Gas Competition - Ukraine
June 3, 2010 By L.I. Group
Monopoly is the phenomenon of economic relations, inseparably connected with relationships of public interests and interests of monopolies.
In this context, the role of the state, the level of legislative regulation of monopolies is of great socio-economic importance. And when it comes to natural gas market, it is a matter of strategic importance and national energy security.
The balance of natural gas in Ukraine is as follows: imported gas comprises 75% of needs of Ukraine and the rest of the amount used is gas of domestic production. Considering energy dependence of Ukraine on the supply of natural gas from Russia, it is easy to conclude that the functioning of the internal market of natural gas depends on the external environment, and therefore has a sensitive nature and depends on the level of protection of the state's interests.
Recent years (2006, 2007 and 2008) showed how the situation in the gas market changed. If until 2007 “Naftogaz” NJSC was an importer of natural gas, then in 2007 an owner of total amount of imported gas - an entity, with Russian capital – appeared on this market. This year the situation has changed in favor of “Naftogaz” NJSC. These circumstances had a different impact on the operational circumstances of domestic natural gas market in a whole.
It is clear, that when it comes to the state monopoly, in this case there is no doubt that the state, carrying a social responsibility to the citizens and implementing the management of public monopolies, thereby compels to seek a balance between the interests of society and government entities. And even in this case, in Ukrainian realities, one should not rule out corruption in the functioning of state monopoly. However, when it comes to a monopolist with absolute influence on the market in the absence of government influence, it is impossible to speak about the balance of such interests. These interests can be protected only under condition of adequate and reliable legal regulation of gas sphere.
It is appropriate to evaluate the practice activities in the market of natural gas in 2007 and legislative-making activities in this field during this period.
During this period, a company created with the participation of “RosUkrEnergo” appeared in the market of natural gas. According to the decree of Cabinet of Ministers “On Amending Resolution of Cabinet of Ministers of December, 27th, 2001 № 1729” № 31 dated January, 16th, 2007 (Resolution of Cabinet of Ministers № 31), needs of all consumers of natural gas were satisfied by resources of that provider, as well as it was granted by a right to accumulate funds for transportation of natural gas bypassing transport organizations. In this way, mentioned subject received an unlimited influence on the market, appeared in such phenomena as the distribution of resources between gas-traders and consumers, control of financial flows on the natural gas transportation, etc.
This situation has highlighted the level of legal regulation of the gas monopoly and neglect of public interests in favor of certain business entities.
Of course, one could argue that we have a good legal base regulating the conditions of monopolies in general, including the laws of Ukraine "On Antimonopoly Committee", "On Protection of Economic Competition". However, as practice in functioning of participants in the natural gas market shows, the powers available at AMC can not be implemented, because the law does not allow to determine the formal aspect of the violations as the basis of influence on a monopolist in the gas sector. Accordingly, the formal grounds, specified by law for the application of appropriate interventions, do not adhere in relation to the gas monopoly the main function of ACU - regulation of monopolies.
For more detailed analysis, to draw appropriate conclusions, it is useful to consider the real impact on the market of gas monopoly in 2007, and to evaluate these processes on the basis of legal norms in terms of defining a monopoly status in the market of natural gas.
Monopoly position of an entity in a particular product market is an obligatory term or qualification of actions of the business entity, restricting competition. In accordance with Article 12 of Law of Ukraine "On Protection of Economic Competition", monopoly (dominating) position is regarded as a position of business entity whose share in the commodity market exceeds 35%, or is less than 35%, if it does not have much competition due to relatively small market shares belonging to competitors.
Accordingly to the provisions of the Law of Ukraine "On Protection of Economic Competition", in particular Article 13, abuse of monopoly position is:
1) Establishment of such prices or other terms of purchase or sale of goods, which could not be established, if there would be considerable competition in the market;
2) Application of different prices or other different conditions to equivalent agreements with subjects of management, sellers or buyers without objective reasons;
3) Stipulation of conducting agreements by making supplementary obligations of the business entity, which by their nature or according to the trade and other fair customs in the entrepreneurial activities do not relate to the subject of the agreement;
4) Limiting of production, markets or technical development, which has caused or may cause damage to other business subjects, buyers, sellers;
5) Partial or complete rejection of purchase or sale of goods in the absence of alternative sources of sale or purchase;
6) Substantial limitation of the competitiveness of other business entities on the market without objective reasons;
7) Creation obstacles to the market access (exit from the market), or removal from the market vendors, buyers, other business entities.
Resolution of Cabinet of Ministers № 31 has determined for a monopolist in the gas market relatively comfortable conditions for misconduct (unfair competition), in particular:
- Control over financial flows of transport organizations;
- Therefore, lack of payment for transportation of gas, and thus complete financial dependence of transport organizations from the gas monopoly;
- Using mentioned factors as a mean of influence, in particular, using different conditions to equivalent contracts, refusal to regional gas distribution companies in access to customers by refusing to provide natural gas for these purposes.
