Fair Gas Prices. 10 reasons why we liberalized the gas market, which failed in Romania

by Dumitru Chisalita, energy expert

In early the 2000s, the idea of a massive conceptual restructuring of the gas market occurred, by liberalizing this market with the declared purpose of decreasing costs and increasing the quality of gas supply. Analyzing the 15 years, we can see that institutions in charge with market functioning have the greatest responsibility in its malfunction. In early the 2000s, the idea of a massive conceptual restructuring of the gas market occurred, by liberalizing this market with the declared purpose of decreasing costs and increasing the quality of gas supply. Analyzing the 15 years, we can see that institutions in charge with market functioning have the greatest responsibility in its malfunction. Gas market liberalization is based on the principle of competition, transparency and fairness. Targets of gas market liberalization, started in 2000, were precise, being made public in various media publications, by those who started and led this process:

1. Low gas price
2. Reducing costs for companies active in the gas market
3. Consumer protection
4. Eliminating crossed subsidies and costs not related to the activity
5. Increasing professionalism
6. Increasing productivity
7. Increasing the operational safety of gas installations
8. Eliminating the political or group influences
9. Establishing an independent institution to operate in the gas market
10. Ensuring a minimum level of energy security for Romania

These reasons haven’t stopped circulating in the 15 years since. At first, because they represented goals shared by many Romanians, then because they were an obligation of Romania, as EU member state. After more than a decade and a half, we plan to analyze the way in which these goals have been reached.

1. Low gas price

In 1999, the average gas price for household consumers was regulated, at RON 0.089/cubic meter including VAT. 14 years later, in late 2013, it was still regulated, but its value was around RON 1.62/cubic meter including VAT. Thus, although the price of gas continued to be regulated, for this category of consumers, it increased by approximately 18 times. An important component of this increase is due to gas import, but the increase in taxes was much steeper.

1. Reducing costs for companies active in the gas market

Arthur Anderson study, conducted in 1995 (work conducted under the Romanian Petroleum Sector Rehabilitation Project funded by the World Bank), shows that within 3-5 years the Autonomous Gas Administration ROMGAZ had to restructure and organize itself in companies with activities of gas distribution, extraction and transmission. The purpose of this reorganization was based on the separation of costs on types of activities, cost transparency and “surfacing” those costs that were not justified or were very high and forcing their diminishing. Based on analyzes of Arthur Andersen, it resulted that the Autonomous Gas Administration ROMGAZ had to keep its vertically integrated structure, keeping its three main activities (gas exploration-production, transmission and distribution). After the Arthur Andersen project was fully achieved, the Autonomous Gas Administration was expected to become a modern company carrying out its core business on the principle of strategic and administrative business units, at its headquarters. Contrary to the study’s conclusions, in 2000 the Autonomous Gas Administration split in 5 companies, and in 2005 the two gas distribution companies detached from ROMGAZ, DISTRIGAZ NORD and DISTRIGAZ SUD, were sold to E.ON Germany and GDF France. The owners of the two companies have implemented, after the acquisition, a massive restructuring and cost reduction process (outsourcing, redundancies, negotiation of prices for products and services provided by Romanian companies for them). Thus, it can be appreciated that this principle was fulfilled, but the results have not reflected in a reduction in prices to end-consumers.

1. Consumer protection

In the last decade, legislation on the protection of gas consumers has developed greatly. Commercial clauses have been introduced to protect the interests of gas consumers in: framework service agreements, regulated supply contracts, performance standards were approved in the provision of services and gas supply to customers etc. Regulations in force went to forcing gas suppliers to send multiple letters for consumer information. But the reality shows that they haven’t reached their goal. Gas customers don’t feel more protected today than a decade ago. Most of them feel the lack of protection in relation to gas suppliers, uselessness of any approach regarding gas supplied or services received, abuses they are subjected to by the “gas people”. To a certain extent, this perception is grounded, operators activating in the market managing to place certain regulations by which they can avoid being held responsible by the technique of throwing the blame from one operator to another. But the absence of a real and applicable protection of gas consumers is due to them to a much greater extent. Lack of culture at individual level, but also at the level of companies, makes them be afraid of suppliers, to refuse to act as a result of own beliefs and to remain unprotected.

1. Eliminating crossed subsidies and costs not related to the activity

Eliminating crossed subsidies between various activities in the gas sector, but also between the various categories of consumers, is a fundamental principle in the European Union and was a principle promoted in 2000, with the launch of gas market liberalization in Romania. This principle was corrected in the Romanian gas market by introducing the “gas basket”, a principle through which all consumers were forced to consume gas from imports and domestic production in a similar proportion (given their differentiated prices), to avoid the preferential approach of certain consumers to the detriment of the others. This measure, which was intended to be a short-term one, has suffered various transformations in time, becoming an indirect mechanism for subsidizing certain consumers by other consumers. The presence of several “gas baskets” for various categories of consumers determined in fact an increase in gas prices for consumers to which a greater amount of the import component was assigned and keeping the price for the other category (residential consumers or industrial consumers have passed, one by one, through these categories).

