The great demolition of the gas monopoly is taking off

All agree: it’s high time to put an end to the monopoly of the PGNiG. On the other hand, the way of dismantling the giant is a bone of contention, and any attempt at challenging its position is like disarming a bomb. If we overly deregulate, the group –deprived of its sumptuous earnings – will not be able to pipe its pipe dream – shale gas, viewed by many as a recipe to restore the soundness of public finance. Conversely, too light-hearted approach to the giant will petrify the status quo which translates into steeply inflated bills for more than ten millions of both private and corporate consumers.

Other countries which have already liberalised their markets have learnt the lesson: removing the monopoly in the domestic gas market sends the price of the commodity downwards and enhances the quality of the provided services.

Behind the times or gone with the gas

Today, anyone who has not yet replaced the gas stove with an electric cooktop is well aware that the contacts with the Polish monopolist will take him on a journey in time to the reality known from the 80. In the PGNiG the customer will always be just a supplicant and the bills he pays are utterly out of touch with the foundations of the economy, i.e. a market play between demand and supply. Until the free gas market develops, even the major consumers cannot influence the prices of this commodity.

It wouldn’t be otherwise. The diagnosis of the market, presented in the report compiled by the Office of Competition and Consumer Protection (UOKiK)  “Directions for the Development of Competition and Consumer Protection on the Domestic Gas Market”, dispels all the illusions. Polish gas market, in respect of exploitation, storing and sales, does not experience competition. This is a kind of a diplomatic understatement that a monopoly prevails.

The facts are rough and tough. Last year, the wholesale gas market obtained as much as 99.8% of its supplies from the PGNiG. The retail market was only slightly better. The PGNiG group controlled 96.38% of the market – again, this is the UOKiK’s estimate. The giant laid its hands also on other  elements of the market which are crucial for upholding its monopoly, i.e. it controls 100%  of storage space and all the levels of trade.

The law ready to fight monopoly

As Małgorzata Krasnodębska-Tomkiel, the head of the UOKiK – the Polish antimonopoly office claims, the monopoly is a left over from the previous era. The gas market was non-existent in the communist Poland until 1989, and politicians have failed to build it since the transformation of 1989 – she observes.

Why liberalise the gas market?

– First, we are forced to do that by the European Union. Second, we wants it ourselves because it is going to bring benefits for the whole market, for  businesses and consumers–  Małgorzata Krasnodębska –Tomkiel explains.

The President of the UOKiK emphasizes the benefits stemming from the deregulation of the gas market.

– consumers will be able to choose between offers, taking account not only of the best price but also of other factors, e.g. the quality of the commodity.

There is no going back from the liberalisation of the gas market. The Ministry of Economy is drafting the Gas Law. Looking ahead, the nearest weeks will see the publication of amendments to the bill, and the draft law will be sent to public consultations. The Law is to chart the path towards the liberalised market and the economy is looking forward to the official promulgation of the Law.

It will not be the first attempt to break the monopoly of the PGNiG. Over the recent years, i.a. distribution and storage  companies have been spun out from the capital group and relevant legislation has been enacted to allow access for independent entities to the infrastructure, as it has happened in the energy sector. Theoretically this should suffice. In practice, however, competition is still nowhere to be seen.

As submitted in the foregoing report of the UOKiK, the company may take advantage of its dominating position in wholesale trade to push up prices. This is the situation we’ve dealt with in the energy sector. At first the aim is to establish two separate financing and accounting systems at the PGNIG by separating the wholesale from the retail lines.

As long as the heads of both lines are sitting in their offices next door to each other, they can meet at lunch to agree the fuel sale price on a level that would render it unprofitable for anyone from outside the group.

According to the UOKiK, establishing a wholesale price of gas should be the next step which could allow alternative retail sellers to operate on the market.

Apparently, the optimal way to build a wholesale market is to force the PGNiG to offer some of the gas that it imports to other entities, via the stock exchange auctions. That has happened in the energy sector where energy prices imposed by the petrified backwater started to fluctuate. Sometimes to the advantage of  customers, other times to the advantage of  producers, in other words, they follow the free market principles. A market like this should be developed also for gas.

As Marek Woszczyk, the head of the Energy Regulatory Office (URE) anticipates, the trading platform for the blue fuel may already be launched on 1 January 2013. Meanwhile, Grażyna Piotrowska – Oliwa, President of the PGNiG Management Board claims trading will commence at the end of Q4 this year. The first step has already been taken. At the beginning of September, the Polish Financial Supervision Authority (KNF) approved the rules of gas trading on the Polish Power Exchange (Polpex). The rules lay down the conditions to be fulfilled to trade in gas on the exchange.

The terms of cooperation between the PGNiG, the Polish Power Exchange and the Warsaw Commodity Clearing House are currently being negotiated and the market may already stand ready to see the first bids come in. Is the business worth the trouble?  In the start-up phase of the gas exchange operations, the prospective sales volume of gas is to amount to a minimum of 0.4 billion cubic metres  p.a., i.e. less than 3 % of the domestic consumption.

Experts emphasise that the monopoly will not collapse overnight, yet the solution will allow the market participants to get the principles and procedures in synch. However, more than half of the volume of fuel will be traded on the exchange, as in the case of electricity, later rather than sooner.

From the neighbour’s sins to the own ones

The gas market is specific and it differs even from the energy market. To a large extent, it is Gazprom that is Poland’s problem. The Russian giant has come under a public eye of the European Commission, which suspects that Gazprom inflates gas prices in an unfair way for 8 CEE countries, including Poland, restricts the free flow of gas between these countries as well as prevents diversification of supplies, i.e. gas supplies from  competitive sources.

