Decreasing the price of gas from domestic production, but not in the interest of consumers

by Dumitru Chisalita

Gas market liberalization, while keeping interventionism, whether or not lawful, direct or covert (through collusion), in the name of benefits promised to consumers, will lead to major disturbance of the gas market, with an economic impact and affecting the security of supply, in the medium and long term. The experience of GEO 114 has shown that interventionism, even in a market not fully liberalized, makes the price to increase at huge rates, the situation becoming even more complicated in a liberalized market. The Gas Release Program is a method to increase liquidity and transparency in a gas market, successfully applied in other countries. The initiative of introducing this method in Romania occurred 4 years ago and belonged to the business environment, at a time when the existence of imports only from the Russian Federation, at high prices, made it impossible to set a fair price for the acquisition of gas as commodity in Romania. The method was continuously rejected by authorities, even if in this way expensive gas imports from the Russian Federation were favored and Romanian gas consumers disadvantaged. The enactment, this week, of the Gas Release Program in Romania has come at a time when supply and demand started to lead to a correct pricing for the commodity, be it for now only on the Intraday and Day Ahead markets.  We don’t see the same concern to apply principles determining the functioning of a competitive market at the end-consumers, especially that the full liberalization of the gas market is due. This approach can only lead to an increase in revenues for certain intermediary suppliers.

Lack of concern for the end-consumer, to the benefit of certain suppliers, is not a novelty of the recent 15 years on the gas market.  But Order 79/2020 on the obligation to offer gas on the centralized markets in Romania comes with a novelty, violating the provisions of European Directives and national law.

• According to Article 41 of the Directive 2009/73/EC, ANRE has the obligation to monitor the functioning of the gas market and not to enact and even less so intervene in the market, by setting the quantities or the price of gas on the free market;
• According to Article 177(1) of the Gas Law 123/2012: “…prices are formed based on supply and demand, as a result of competitive mechanisms“; therefore, imposing a price by ANRE and taking the price on CEGH Vienna as reference violates the legislation in force.

A question arises: how did Order 79/2020 receive the positive opinion of the Competition Council? What will be the position of DG-ENER in Brussels? Or of the European Federation of Energy Traders (EFET)?

Therefore, even under these difficult circumstances caused by the COVID-19 pandemic, complying with the law must remain a normality, which is why we propose:

– amending the Law 123/2012 and eliminating the obligation imposed on producers to trade at least 50% of their production on the centralized market and establishing by law the producers’ obligation to offer natural gas on the centralized markets in Romania at a rate of 30%, the ANRE Order following to establish only how the sale of this quantity will be applied;

– eliminating from the existing ANRE Order a starting price, this provision, in our opinion, violating both Law 123/2012 and the EU Functioning Treaty and the principle of free competition on a free market.

After making the Gas Release Program lawful, it is necessary to establish the implementing methodology by ANRE, aimed at producing liquidity on the market under competitive and transparent terms, but not before understanding the reasons that make the Romanian gas market dysfunctional.

The causes that make the Romanian gas market dysfunctional:

• The gas market in Romania is still extremely focused on the retail segment (sale to end-consumers);
  •  The main players on this market are basically the same since the beginning of the liberalized market (unbundling of producers/distributors/suppliers), as they have only moved certain market shares, temporarily, from one to another, depending on the short- or medium-term strategy;
  • Moreover, some of these players are also majority players in the gas production and wholesale transactions segments.
  • Therefore, we can expect these forces to compete to maintain status-quo that does not give the Romanian gas market the most correct price it could benefit from.
  • These players claim and they have always claimed that they had to recover, with the approval of the Romanian regulator, costs not recognized/deferred from the regulated supply activity; hence their desire to maintain an unjustifiably high price on the wholesale markets (from the point of view of regional markets, for example), or on the retail gas market.
• Unfortunately, the experience of regulation of the wholesale gas segment in Romania is disastrous (it is true that before this order it was done lawfully).
  • As recent as the autumn and winter of 2019/2020, Romania couldn’t benefit from the declining prices on the European markets, as producers were forced to sell their production at a price of RON 68/MWh, the market thus being under the effect of this benchmark set artificially by the regulatory authority.
  • There is an accumulation of obligations that only hinder the increase in liquidity and competition, both on the wholesale segment and in the retail segment:
    • the obligation to trade on the centralized platforms in terms of both sale and purchase
    • the storage obligation for suppliers to end-customers
    • the producers’ obligation to offer 30% of their production
• the author of the Order 79/2020 – Gas Release Program has no basic knowledge of the dynamics and logics of gas transactions on the competitive markets in Europe:
  • The fact that elements of transactions are already known for the following 30 months is extremely serious. The following as already known:
    • the calendar dates of transactions
    • the initiating bidders (the two producers)
    • the offered volumes and products
    • to a great extent, the algorithm of calculation of the transaction initiation price is also known; therefore, either estimating or influencing one can know – at least by approximation – the starting prices
  • transactions will be confirmed under contracts endorsed by ANRE;

All that’s missing is that the Order mentions the names of buyers, the moment of purchase, the purchased products and the price at which they are concluded.

• Those who advocate for market liberalization for household consumers must understand that the only chance for its functioning is a healthy development of the wholesale market, which cannot be achieved without eliminating the regulation of the wholesale market, promoting free trade, so that the innovating spirit of those who can take risks of advance payment, long-term purchase/sale, product diversification etc. can result in additional alternatives for the final market served. The Competition Council, the Consumer Protection Association, ANRE are obliged to monitor and adjust the slippages in process of formation or already created on these markets.
• The Romanian regulatory authority forgets to monitor and adjust other important aspects of the mechanisms that have proven beneficial for increasing competition and real chances to form a Fair Gas Price in Romania.
  • For example, ACER yesterday published a report in which Romania is mentioned as one of those that ignored ACER requirements to punish and no longer allow an unfair competition on the market of cross-border capacities, specifically the fact that there are companies that overbid the price of these capacities in organized auctions, they win such auctions, then do not use them, to the detriment of the opportunities offered by the regional market.
  • In contrast, other regulators, even from neighboring countries (Hungary, the Czech Republic, Germany), have decided to punish those who do so, applying the “use-it-or-lose-it” rule, thus re-offering for transparent contracting the unused capacity of others who are able to use its opportunities for the benefit of the national market.

Eliminating these clauses with measures to streamline and increase the utilization of the infrastructure must be achieved as a matter of urgency, as long as the price level is low. Otherwise, when gas prices return to the level before the current crisis, the effect will be disastrous for the Romanian consumer and the Romanian economy.

Translation from Romanian by Romaniascout.