Understanding domestic natural gas market: 10 arguments in favour of liberalization and as many risk factors

Liberalization means not only higher prices, even if they have increased almost 18 times since 2000. If we analyze the final structure of the price, we find out, for example, that tax increases have exceeded all the other components of price formation altogether. The restructuring of former Romgaz administration and the costs separation by the types of activities to identify the unjustified ones or eliminate cross subsidies, the privatization of gas distributors continue to raise many questions about the success of reform. Finally, we note that the end consumer is at least just as vulnerable as it was 15 years ago when the reform in the system started.

Natural Gas marketIn the early 2000s, for the natural gas sector the idea of a massive restructuring of the gas market through its liberalization appeared, with the stated aim of lowering costs and increasing the quality of gas supply. Analyzing the last 15 years, it can be concluded that the institutions responsible for the operation of the market have the greatest responsibility in making it inoperative.

The liberalization of the natural gas market is based on the principles of competition, transparency and fairness.

Gas market liberalization targets, action initiated in 2000, were precise, being publicly announced in the media by those who initiated and led the process:

  1. Low gas price;
  2. Reduce costs at the companies operating on the gas market;
  3. Consumer protection;
  4. Eliminate cross subsidies and non-specific costs;
  5. Increasing professionalism;
  6. Increase productivity;
  7. Increased safety in the operation of natural gas facilities;
  8. Elimination of political or group influences;
  9. Establish an independent institution to operate on the natural gas market;
  10. Ensure a minimum level of energy security for Romania.

Arguments on these reasons continued during the last 15 years. At the beginning they represented the goals shared by many Romanians, subsequently because they have become an obligation for Romania, as an EU member.

After more than a decade and a half away, we intend to perform an analysis of how these goals have been achieved.

Low gas price

In 1999 the average price of gas supplied to the end consumers was a regulated one and amounted to RON 0.089/cubic meter, VAT included. 14 years later, at the end of 2013, the price was still a regulated one, but its value amounted to about RON 1.62/cubic meter, VAT included. Thus, although the price of natural gas has not ceased to be regulated for this category of consumers, it increased by about 18 times. An important component of this increase is due to the import of natural gas, but tax increases were much more intense.

Reducing costs at companies operating on the natural gas market

An Arthur Andersen study conducted in 1995 (under the Romanian Petroleum Sector Rehabilitation Project funded by the World Bank), shows that within three to five years the Autonomous Gas administration Romgaz should have been restructured and organized in trading companies for distribution, natural gas extraction and transmission. The purpose of this reorganization was based on separation costs for types of activities, cost transparency and ‘uncovering’ unjustified or very high costs in order to be cut down.

On the basis of Arthur Andersen’s analysis, the Autonomous Gas administration Romgaz must maintain its vertically integrated structure, retaining three core activities (exploration-production, transmission and gas distribution). After completing the Arthur Andersen project, the Autonomous Gas administration was to become a modern company to carry out its basic activities on the principles of strategic business and administrative units, at its headquarters. Reducing costs at the privatized companies’ level in the field of natural gas was not reflected in the price of gas supplied to the end consumer.

Contrary to the study’s conclusions, by 2000 the Autonomous Gas administration broke into five companies and in 2005 the two gas distribution units separated from Romgaz - Distrigaz Nord and Distrigaz Sud - were sold to E.ON Germany and GDF France. The new owners of both companies implemented massive restructuring and cost reduction after the acquisition (outsourcing, layoffs, negotiating prices for the products and services provided by Romanian companies for them). Therefore we can say that this principle has been reached, but the results were not reflected in the price reduction to the end consumer.

Consumer protection

In the last decade the legislation on natural gas consumer’s protection has grown dramatically. Trade clauses have been introduced to protect the interests of natural gas consumers: framework service contracts, regulated supply contracts, performance standards have been approved for services and supply of natural gas to customers, etc.

The regulations in force have reached the step of forcing the gas suppliers to submit multiple notifications for consumer’s information.

Reality shows, however, that none of these have reached the goal. The consumer is not safer today than a decade ago. Most customers’ perception is the lack of protection against the gas supplier, the futility of any efforts in relation to the supplied gas or services, the abuses coming from the ‘gas people’.

Consumer regulations in the field of gas consumers were substantially amended, without practically determining an effective protection for gas consumers.

To some extent, this perception is well founded, the operators on the market managed to issue some regulations that may exonerate them, casting the blame from one operator to another. But the lack of effective and enforceable consumer protection is due to a much greater extent to the customer. The lack of a culture at the individual level, but also for companies, makes them fear the suppliers, makes them refuse to take their own decisions and remain unprotected.

