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  • Keynote

    1. 1. Methodology for calculation of tariffs for trunk gas transportation Keynote seminar
    2. 2. Russian Gas Transportation System
    3. 3. Gas Transport Costs In Russia * For Independent Producers excluding transit gas of Central Asia
    4. 4. Typical Gas Value Chain
    5. 5. Sensitivity Of Business To The Tariff Trends <ul><li>« Fair Competition » radius - 1600 km . </li></ul><ul><ul><li>As long as tariff is linear and costs of production are equal. </li></ul></ul><ul><li>A decrease in the tariff by 1 ruble (4%) increases the radius by 50 km. </li></ul><ul><ul><li>Faster than linearly </li></ul></ul><ul><ul><ul><li>3 RUR – 13% - 400 km . </li></ul></ul></ul><ul><ul><ul><li>5 RUR – 20% - 600 km . </li></ul></ul></ul><ul><ul><ul><li>7 RUR – 30% - 1100 km . </li></ul></ul></ul><ul><ul><ul><li>10 RUR – 40% - 2300 km . </li></ul></ul></ul>-10 -7 -5 -3
    6. 6. Bases For Tariff Regulation <ul><li>List of regulatory documents </li></ul><ul><ul><ul><li>Federal Law &quot;On Natural Monopolies&quot; (1995) </li></ul></ul></ul><ul><ul><ul><li>Federal Law &quot;On Gas Supply in the Russian Federation&quot; (1999) </li></ul></ul></ul><ul><ul><ul><li>Government resolution No. 1021 (2000) </li></ul></ul></ul><ul><ul><ul><li>Methodology for calculation of tariffs (2005). </li></ul></ul></ul><ul><li>Current tariff application logic </li></ul><ul><ul><li>Cross-subsidizing transport costs </li></ul></ul><ul><ul><ul><li>Tariff = Planned revenue/Planned shipments </li></ul></ul></ul><ul><ul><ul><li>Cost = Tariff x Route length x Gas volume </li></ul></ul></ul><ul><li>Special cases </li></ul><ul><ul><ul><li>Gazprom's internal tariffs </li></ul></ul></ul><ul><ul><ul><li>Export and Transit tariffs </li></ul></ul></ul><ul><ul><ul><li>Local gas supply systems </li></ul></ul></ul>
    7. 7. Background Of Tariff Setting <ul><li>Actual regulatory procedure </li></ul><ul><ul><li>« Negotiating » CAP </li></ul></ul><ul><li>Trend in tariff increase </li></ul><ul><ul><li>Due to the wholesale prices increase </li></ul></ul><ul><li>Interrelationship between the tariff and the regulated wholesale prices </li></ul><ul><ul><li>The market is unbalanced up to date </li></ul></ul>
    8. 8. Estimated prices of the independents and regulated wholesale prices Price Zone
    9. 9. Trends of Tariff and Wholesale Price Tariff ( left axis ) Wholesale price ( right axis )
    10. 10. Problems Of Setting Tariffs In Russia <ul><li>The huge role of Gazprom in the economy of Russia </li></ul><ul><ul><li>8% tax revenue of consolidated Russia’s budget </li></ul></ul><ul><li>Forms of influence of the Monopoly on the Regulator </li></ul><ul><ul><li>From President Opinion to steamroller tactics </li></ul></ul><ul><li>Lack of adequate information </li></ul><ul><ul><li>Security as technique of evasion ex parte </li></ul></ul><ul><li>Lack of Regulator's authority </li></ul><ul><ul><li>Lack effective coercive leverages </li></ul></ul><ul><ul><ul><li>Draft of Law “On public utilities” </li></ul></ul></ul>
    11. 11. Gas Price Regulation System in Russia 1: Associated gas price set at entry level to gas processing facility . 2: Transportation tariff for independent producers accessing Gazprom's pipeline. 3: Wholesale gas price (based on geographic zone and consumer type). 4: Distribution tariff (based on size and state of distribution pipeline). 5: Supply and sales service fee (based on size of consumer). 6: Residential Tariff (per person or per 1,000 m 3 )
