ANATOLY GOLOMOLZIN: THE ROLE OF CONSUMERS MUST INCREASE WITH DEVELOPING GAS MARKETS AND MARKET PRICING

Deputy Head of FAS discussed the measures towards developing gas market in light of the National Competition Development Plan approved by the President of Russia and 2018 – 2020 Road Map for competition envelopment passed by the Government. On 7 December 2018, he was a speaker at the XVI International Forum – “Russian Gas – 2018”.

Deputy Head of FAS Anatoly Golomolzin outlined the steps for advancing competition in the gas markets in the Russian Federation.

He reported that under theNational Competition Development Plan approved by the President at the end of December 2017, Russian economy will be further developed, particularly, through on-exchange trading, establishing exchange and off-exchange price indices, developing on-exchange trading by market sectors, including gas market. A transition to market pricing will be done through on- and off-exchange price indicators for natural gas, supported, in particular, by increased on-exchange sales of natural gas, establishing on-and off-exchange indices.

Deputy Head of FAS added that in summer 2018 the Government had approved Road Maps on the main sectors and markets. For example, the Road Map with systemic measures towards developing on-exchange trading with natural gas, establishing market prices and attracting economic entities to exchange trade.

He emphasized that market pricing is the key element of the national gas market:

“I would say we are not at the stage of establishing the gas market, we are at the stage of its development – it has gone through structural transformations at “Gazprom”: companies producing, transporting, distributing and selling gas are split up; independent gas producers operate  that supply it to the market, under free pricing, and most large industrial consumers receive gas at free prices. And we will move on under the conditions of price deregulation. The next question – how prices will be formed? And exchange trading plays the most important role here.”

Natural gas supply market in Russia is no longer monopolistic, but it remains highly concentrated. Three companies – “Gazprom” PJSC, “Novatek” PJSC and “Rosneft” NK” PJSC have collective dominance and their cumulative share is over 70 %. The share of each company exceeds 8 %.

“It forms the grounds to move further towards price deregulation. Obviously, just to make a decision to deregulate would facilitate monopolistic pricing when prices are formed by only three players in friendly competition, which naturally can lead to adverse consequences. Specially tuned mechanisms protect consumers and markets, including development of exchange trade when consumers can put pressure on prices”, said the speaker.

Deputy Head of FAS discussed in detail the gas supply Road Map approved by the Government. It consists of three blocks: the first concerns access to the services of natural monopolies, particularly, improving the tariff-setting system. The second focuses on the measures for developing on-exchange trading with natural gas. The third block covers the measures necessary to develop the domestic gas market: “to develop the processes and the state of the markets that are already established”.

To execute the Road Map, a Government Decree is drafted and is under discussion with the interested departments and organizations regarding development of market principles of pricing on the domestic gas market. The draft Decree abolishes state regulation of wholesale gas prices (except for the population and equated groups) of “Gazprom” PJSC and its affiliated persons; and sets a unified tariff for gas transportation via the main gas pipelines for independent gas producers, as well as for “Gazprom” PJSC and its affiliated persons.

Deputy Head of FAS reported that improving tariff-setting for gas transportation services is being discussed, where the key condition is the equality of the working environment of independent companies and “Gazprom” PJSC:

“The current methods should be refined to evaluate whether the basic tariff is economically reasonable, so it will be possible to rely on it and make decisions on long-term tariff indexation”.

In view of the current market changes and in order to improve contractual relations between market players, a new pricing model based on the “entry-exit” principle is being developed.

“FAS has also drafted and put for discussion a Government Decree that concerns, for example, changes in the current rules for non-discriminatory access, particularly, dividing the market due to technological connection on the main systems. It is essential for developing gas-producing companies as well as gas consumers. The Rules will also have a new chapter on access to UGSF systems. A draft standard contract that narrows the field for discussions between the monopolist – supplier of services and its counteragents is prepared”, explained Anatoly Golomolzin.

The speaker also described the efforts to refine the rules for non-discriminatory access to gas-distribution systems: “A relevant project is drafted and will be discussed in Q1 2019 under the Action Plan”.

He added: “Recently we forwarded an order to register by the Ministry of Justice: “On approving the forms, deadlines and frequency and periodicity of information disclosure by natural monopolies offering services for gas transportation via pipelines, as well as the rules for filling in those forms”. It is a key document, essential for increasing infrastructure accessibility as well enhancing efficiency of tariff regulation”.

On 6 December 2018, Russian Ministry of Justice also registered FAS Order “On avoiding he Guidelines for estimating the fee for technological connection of gas-using equipment to gas-distribution networks and (or) the standardized tariff rates, determining their size”. (Significant optimization of the costs of connection, increasing transparency in determining the fee for technological connection will help improve gasification rates in Russia).

Anatoly Golomolzin stressed that developing exchange trade with gas is the key to creating a system where consumers are directly involved in pricing, and so that the system is sustainable, amendments should be passed to some document accompanying exchange trading: refine the gas supply rules and improve contractual relations.

“It concerns some aspects of the balancing gas market: reselling gas that was not used or sold under the exchange contracts. The reselling mechanism, in this segment is clear and predictable. The next step is to sell out the resold or not used gas under direct contractual relations. These are the gas volumes that allow balancing the market. On the one hand, it increases its efficiency significantly, on the other, gives an additional source to form liquidity. Then there will be no sharp need to obligate any players to deliver additional volumes. Due to objective reasons, nobody knows in advance the volume of gas in the assignment or how much gas will be consumed. It is essential, therefore, to have economic mechanisms of adjusting the market in the state of sustainable dynamic balance achieved through exchange trading. Along with an increased economic efficiency of market performance, exchange trading and balancing markets make gas supply more reliable”, stated Deputy Head of FAS.

Regarding the main directions of the work on developing on-exchange gas trading, Anatoly Golomolzin drew the participants’ attention that parity was essential at the stage of launching exchange trading, when both “Gazprom” PJSC and independent companies supplied roughly the same gas volumes to the markets. The situation has changed recently:

“Now it mostly “Gazprom” trades. Independent companies lack resources. Obviously, the problem must be solved. FAS has already drafted a Government Decree to increase the share of allowed “Gazprom” volumes from 17.5 billion RUB to no less than 35 billion RUB”.

“Not only independent participants, not only producers and sellers enter the market of on-exchange gas trading. The commercial infrastructure of the market is changing and new entrants emerge. Now “Gazprom Mezhregiongaz Delivery” obtains the status of a supply operator and begins to work in completely different conditions – under the law on exchange trading and clearing. These changes, perhaps, unnoticeable for men on the street, are of pivotal importance for the market”, concluded Deputy Head of FAS.