Above mentioned circumstances formed the basis of Presidential Decree № 552/2007 of June, 25th 2007, which stopped the decree of Cabinet of Ministers № 31. The above facts of unfair competition were displayed in the explanatory memorandum to the Decree.
Thus, we can conclude that such a situation, where one business entity has an unconditional right to influence, and others were totally dependent on it, was created. Here the provisions of the antimonopoly legislation can be recalled, which, unfortunately, do not apply. According to the formal features, reflected in the definition of a monopoly position in the market, a business entity - actual monopoly (the owner of all imported natural gas resources) is not a de jure monopoly, but only one of the business subjects on the natural gas market with a license to supply natural gas. Notably, it allows such a large entity to influence the market through distribution of its own resources among controlled gas-traders.
Mentioned situation indicates the urgent need of legislative regulation of legal gaps in this area. Suggestions to solve this issue include: a clear distinction between natural gas markets by type; to ensure to all market participants an equal access to natural gas resources. The way of resolving this problem is important, it is advisable to do by law.
Under a clear distinction in the natural gas market we mean its division on the basis of subjects of natural gas market. Supply of natural gas in accordance with the Law of Ukraine "On licensing" is a type of activity subject to licensing. And the distinction of licenses by types of supply itself will form the basis of the criterion of demarcation of supply markets. That is, to introduce the concept, for example, of a general license, under which the business entity will be entitled to import natural gas and supply it to other subjects, acting on the basis of a license for supply of natural gas, which includes the gas supply to consumers and other licensees.
Thus, an entity having a general license would have in Ukraine a right solely on import of natural gas and a right to sell it only to participants of this market, who have a license to supply natural gas to consumers. As a result, these innovations may, to some extent, provide observance of anti-monopoly legislation and strengthen control by the ACU. This, in particular, will allow using effective measures to ensure conditions for free competition in the gas market, when such phenomena, as conspiracy (concerted anticompetitive actions) between traders and participant of the market importing a resource, are detected.
An additional tool to ensure free access of business entities to the natural gas market and, correspondently, its de-monopolization is determination at legislation level requirements for entering into exchange agreements on gas sale from the importer of natural gas to the trader (business subject, having a license to supply natural gas to consumers). That is, equal access to volumes of natural gas to all participants on market principles.
ABOUT THE AUTHOR: Shershun Lubomyr
Senior Partner, Chairman of the Board of Directors of the law firm L.I.Group, Kiev
Copyright L.I. Group
More information about L.I. Group
Disclaimer: While every effort has been made to ensure the accuracy of this publication, it is not intended to provide legal advice as individual situations will differ and should be discussed with an expert and/or lawyer. For specific technical or legal advice on the information provided and related topics, please contact the author.
The balance of natural gas in Ukraine is as follows: imported gas comprises 75% of needs of Ukraine and the rest of the amount used is gas of domestic production. Considering energy dependence of Ukraine on the supply of natural gas from Russia, it is easy to conclude that the functioning of the internal market of natural gas depends on the external environment, and therefore has a sensitive nature and depends on the level of protection of the state's interests.
Recent years (2006, 2007 and 2008) showed how the situation in the gas market changed. If until 2007 “Naftogaz” NJSC was an importer of natural gas, then in 2007 an owner of total amount of imported gas - an entity, with Russian capital – appeared on this market. This year the situation has changed in favor of “Naftogaz” NJSC. These circumstances had a different impact on the operational circumstances of domestic natural gas market in a whole.
It is clear, that when it comes to the state monopoly, in this case there is no doubt that the state, carrying a social responsibility to the citizens and implementing the management of public monopolies, thereby compels to seek a balance between the interests of society and government entities. And even in this case, in Ukrainian realities, one should not rule out corruption in the functioning of state monopoly. However, when it comes to a monopolist with absolute influence on the market in the absence of government influence, it is impossible to speak about the balance of such interests. These interests can be protected only under condition of adequate and reliable legal regulation of gas sphere.
It is appropriate to evaluate the practice activities in the market of natural gas in 2007 and legislative-making activities in this field during this period.
During this period, a company created with the participation of “RosUkrEnergo” appeared in the market of natural gas. According to the decree of Cabinet of Ministers “On Amending Resolution of Cabinet of Ministers of December, 27th, 2001 № 1729” № 31 dated January, 16th, 2007 (Resolution of Cabinet of Ministers № 31), needs of all consumers of natural gas were satisfied by resources of that provider, as well as it was granted by a right to accumulate funds for transportation of natural gas bypassing transport organizations. In this way, mentioned subject received an unlimited influence on the market, appeared in such phenomena as the distribution of resources between gas-traders and consumers, control of financial flows on the natural gas transportation, etc.
This situation has highlighted the level of legal regulation of the gas monopoly and neglect of public interests in favor of certain business entities.