    12. 12. Systematic problems <ul><li>Arbitrariness in the reference data </li></ul><ul><ul><li>Security as technique of cost manipulating </li></ul></ul><ul><li>Linear cost of the transportation is inadequate economic situation </li></ul><ul><ul><ul><li>Transportation costs </li></ul></ul></ul><ul><ul><ul><li>Actual wholesale prices </li></ul></ul></ul><ul><li>Procedural arbitrariness in setting the tariffs </li></ul><ul><ul><li>Lack of coordination in the tariff and wholesale price regulation schedules </li></ul></ul><ul><li>Route variability </li></ul><ul><ul><li>Cost variation - up to 20% </li></ul></ul>
    13. 13. Route variability
    14. 14. Once More About « Old » Practice <ul><li>Unpredictability of the transportation cost </li></ul><ul><ul><li>Significant cost variations </li></ul></ul><ul><li>Discrimination when entering into transport agreements </li></ul><ul><ul><li>Unreal routes </li></ul></ul><ul><li>Limited geographic range for gas sales </li></ul><ul><ul><li>Economical reservation for gas of independent producers </li></ul></ul><ul><li>&quot;Access problem&quot; because the &quot;bottlenecks&quot; have not been resolved economically </li></ul><ul><ul><li>Invitation to “investment tribute” </li></ul></ul>
    15. 15. Sources Of New Methodology <ul><li>Background for gas sector key documents </li></ul><ul><ul><li>ERTA experts took part in all progressive shifts in sector key documents </li></ul></ul><ul><ul><ul><li>Gas supply law </li></ul></ul></ul><ul><ul><ul><li>Resolution 1021 </li></ul></ul></ul><ul><ul><ul><li>Gas shipment rules </li></ul></ul></ul><ul><li>ERTA’s initiative to &quot;change the situation&quot; </li></ul><ul><ul><li>Purpose: a stable gas market based on unified principles. </li></ul></ul>
    16. 16. Principles Of Tariff System Structure ( recommended by the Madrid Forum decisions ) <ul><li>The tariffs should : </li></ul><ul><ul><ul><li>show the transportation costs </li></ul></ul></ul><ul><ul><ul><li>promote a higher effective gas trade </li></ul></ul></ul><ul><ul><ul><li>ensure a high level of transparency </li></ul></ul></ul><ul><ul><ul><li>stimulate effective long-term investments to the transportation infrastructure </li></ul></ul></ul><ul><ul><ul><li>provide a satisfactory investment profit level for the transport company </li></ul></ul></ul><ul><ul><ul><li>have the appropriate control level </li></ul></ul></ul><ul><ul><ul><li>prevent discrimination </li></ul></ul></ul>
    17. 17. Fundamentals Of The Proposed Concept <ul><li>Specifics of the Russian gas transportation system </li></ul><ul><ul><ul><li>Long distance </li></ul></ul></ul><ul><ul><ul><li>A few entry – many exits </li></ul></ul></ul><ul><ul><ul><li>Administrative fragmentation </li></ul></ul></ul><ul><li>Cases of applicability of the worldwide experience </li></ul><ul><ul><li>The worldwide experience is not applicable directly </li></ul></ul><ul><ul><ul><li>History of regulation in North America </li></ul></ul></ul><ul><ul><ul><li>Advantage of European Principles </li></ul></ul></ul>
    18. 18. Current Tariffication Systems <ul><li>«Рostage stamp» </li></ul><ul><ul><li>Significant cross-subsidizing </li></ul></ul><ul><li>«Entry - Exit» </li></ul><ul><ul><li>Tedious calculations </li></ul></ul><ul><li>D istance-related </li></ul><ul><ul><li>Dependency on variable route </li></ul></ul><ul><ul><li>Absence of investment motives </li></ul></ul>
