the structures. Now we are discussing the possibility of exchange trading not only on the basis of separate refineries, but on the basis of the product transportation system of Transneft as a whole. Moreover, the company will function as an operator of commodity supply, exercising control over petroleum products, decreased delivery dates, guarantees for property hand-over rights to the participants of the exchange deals. We welcome the move. We have an appropriate agreement between FAS, Transneft and Spimex. At the same time, we also discuss the deregulation of oil cargo transportation by rail.
We already had and will have more test-trading for oil cargoes at Spimex to develop regular supplies. Today, at least 10% of oil products sent to the domestic market are traded at the exchange, but we have problems with further transportation of those products by rail. We want to change that. If there is a stable and regular exchange trading, it is necessary to have regular and stable supplies. So now we are working on having a schedule for rail shipments for the major consumption directions of oil products. As a result, all participants will understand when and at what price the product sold on the stock exchange will be delivered to the consumer. Thus, we can create the corresponding price indicators.
Q: How is products exchange-trading developing? In 2008-10, FAS initiated a number of cases against oil companies for violating antitrust laws in the market. Has the situation changed?
A: The worst situation was in 2008-10 during the gasoil crisis, when we had more than 100 antitrust cases against oil companies at regional levels. As a result, we were forced to initiate a so-called "three waves" of cases of violations of the antimonopoly legislation against vertically integrated oil companies on the federal wholesale market to stop these transgressions. Following those cases, record penalties totaling more than $700 million were ordered, but the order was given on the need for exchange-trading. The exchange has been set up, on which these trades began, and in 2011-12 we already reached trading liquidity. The companies were ordered to sell at least 10% of the amount of products supplied to the domestic market through the exchange. Now the volumes are constantly growing not because of orders from us, but at the request of oil companies themselves. The figure now stands at 15%-20%. Today, the exchange trades around 15 million-17 million tons of oil products - diesel, gasoline, jet fuel and fuel oil. The trading volume is more than 500 billion rubles a year. Non-exchange deals are also reported to the exchange and there are regular publication of both exchange and non-exchange price indicators. So the situation has radically changed. All market participants started to understand that they can buy products both through direct contracts with oil companies, and on the exchange. The exchange helped to optimize the market as a whole. And today, contracts inked outside the exchange are looking at price indicators on the exchange. In addition, oil companies have approved the so-called trade policies, which set trading rules and working principles on non-discriminatory terms with third parties given the oligopoly nature of the petroleum products market. So the companies' business in this part has become open and transparent.
Q: So there are no proceedings against the oil companies today, right?
A: There are currently only a few cases of antitrust legislation violations. At the same time, we have used other levers: there were so-called four-sided agreements signed on refinery modernization between FAS, Rostekhnadzor, Rosstandart and oil companies. In principle, refinery modernization is not our job, but there was a threat of insufficient supply, which means that there was a threat of rising prices, so we were forced to intervene. We monitored these processes and used different methods of economic regulation. For example, there are different excise taxes for high- and low-grade fuels, diesel and gasoline. This flexible policy allows the situation on the market to improve. Over the past five years, there was a full transition from the Euro-2 fuel to Euro-5 standards. Now the situation is relatively favorable for market participants and regulators, so we are working in the direction of the further development of a commercial market infrastructure for petroleum products and crude oil.
Q: Spimex in late November launched trading of Urals futures contracts. FAS has actively participated in the launch of this contract. How do you see prospects for Urals becoming a new benchmark with the help of the contract? Are there any plans to oblige oil companies to sell certain amounts of crude oil through the exchange?
A: For the Russian petroleum products market with its oligopoly nature (which is similar to most national markets in other countries), this measure was effective. But we think it is not necessary to set obligatory rules for Russian crude exporters. There is greater need for new stable world crude price indicators, for cutting the gap between paper contracts and real contracts. Moreover, world prices have their impact on pricing on the national markets of oil exporting and importing countries, both bigger and smaller states. International players have direct access to Spimex trading, which is why the launch of the export futures contract required international backing. It is important that the project was developed considering the international cooperation experience of antimonopoly services and financial regulators. It fully meets the terms of a declaration of the international working group, comprising representatives of 20 antitrust authorities from various countries, including Russia, Austria, Portugal, Germany, Kazakhstan, Ukraine, the US and the UK, which was approved in 2013 by the competition committee of the Organization for Economic Cooperation and Development (OECD) and the UN Conference on Trade and Development. The offers of antitrust bodies included boosting pricing mechanisms' transparency and exchange trading of both real goods and derivatives. The project also fits the recommendations of International Organization of Securities Commissions, supported by the G20. Their recommendations are aimed at improving the activities of oil price-reporting agencies and based on this, at improving the trading of derivatives. Russia's experience of exchange trading of both real goods and derivatives fits the world best practices and provides optimism for the success of Urals futures trading.
Q: What has been done so far?
A: Parameters and terms for the deliverable futures contract were designed, all the preparatory and tutor activities on exchange trading, clearing, supplies under exchange contracts, risk management procedures, market-making, were done. All the regulations were agreed between the commercial - Spimex and RDK clearing - and technological - Transneft - sides in order to provide for logistics, export schedules and supplies based on exchange trading. We also prepared oil companies so that they were able to supply the crude under futures contracts. In early November, we had a Urals day devoted to the Urals contract launch. Participants, who included some 230 representatives from 140 oil companies from Russia and abroad, leading oil traders, financial institutions and market experts, have a strong understanding of the stable level of supplies and quality of the Russian crude, and the high potential of the contract as a future benchmark. Stable trading of the contract should help form the new benchmark for Russian crude. The development of the derivatives market and trading of real goods provide for additional opportunities for Russia to position itself as one of the world's financial centers.
Источник: Energy Intelligence