INTERVIEW: Federal Antimonopoly Service deputy head Golomolzin: agreements with oil companies just the beginning
MOSCOW. July 24 (Interfax) - The head of the Federal Anti-Monopoly Service (FAS), Igor Artemyev said at a cabinet meeting in June that in the past few years the government has failed to achieve many of its objectives concerning the development of competition in Russia and that the existing program needs to be revised. FAS deputy head Anatoly Golomolzin spoke with Interfax about what action is being planned in the fuel and energy, electricity and communications sectors.
DEADLINE OF TECHNICAL REGULATION FOR FUEL SHOULD NOT BE PUSHED BACK AGAIN
- In July there was another increase in fuel excises, but according to the Federal Statistics Service (Rosstat), there was no increase in prices. Why did this happen? Many had expected a jump in prices.
- We are also seeing stability in prices on the retail market. Wholesale prices have changed somewhat, but this change was also not significant and was not transmitted to retail. One should understand that several factors affect the situation.
World prices have been relatively low recently, which puts downward pressure on the wholesale element. However, there was a substantial (more than 10%) reduction of export duties on oil products, and there was the increase in excises. The last two factors put upward pressure on prices.
Gasoline prices are also not changing much because they correspond to a balance of demand and supply on the domestic market. Traditionally, the middle of the summer is a period of relative stabilization of demand on the market, while supply is sufficient. In addition, the domestic gasoline market is less dependent on the foreign situation, since most of the gasoline produced in the country is consumed on the domestic market, its exports are tiny. The diesel fuel market is more sensitive to changes in prices on the external market because about half of the diesel fuel produced in the country is exported.
The influence of the seasonal factor of stronger demand for light oil products might increase at the end of the summer - beginning of fall. But at the same time the government has levers of influence on the situation through the use of ample reserves of fuel. With this market tool the government protects the market from unjustified increases or fluctuations in prices. Thus, we don't give the seasonal factor the chance to turn into speculative growth. The additional supply of oil products is sufficient to meet growth in consumption of fuel due to seasonal demand.
Decisions might be made soon to have the state reserve operate as an automatic regulator of the market. If there is a threat of a shortage of fuel it would throw out additional volume, and this will also be an additional stabilizing factor. We are currently not doing this automatically.
- Does this require any legislative amendments? What is the mechanism being proposed?
- The issue of preparing the corresponding draft resolution is being discussed. The mechanism is such that if reserves fall to a level below which problems could arise on the market, certain algorithms go into effect. According to them, the authorized organization (a version of the state reserve) offers oil products for sale on the exchange in periods of heightened demand. It does so in a targeted manner in those areas of supply where there is a threat of a shortage. The stocks in reserve are replenished during periods of low demand. This ensures the stability of the situation on the domestic market.
- Have you and the Energy Ministry managed to reach an agreement with the Economic Development Ministry and Finance Ministry on the idea of a floating excise on fuel? Does this proposal have a future?
- We believe that we have managed to influence the perception of our proposals, and it is now more positive than it was at the initial stages of discussion. Amendments in regard to a transition to a flexible scale for collecting excises should be adopted.
Such a structural addition to the system of taxation will promote market pricing with a virtually unchanged budget revenue base for an extended period, for example, for a year. Therefore, while budget revenues will be little changed, the correcting and regulating impact on the market will be favourable. That's important.
- And what arguments do the opponents of these proposals give?
- They say that excise revenue is channeled into the highway funds. So, in order to keep the highway funds topped up, the tax system as a whole needs to be tweaked, not individual taxes. They also say the tax is too hard to administer.
We tell them that the situation in the market has to be sustainable - that is an essential consideration, and that improving tax administration is an organizational one. We understand and are suggesting how to resolve this issue essential issue. As for administering, we have to sit down with our colleagues who are specialists in the field to solve that one.
-Will floating excise taxes be introduced from 2013?
- We think this ought to happen. Whether it does or not depends how complicated the legislative process is. But given that category 2 fuel will be banned on the domestic market from 2013, this subject will be of relevance for category 3 fuel, at least for 2013. In this sense it would have to be ready for execution in 2013. But in general we are talking about more radical changes to the tax system, but that's a separate conversation.