    19. 19. Zoning Principle <ul><li>Inlet zones : </li></ul><ul><ul><li>The recommended distance is no more than 100 km </li></ul></ul><ul><ul><ul><li>The set of gas supply points </li></ul></ul></ul><ul><ul><ul><ul><li>from the fields </li></ul></ul></ul></ul><ul><ul><ul><ul><li>gas producing plants </li></ul></ul></ul></ul><ul><ul><ul><ul><li>underground gas storages </li></ul></ul></ul></ul><ul><ul><ul><ul><li>points where trunk gas pipelines cross the Russian Federation border </li></ul></ul></ul></ul><ul><li>The outlet zones : </li></ul><ul><ul><li>Should the region extend for more than 400 km, several outlet zones may be assigned . </li></ul></ul><ul><ul><ul><li>The set of points where gas is taken from </li></ul></ul></ul><ul><ul><ul><ul><li>the gas trunk pipelines </li></ul></ul></ul></ul><ul><ul><ul><ul><li>underground gas storages </li></ul></ul></ul></ul><ul><ul><ul><ul><li>where main gas pipelines cross the Russian Federation border </li></ul></ul></ul></ul>
    20. 20. Consideration Of Nonlinear Costs <ul><li>&quot;Costs plus&quot; principle </li></ul><ul><ul><li>Economic grounds for « negotiating fairness » </li></ul></ul><ul><li>Two rates for the same tariff : </li></ul><ul><ul><ul><li>The rate for gas transportation implemented </li></ul></ul></ul><ul><ul><ul><ul><li>Based on the &quot;distance&quot; principle . </li></ul></ul></ul></ul><ul><ul><ul><ul><li>Covers 20 to 30% of all expenses . </li></ul></ul></ul></ul><ul><ul><ul><li>Trunk gas pipeline use rate </li></ul></ul></ul><ul><ul><ul><ul><li>Nonlinear relationship to the weighted average distance between the &quot;inlet&quot; and &quot;outlet&quot; zones . </li></ul></ul></ul></ul>
    21. 21. Payment “For Transport” <ul><li>Is set for transporting 1,000 m 3 for 100 km </li></ul><ul><ul><li>Is depend on actual route </li></ul></ul><ul><li>Is calculated as the ratio of the total expenses </li></ul><ul><ul><ul><li>for electricity </li></ul></ul></ul><ul><ul><ul><li>gas for in-house needs </li></ul></ul></ul><ul><ul><ul><li>net profit distributions </li></ul></ul></ul><ul><ul><li>Is 20% to 30% of the total tariff </li></ul></ul>
    22. 22. “ User Fee” <ul><ul><ul><li>Confirmation of the &quot;normal gas transportation flow system&quot; </li></ul></ul></ul><ul><ul><ul><li>Minimizing the tariff route </li></ul></ul></ul><ul><ul><ul><li>&quot;Averaging&quot; the tariff route length and cargo transporting </li></ul></ul></ul>L 1 = 100 км; V 1 = 4500 м 3 L 2 = 2 00 км; V 2 = 500 м 3 L 0 = 110 км
    23. 23. “ User Fee” <ul><li>Is set for transporting 1,000 m 3 </li></ul><ul><ul><li>Based on the gas average weighted transportation distances between the inlet and outlet zones </li></ul></ul><ul><li>There is a constant part that does not depend on the transportation distance </li></ul><ul><ul><li>Is based on the averaged gas-distribution stations maintenance costs </li></ul></ul><ul><li>Nonlinear relationship to the transportation distance </li></ul><ul><ul><li>Based on the differentiation factors </li></ul></ul><ul><li>Based on the total costs that were not considered in the payment “For Transport” </li></ul>
    24. 24. Estimation Of Required Sales <ul><li>Required Sales = </li></ul><ul><ul><ul><li>+ transportation expenses , recognizes as cost </li></ul></ul></ul><ul><ul><ul><li>Balance of operational incomes/expenses </li></ul></ul></ul><ul><ul><ul><li>Balance of extraordinary incomes/expenses </li></ul></ul></ul><ul><ul><ul><li>+ profit tax </li></ul></ul></ul><ul><ul><ul><li>+ net profit </li></ul></ul></ul><ul><ul><ul><li>+ calculation discrepancy for previous period </li></ul></ul></ul>
    25. 25. Tariffs And Wholesales Prices
