The process of liberalisation of the natural gas market in Romania, initiated in 2001, in the context of the preparations for Romania’s accession to the European Union, has been finalised. At least on paper. From a legislative perspective, the full liberalisation of the electricity and natural gas markets was achieved since 1 January 2007. At a practical level, the deregulation of prices for non-household clients was achieved on 1 January 2015, while the full liberalisation of prices for household customers is scheduled to be achieved by 30 June 2021.
Liberalisation of the natural gas market implies that all customers can freely choose their gas suppliers and negotiate directly with them the sale-purchase contracts, the price being determined on the basis of supply and demand. The principle is consistent with normative acts adopted at European Union level, with multiple national regulations being adopted for the purposes of the implementation thereof, and in particular to facilitate the client's change of gas supplier.
Amid a true legislative effervescence over the last period in the field of natural gas, we propose to briefly analyse some of the reasons why the client’s freedom to choose its gas supplier is not yet complete and the way in which this situation influences competition on the Romanian market.
The client’s right to freely choose its natural gas supplier. From theory to practice
As of 1 January 2007, the specific legislation has provided the opening of the natural gas market and, along with it, the client’s right to freely choose its supplier.
To encourage the customers to exercise this right, ANRE (the national regulatory authority) has taken several measures aimed at stimulating competition between suppliers and protecting customers in their relationship with suppliers. One of the main measures, aimed at protecting customers against possible unfair terms, was the regulation of mandatory clauses in supply contracts (e.g. the client’s right to unilaterally terminate the contract with a notice period of 21 days, the prohibition of including penalties for termination of the contract, establishing the regime of delay penalties, etc.).
In addition, in an attempt to facilitate the customers’ access to information on the offerings of various suppliers, ANRE has published on the institution's website a comparison of gas supply offerings. Further, information on the rights in relation to suppliers, the procedure for the change of supplier etc. have also been made available to customers.
There are numerous examples of public interventions, in which ANRE representatives have informed customers of possible "traps" of contracts concluded with suppliers on the competitive market, insisting that all customers should ensure that any advantageous conditions in the offer are maintained throughout the contractual period and that these contracts comply with the legal provisions, in particular those relating to the payment of green certificates or the cogeneration contribution.
Despite the legislative changes and efforts made by ANRE, the reality shows that, at least in the case of household customers, a strong level of "inertia" is manifested. Thus, according to reports published by ANRE, in June 2018 only 4.03% of households were eligible, i.e. they had opted for the transition to the competitive supply regime, based on a contract negotiated with the gas supplier. A percentage of 95.97% of household clients are still under regulated regime.
Lack of information – the main reason for the "inertia" of household customers?
The lack of information at the level of customers, with respect to their rights and obligations in relation to the supplier and the legislative regulations in the field, are real obstacles to the change of the gas supplier. Even after the transition to the competitive market, household customers continue to have as a gas supplier the company that is part of the same group as the holder of the concession right for gas distribution in the region where the customer is located.
This phenomenon continues to manifest even in the context of the introduction of the legal obligation of integrated energy entities to clearly separate their distribution and supply operations, including from a visual identity perspective (in order to avoid the transfer of reputation from the distribution company to the supply company within the group), which resulted in 2017 in the change of the name of several Romanian distribution companies.
Customer information efforts are largely left to the authorities, as small gas suppliers are deprived of resources or interest in investing in information campaigns or marketing for attracting customers from the household segment, preferring to focus on non-household customers (less numerous and with higher negotiating power, but with lower trading costs).
In addition to the lack of information, the general perception regarding the regulated nature of this sector, the client’s possible negative experiences in its attempts to change the supplier in other areas, the technical nature of the sector rules, which are hardly accessible for ordinary customers, as well as, in some situations, the behaviour of the distribution company, are elements that contribute to maintaining a reduced appetite for household customers to change their gas supplier.
Non-household customers – better informed, but not without difficulties
If, in relation to non-domestic customers, the figures on the exercise of eligibility look much better, in reality, even in this area the change of the gas supplier is not exactly easy.
The gas sector is a heavily regulated area, and the legislative framework is constantly changing. Many regulations have been adopted or are in the project stage, from ordinances amending the Energy Law, to regulations and rules adopted by ANRE.
The introduction of mandatory minimum quotas for trading on centralised markets, changing the applicable thresholds, modifying the procedures for booking capacity in the National Transport System (NTS), eliminating the mechanism of the gas transfer facility etc., are just a few of such changes, which although necessary, increase the complexity of the regulatory framework.
