Regulator Keeps Hold of Gas Prices

The regulatory authority URSO stands over yet another request for a hike in gas prices for households from SPP, but just how much longer can it keep control over prices as competition rises. Here The Daily provides a translation of an article from yesterday’s issue of Trend looking at the issue.

Gas company to remain under control

Source: Trend, Page: 20, Author: Marek Legéň, Date: 17.11.2011

Over a million Slovak households faced a double hike in gas prices this year from the dominant player Slovensky plynárensky priemysel (SPP).

In both cases, the adjustment of the pricelist was blessed by the formally independent regulator ÚRSO. Chairman of opposition party Smer-SD Robert Fico did not resist making comments about the seven-percent hike in July, thanking the regulator for saving the wallets of the people.

He underlined that SPP wanted to push through a much higher hike in prices also with the help of the government.
Economy minister Juraj Miškov (SaS) hit back. In his words, R. Fico admitted that he politically controls ÚRSO, and if people get higher bills for their gas, they know who they should thank. SPP is seeing growing competition in supplies of gas to households and the issue of cancelling price regulation altogether is coming to the forefront. Prices don’t look set to be released any time soon, though. The theme of gas prices for households will continue to be a grateful ping-pong ball of politicians for some time yet.

Reluctant officials

photo (c) James Riden

Households have had the right to select their gas supplier de iure since 2007. Until recently, though, alternative players were not attracted to doing business in this segment and so the option to choose a supplier remained only on paper. People were still reliant on the half state-owned SPP, with the regulatory authority to protect them from its price policy. A change came only this year, when the situation on the gas market attracted several new suppliers to the households segment.

ÚRSO approved the pricelists of over ten companies for this year.
Realistically, according to the regulator there are eight companies supplying gas to people, with other players expressing interest in entering the market. Both gas suppliers and bureaucrats agree that the approval of pricelists by the regulator should end with competition.
The only question is when.

The abolition of regulation rests in the hands of politicians, and the regulator can only recommend it to them. Last week the outgoing cabinet of Iveta Radičova announced changes to key energy laws, but the term by which price control in the case of gas for households should be removed is not set out in them. According to the Ministry of Economy, the draft laws on energy and on regulation in network industries open up the way in future for ending regulation with a sufficiently liberalised market.

The Ministry says that this has not yet happened, despite the arrival of several new players to the market.
”Their market strength is still not profiled enough for real competition to be established”, states the standpoint of the department of economy.

As competition grows, the price dictate will gradually lose its justification. Even the regulatory authority is still cautious about making concessions in prices. “There is definitely no near-future probability of regulation of gas prices for households being cancelled. We have to wait at least another two years and then see how the market will develop”, says acting chairman of ÚRSO and head of the Board for Regulation, Jozef Holjenčík. The doors to free pricing should open up, in his opinion, the largest number of households that prefer SPP over the offer of the competition.

The dominant supplier, which this year has an estimated market share of 75 percent this year, did not want to publish figures about departing customers. Today it bills roughly 1.4 million households for their gas. The regulatory authority claims that data about how many customers companies acquired and lost this year will be available at the end of the year. “When at least twelve percent of households change their supplier, then this will be the signal that we should start thinking intensively about how to proceed”, feels J. Holjenčík, who took over as head of ÚRSO under the government of R. Fico in 2007.

Rising competition

The people from SPP do not hide the fact that they would welcome the cancellation of price caps as soon as possible. “Regulation can adversely affect the natural development of the market and deform it”, points out SPP spokesman Ondrej Šebesta. The dominant player looks at the positive effects of unrestricted formation of pricelists from the opposite side as the regulator ÚRSO or the Ministry of Economy. While the officials want to wait with cancellation of regulation until such times as competition becomes stronger, SPP claims that it is the release of prices in fact that could produce greater competition, variety in price offers and higher quality of services for consumers.

The competition has probably taken tens of thousands of clients away from SPP in the household segment. The Slovak branch of Czech energy concern ČEZ has signed almost 70,000 contracts for energy supplies since the beginning of this year. In addition to gas, it also offers Slovaks electricity. The company would not specify how many customers it supplies with gas.

“This year we are only gradually starting with supplies, while next year we count with tenfold the supplied volume”, says executive at ČEZ Slovensko, Igor Nagy. The number two on the market, RWE Gas Slovansko, is also aiming at its target of tens of thousands of household customers by the end of the year. Gas is being offered to the population also by other companies, like Elgas, Energie2, Magna E. A. or Lama Investments.
Impacts of deregulation

J. Holjenčík is concerned that if regulation is cancelled prematurely, SPP could abuse its still dominant position and gas prices for the population would definitely go up.
In recent months SPP has tried several times to raise prices for households, but it mostly did not manage to break down the regulatory barrier. It argued for the price hike proposals by the adverse changes to key factors that determine the purchase price of Russian gas in the long-term contract – oil prices and the euro-dollar exchange rate. ÚRSO only acknowledged the gas company’s arguments twice in the last year.

Even after the regulation of prices is abolished, the most vulnerable households should not be just left to the winds of fate. “The range of socially dependent has to be defined and given addressed subsidies or discounts”, says former member of the team of regulators and currently executive director of the Slovak Gas and Oil Association, Ján Klepáč.
Releasing gas prices for households will not mean that regulation ends completely. This is because the end prices for customers include, in addition to costs for the actual purchase of the commodity for which regulation is to be stopped, also fees for distribution and transmission of gas via the pipes of SPP.
As there is no competition in this, URSO will continue to set them.

The regulatory authority and SPP mostly can’t find common ground when it comes to requests to hike up gas prices for people. What’s more, ÚRSO sets also the price for gas that is used for the production of heat intended for households. The gas company claims that it is in the red as a consequence of the decisions of the regulator, posting an audited loss of roughly seventy million euro last year in regulated segments. The gas company expects that despite the two hikes in prices this year by four and a half and seven percent respectively, it will once more slide into losses of several tens of million euro.

The company wanted a more significant hike in prices and it claims that the permitted increase in prices covers only part of their costs in regulated areas. SPP even took the thwarting of several adjustments to pricelists all the way to court.
SPP is disadvantaged by the purchase of gas through a long-term contract with Russian concern Gazprom at higher prices than the commodity is purchased by competitors at a time of surplus and lower prices on the short-term spot markets. The regulated price of gas should cover admissible costs of the supplier and reasonable profit.
The dominant gas company claims that ÚRSO prevents it doing this by its verdicts.
”It is a bad managerial decision of the SPP management about what contract they concluded. From our perspective, this is clearly the biggest problem” says J. Holjenčík about the Russian contract.

Today the regulator has another request for a hike in gas prices for households on its table. According to daily Sme, SPP wants to increase prices from the New Year by 23 percent. J. Holjenčík indicates that no substantially greater hike will take place. “I definitely do not expect a dramatic change in the price of gas”.

The method according to which the regulator regulates prices does not let the gas company reflect the loss from one year in increased prices in the next year. This should change with the new energy legislation from the department of economy, which has already been approved by the government. This so-called correction factor is not supported by the regulator.

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