Elimination of cross-subsidies and nonspecific costs

The elimination of cross-subsidies between different activities in the natural gas sector, but also between different categories of consumers, is a fundamental principle in the European Union and was a principle promoted in 2000 by the launch of the natural gas market liberalization in Romania. This principle has been corrected on the natural gas market in Romania by introducing the ‘gas basket’, a principle that all consumers were bound to consume imported and domestic natural gas in a similar proportion (given the different prices they had), in order to avoid preferential approach to the detriment of other consumers. This measure, envisaged on short-term, underwent various transformations over time, becoming an indirect mechanism for subsidizing some consumers by other consumers.

The ‘gas basket’ forced industrial consumers subsidize residential consumers and vice versa.

The presence of several ‘gas baskets’ for various categories of consumers actually resulted in raising the price of gas for consumers that were assigned a higher amount of imported gas and a constant price for the other category (residential consumers and industrial consumers have all gone through these categories).

Increasing professionalism

According to the theory, by separating the activities in the natural gas sector, people and companies get specialized in a narrow field of activity, substantially increasing professionalism. Competition in the same sector fosters innovation and technical progress and leads to lower prices. This theory has not met with the practice in the gas sector in Romania.

The high demand for natural gas services, the reduced effort - intellectually and physically - to operate in the gas sector, the high prices for services have led to the rapid growth of the number of companies operating in the gas sector, but also attracted people lacking theoretical training and experience in the gas sector, from various other fields that have ceased or reduced their activity. Thus, thousands of businesses got licensed in the natural gas sector, bringing together tens of thousands of inexperienced people in the field.

Professionalism in the gas sector followed a downward curve in recent years.

Some of the elements that determined professionalism to follow a downward curve in past years are unawareness of the natural gas sector values, lack of time for preparing and training of newcomers from other fields, the abolition of the hierarchical responsibilities, political influence.

Increasing productivity

The separation of operations provides transparency and traceability of actions, the way actions are carried out in terms of efficiency and effectiveness. This way of setting the targets are determinable in terms of space, money and time and subsequently determine actions that allow overcoming previous standards.

Productivity is a result, a consequence of efforts and not a quality or skill. Productivity is an excellent indicator of the ability of natural gas companies to achieve additional added value in conjunction with lower costs.

Inventing productivity indicators has determined mimicking the added value and has not allowed costs cuts in some companies.

The period was characterized by a paradox: people having knowledge were removed, retired, transferred, etc., in order to employ people who needed time to reach the knowledge of the ousted ones.

People have adopted an attitude at the workplace in accordance with their own way of perceiving the work environment. The unstable environment has ruined people’s faith in values such as quality, innovation, creativity, risk taking, maintaining standards and attitude to work. Work has become to be regarded, in general, without interest, to be avoided if possible, seen as an issue without responsibility and an exhausting one.

Increasing safety in the operation of natural gas facilities

Lack of minimum technical culture in the gas field, bribery, untrustworthiness, etc. led to the approach of works outside the conditions laid down by the regulations in force. These issues have led to the increase in number of defects and their respective impact.

In fact, I believe that the separation and liberalization of some operations, while protection systems have multiplied, have led to a lower level of equipment safety.

Elimination of political or group influences

The liberalization of the natural gas market has actually brought increasing political influence in the sector; the opportunities of these influences were far superior to the situation of an integrated company.

The establishment of an independent institution to operate on the natural gas market ANRGN and then ANRE - institutions called ‘independent’ since their establishment, in fact have responded to political orders and not only.

Ensure a minimum level of energy security for Romania

The lack of an energy security strategy to include Romania’s objectives on energy security, the anti-poverty energy strategy, energy efficiency, the role of the state as a minority or majority shareholder of many of the energy companies, has made the notion of energy to be valid only at the present time and in the past.

In fact, Romania’s energy security is today a ‘random’ one, and the future is not too optimistic. As a supporter of the principles of operational liberalization, of the transparent activities and equity, I think that the way all these were implemented in Romania, with the authorities’ complicity and duplicity, have contributed to the current situation when correct principles lead to reverse effects.

“The road to understanding liberalism cannot be made easier for anyone, the important thing for people is not to declare themselves liberals, but that they really become liberals, who think and act as such,” Ludwig von Mises Being a supporter of market liberalization means, ultimately, to think more about the future without forgetting the past, to have the courage to let yourself carried away by innovative ideas after passing them through sustainable analysis. The postponement in achieving real reform of the natural gas market in Romania will only lead to deeper problems. The increase in gas prices after the start of gas market liberalization was not due to market liberalization, was due to the state institutions’ administrative measures.

In other countries, responsible politicians and visionaries have managed to bring available gas price to a minimum possible by correctly applying the principles of gas market liberalization (but following the strategic objective of this action: the balancing of gas quantities available on the market with the real financial possibilities of the customers to buy that gas). In Romania, the politicians are not ready for the gas market liberalization, the institutions are not prepared for the gas market liberalization, consumers are not ready for the gas market liberalization, however the price of gas has increased and will continue to grow.

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