The companies affected by these rules are often obliged to adapt quickly and on the go to the requirements imposed by legislative changes, which affect their work and ability to make plans for the medium and long term.
Navigating through this true legislative labyrinth can prove a challenge even for large energy companies, which possess adequate financial and legal resources, and all the more so for small companies, for which natural gas is only one of the inputs used.
Moreover, many times the regulation is not complete and there are legislative loopholes, which are very difficult to overcome when it comes to effective implementation of the rules. For example, the legislation provides the client’s right to freely choose its supplier and, by default, to change its supplier. However, the legislation in its current form does not allow the subsequent supplier to be automatically allocated the transport capacity booked by the initial supplier at the exit points from the NTS.
Solving this problem, by regulating the principle "capacity follows the customer", was recently attempted by a draft order published by ANRE, which provided for the automatic transfer of the booked capacity from the portfolio of the current supplier to that of the subsequent supplier. Unfortunately, the final form of the act, adopted by Order of the President of ANRE no. 161/2018 amending the network code for NTS has not maintained that provision.
What does this mean in practice for a gas supplier? The regulatory loophole described affects both the original and the subsequent supplier, but also the client who wishes to change his supplier. Thus, after the client leaves, the original supplier remains with an unused additional capacity, which may result in cumbersome procedures of voluntary return of capacity or even in compulsory transfer of capacity, at the request of the NTS operator. Failure to comply with these obligations may result in a penalty imposed on the supplier for non-use/failure to return the booked capacity. For the subsequent provider, which is not able to predict from the beginning of the gas year how many new customers they could attract during the year, getting a new customer might trigger the need to increase the original reserved capacity. Depending on the time in the gas year, in which the change occurs, and the quantities of gas requested by the new customer, this may lead to the need for the supplier to book capacity products at a higher cost (being obliged to rely on quarterly, monthly or daily booking capacity).
This type of difficulties is hard to surmount especially by the small-scale suppliers, who do not have a consistent customer portfolio, enabling them to optimize their costs, including with regards to capacity bookings.
Competition without competitors?
In theory, one of the effects of liberalisation should be the entry on the market of new players. Nevertheless, ANRE reports show that, if in January 2017, on the Romanian gas market operated 91 suppliers, this number fell to 87 in January 2018, and to 85 in June 2018.
In addition to lack of information, the lack of clarity and the gaps in the regulatory framework can cause significant difficulties in practice. As we have exemplified, certain regulatory gaps can create technical barriers, which generate additional trading costs, which are subsequently transferred to end customers. These practical difficulties may hinder suppliers, especially the small ones, to advance competitive offers to the clients of other suppliers, since any additional capacity booking costs will finally be found in the prices charged.
This reduction of the competitiveness of gas suppliers, and especially of the small ones, diminishes the competitive pressure they could exert on the large suppliers.
The cumulative impact of these factors contributes to maintaining a certain status quo, as the structure of the demand side of the gas supply market to end-users on the competitive market has not changed substantially between December 2014 and 30 June 2018.
Thus, even though the eligible client base increased significantly, and the opening level of the gas retail market also recorded a certain increase (from 56.99%, in December 2014, to 69.55% in June 2018), the indicators that measure the competition parameters, namely the Herfindhal-Hirschmann-HHI index (which measures the degree of market concentration) and the CR3 indicator (the aggregate market share of the first three suppliers), monitored by ANRE, have maintained at constant values. Thus, the HHI index continues to have values exceeding 1.500 (indicating a heavily concentrated market), while CR3 maintained around 66%.
The data provided by ANRE indicates that, in June 2018, there were 85 companies holding a supply licence. However, as mentioned, three companies hold together approximately 66% of the market. Also, the top five positions are occupied by companies that are at the same time either large domestic gas producers or are part of the same group with companies which hold concessions of the gas distribution service in extensive regions. The largest supplier, which does not fulfil these conditions, has a market share of approx. 4%, followed by five other suppliers, holding individual market shares between 1.78% and 0.75%.
As in other areas, the transition of the gas sector from a regulated regime to competition is not an easy process. The initiatives to inform the clients of the right to choose and to change their gas supplier freely are welcome and should be intensified. However, such information campaigns must be accompanied by swift and concrete measures to simplify the existing legislative framework and to remove barriers which hinder the exercise of effective competition between suppliers.
Although it sounds like a paradox, stimulating competition seems to be the safest way for liberalisation to become, from a goal adopted in the context of Romania's European aspirations and always postponed, a reality.