- What's the situation with the four-sided agreements to modernize oil refineries? What changes are needed?
- The overwhelming majority of companies are observing the deadlines that have been set. Some of them are way ahead and have even started to produce category 5 fuel.
There are certain difficulties with the implementation of a limited number of agreements. When this issue was discussed earlier by the government commission for the fuel and energy sector, a decision was made on the possibility of making certain changes and additions to the modernization agreements. But it was especially stipulated that these changes should not affect fuel supplies to the domestic market
Consequently, the agreements should ensure compliance with obligations to supply fuel in exchange for the volumes that for some reason cannot be produced at a specific oil refinery. And the agreements will become slightly more detailed, they must clearly spell out both schedules for the purchase of equipment and schedules for construction and installation work, and the agreements could be amended in this regard.
- Are the deadlines for banning Euro-2 fuel going to be extended yet again?
- No. We and out other colleagues from the government think the deadline shouldn't be extended. And the necessary volumes of the required quality of fuel will certainly be produced and supplied to the domestic market. Some issues might arise not about volumes but the quality of just one product, gasoline. But the four-sided agreements are ahead of schedule with respect to all the other petroleum products.
As for gasoline, options are being discussed such as redistributing supplies for consumers with legal grounds to use fuel of lower grade than 3; or for exports-imports; or replacing them with fuels that other market participants might produce in addition.
- What's the overall investment related to the four-party agreements?
- More than 1 trillion rubles, by expert estimates. The present situation differs from previous years in that companies used to declare big investment plans but would only complete half of them. Now these projects are really being carried out in full.
But I'd say the obligations set down by the four-party agreements are not excessive for companies. Why? Because this really is the minimum. In general, of course, refining capacity is in need of far more serious and extensive modernization. So in our understanding this is just the first step in large-scale modernization.
- And what should be the second step?
- The second step is the step taken by companies that want to be competitive.
- So the state won't continue to stimulate refining?
- The state will continue to stimulate refining in the framework of various economic mechanisms. For example by leveling out duties on dark and light petroleum products you can stimulate production of light products. By developing trading on exchanges, the state is putting a mechanism to hedge against risk in place, and so on.
As regards the four-sided agreements, we opted to sign them only with a view to preventing fuel shortages and unjustified price hikes as a result. This is the immediate goal, essential to solving any problems that may arise in the domestic market. And for the future, so that companies can develop as advanced, modern companies, many of them will have to spend a lot of time indeed addressing these issues.
- What's the situation with the petroleum product exchanges? Does the FAS consider prices on the exchange to be fair? Have all discord and violations been eliminated?
- It is of course an advantage to have such exchanges at all. But we can't yet say this is institution is running well. We have now prepared three documents. One of them is a draft government resolution on regular sales on an exchange platform. Within the framework of this document we outline a mechanism for regular sales of fuel on an exchange. Regular sales on an exchange will follow companies' plans for production of oil products for the year ahead broken down by month. Within the course of a month, companies would have to sell the necessary amounts with an equal daily breakdown.
The second document is a joint decree of FAS and the Energy Ministry that stimulates the amounts that must be supplied to the domestic market. For each fuel specified in technical regulations, there will have to be exchange trading with delivery of fuel to the domestic market. Jet fuel, gasoline, diesel fuel, fuel oil, oil, each of these commodities will have to be supplied on a constant basis and at least 10% of the volume of supplies to the domestic market.
The third document is the procedure for providing information about affiliated parties. This is being done so as to ensure conditions for market pricing on the exchange. If there is a significant volume of deals between affiliated parties on the exchange, these volumes will not be included in the estimate for compliance with the requirement for 10% of deliveries to the domestic market. This threshold is one of the indicators of the liquidity of trading.
So far, demands for the sale of mandatory volumes on the exchange, on the procedure for disclosing information concern companies that have domineering positions in the market. As per the law on pricing, we are proposing to extend this procedure to all companies producing oil products in Russia.
- What will be the consequences if one company sells to its own affiliate on the exchange?