Of course, one could argue that we have a good legal base regulating the conditions of monopolies in general, including the laws of Ukraine "On Antimonopoly Committee", "On Protection of Economic Competition". However, as practice in functioning of participants in the natural gas market shows, the powers available at AMC can not be implemented, because the law does not allow to determine the formal aspect of the violations as the basis of influence on a monopolist in the gas sector. Accordingly, the formal grounds, specified by law for the application of appropriate interventions, do not adhere in relation to the gas monopoly the main function of ACU - regulation of monopolies.
For more detailed analysis, to draw appropriate conclusions, it is useful to consider the real impact on the market of gas monopoly in 2007, and to evaluate these processes on the basis of legal norms in terms of defining a monopoly status in the market of natural gas.
Monopoly position of an entity in a particular product market is an obligatory term or qualification of actions of the business entity, restricting competition. In accordance with Article 12 of Law of Ukraine "On Protection of Economic Competition", monopoly (dominating) position is regarded as a position of business entity whose share in the commodity market exceeds 35%, or is less than 35%, if it does not have much competition due to relatively small market shares belonging to competitors.
Accordingly to the provisions of the Law of Ukraine "On Protection of Economic Competition", in particular Article 13, abuse of monopoly position is:
1) Establishment of such prices or other terms of purchase or sale of goods, which could not be established, if there would be considerable competition in the market;
2) Application of different prices or other different conditions to equivalent agreements with subjects of management, sellers or buyers without objective reasons;
3) Stipulation of conducting agreements by making supplementary obligations of the business entity, which by their nature or according to the trade and other fair customs in the entrepreneurial activities do not relate to the subject of the agreement;
4) Limiting of production, markets or technical development, which has caused or may cause damage to other business subjects, buyers, sellers;
5) Partial or complete rejection of purchase or sale of goods in the absence of alternative sources of sale or purchase;
6) Substantial limitation of the competitiveness of other business entities on the market without objective reasons;
7) Creation obstacles to the market access (exit from the market), or removal from the market vendors, buyers, other business entities.
Resolution of Cabinet of Ministers № 31 has determined for a monopolist in the gas market relatively comfortable conditions for misconduct (unfair competition), in particular:
- Control over financial flows of transport organizations;
- Therefore, lack of payment for transportation of gas, and thus complete financial dependence of transport organizations from the gas monopoly;
- Using mentioned factors as a mean of influence, in particular, using different conditions to equivalent contracts, refusal to regional gas distribution companies in access to customers by refusing to provide natural gas for these purposes.
Above mentioned circumstances formed the basis of Presidential Decree № 552/2007 of June, 25th 2007, which stopped the decree of Cabinet of Ministers № 31. The above facts of unfair competition were displayed in the explanatory memorandum to the Decree.
Thus, we can conclude that such a situation, where one business entity has an unconditional right to influence, and others were totally dependent on it, was created. Here the provisions of the antimonopoly legislation can be recalled, which, unfortunately, do not apply. According to the formal features, reflected in the definition of a monopoly position in the market, a business entity - actual monopoly (the owner of all imported natural gas resources) is not a de jure monopoly, but only one of the business subjects on the natural gas market with a license to supply natural gas. Notably, it allows such a large entity to influence the market through distribution of its own resources among controlled gas-traders.
Mentioned situation indicates the urgent need of legislative regulation of legal gaps in this area. Suggestions to solve this issue include: a clear distinction between natural gas markets by type; to ensure to all market participants an equal access to natural gas resources. The way of resolving this problem is important, it is advisable to do by law.
Under a clear distinction in the natural gas market we mean its division on the basis of subjects of natural gas market. Supply of natural gas in accordance with the Law of Ukraine "On licensing" is a type of activity subject to licensing. And the distinction of licenses by types of supply itself will form the basis of the criterion of demarcation of supply markets. That is, to introduce the concept, for example, of a general license, under which the business entity will be entitled to import natural gas and supply it to other subjects, acting on the basis of a license for supply of natural gas, which includes the gas supply to consumers and other licensees.
Thus, an entity having a general license would have in Ukraine a right solely on import of natural gas and a right to sell it only to participants of this market, who have a license to supply natural gas to consumers. As a result, these innovations may, to some extent, provide observance of anti-monopoly legislation and strengthen control by the ACU. This, in particular, will allow using effective measures to ensure conditions for free competition in the gas market, when such phenomena, as conspiracy (concerted anticompetitive actions) between traders and participant of the market importing a resource, are detected.
An additional tool to ensure free access of business entities to the natural gas market and, correspondently, its de-monopolization is determination at legislation level requirements for entering into exchange agreements on gas sale from the importer of natural gas to the trader (business subject, having a license to supply natural gas to consumers). That is, equal access to volumes of natural gas to all participants on market principles.
ABOUT THE AUTHOR: Shershun Lubomyr
Senior Partner, Chairman of the Board of Directors of the law firm L.I.Group, Kiev
Copyright L.I. Group
More information about L.I. Group
View all articles published by L.I. Group
Disclaimer: While every effort has been made to ensure the accuracy of this publication, it is not intended to provide legal advice as individual situations will differ and should be discussed with an expert and/or lawyer. For specific technical or legal advice on the information provided and related topics, please contact the author.