1. Increasing professionalism

According to the theory, separating activities in the gas sector determines the specialization of persons and companies on a narrow field of activity, determining a substantial increase in professionalism. Competition in the same field of activity stimulates innovation and makes prices for services offered to be lower. This theory hasn’t been met in practice in the Romanian gas sector. The great demand in the gas sector, reduced effort – intellectually and physically – to activate in the gas sector, high prices of services determined the quick growth of the number of companies in the gas sector, but also determined the move of persons from various other fields that ceased or restricted their activity, without theoretical training and experience in the gas field. Thus, thousands of companies received permits and licenses in the gas sector, reuniting tens of thousands of unexperienced people in this activity. Failure to learn the specific values of the gas sector, appearances this sector determines compared to its difficulty, lack of time needed for the preparation and training of newcomers from other sectors, cancellation of the hierarchical line, political influence are some of the factors determining the professionalism of recent years to follow a downward trend.

1. Increasing productivity

Splitting activities ensures the transparency and traceability of actions, but also the way in which these actions are performed in terms of efficiency and effectiveness. Targets set in such a way as to be determinable in space, money and time, subsequently determine the performance of actions allowing to overcome the previous standards. Productivity is a result, a consequence of efforts made and in no way is it a feature or skill. Productivity is an excellent indicator of the capacity of gas companies to get additional added values combined with cost savings. The period was characterized by a paradox: people with knowledge were alienated, retired, transferred etc. to hire people who needed time to reach the knowledge of those rejected. People adopted an attitude at their jobs in line with their own way of perceiving the work environment. The unstable environment destroyed the confidence of people in values such as: quality, innovation, creativity, risk taking, keeping standards and attitude towards work. Work is seen, in general, without interest, to be avoided as much as possible, lacking accountability and tiring.

1. Increasing the operational safety of gas installations

Absence of a minimum technical culture in the gas sector, bribe, lack of seriousness etc. determined the approach of certain works outside the conditions stipulated by the regulations in force. These aspects are noticeable by the increased number of defects and their impact.

1. Eliminating the political or group influences

Gas market liberalization led in fact to increased political influence in the gas sector, opportunities of these influences being much superior compared to the situation of an integrated company.

1. Establishing an independent institution to operate in the gas market

ANRGN and subsequently ANRE was an institution declared “independent” from its establishment, but in fact it answered the political orders and not only.

1. Ensuring a minimum level of energy security for Romania

Lack of an energy security strategy including Romania’s objectives on energy security, anti energy poverty, energy efficiency, state’s role as majority or minority shareholder in many of the energy companies make the energy notion exist only in the current and past time. In fact, Romania’s energy security is today “accidental”, and the future is not too bright. Supporter of principles of activity liberalization, of transparent activities and of fairness, I believe that only the way in which they were transposed in Romania, complicity and duplicity of authorities determined that fair principles cause opposite effects. What we find today is the result of the approach with gloves! Market participants believe something and say the opposite. The belief that fooling the system, sneaking under the law is the key to success. Fear of the future, fear of collapse, do not allow any action. Leaders of certain institutions in the gas market don’t believe in anyone and in anything, but talk with self-confidence. They believe that if they change something here and there, without falling out with anyone, some things will change significantly by themselves. I believe the failure to apply these principles is due to the Romanian model promoted by institutions that say one thing and do another. In this way, Romanians, customers and suppliers, don’t believe in the market economy of “Romanian type”, don’t believe in the liberalized gas market. They don’t feel the market because it is not visible. It is not visible because it is not free. It’s an administrative market, dominated by legal constraints, institutional constraints, operational constraints, constraints, constraints, constraints…! Being the adept of market liberalization finally means thinking more about the future, without forgetting the past, having the courage of being driven by innovating ideas after they pass the analysis of sustainability. Delaying the achievement of a real reform of the gas market in Romania will only lead to deeper problems. In other countries, responsible and visionary politicians, properly applying the principles of gas market liberalization (but following the strategic objective of this action: balancing the amounts of gas available in the market with the real financial possibilities of customers to buy such gas), managed to bring the price of gas available to a minimum price possible. In Romania, politicians are never ready for gas market liberalization, institutions are not ready for gas market liberalization, consumers are not ready for gas market liberalization; however, gas prices have increased and will continue to grow. Things must change in the gas sector!

Image courtesy of Stuart Miles at FreeDigitalPhotos.net