18:10 31.08.2020

Author OTTO WATERLANDER

Dealing with the last monopolies in the Ukrainian gas market: will regulation be effective to protect the right of Ukrainians to freely choose their gas supplier?

4 min read
Dealing with the last monopolies in the Ukrainian gas market: will regulation be effective to protect the right of Ukrainians to freely choose their gas supplier?

Otto Waterlander, Naftogaz Group Chief Executive Officer - Chief Transformation Officer

 

It is the first month since the launch of a free gas market for households that transformed Ukrainian gas consumers into customers. Customers can now freely choose their supplier. The resulting competition between suppliers is already resulting in innovative propositions for Ukrainian customers, sometimes at the expense of supplier margins. However, it is not enough to give customers freedom to choose. It is also important to establish a so-called ‘level playing field’ for all competitors. International experience shows that competition must be protected and stimulated, especially when natural monopolies are involved.

A clear and early example of government intervention is the forced break-up of John Rockefeller's Standard Oil Corporation. Until 1911, it directly or indirectly controlled almost all US oil transportation and refining.

Due to its monopoly position, Standard Oil dumped, squeezed out competitors, bought their property for next to nothing, and completely controlled the market. For example, Rockefeller secretly owned the Union Tank Car Company and a patent for metal sealed tank wagons for oil delivery. The alternative was platform cars in open wooden barrels, from which oil evaporated and lost quality along the way.

Rockefeller used wagons to transport his own oil and leased them to competitors, but at different rates. When rivals began building their infrastructure and production, his company unilaterally terminated transportation contracts. Competitors lost money and went bankrupt, and Standard Oil bought their assets for almost nothing, expanding its capacity and infrastructure.

Standard Oil was forced to break up into separate companies, with the case becoming the basis of US antitrust law. Both Chevron and ExxonMobil grew from the break-up.

The EU recognized the risks of a ‘natural monopoly’ represented by owners of gas transport networks and when creating a competitive gas market. To avoid conflicts of interest and abuse of monopoly positions, the EU introduced its ‘Third Energy Package’. This provides for the separation of transportation from the sale of gas.

Ukraine has adopted the rules of the EU Third Energy Package in order to create a competitive gas market in Ukraine and advance the integration of the Ukrainian market into the EU gas market. 

As a direct consequence, Naftogaz  separated from the Gas Transmission System Operator of Ukraine (Gas TSO of Ukraine). The TSO is now a separate entity where Naftogaz has no management or control. Naftogaz is now merely one of its customers. Initially, this separation process caused a lot of controversy and doubt within Ukrainian society. Skeptics argued that the new company would be unprofitable and that it would not yield the expected market results. However, it was and remains clear and proven that genuine ‘unbundling’ of gas transport activities from gas sales activities gives Ukraine new opportunities for development, both within the country and in negotiations in the international arena. At the national level, trunk pipes are no longer under the control of any of the suppliers and cannot be used to monopolize supplies.

Much like the national transport system, operators of regional and local gas pipelines (regional gas companies) were also obliged to separate from gas suppliers in 2015 when the law "On the natural gas market" was adopted, according to which delivery and transportation could no longer remain in the same hands. However, the owners of regional gas companies have found a way to circumvent this law: regional gas companies have created new supplier companies, or “Gazzbutes”, that have started selling gas. Although technically different companies, they have the same or similar ownership.

Until August 1, there were no major problems. However, after the market had opened and competition for Ukrainian residential customers began, we saw some signals that raise concerns about the effectiveness of regional competition. Regional gas companies can "accidentally" return customers to their subsidiaries even if those customers have decided to change suppliers. Moreover, despite the closed procedure to change suppliers, “Gazzbutes” somehow find out the client's intention to receive services from another company. They then call the customers, sometimes even threatening that gas supplies will be turned off.

Our observations may be the result of startup challenges. However, these signals should activate the National Commission for State Regulation of Energy and Public Utilities  (NCSREPU) regulator to control and possibly intervene to protect Ukrainians from the unfair actions of monopolists.

The gas market is a matter of freedom to choose for every Ukrainian, and the State must protect their right to make this choice.

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