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