February 12, 2013

Liberalization: No Time to Delay

Serhiy Dyachenko "Mirror of the Week in Ukraine” № 36, October 12, 2012, 20:30

At present, the gas market in Ukraine consists of two unequal segments - households and industrial-municipal sector, which actually operate separately from each other and their price parameters differ greatly. The systems of calculation of gas consumed by different categories, also differ. These and many other circumstances make urgent the need to bring the Ukrainian gas market to European standards.

Of course, the basic principle of liberalization - the consumer has the right to choose his supplier, and the supplier can choose the range of his customers - sounds appealing, although to many in Ukraine it may seem an unachievable goal. However, in EU countries, particularly our neighbors - Slovakia, Poland, such a relations between consumers and suppliers of gas is gradually becoming reality. Of course, while we are talking about a fairly modest part of consumers, mostly industrial ones, which can choose a supplier. But this trend has become irreversible.

In Ukraine, the realities are quite different. Against the background of the processes of hidden monopolization and liquidation of competition, we can get a reform of the gas sector, which will only look like European, and by the spirit it will be pseudo-reform with a quasi-market pseudo-competition. In this context, determining will be the content and the spirit of the reform of "Naftogaz of Ukraine".

European principles of reforming the power sector companies are first of all in their division by kinds of activity: production, transmission, distribution, sale of gas. However, without a proper competitive environment such division won’t matter, it will lead to further fragmentation of the existing quasi-market with preserving the monopoly and will create conditions for a non-transparent privatization of the gas industry by oligarchic groups. The outlines of such "privatization" have emerged.

Subsidiary company "Naftogaz" - "Ukrtransgaz"Under such circumstances, preserving the current model of the gas market, based on a long-term contract with "Gazprom", will return us to the 1990s, when oligarchs connected with the government, will divide regions and strengthen their monopolist status in them. And the Antimonopoly Committee of Ukraine, as usual, will not see violations of antimonopoly laws.

At the same time, giving up the long-term contract and further liberalization of the gas market can leave to direct Gazprom’s deliveries of gas to the final users, and this way the control of the Ukrainian domestic gas market will be gradually taken over by the Russian gas monopoly.

So, without diversification of gas supply and without the appearance of European players at the Ukrainian market, a true liberalization of the gas market is impossible.

If “Ukrtransgaz” (the daughter company of “Naftogaz”) becomes independent in the current economic and political situation, this will be a straight way either to the “Belarusian scenario” or to a bilateral (with “Gazprom”, and on its terms) consortium to run the Gas-Transporting System of Ukraine (GTS) under the “Gazprom”’s leadership. Today, when Ukraine is in a soft isolation from the EU, the possibility of forming a trilateral consortium is practically zero. There are dramatic changes at the European market, leading European energy concerns, following the Third Energy Packet, carry out division of business, - what later, as a member of the Energy Community, Ukraine will also have to do.

It is difficult to imagine that someone with European grants wishes to join the chimerical tripartite consortium to manage the Ukrainian gas transportation system only to very soon have problems with European energy legislation already at the territory of Ukraine. Just look at neighboring Slovakia, the circle of owners of its GTS being left by the German and French shareholders. One can hardly believe that having left Slovakia (an EU member, fulfilling its commitments within the framework of the European Directives), these companies will come to Ukraine with its oligarch rules of the game, the main of which is a game without rules. It seems a consortium to manage the Ukrainian GTS is the day-before-yesterday’s project, which is not to be.

Giving independence to mining companies, which the ruling team is ready to do, will lead to rapid – within 2013 – changing their status from controlled by this or that oligarch  to legally privatized assets of this or that business empire. It is a cross on the social gas for the population and transfer to the highest prices in Europe. This is not too scary, if there are definite and secured social guarantees.

So, reforming "Naftogaz" for Ukraine is like balancing over the abyss into which the energy system of the country may fall at the smallest wrong movement, let alone a wrong step. A rescuing balance can be found by applying the offered by the European Law, ITO (Independent Transmission Operator) scheme for the transformation of "Naftogaz of Ukraine". It allows, at dividing a company to preserve its vertically integrated structure and ownership (the state’s one) of the framework. But they must be managed by a daughter (managing) company-operator under a strict control of independence of the gas transporting system’s work.

This organization of "Naftogaz of Ukraine" will help leading a sole sector policy, the accumulation of funds, and participation in international projects, limiting risks and partial privatization with the implementation of an IPO on one of the European sites. The attractiveness of such a step is obvious, because improving financial indexes, attracting investments for the modernization of obsolete fixed assets, increasing market capitalization, improving capital structure and credit rating, joining the European corporate culture of doing business will help the company survive. In this case, preparations for IPO will show the real state of the gas market and the real state of “Naftogaz of Ukraine”, as no European investor will buy shares of a company that has neither clear prospects, nor strategies and works at an unstable market, where prices often do not allow the producers to compensate their expanses.

Along with the reform of the gas market, Ukraine must ensure in the coming years creating technical capabilities for receiving gas from alternative sources. In this context, become important a project of building a terminal for liquated natural gas, and creation of technological capabilities for receiving gas from EU suppliers, using the resources of the EU spot market.

It is also hard to overvalue the importance of cooperation with neighboring Slovakia, with the support and monitoring of this process by the European Commission.

After the diversification of the sources of gas supply and integration of the Ukrainian market into European ones, a deeper division will be possible. Such components of the liberalization process, as independence of the market regulator, a free access to gas transmission networks, should, probably, start being developed right now.

The work of the gas distribution companies, the so-called regional gasAt this, another stumbling block on the way of reforms may be the work of gas distributing companies, the so-called “Oblgazes” (regional gas companies). Although many of them have been keeping significant state packets of shares lately, "Naftogaz of Ukraine" has long lost real control over them, having lost in muddy waters of the Ukrainian corporate law to more agile oligarchic structures in the struggle for influence on the management. Now, through privatization of oblgases, this victory will be secured legally.

These businesses provide the owners not only with a stable business. Controlling billing and telemetric system, they actually form a regional balance, provide information to the government agencies about who and how much consumed or lost gas. By the nature of their activity, regional gas companies have business relations with most industrial enterprises, at this everybody owes them and they owe everybody. They also turn off gas if it comes to not paying. That is why the leaders and owners of oblgazes are dear guests in local governments, and their wishes are always heard.

In the course of liberal reforms, these businesses can put obstacles on the way of free access to networks, as apart from distributing gas, they sell it.  Therefore, the regional gas companies, in their turn, are subject to division by types of activity. It is very important to properly decide who and on what basis will manage gas networks, most of which are the state’s ownership.

Unfortunately, the current Ukrainian legislation forms of giving over the pipelines into operation can not fully resolve all problems that arise in this case, particularly in relation to inseparability of integral property complexes, disposal and write-off of property, involving investments, and many others. Obviously, to regulate such an important issue, a separate law is needed. Without a proper reform of oblgases, their concentration in the hands of one structure may be the key to a monopoly control of the gas market. And in such a situation, this structure can be "Gazprom".

In the current circumstances it is impossible to fully reform any of the energy markets separately. For example, gas problems can not be solved without fundamental changes in the market of heat, producers of which are among the key consumers of gas and defaulters. The gas and coal market in its current form prevents the electricity market from normal work and reforms. These and many other problems can be solved only within the framework of a proper energy strategy, aiming at the integration of the Ukrainian energy system into the European energy space.