- That sort of transaction will not be reflected in the closing index for exchange trading. If there's a significant volume of deals between affiliated parties on the exchange, those volumes will not be taken into account when assessing how the requirement to supply 10% to the domestic market is being observed. This threshold is one of the benchmarks for trading liquidity. Trading in smaller volumes means exchanges cannot be an indicator of market prices.
- When will the documents you spoke of come into effect?
- They could be approved in the coming months.
GAS BOURSE WON'T SOLVE ALL PROBLEMS ON ITS OWN
- What's the FAS position on the creation of a gas exchange?
- Gas trading is too related to technological issues as gas supply consists of the centralized transportation of large flows from West Siberia to the European part of the country, controlled by a single, central dispatch system. When gas is traded on an electronic floor, and this is coupled entirely to the technological aspects of transportation and distribution, then real gas supplies can be guaranteed, but if this happens only on the bourse it cannot take the technological specifics into account.
That's why there are bourses and e-floors at the same time in Europe, in absolutely all countries. In Britain, the first to have e-trading, and at bourses in the Netherlands, in Germany, in all European countries where there is organized trading these two institutions exist side by side.
The results of e-trading constitute an information base for exchange trading and derivatives trading. This is an important tool for the spot market, enabling it to react to changes in the fuel market situation.
Above all this is important for the power industry - the results of the Gazprom e-trading floor experiment showed that an e-floor and a floor similar to the Trading System Administrator (ATS) in electricity can be interconnected. Trading two days ahead for gas on the e-floor and a day ahead trading on the ATS are an exceptionally important juxtaposition because, after buying gas for two days ahead you can trade in the electricity market for a day ahead.
When the e-floor for gas stopped functioning, fuel oil became the marginal fuel, not spot market gas." "Its cost was far higher than the cost that formed in the gas market. As a result, this pushed prices on the electricity market up considerably and made them considerably but unjustifiably volatile.
So of course this infrastructure for organized trading with actual commodities has to exist in either case, for both electricity and gas. Special measures need to be taken while the competitive markets are under formation, that's a mandatory element of the commercial infrastructure of markets.
In 2008, Russia was roughly on the same level as the rest of Europe, and all lagging together behind Britain. But despite the positive results of the e-trading experiment, spot trading in gas in Europe has reached 50% of the total since then, and we have peaked at 2%, we've stopped trading spot gas altogether. We've fallen behind Europe (and even more behind the United States) in the last five years when despite the positive results of the e-trades experiment, Gazprom did not start working on this floor on a constant basis.
NO QUESTIONS ABOUT LTE TENDERS
- How do you assess the results of the LTE frequency tenders?
- We do not yet have any basis to dispute these tenders. Before we had a situation where there were several holders of frequency resources, on which LTE could be developed and there was not enough competitive pressure from other possible market participants. Additional bandwidths were allocated in the 790-860 and 2500-2700 Mhz ranges and distributed through the tenders. Using the new bandwidth resources, suitable for LTE, is becoming possible. Correspondingly, conditions for competition will improve and that is a good thing. We expect further steps from the Telecommunications Ministry based on the preliminary agreements reached with it. They relate to additional frequency resources with the aim of attracting regional operators to this market. We are also discussing expanding opportunities for using 4th generation frequencies, which are currently used in other segments, especially 900 and 1800, in which GSM services are provided.
- Are we talking about introducing technological neutrality?
- Yes. The principle of technological neutrality, which lies at the basis of government policy in telecommunications and information technology, is universal and affects the use of the frequency spectrum. Earlier, on the proposal of the Federal Antimonopoly Service to the administrative reform commission, this principle was enshrined and confirmed by the government in plans to improve monitoring functions and eliminate surplus state regulation in the telecommunications sector.
Until recently this principle was used, but unfortunately, only in a targeted way. If a decision on GSM is taken in the near future and bandwidths are allocated for regional operators, competitive conditions will improve considerably. Correspondently, we can expect a significant increase in new quality already fourth generation services.
