The voice of the entire
Upstream sector in Romania

Populist policies come with a high bill for the real economy - Daniel Apostol, Secretary General of ROPEPCA

he gas market liberalization issue returns to public attention because it is approached again from a risky, populist perspective. Moreover, the way in which liberalization is publicly debated, it leads to major disputes between market players.

The most surprising point of view comes from distributors, which approach a populist perspective, of alleged protection of households, thus opposing liberalization. They warn in an alarmist manner on potential price increases to endconsumers, but forget to communicate that 50% of the final price, paid from households' pockets, is represented by distribution, transmission and storage tariffs. Basically, in gas case, the commodity itself accounts for only half of the final price paid by consumers, as share, this being an exceptional situation: Romania is the country which, although it has the lowest gas price for household consumers in the European Union, has the largest share of network tariffs.

The dispute in the market on full gas market liberalization - undertaken by Romania before the EU - takes place within the parliamentary debate on the approval of GEO 64/2016 which provides for liberalization for household consumers as of 1 April this year by eliminating the obligation for producers to make available with priority in the regulated market gas from domestic production, an obligation considered by the European Commission a restriction of free movement of goods in the Community space and for which the Commission has triggered an infringement procedure against Romania.

The risk for the parliamentary solution to adopt GEO 64 to be a populist solution in its turn, "covered" by complains of distributors and without taking into account the realities in the market and the perspectives of the gas production sector in Romania, an important sector for the economy, jobs and for revenues to the state budget, is maximum. Moreover, although gas producers have been forced to pay, since 2014, a tax of 60% on revenues from liberalization, revenues which had to be transferred, according to the substantiation note of GEO 13/2014, which establishes this tax, to vulnerable consumers, the Government hasn't defined so far the vulnerable gas consumer for which potential price increases would have a negative impact.

As a media analysis has recently showed, if gas market liberalization is "pushed" beyond 1 April provided by GEO 64/2016, Romania risks losing one of the largest projects in the past 10 years, respectively it could lose the European funding of EUR 180mln for BRUA gas pipeline. Moreover, I recall that last year the EC started an investigation on the two domestic gas producers (OMV Petrom and Romgaz) and on Transgaz, and a delay of liberalization could be an aggravating factor that would lead to fining Romania. Last year, EC President Jean Claude Juncker requested the Government of Romania to eliminate physical and commercial barriers against gas exports, in exchange for funds of EUR 180mln to build the Romanian section of the gas pipeline that will cross Bulgaria-Romania-Hungary-Austria. According to Hotnews, in September 2016 a draft GEO was drawn up, which eliminated the legislative provision requiring the supply with priority of gas from domestic production to households and thermal power plants.

At the same time, it specified the schedule for the full gas market liberalization, in the context in which for industrial consumers liberalization had already taken place in 2015, without the negative consequences expected on price increases. The Parliament now wants to "adjust the ordinance", for obvious politicking purposes, but which would maintain the regulation of gas from domestic production and the further application of the obligation on priority, which would actually mean going back to the infringement procedure.

The obligation to make available gas with priority for households and power plants actually creates a harmful policy in the market whereby suppliers have the possibility to buy gas at a regulated price from producers and then sell it at market price, maximizing their profits. The final destination of these gas amounts is very difficult to track, although it must be complied under the law. If the infringement procedure were to be resumed, the European Court of Justice could force Romania to pay a substantial fine (tens of thousands of euros per day), and the European Commission would block the funding for BRUA.

In a market consultation at the invitation of the Committee for Industries and Services of the Chamber of Deputies, the representatives of distribution operators were concerned about the fate of household consumers, but they forgot to mention that they demanded the increase in distribution tariffs by 74% (according to the same site quoted). The main distributors and suppliers (E.ON and Engie - formerly GDF Suez) claim that liberalization throws prices into the air for household consumers. But the distributors' argument does not hold, in the context in which 50% of the final price received goes to distribution operators and other network operators and they are the ones to request from ANRE distribution tariffs higher by 40%, and the increase would be transferred directly to the final price to consumers.

Also, they requested an increase in the regulated tariff by 40%. ANRE President Niculae Havrilet claims that a possible price liberalization for gas from domestic production starting with 1 April wouldn't bring significant price increases to households, because prices would be adjusted in the market depending on production and imports. In any case, an increase by 10% in gas production prices would reflect in an increase by only 5% in prices to end-consumers, the price of commodity having a share of only 50%.

In fact, in the recent years it has been noticed anyway a convergence of regulated prices with prices in the free market, which is why the price to household consumers was frozen in 2016 at RON 60/MWh. At the time, in July 2016, the Government considered that an increase from RON 60/MWh to RON 66/MWh, as provided by the deregulation schedule in force, would have led to an increase in regulated prices above the level of prices in the free market. From this point of view, it is no longer justified to delay liberalization after 1 April. The Emergency Ordinance 64/2016 is at the Committee for Industries of the Chamber of Deputies, for debates, committee whose President is Iulian Iancu (PSD), who has recently stated that "Romania plans to move to liberalization 'suddenly, overnight', and that "a full liberalization of the gas price four years ahead of schedule will hinder any discussion on saving the centralized systems for hot water and heat supply".

Price liberalization in the gas sector is an objective undertaken by Romania before joining the European Union, the initial deadline being 2007. For this purpose, it is important to start from the assumption that price deregulation is not an exceptional situation for the sole benefit of producers and which guarantees additional, undeserved revenues for them, but a return to normality, respectively a rate of return at the level of the global industry, a rate of return which takes into account the investment efforts and which is in line with the supplydemand ratio, with the related market risks. Liberalization is also a compliance with EU legislation, with the final purpose of ensuring competitive market prices.

Liberalization is beneficial for end-consumers, which have advantages from a real competition among suppliers, with a focus on quality services and competitive pricing. In the medium and long term, liberalization is beneficial for the energy security, because the proper price signal given by the supply-demand ratio is likely to boost investments in gas exploration and exploitation, for the national interest and benefit.

Source: Profit.ro

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