The Importance of Antitrust
Regulation for the Creation of
Competitive Relations in the
Russian Power Industry.
Italy, Rome
June 1, 2006
Pirozhenko Alexander
Federal Antimonopoly Service
Quote
«The key to success in creating competitive
power market (…) in Russia is to create strong,
well-financed, well-informed, trained and
independent regulator capable of providing
access to grids and other monopolies’ products
and services on fair and reasonable terms for all
market participants»
Claude Mandil,
ex-Executive Director of International Energy
Agency (IEA)
2
Menu
1.
2.
3.
4.
Antipasti: Conditions for competition
development on Russian power markets
Il primo piatto: The role of FAS in power
industry restructuring
Il secondo piatto: Risks of price manipulation
in the wholesale power market
I dolchi: Control over price manipulation: the
Russian approach
3
Antipasti:
1. Conditions for competition development on
Russian power markets
The most important conditions for the creation
of competitive energy markets
On the wholesale level:
- Sufficient number of independent producers
- Separation of competitive activities from monopolistic ones
- Non-discriminatory access to services provided by natural
monopolies
- Control over price manipulation
- Developed power grid
On the retail level:
- Option for consumers to choose a power supplier
- Wholesale power cost differentiation should be reflected in retail
market’s prices:
-
Wholesale price translation
Hourly record translation
5
Configuration of generation
companies (1)
Pursuant to the Russian Federation Government Resolutions,
generation companies comprise assets of the RAO UESR Holding:



6 thermal WGCs on extraterritorial basis
1 Hydro-WGC on the basis of hydroelectric power plants
14 TGCs on territorial basis
There are 5 companies independent from RAO “UES of Russia” in
the wholesale market:





Concern “Rosenergoatom”
“Irkutskenergo”
“Novosibirskenergo”
“Bashkirenergo”
“Tatenergo”
It is assumed that in the process of restructuring the State will
withdraw from the equity capital of thermal WGCs and all TGCs
6
Configuration of generation
companies’ (2)




Generation companies are created with maximum
limitation of their market power.
Each WGC and TGC could have the least influence
over wholesale power market prices.
The configuration of generation companies was
independently evaluated by FAS and was approved for
arrangement of conditions for the development of actual
competition in the wholesale market.
CR-3 index for the two Russian price areas within the
wholesale market:


Europe+Ural
Siberia
7
Market concentration (installed capacity of generation
companies)
The first price zone (Europe + Ural)
Bashkirenergo8,58
Tatenergo-3,45
ZapadniSibirskaya TPP 2,8
WGC-1-6,37
WGC-2-5,83
WGC-3-4,67
Rosenergoato
m-15,42
The second price zone (Siberia)
UzhnoKuzbasskaya
TPP - 1,7
WGC-3 - 3,49
WGC-4 - 3,28
WGC-6 - 2,85
Krasnoyarskaya
HPP - 13,68
Hydro WGC 14,59
WGC-4-4,8
WGC-5-5,83
TGC-10-1,74
TGC-11 - 4,56
WGC-6-5,2
TGC-9-3,15
TGC-8 -2,35
Hydro WGC9,19
TGC-7-4,63
TGC-6-2,08
TGC-5-1,68
TGC-4-2,21
TGC-3-7,11
TGC-1-4,09
Irkutskenergo 29,41
TGC-2-1,61
Holding RAO “UES of Russia”
Concern «Rosenergoatom»
Independent AO-energos
- 72,55%
- 15,42%
- 12,03%
TGC-12 - 11,63
Novosibirskenerg
o - 6,84
TGC-13 - 5,7
TGC-14 - 1,37
Holding RAO “UES of Russia”
Independent producers
- 45,57%
- 54,43%
8
Supposing the reform was completed in 2005?
Share assessment between generation companies in Europe and Urals
(index shows the output volume).
25
21,92
20
15
9
10
8,53
8,68
6,04 6,01
6,11
5
3,37
3,52
1,76
3,65
2,92 3,38
3,99
2,49
1,42
2,43
1,94
1,5 1,4
WGC-1
WGC-2
WGC-3
WGC-4
WGC-5
WGC-6
TGC-1
TGC-2
TGC-3
TGC-4
TGC-5
TGC-6
TGC-7
TGC-8
TGC-9
TGC-10
Hydro WGC
Rosenergoatom
Tatenergo
Bashkirenergo
0
Holding RAO “UES of Russia”
Independent
producers
9
Supposing the reform was completed in 2005?
Share assessment between generation companies in Siberia
(index shows the output volume).
35
31,22
30
24,44
25
20
15
13,1
7,69
10
5
4,99
3,99
3,18
2,77
2,44 5,18
WGC-3
WGC-4
WGC-6
TGC-11
TGC-12
TGC-13
TGC-14
Hydro WGC
Novosibirskenergo
Irkutskenergo
0
Holding RAO “UES of Russia”
Independent
producers
10
Market concentration in Russia