    26. 26. Achievements Of Methodology <ul><li>Procedure formalization </li></ul><ul><ul><li>The Methodology did not exist for 10 years </li></ul></ul><ul><li>Increase predictability of transport cost </li></ul><ul><ul><li>Except for 20-30% payment « For Transport » </li></ul></ul><ul><li>Tariff calculation method for new pipes </li></ul><ul><ul><li>Based on guarantee of reasonable rate of return on invested capital for investors </li></ul></ul>
    27. 27. Methodology Weakness <ul><li>The rate depended on a route </li></ul><ul><ul><li>Discrimination is limited , but not liquidated. </li></ul></ul><ul><li>Arbitrariness in zone formation and interzonal distance calculation </li></ul><ul><ul><li>Calculated distance of interzonal transportation depends on details of procedure </li></ul></ul><ul><li>Poor validity of the &quot;correction factors&quot; </li></ul><ul><ul><li>Correlation between prices and tariffs is introduced from price to tariff. </li></ul></ul><ul><li>Tariffication of services for short distances demands for detailed approaches </li></ul><ul><ul><li>Actual length of transportation is used within one zone. </li></ul></ul>
    28. 28. Causes Of Imperfection <ul><li>Key participants in the process </li></ul><ul><ul><li>Adoption of the Methodology is a complicated administrative process </li></ul></ul><ul><ul><ul><li>FTS RF </li></ul></ul></ul><ul><ul><ul><li>Gazprom </li></ul></ul></ul><ul><ul><ul><li>MEDT </li></ul></ul></ul><ul><ul><ul><li>Independent Gas Producers </li></ul></ul></ul><ul><li>Methods of working out and adopting compromises </li></ul><ul><ul><li>Signification of key interests demands for specific efforts. </li></ul></ul><ul><li>Chronology of methodology approval </li></ul><ul><ul><li>Key administrative compromise of 2005 is an adoption of a new tariff for approval of methodology </li></ul></ul>
    29. 29. Why is it necessary ? <ul><li>Methodic is necessary because : </li></ul><ul><ul><ul><li>It simplifies investment decisions for the full fields development </li></ul></ul></ul><ul><ul><ul><li>Sidestep a linear tariff makes Company market widely </li></ul></ul></ul><ul><ul><ul><ul><li>Long-distance transportation cost cutting opens access to new customers </li></ul></ul></ul></ul><ul><ul><ul><li>It resolves long-term gas transportation cost planning. </li></ul></ul></ul>
    30. 30. Key Objective Risks And Threats <ul><li>« Expenses plus » </li></ul><ul><ul><li>Costs are an actual charge of money and expenses can be as money payment as creation of financial guaranties </li></ul></ul><ul><ul><ul><li>Expenditure of gas for own needs and losses </li></ul></ul></ul><ul><ul><ul><li>Expenditure of electric power </li></ul></ul></ul><ul><ul><ul><li>Labor compensation </li></ul></ul></ul><ul><ul><ul><li>Expenses for basic repairs </li></ul></ul></ul><ul><li>“ Basic Approach” to costs classification of holding company </li></ul><ul><ul><li>Proportional to the costs of the transportation subsidiaries to the total costs of subsidiaries. </li></ul></ul><ul><li>Gazprom cost structure </li></ul><ul><ul><li>Principles of regulation of wholesale prices links tariff and prices closely . </li></ul></ul><ul><ul><ul><li>An average leasing of permanent assets is 34% of costs ( to 48% for « Tumentransgas ») . </li></ul></ul></ul><ul><ul><ul><li>Capital investments are more than 50% to transport infrastructure. </li></ul></ul></ul>
    31. 31. Key Objective Risks And Threats <ul><li>Vague algorithm for calculating transportation cargo </li></ul><ul><ul><li>“ … on the basis of volume forecast for period of regulation and taking into account contracted volumes, statistical data of transported volumes and transportation cargo for previous 3 years.” </li></ul></ul><ul><li>“ Common Pot” way to account gas for Gazprom technological needs </li></ul><ul><ul><li>Scale of problem - 70 bln m 3 per year </li></ul></ul><ul><ul><ul><li>consumption for transport 1000 m 3 per 1000 km is 25-40 m 3 </li></ul></ul></ul><ul><ul><ul><li>normative standard - from 14 to 101 m 3 </li></ul></ul></ul><ul><li>Loss of the initiative can lead to financial losses </li></ul><ul><ul><ul><li>Gazprom opinion </li></ul></ul></ul><ul><ul><ul><li>Other interests </li></ul></ul></ul>