Clearly the majority of these services will be provided by the big operators. Just as is the case now on the telephony and other mobile phone services market with the big three operators accounting for 85% and other operators for 15%, but that 15% puts considerable competitive pressure on the big players. And in regional markets where there are four or five players, the price situation immediately changes. Besides regional operators are more mobile in their search for new customers in large, mid-sized and small areas.
- So are you proposing regional tenders for LTE on GSM frequencies?
- No, GSM frequencies, based on the principle of technological neutrality, will be used by the operators themselves - part of the spectrum for voice telephony and part for LTE. However, there are still frequency ranges, including close to those distributed for LTE. So there is an opportunity to additionally allocate these frequency bands already for regional operators. There are many market players that would participate in such tenders.
- Do you propose that for this year?
- We think this needs to be done fairly quickly because competitive terms largely depend on how quickly you can start in this segment of the market. Why did we not oppose the tenders? Because a delay in carrying out the tenders would encourage a delay on overall market development. It is the same for the regional frequencies and for GSM decisions need to be made rather quickly so that many telecom operators have the chance to develop on this segment of the market, helping to develop a competitive market.
- What about moving telephone lines in Tatarstan and Yekaterinburg. What is happening there? FAS closed the case in Tatarstan and what did eliminating the violations exactly entail?
- There was no movement from the authorities in Yekaterinburg to eliminate the violations that occurred, so an injunction was issued and that was disputed in court. Of course we will defend our position in court. We have a tough stance on this. Why? Overhead lines are a way to achieve signals that is permitted by legislation. Around 40%-50% of overall services, associated with cable television and access to the Internet, are provided in this way
There was a similar situation in Tatarstan. But we explained to representatives from Tatarstan and I think they made a very important decision not to proceed. The government of Tatarstan will be invited to amend legislation adopted at a municipal level. In this way this permitted method of bringing a signal to the subscriber will still exist. If there is the chance at acceptable prices to change conditions for achieving signals that will be a good thing, if not, it means the existing system will work.
- So they lifted the orders?
- Yes, two Cabinet resolutions, which introduced various unjustified restrictions, were lifted.
FEDERAL GRID CO, GRID HOLDING INVESTMENT PROGRAMS SHOULD BE DIFFERENT
- What's the FAS position on FGC and IDGC's investment program
- We are taking part in the agreements on the investment program along with other agencies. We generally believe that this issue should be settled differently in the framework of the system for long-term tariff development and changes in the approaches to tariff formation.
We propose to a system of long-term tariff development, a system that would factor in prices on comparable markets, or so-called benchmarking. But the overall foundation for this tariff policy is the need to develop applicable tariff decisions based on market analysis and the development of long-term development plans.
Before making decisions on investment programs, a series of procedures should be implemented. Optimized long-term plans with a sector-focus for development and fund allocation should receive approval. Also, separate sector plans should be connected to each other. For instance, plans for the development and allocations should be tied to long-term programs for gas supply, the coal industry and railway transport.
Programs for the development of natural monopolies should be coupled with programs for the development in commercial sectors. Federal programs should be balanced with regional program and programs, which are approved on the municipal level. Therefore, there should be development programs for a region and an integrated program for development in municipalities. Only on the basis of such work it would be possible to appraise decisions for the balance sheets and placement of fixed assets, and set appropriate parameters for reliability, efficiency and quality, as well as the parameters for price accessibility (tariff levels).
Only after this is it possible to discuss the foundations of the investment programs. Any investment program should broken down according project and be gauged according to its effectiveness. A portion of projects might be financed on their own while some would receive raised funds or through shareholder capital. The projects deemed necessary but impossible to implement under regular commercial conditions might be executed with budget funds.
The existing oversight system for investment program definitely does not fully conform to these requirements. Therefore, moving to RAB, of course, is an extremely brave move since it has not been supported by necessary study. When this work is implemented entirely, it would be possible to talk about applying long-term tariffs.
At the same time, it is our understanding that decisions for long-term tariffs should be solidified in a regulator contract. The regulator, a sanctioned authority, the operator of a natural monopoly and investor should each sign on according to their obligations. It is necessary to minimize institutional risks for those who invest in the program, and put together predicable terms for market operators to work, as well as protect consumer interests over the long-term.