18:02 15.03.2021

Author OTTO WATERLANDER

Solving the ‘myth’ of gas monopolies on the Ukrainian gas market

7 min read
Solving the ‘myth’ of gas monopolies on the Ukrainian gas market

Otto Waterlander, Chief Operating Officer (COO) of Naftogaz Group, Naftogaz Group Chief Transformation Officer

 

Monopolies are bad for consumers. They eliminate competition, may and often will abuse their dominant market position and stop innovation. In addition, it prevents customers from making choices. Especially if such monopoly is in the business of essential supplies – like natural gas. Moreover, solving the problem of the monopoly is crucial for Ukraine this year, given world’s economic recovery and strong possibility of the return of high market prices of the gas.

So, addressing the topic of monopolies is important as it concerns the price in your heating bill (and how can we solve the problem by fighting the abuse of the real monopolies)

There exists an important misconception in Ukraine concerning “monopoly” on gas market and its influence on your heating bills and the State budget. Numerous media outlets, experts, even some politicians (let alone populists) call your State-owned Naftogaz a "monopolist" and request to break-up or liquidate the company. Would that work in your interest? I believe definitely not. What is more, it leaves the real monopoly of RGK in retail-supply of gas with harmful effects in place.

Let me explain why existing misconceptions are wrong and harmful.

Myth one: “Naftogaz as monopolist on the wholesale market”

Allegations of the monopoly position of the state-owned Naftogaz are common, even analysts of some gas companies reiterate that in public communication.

The reality is opposite. People confuse large with monopoly.

Today, anyone can buy gas from Naftogaz or any of the other 50 traders in the Ukrainian market. With a lot of effort and investments, the Ukrainian market is integrated in the European market. The physical volume of European market is 450 bcm, and the Ukrainian market about 30 bcm market. With so many parties and Ukrainian market volume some 6-7% only, every buyer has significant choice to purchase from domestic producers, imports, or taken from storage. Naftogaz supplies about half the Ukrainian volume and has some 3% market share in Europe. This is relevant as the pricing is made now in the European context. Everyone will continuously make the choice what is the best available price for today, tomorrow and in future. The European market allows to purchase gas at different moments in time: for delivery the next day, the next month or even the full year ahead. All the Ukrainian regional “Gazzbut” companies are able to buy gas from Naftogaz, and some already do so. Naftogaz does not discriminate on prices or contract terms between parties. Also, Naftogaz own retail company purchases gas at market prices levels and conditions.

Naftogaz supported the development of an open and competitive market for years and now the whole country benefits from it. During the winter, Ukraine’s market  prices were actually lower than in Europe. And just to make make sure, that our price is fair, Naftogaz has committed to sell 15% of our gas on the energy exchange every year.

Of course, all retail-supply companies need to adjust to this competitive market and not everyone is happy. You have to pay if you want to purchase gas from Naftogaz. The “Gazzbut” network, mentioned earlier, enjoyed regulated prices for the households till last year, and Naftogaz was obliged to supply. But now, we only need to supply if you can demonstrate you can pay. As a result, “Gazzbut” still owes 13 bln. UAH to Naftogaz. And this is the money that we wish to collect as it belong to every Ukrainian.

Myth two “Naftogaz as monopolist on the retail market”

Unlike business companies and “Gazzbut” retailers, households till recently had no choice of the price and supplier. The price was regulated by the state and each region has a single supplier. In 70% of the cases this was “Gazzbut”, founded by the gas network provider. And since the price was regulated and Naftogaz was obliged to supply through these companies, they enjoyed a monopoly situation. Households paid for the gas. Why did they not pay for it to Naftogaz?

This was actual abuse of monopoly, and its monopoly power still influences people. Government of Ukraine understands the problem, and despite huge pressure bravely abolished regulated price last summer fro the benefit of competition.

The results were impressive: 30 retailers started to fight for the attention of the customers, proposing the best price and terms. Our newly created retail company proposed price 30% less than the “Gazzbut” network – setting the benchmark of what the real market prize is. Till the end of 2020, some 600 000 households changed its supplier according to the regulator data. It’s a lot in such short time! It is clear: customers want free choice and want to exercise their ‘customer power’!

And the real monopoly – “Gazzbut” network, responsible for 70% of the clients, decided to compete unfair. National regulator and consumer rights NGOs were overwhelmed with the appeals from the customers: local gas network providers were preventing consumers to shift to cheaper providers. Their arsenal – hiding of the EIC code, forceful outage, even threats. These actions are the best evidence, that gas network providers (RGK) and gas supply companies (Gazzbut) were not separated properly.

We shall expect that this new experience since August 2020 will be taken into consideration in the next Annual Implementation Report by Energy Community Secretariat. Importantly, the latest report fully acknowledges Naftogaz unbundling success.

Only when we can celebrate, that Ukrainian households can change suppliers without any restrictions, will we have proof of effective local distribution unbundling.

According to European and Ukrainian legislation network owner cannot be anyhow connected with the supplier. They have different interests. For example, network owner is interested in the quality measuring and open database, open for any company.

But still not in Ukraine. Network operators were actually forcing people to stay with their old suppliers, that they founded. And we do know the price. According to the calculations regional gazzbut companies received 7 bln. UAH extra from Ukrainian households. We simply compared market price and price, they set for the customers.

And make no mistake – regional “Gazzbut” companies were able to buy from Naftogaz or any other company on the wholesale market – see myth one.

What’s the solution? 

It is obvious that no government will tolerate such an abuse of the market and rights of the customer. Emergency measures were taken in February, when temporary price cap was imposed. More to come.

Antimonopoly committee opened investigation on the “Gazzbut” companies, for the abuse of monopoly position to raise prices. It’s not the first case, A case against RGK network (DSOs) companies is opened some time ago (2019) in Antimonopoly committee, and we just sent additional information that should help regulator to find out that this group is actually one single entity and that their concentration was made without AMCU consent

National regulator issued the decree obliging all the retailers to set a yearly tariff -  a market solution, aimed to shelter customers from the price volatility and offered by Naftogaz last year already.

We also informed Energy Community on this situation –European partners should have clear understanding of the Ukraine’s reality

And the next much needed step – creation of the of the datahub (just like E-health system) with the customer information secured, but opened for every gas supplier, that has the agreement with the customer.

Unlike existing datahub 104.ua opened only for … selected companies (subject of investigation of Antimonopoly committee as well) and clearly, not secured for the users, that are NOT in control of their data. We believe that the datahub, as required by Ukraine’s IMF commitments, will help guarantee that households are in hold of their own data and can easily transfer it to suppliers of their own choice.

With the joint efforts of government, regulators and businesses we can create retail market, that protects consumer, not pickpockets in the interest of private intermediaries. 

 

 

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