    32. 32. What Is The Future? <ul><li>Zones formation and costs calculation </li></ul><ul><ul><li>Will be adopted by FTS , but who will be a vendor ? </li></ul></ul><ul><ul><ul><li>Administrative and organizational issues </li></ul></ul></ul><ul><ul><ul><li>Objective issues </li></ul></ul></ul>Entry Exit V 1 , L 1 V 2 , L 2 Entry Exit V 1 , L 1 V 2 , L 2 V 3 V 4 V 5 V 6 V,L 1 V,L 2 0 ,L 3 I I I I II V I
    33. 33. Methodology Development <ul><li>Development of a gas pipeline loading information disclosure mechanism </li></ul><ul><li>&quot;Localization&quot; of specific tariff rates and calculation of tariffs via calculation of weighted average transportation costs </li></ul><ul><li>Elimination of the tariff component related to a specific route </li></ul><ul><li>Elimination of the tariff rate linkage to cost items </li></ul><ul><li>Inclusion of payment for balancing and storage </li></ul>
    34. 34. Risks And Threats - II <ul><li>New owners of the gas transport infrastructure </li></ul><ul><ul><li>Different versions of setting and calculating tariffs are possible </li></ul></ul><ul><ul><ul><li>Cost+ </li></ul></ul></ul><ul><ul><ul><li>Project economics </li></ul></ul></ul><ul><li>FTS set up zones </li></ul><ul><ul><li>Calculated consumer’s prices can be different from Company commercial strategy </li></ul></ul><ul><li>Non-comparability of the cost calculation forms and methods </li></ul><ul><ul><li>The Methodology is based on separate functional cost accounting , according actual Russian accounting rules . Shortcomings of the accounting rules automatically became shortcomings of the Methodology . </li></ul></ul><ul><li>The change of the tariff procedure should lead the changes in market strategy of Independents </li></ul><ul><ul><li>Existing balance of interests will be inevitably broken </li></ul></ul>
    35. 35. What Can And Should Be Done Further <ul><li>Improvement in the regulation principles </li></ul><ul><ul><li>The situation should be moved </li></ul></ul><ul><ul><ul><li>Improvement in the actual methodology </li></ul></ul></ul><ul><ul><ul><li>Correction of the Access Resolution and Shipping Rules </li></ul></ul></ul><ul><li>Participation in calculation/methodology work </li></ul><ul><ul><li>The situation should be driven </li></ul></ul><ul><ul><ul><li>Zone formation </li></ul></ul></ul><ul><ul><ul><li>Calculation of the route bank </li></ul></ul></ul><ul><ul><ul><li>Calculation of the inter-zonal cargo transportation </li></ul></ul></ul><ul><li>Take into account the difference of Independent Producers interests </li></ul>
    36. 36. Preliminary Recommendations <ul><li>A passive position is extremely dangerous </li></ul><ul><ul><li>The process has reached the level of specific calculations: if you don't take of it yourself, no one will take care of it. </li></ul></ul><ul><ul><li>Because the Regulator does not have a justified position the Methodology will be discredited: a valid methodological logic needs to be developed </li></ul></ul><ul><li>It is important to start the process BEFORE the methodology is introduced </li></ul><ul><ul><li>Discrimination during the &quot;zone rating&quot; may prove to be very significant </li></ul></ul>