ANATOLY GOLOMOLZIN DISCUSSED PROSPECTS OF PRO-COMPETITIVE TARIFF REGULATION

At the outset of his speech during the Plenary session of the National Tariff Regulation Workshop – 2019 in Crimea, Deputy Head of FAS Anatoly Golomolzin outlined the main features of a new, pro-competitive tariff policy pursued by FAS since it undertook the functions of the tariff regulator

Deputy Head of FAS explained that it comprises efforts aimed at:

• Stage-by-stage elimination of cross-subsidizing;

• Rebalancing tariffs, applying indicators for the markets comparable with regulated markets and adjacent markets;

• Rejecting the “costs plus” principles and shifting to market indicators through use of the “inflation minus” principle;

• Making decisions on introducing, changing, terminating regulation and control based on market analysis;

• Digitalizing decision-making procedures;

• Launching long-term tariff policy (in view of the infrastructure life cycle, prospective market changes, sustainable innovative economic growth);

• Establishing the role of the regulator in shaping a business-model of development, creating conditions for investments, entry of new market players, enhancing efficiency of incumbents.

He reminded that FAS position had been supported by market players and experts in the course of devising prospective, 2025 pro-competitive tariff policy, which should be “smart, light, electronic, fair, minimizing, strategic, taking into account the balance of interests between consumers and suppliers, three-pronged (supporting profit-making capacity, accessibility, control), distributed, considering regional practices”, and “that plenty of the things suggested earlier have been implemented in practice”.

Anatoly Golomolzinemphasized the significance of the fact that according to an order issued by the President of Russia, tariff policy is included in the main directions of state competition policy. The focus in the Order is put on comparable markets and long term tariff regulation.

He added that “not only tariff-setting methodology and practice are improving, technological connection to networks is getting cheaper and accelerates, the practice of regulatory contracts is developing”.

Deputy Head of FAS pointed out that developing and implementing marginal pricing for estimating regulated tariffs for the services of publically-accessible telecommunications and postal services is recognized the best achievement of sectoral units of FAS Central Office in 2018.

The Government¹ instructed FAS to devise and approve the procedure for estimating regulated tariffs for the services of publically-accessible telecommunications and postal services using marginal pricing that enables profit-making from efficient cost management based on comparing operators’ efficiency indicators with the efficiency indicators of the economy. FAS² approved the procedures to estimate regulated tariffs for the services of publically-accessible telecommunications and postal services with use of marginal pricing, that allows to gain profit from efficient cost management.

Deputy Head of FAS pointed out that the new regulatory method has been applied with regard to “Rostelecom” PJSC since 2019.

He said: “The company is able to set tariffs at the average annual tariff changing no higher than 3.2%, which is 1.4% lower the projected inflation level (4.6%), making independent decisions on the service basket, but based on not exceeding the tariff changes for each particular service higher than the inflation level. After the initial marginal price (the base tariff) is set, complex regulatory administering through annual control of the producer’s costs is not required for the next five years. The base tariff includes the operating costs and the standard earning power of the capital used to provide communications services. Providers can increase tariffs for the CPI level in the economy in general minus the predicted cost saving (X–factor), or “adjustments for efficiency improvement”. For the first time X-factor was defined in the practice of Russian tariff regulation as part of economic estimates based on the ratio of performance parameters for both communication providers and the economy in general”.

“Marginal pricing based on comparison of communication providers’ efficiency with economic efficiency enables profit gaining from efficient costs management. It will subdue tariff policy of regulated entities to the rules reproducing discipline of a particular market. This method (as a type of methods applied in comparative analysis of efficiency of natural monopolies, specified in the Treaty on the Eurasian Economic Union) can be used in other fields of activities and other EAEU countries, enhancing efficiency of regulatory practice and flexibility of regulated entities. It also marks the stage of transition from flexible tariff regulation to deregulation, when the sphere of regulated tariffs is shrinking and free pricing is expanding”, continued Anatoly Golomolzin.

Deputy Head of FAS underlined that the best achievements in FAS methods and practice of tariff regulation, including communications sectors, and regulatory requirements set by the EAEU Treaty should be taken into account in FAS legislative activity. In his opinion, a “narrow framing” of tariff regulation methods in the draft Law “On the basics of tariff regulation” – comparative analysis (benchmarking)” should be replaced with the wording from the EAEU Treaty – “comparative analysis of performance of natural monopolies”. A similarly “narrow framing” in the draft law – “setting prices (tariffs) by setting estimate’s formulae by the regulator” should be replaced with “setting prices (tariffs), including their marginal levels, based on the approved methodology (formula) and the rules for applying them”.

“Application of the law on the basics of tariff regulation must not be expanded to competitive spheres. In the draft Law “On amendments to the Law “On Protection of Competition” and “On invalidating  the Law “On natural monopolies”, the concept of a holder of natural monopoly should be clarified based on  presence (strengthening) of the dominant position of economic entities - holders of natural monopolies due to possessing technological and (or) commercial infrastructure facilities; the Register of holders of natural monopolies should be made not just an information resource but a data base that incur legal consequences; and the “services of publically-accessible postal services” should be returned in the list of natural monopolies”, concluded Anatoly Golomolzin.

Reference:

¹ № 922 Decree of the Government of the Russian Federation of 06.08.2018

² № 126/19 FAS Order of 05.02.2019