According to the experts of the Polish Institute of International Affairs (PISM), the action taken by the European Commission against Gazprom may undermine the position of the giant.

– Abusing the dominant market position carries a financial penalty amounting even up to 10% of the total turnover posted in the year preceding the issuing of the decision – point out Jarosław Ćwiek-Karpowicz and Aleksandra Gawlikowska-Fyk from the PISM.

The experts note, however, that even though harassing Gazprom is in the interest of Poland, it may harm us in the short-term.

– The conflict with the European Commission provides Gazprom with a convenient argument not to lower the prices of gas for selected European contractors (i.a. the PGNiG) while the case is pending – they raise.

The sins of Poland’s eastern neighbour – i.e. most notably locking the grip on Central Europe – impact the situation of Poland. We consume over 15 billion cubic metres  of gas,  the local resources satisfying only 30% of our needs. The remaining amount of gas is imported, most of it from Gazprom. The gas contract, whereby the price of gas is „tied” to oil prices, which persist on a high level during the crisis, locks Poland for 10 years with that supplier.

It is still possible to crumble the monopoly of the PGNiG from inside. The first step was taken in 2005, when the administration of the national network of gas pipelines was taken over from the PGNiG by Gaz-System, also a state-run enterprise. The effects prove miserable  – no competition exists in the distribution segment. The diagnoses of the status quo are similar and they stem from one common root: the regulated prices of gas.

The EU is pushing gas market deregulation ever harder, in the same way it did in the case of the energy market.  Yet, the only thing known is that, the tariffs will be freed for businesses beginning from the next year. It is still unknown, when gas sellers will clash in competition on the retail market and how much the average retail consumers will pay for their bills.

Paradoxically, liberalisation of gas and power market may turn out most beneficial for… the PGNiG itself. Let us illustrate it with the example of the United Kingdom. British Gas is the leader among the so-called „big six” gas and power suppliers in the UK, whereas the French EDF and German E.ON fall far behind it.

Liberalisation at no haste

Liberalisation of gas market should not proceeds too fast. Taking account of the UOKiK’s warning, should the gas prices regulation be abolished overnight, the PGNiG would only consolidate its monopoly. The giant market  player, freed from competition, would have an open way for an uncontrolled price raising spree. And it would not be easy, and would also be time consuming to prove the company has overcharged its customers.

Instead of sprint running, the government proposes a marathon. In accordance with the roadmap towards liberalising gas prices in Poland – developed in by the Ministry of Economy – the gas tariffs for the industrial sector will be deregulated first (as from January 2013) and public gas trading will be introduced. Two years later, the fixed rates will be abolished for households. Yet, if no wholesale gas market is successfully established, and if consumers cannot change their gas supplier freely, it will not come true.

As agreed,  following the example of the UK, France, Italy or, recently, the Czech Republic, the PGNiG will be ordered by an administrative decision to give up its monopoly in wholesale trade. The gas company itself proposed the scenario of this process. According to the company, the optimal strategy would be to sell 70 % of gas from the company trade book via the auctions, but only on the basis of 1-year contracts. The asking price would correspond to the average price of gas from the PGNiG increased by the wholesale margin.

The proposal came out to be a play for time, as the European Commission long ago criticised selling only 1-year contracts via the auctions as a way to substitute the genuine free market. None of the players interested in a long-term presence in the market will draw its business on that foundation. In addition, with the method of determining the asking rates the giant still be able to manipulate the price, as the EU officials claim.

At the end of August, the consulting company  PwC commented upon the liberalisation of gas prices. According to its experts, the revolution requires the implementation of the “4 freedoms” package, which includes the freedom of infrastructure, gas trading, contracts and trade.

– By and large, as the competition develops, the entity currently dominating in the market loses is leading position. Due to a conflict of interests between the entity’s attempts to retain its monopolist position  and the liberalisation processes the effectiveness of voluntary programs  implemented by the dominating entity raises serious doubts – observes Jacek Ciborski, Deputy Head of PwC, pointing to the regulator’s leading role in the process of gas market liberalisation.

Marek Woszczyk, President of the URE commented in the industry online directory wnp.pl, that 70% of the gas consumed in Poland should be traded on the exchange, yet in open auctions without any calendar limits.

– This is the volume that the industry needs, and I aim to liberalise the prices for that segment of recipients. If for some reasons it was necessary to steadily reach the level 70%, than I deem it an  absolute minimum to generate a market with the turnover of around 30% of gas consumption in Poland. Otherwise, price indexes generated in that market will be unreliable– said Marek Woszczyk.

The liberalisation of the market is round the corner, and the PGNiG itself is perfectly aware of the situation. In August Grażyna Piotrowska-Oliwa announced that the company with the headcount of 33 thousand had already commenced the restructuring process.

– We have already launched the restructuring processes,  designed primarily to adjust the company to the challenges we are facing, especially the forthcoming liberalisation of the Polish gas market – said the President.

Accordingly, the monopoly is becoming to crumble. The final outcome and its effects remain an open issue.  It is even more difficult to challenge the monopolist position of the PGNiG, given a special role in the economy it has been vested with by its owner, i.e. the State. Though the company is listed on the stock exchange, its Articles of Association contain provisions which allow it to undertake activities which render it liable to losses, if only it is in compliance with its strategic function in the Polish economy. It is about time that the State – in its agenda – put in on equal terms with the interests of an average citizen and millions of companies.

OF