Why did Antimonopoly Committee start proceedings against Naftogaz?

Author : Olena Holubeva

Source : 112 Ukraine

The committee initiated a case at the end of the heating season and two months before the end of the PSO - the mechanism on the basis of which a price different from the market one is formed
15:30, 5 March 2020

112 Agency

The decision of the Antimonopoly Committee to start proceedings against Naftogaz Ukraine in connection with the violation of the Law on Protection of Economic Competition was surprising. The state-owned company is suspected of abusing its monopoly position in the natural gas markets by setting natural gas prices on November 1, 2018 at a level "which could not have been established if there had been significant competition."

But what’s interesting, the committee initiated a case at the end of the heating season and two months before the end of the PSO - the mechanism on the basis of which a price different from the market one is formed. As you know, from May 1, the population and heat supply organizations will switch to a regime where they will have to buy gas in a market environment. They will be able to choose any supplier with a suitable price. That is the committee’s sanctions, which may appear if the case is completed, will not work. Or is it worth considering that the government is again not ready to abandon the mechanism of artificial price containment for the population?

If you delve into the history of the issue, the PSO was brought back to life in 2017, after the Groysman government made a revolutionary decision a year earlier to transfer the population to market conditions, after which gas prices for the population soared from preferential 3,600 UAH (146 USD) to 7,188 UAH (292 USD). Due to the objective economic factors prevailing at that time, prices have broken this bar. And they could continue to rise if the government decided not to flirt with the consequences of social discontent. March 22, 2017 adopted Resolution No. 187, which contained a formula that separated gas prices for the population from the market, where growth continued. In accordance with the formula approved by the document, the price from September 1, 2017 for the population was 6,879 UAH (280 USD) per thousand cubic meters, while for industry it already reached 8,749 UAH (356 USD).

From this time a period of protracted battles started. In a period of high gas prices at world hubs, which also affected the situation in Ukraine, the government was looking for ways to prevent gas prices for the population from rising - the elections were just around the corner. In this regard, the PSO formula has been constantly changing. In particular, on October 19, 2018, the Cabinet of Ministers adopted Decision No. 867, according to which from November 1 (the period from which the Antimonopoly Committee believes that prices were set too high) the gas cost for the population was calculated.

According to the decree, the price was calculated by the formula: the base price multiplied by a decreasing coefficient. The base price, in turn, was tied to the "arithmetic average selling price of Naftogaz Ukraine" for industrial consumers who bought gas on a prepayment basis until the delivery period (from July 1, 2018 to September 30, 2018), when it was 8981 UAH (365 USD) per 1 000 cubic meters. Actually, this parameter became the cornerstone on which the committee builds its accusations. "According to available information, Naftogaz set prices for industrial consumers that were higher than those that set in a competitive environment, in particular according to the results of electronic exchange trading on the Ukrainian Energy Exchange and on the NCG European hub with gas delivery to the Ukrainian border," the agency said. It is alleged that this allowed Naftogaz to establish gas prices for the population from November 1, 2018 at a level that would not be possible to set given significant competition.

Related: Ukraine’s Antimonopoly Committee opens case against Naftogaz

By the way, experts have repeatedly noted that Naftogaz, which is still a serious player in the gas market with a fairly large share of sales, has been priced the product up (for industrial consumers) all these years, which is why the Ukrainian gas market is considered to be premium and one of the most expensive.

The defense arguments of Naftogaz are based mainly on the fact that gas prices for the population were not set by decisions of companies, but directly by the Cabinet, in accordance with the formula approved by it. The company also emphasizes that buyers were not limited in their choice: Naftogaz fulfilled its special obligations, but gas and heat suppliers were not obliged to buy gas exclusively from it, they could choose any seller of the resource, including private. The only question is that Naftogaz PSO price was lower than the market for a certain period.

It is worth recalling that in December 2019 gas prices fell, and the PSO price was higher than the market one (industrial enterprises bought gas in the range of about 4,700 UAH (192 USD) per 1,000 cubic meters, while the guaranteed price for the population was fixed at the level of 5500 UAH (224 USD) per 1 000 cubic meters (excluding VAT and transportation), private regional gas companies rushed to buy gas on the market in the hope of selling it at the PSO price and making money on the difference. In this regard, the government urgently adopted a new resolution introducing the Amsterdam formula plus, according to which the price for the population and business in January amounted to 4650 UAH (189 USD) per thousand cubic meters, and in February fell to 3948 (161 USD) per thousand cubic meters.

So, taking into account all the circumstances, judges of legal practice can bet on who outstrips whom in sophistication and tactics - Antimonopoly lawyers or Naftogaz lawyers. Indeed, for sure, even if the committee quickly makes a decision, Naftogaz will challenge it in court. But the only thing that the committee can achieve under the article of charges put forward by it is financial sanctions, a banal fine. Nothing else is provided for by law under this article. The Antimonopoly Committee of Ukraine will not even be able to oblige Naftogaz to prevent certain actions in the future or to pay compensation to the population and the fuel and energy complex: a banal fine - a certain amount from the pocket of one government agency (Naftogaz) is transferred to the account of another agency (Antimonopoly Committee).

Then for what purpose did the Antimonopoly Committee of Ukraine start this business right now? It is difficult not to suspect that the committee is guided by motives other than the protection of economic competition, a political nature is possible. It is noteworthy that the decision of the Antimonopoly Committee of Ukraine appeared in the midst of a struggle over one of the most appetizing posts in the public sector - the Naftogaz leadership. The contract with the current board of directors Andriy Kobolev ends, and the government should already have decided on a competition for this position.

According to our sources, the antimonopoly opera conductor may be the head of the Presidential Office, Andriy Yermak, who, according to rumors, already has his own candidate for the post of Naftogaz Ukraine head.

Related: Naftogaz cuts gas prices in March, but only for industrial consumers

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