Effectively addressing Gazprom’s excessive pricing in CEE

DISCLAIMER: All opinions in this column reflect the views of the author(s), not of EURACTIV.COM Ltd.

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Gazprom commitments will not provide any change to its anti-competitive practices in Central and Eastern European countries. PGNiG here presents possible remedies to address excessive pricing applied by the Russian energy giant in some CEE countries.

This op-ed was submitted by the Polish Oil and Gas Company (PGNiG).

For the past decade Gazprom has been exploiting its CEE customers by imposing contractual price formulas linking the price of gas in a given contract to the price of oil or oil-based products.

Despite dynamic development of the gas markets during the last decade and increasing role of gas trading in liquid gas hubs (like TTF or NBP), Gazprom still insists on indexing gas prices to oil prices in its long-term contracts.

In its contracts with the customers in the Baltic States, Poland, and Bulgaria, Gazprom enforced oil-indexed price formulas that resulted in prices significantly higher than in, for example, Germany and Italy (note that the transport costs to Poland and Baltic States are significantly lower) or gas hubs (like TTF).

Gazprom’s proposal

In order to address the issue of excessive prices, Gazprom, in its commitment proposal accepted by the European Commission, proposed to include a price revision clause into long-term contracts with its customers from CEE.

According to the proposal, customers will be able to ask for price revision every two years (plus extraordinary revision once every five years if the conditions on “European gas markets” change. Reference to “European gas markets” can be understood as:

  • Prices in the “relevant, generally recognised liquid gas hubs”,
  • Import prices of Germany, France, and Italy.

If Gazprom and the customer do not reach an agreement within 120 days, the customer can initiate an arbitration proceedings.

Analysis of Gazprom’s proposition

The first thing that should be noted when assessing Gazprom’s proposal is the fact that the company does not promise to stop excessive pricing. It merely says: “if you do not like the price formula – negotiate and/or go to arbitration court and, maybe the latter will grant you a better formula”.

Therefore, this proposal does not meet a fundamental legal condition deriving from Regulation 1/2003 – namely, bringing infringement to an effective end. The rationale behind adopting the commitment decision by the Commission (instead of prohibition decision) is to swiftly interrupt the questioned practice – while the commitment proposed by Gazprom and initially accepted by the Commission comes nowhere near this objective.

Price revision clauses are already present in Gazprom’s long-term contracts, including contracts with CEE customers. Moreover, their wording does not exclude reference – in the course of price revision – to hub prices or import prices in Germany, Italy or France.

Therefore, Gazprom is offering something that is already available to the customers, while at the same time announcing (see Ms Burmistrova’s speech at Flame Conference 2017 in Amsterdam) that it will not change its pricing policy (especially in terms of indexing gas prices to oil-based products).

Another fundamental flaw in the proposed clause is the lack of retroactive effect of the revision clause. Retroactive effect allows the customer to request that the revision  is made retroactively (when justified) from the day of submitting the revision request, regardless of the actual date of an agreement or arbitration award.

This is already a well-established market standard in long-term contracts, including Gazprom’s.  If it weren’t the case, the supplier would have no incentive to accept the revision request in the course of negotiation. It would always be more profitable to obstruct the revision process for as long as possible and keep profits from excessive price to yourself

Putting such a proposal on the table perfectly shows Gazprom’s attitude to the antitrust proceeding – use it to its own advantage through proposing something that is even worse than the current market standard, and hope that the Commission will not notice. After all Gazprom can always argue it did its best.

PGNiG’s counterproposal

Excessive pricing is probably the most difficult practice to address by a competition authority like DG COMP. If this practice is not interrupted before closing of antitrust proceedings, adopting a prohibition decision theoretically should require assessing certain prices as “non-excessive”.

However, DG COMP – as rightly stated by Commissioner Vestager at Chillin’ Competition Conference 2016 – is not a price regulator. Nevertheless, due to the specifics of long-term contracts, it is possible to impose an effective remedy on Gazprom and allow almost immediate introduction of market-based prices in CEE. Furthermore, by using the same mechanism, the Commission may achieve full removal the effects of past overpricing.

The said mechanism is based on one -shot shift of the right to impose price formula – from seller (Gazprom) to purchaser – with an almost immediate entry into force of the new formula.

To guarantee that this measure is not used as a retaliation of customers over the Gazprom for its long-time anti-competitive practice, , the latter should be entitled to refer the case to an arbitration court if the new price formula produces non-market price. In arbitration court, Gazprom would have to prove that the price is too low and that the formula should be changed.

Summary

PGNiG’s counterproposal – contrary to the Gazprom one – allows to effectively end the pricing infringement and bring prices for CEE customers in line with market-price level (as enjoyed by Gazprom’s customers from Western Europe), and it does not require the Commission to take a role of a price regulator. It is a rational and moderate measure that allows to ensure fair prices for customers while preserving the rights of Gazprom as a supplier, which should be the main goal of the Commission in the antitrust proceedings.

The text of PGNiG reply to the market test can be found here.

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