Market concentration in the second price zone is higher than that in the first
price zone. But it doesn’t mean that leading companies – HydroWGC and
Irkutskenergo – have considerable market power, because the largest
contribution to the amount of energy produced by these companies is made
by hydroelectric power plants, which have limited opportunities to influence
market prices.
But the results of the investigation carried out by the Federal Antimonopoly
Service of Russia in order to evaluate the situation with Kuzbassenergo
restructuring showed that TGC-12, which was established on the basis of
Kuzbassenergo assets, has considerable market power and thus may
influence market prices in Siberia. For this reason, the decision was taken to
exclude two Kuzbassenergo’s power plants from the configuration of TGC12. These power plants are to be sold in the auction by mid-2007.
Considerable market share of the Concern “Rosenergoatom” is not
proportional to its market power. The company has limited opportunities to
influence prices.
According to the wholesale market rules, producers make zero price bids for
the minimum amount of the technological production (cogeneration, safe
working conditions for nuclear power plants, restrictions on water content for
HEPPs)
11
Market power of energy producers is
determined by:
1.
Market share (including potential one,
i.e. installed capacity share)
However, market boundaries are flexible; they
may change depending on the following
factors: current balance between supply and
demand, presence of system restrictions
2.
Correlation between producer’s supply
volume and the “remaining supply” of
other producers
12
Unbundling

The Russian legislation specifies the necessity to separate
competitive activities from natural monopoly ones before April
1, 2006

This requirement of the legislation is the strictest in the world:
all energy companies, irrespective of their size, must separate
their activities

Different legal entities should perform different activity types,
but during the transition period some of them may be affiliated

Energy companies that fail to undergo unbundling by activity
type are subject to compulsory reorganization

By the end of 2006 unbundling will be practically completed
(by now more than 35% of companies have separated their
activities)
13
Non-discriminatory access to services
provided by energy monopolies
In 2004 the Russian Federation
Government approved the rules for nondiscriminatory access to services provided
by:
- grid companies
- Trading System Administrator
- System Operator
and:
The rules for the connection to power grids
14
Il primo piatto:
2. The role of FAS in power industry restructuring
Powers of FAS in the power industry
1.
Antimonopoly control in accordance with the antitrust legislation
2.
Antimonopoly control in accordance with the special regulations imposed
by the Federal Law “On the Electric Power Industry”, which controls:


3.
the level of economic concentration in the power market
power market prices
FAS is the authority commissioned by the government to control:




Trading System Administrator
Observance of the rules for the non-discriminatory access to the infrastructure
Observance of the standards of information disclosure by both wholesale and retail
market participants
Observance of the requirements imposed by the legislation concerning unbundling
of energy companies by activity type
Besides, FAS plays a very important role in defining the strategy and
tactics of the restructuring of the Russian power sector
16
Tasks of FAS in the wholesale power
market
1. To avoid price manipulation by means of:




Abuse of dominant position
by power suppliers
Vertical integration (including restrictions on fuel supplies)
Horizontal integration (affiliation of generation companies, which
are capable of influencing prices)
Agreements and agreed decisions (between producers;
between producers and infrastructure organizations: the System
Operator, Trading System Administrator, grid companies)
2. To provide free and non-discriminatory access of
producers and consumers to wholesale market
17
How to reduce risks of horizontal and vertical
integration in the power industry
problem
consequence
FAS solutions
Horizontal
integration
Risks of market power
abuse grow – companies
may manipulate prices
To limit acquisition of control over
those WGCs or TGCs that are
located in one area (if they have an
opportunity to influence prices
together) by a group of people
Vertical
integration «fuel
supplier –
generation
company»
Shake-out of competitive
generation companies by
manipulating fuel supplies –
rise in prices for electric
power
To limit acquisition of control over
WGCs or TGCs by fuel companies
that have a dominant position in fuel
supplies to power plants
18
Tasks of FAS
in the retail power market
To ensure competition using:





Separation of competitive activities from natural monopoly ones
Creation of conditions that encourage local supply companies to
enter the wholesale market
Fair competitive selection of guaranteeing suppliers
Control over non-discriminatory access to grids (by consumers and
independent supply companies)
Creation of conditions that encourage consumers to use their right
to choose a supplier
It will take from 3 to 5 years to create the fully
competitive retail power market in Russia
19
Il secondo piatto:
3. Risks of price manipulation in the wholesale
power market
The Russian market today: absence
of price risks
mln. kWh
250
600
5415
5068
6060
5284
5794
4948
5109
4382
4311
555,68
557,96
556,51
5179
200
551,36
547,80
543,50
150
506,73
505,93
5078
5618
550
556,34
551,82
548,48
500
530,39
450
100
Volume of direct contracts
Free trade sector volume
Free trade sector price
Regulated sector price
Market
price
400
50
350
0
November
Regulated
price (tariff)
December January February March
April
May
June
July
August September October
The market organized in this way, i.e. the state regulated price is a natural price
cap, can’t give right market signals. In 2006 the market model will undergo changes
encouraging the creation of actual competition; price risks will also appear in the
21
market.
Special features of the power
market
Inelastic demand
Continuous (inseparable) process of production and
consumption
Technical and technological limitations (production,
transmission)
Peculiarity of the power market from a regulatory point of view:
not having a commonly understood dominant position (market share of more
than 35%), in certain moments a producer may manipulate market price
(abuse his position in the market)
22
Manipulation of power market price without having a
considerable market share
Price,
RUB.
7
The demand (vertical line) won’t
be met without the volume
produced by the generator №5.
None of other generators will be
able to substitute the volume of
power offered by this generator.
This means that this generator
may increase the price specified
in its bid and set a new price
(horizontal dashed line).
The volumes produced by other
generators can be substituted by
competitors.
6
5
4
3
2
1
х5
Y
Volume, MW
Х
23
Opportunities for price manipulation:
1.
Do not depend directly on the market share of
generation companies.
2.
Each TGC or WGC may potentially have these
opportunities.
3.
May arise in different periods of time depending on the
balance between power supply and demand or
restrictions imposed on grids, which in turn depend on:

weather conditions,

preplanned or unplanned maintenance schedules for network
and generation equipment,

fuel prices, and many other factors.
24
Price volatility in power markets
APX (The Netherlands ) 2001: 1200%
CAISO (California ) 2000-2001: 640%
400
Actual Load
Average Cost per MWh
Daily base & peak load index APX July 2001
350
400
300
350
300
200
Euro/MWh
250
250
200
150
150
100
50
100
0
1
50
2
3
4
5
6
7
8
9
10
11
12
13
14
15
16
Base load
17
18
19
20
21
22
23
24
25
26
27
28
29
30
Peak load
Apr-02
Dec-01
Jun-01
Dec-00
May-00
Dec-99
May-99
0
Month
Russia is not ready for such price movements: a
significant price increase may "bury" further
liberalization
25
31
Means to reduce risks of price
manipulation
1.
Developed derivatives market (derivatives for electric power and
capacity) - smoothing of price volatility
2.
Timely and transparent development of network infrastructure in favor
of market interests
3.
Information transparency and efficiency of the information delivery
4.
Sufficient number of independent power suppliers
5.
Presence of a professional, transparent, independent and objective
state regulator
6.
Effective antimonopoly control based on:

precautionary measures taken by the organizer of trade (TSA)

tough sanctions imposed by the State
26
I dolchi:
4. Control over price manipulation: the Russian
approach
Price manipulation: how to fight?

In order to reduce risks of abrupt price
movements and to avoid price manipulation, most
foreign power markets implement a monitoring
system with individual measures and sanctions,
which are different from those implemented in
other markets

Russia will also have a monitoring system, which
will help to avoid unfair behavior in the power
market
28
The Russian approach (1)
1.
2.
3.
The Russian wholesale market monitoring and controlling
system will be based on the evaluation of generation
companies’ behavior in the wholesale market, when they
are filing applications for their participation in the day
ahead market and in the balancing market.
The temporary dominant position of generators will be
defined. This refers to those generators, which may
increase prices for electric power using the inelastic
demand and the current network topology.
Trading System Administrator will control market behavior
of such generators.
29
The Russian approach (2)
1.
2.
3.
If a leading generator increases (reduces) the price
previously fixed in its price bid, TSA will correct this
bid.
The price specified in the price bids previously made
by the generator and accepted in the market during
the period when this generator didn’t have a dominant
position, will serve as the criterion of
“competitiveness” of the bid.
Final evaluation of dominant producers’ behavior,
which led to the price increase (reduction), will be
made by the Federal Antimonopoly Service of Russia.
30
The scheme of control
Market participants
Supervision in accordance with
the Rules and regulations
(ex-ante control)
Supervision in accordance
with the Rules and the
antitrust legislation
(ex-post control)
Federal Antimonopoly
Service
Supervision in
accordance with the
Rules
31
Prospects of the control system




Availability of the control system with tough sanctions for
violations is a condition that is necessary and obligatory for
competitive market formation
In the future the system will be improved, thus being able to resist
such complex violations as confederacy, joint strategy of price
behavior etc.
Before the liquidation of RAO “UES of Russia”, the company will
have a corporate system of responsibilities and liabilities imposed
on Directors General of generation companies (TGCs and WGCs).
They will bear responsibility for non-competitive behavior in the
wholesale power market. This system is now being developed
jointly by RAO UES and FAS.
Generation companies will be obliged to take notice of the system
of responsibilities when choosing their market behavior, because
this system doesn’t allow them to abuse their behavior in the
market.
32
Grazie! Il conto per favore…
© Federal Antimonopoly Service