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Energy Law in the Sphere of Price Formation in the Gas Industry

Izotova Anna Vladimirovna, head of the legal department of Federal service of tariffs, teacher of the department of energy law of Moscow state law university named after O.E. Kutafi n (MSLA)

In this article the author conducts legal analyses in the sphere of price formation in the gas industry, the trends of its change, examines the varieties of prices of gas and tariffs on the transportation of gas as well as pays attention to court decisions.

The principles of the state pricing policy in the gas sphere, the order of conducting federal state control (supervision) for the setting and (or) implementing the prices (tariffs) regulated by the state in the area of gas supply, the authority of the Government of the Russian Federation in setting the gas prices and the service tariffs on its transportation in the gas transport and gas distribution networks are regulated by Federal Law No. 69-ФЗ “On the Gas Supply in the Russian Federation” of 31 March 1999[1].

In fulfillment of the given law, the Government of the Russian Federation has adopted the following legal acts in the sphere of price formation:

-          the Resolution of the Government of the Russian Federation No. 1021 “On the State Regulation of the Gas Prices and Tariffs on its Transportation in the Territory of the Russian Federation” of 29 December 2000[2] (further referred to as “The Main Clauses”);

-          the Resolution of the Government of the Russian Federation No. 335 “On the Order of Setting Special Premiums to the Tariffs on the Transportation of Gas by the Gas Distributing Organizations for Financing Gasification Programs” of 3 May 2001[3].

The legal analysis of the above-mentioned normative legal acts shows that state regulation is currently obligatory for:

a) the wholesale gas prices[4];

b) the tariffs on the services on transporting gas through the gas mains for independent organizations;

c) the tariffs for the services on transporting gas through the gas pipes belonging to the independent gas transporting organizations;

d) the tariffs on the services on transporting gas through gas distribution networks;

e) the size of payment for the procurement and supply services provided to the end-consumers by gas suppliers (under the regulated wholesale gas prices);

f) the retail gas prices when sold to the population;

g) special premiums to the tariffs on the services on transporting gas in gas distribution networks, aimed for financing the programs of gasification.

Apart from that, according to the Resolution of the Government of the Russian Federation No. 332 “On the Measures to Order the State Regulation of the Gas Price and the Price for the Gas Raw Material” of 15 April 1995[5], liable for the state regulation of prices are:

a) the wholesale prices for the liquefied gas;

b) the retail prices for the liquefied gas sold to the population as well as to the organizations operating housing blocks, the organizations managing the blocks of flats, the house-building cooperatives and the cooperatives of the owners of housing, when gas is used for the everyday needs of the population (apart from the gas for the tenants of the non-residential spaces in the residential housing and the gas for the fueling of the vehicles).

Let us dwell in more detail on the current legislation, which is regulating the setting of the above-mentioned prices and tariffs.

a) Wholesale gas prices.

According to the Main Clauses, the regulated wholesale gas price is the gas price fixed under the established order (or the gas price determined based on the gas price formula), which should be charged by the gas suppliers (gas supplying organizations) directly to the end-consumers, who are using gas as fuel and (or) raw material or to the organizations for the further sales to the end-consumers:

-          at the exit from the system of the gas mains;

-          at the entry into the gas distribution networks (in case of the absence of the gas mains as part of the supply chain);

-          at the entry into the receiver tank, which is technologically connected with gas distribution networks and the networks of the end consumer, for further storage of liquefied natural gas and its re-gasification (in case of the utilization of the technology of gas liquefication in the process of supply).

The state regulation of the wholesale gas prices (excluding the wholesale prices for the natural gas sold at the commodity markets) is conducted until the transition to the state regulation of the single gas tariffs on its transportation in the gas mains in the territory of the Russian Federation for all suppliers.

The transition from the state regulation of the wholesale gas prices to the state regulation of the tariffs on the services for its transportation through the gas mains in the territory of the Russian Federation is being conducted in stages. The last stage should create the conditions for the practical application of the market principles of the price formation, including the application of the formula of the gas price. The market principles should lay the foundation for the limitation of the sphere of the state regulation of the price formation in the gas industry, the setting of the tariffs for the services on the transportation of gas in the gas mains and in the gas distribution networks.

Until 2007, the wholesale gas price had been set as a fixed number and differentiated based on the price ranges. After the adoption by the Government of the Russian Federation of the Regulation No. 333 “On Improving the State Regulation of the Gas Prices” of 28 May 2007[6], the wholesale price of gas for the system of gas supply into the foreign markets (except for the population and the consumers listed in p. 15.1. of the Main Clauses) is calculated based on the gas formula.

The wholesale prices for the gas extracted by the OAO Gazprom and its affiliates[7], sold to the certain categories of consumers, are set based on the agreement of the sides (p. 15.1. of the Main Clauses). These categories include:

-          the end-consumers, which have signed first time contracts for the supply of gas with the starting date after 1 July 2007;

-          the end-consumers, who are purchasing gas in excess of the volumes set in the contracts of the gas supply for the year 2007.

However, the prices, which are fixed based on the agreement of the sides, should lie within the maximum and minimum levels of the wholesale prices fixed by the Federal Bureau on Tariffs of the Russian Federation.

The regulation of the wholesale gas prices is conducted based on the formula of the gas price in accordance with the Regulation on determining the formula of the gas price set by the Order of the Federal Bureau on Tariffs of the Russian Federation No. 165-э/2 of 14 July 2011[8].

The calculation of prices based on the formula is conducted quarterly by the participants of the market themselves. The services on the transportation of gas through the pipelines in accordance with Federal Law No. 147-ФЗ “On the Natural Monopolies” of 17 August 1995[9] have been transferred to the sphere of the activity of the subjects of natural monopolies.

In accordance with the Main Clauses, the tariffs on the services on the transportation of gas are distinguished based on the type of the gas pipeline and the type of consumers.

This feature determines the peculiarities of the price regulation of these services and the legal status of the subject of the natural monopolies themselves. The procedure of the adoption of the tariff decisions with respect to the subjects of the natural monopolies, which are conducting activity on the transportation of gas through the pipelines, differs from other regulated organizations, which are not the subjects of natural monopolies.

The price of the services on the transportation of gas through the gas pipelines is set based on the methodological instructions.

Thus, in accordance with the Main Clauses, we distinguish between:

b) the tariffs for the services on the transportation of gas through the gas mains for independent originations;

c) the tariffs for the services on the transportation of gas through the gas pipelines owned by independent gas transportation organizations.

The state regulation of the tariffs in relation to these services is conducted through setting their fixed levels. The Methodology for the calculation of the tariffs for the services on the transportation of gas through the gas mains approved by the Order of the Federal Bureau on Tariffs of the Russian Federation No. 388-э/1 of 23 August 2005[10] is used for the calculation of the above-mentioned tariffs.

The tariffs are set depending on the structure of the expenditures of the subject of the regulation and on the scheme of gas transportation. The tariffs can be:

-          one-part, in the cases when no compression of gas is conducted in the system of the gas main or the share of the consumption of electricity or gas used for the technological needs of the subject of the regulation during the transportation of gas does not exceed 1% of the total cost of the transportation of gas. One-part tariffs can also be set for the regional systems of gas supply;

-          two-part, in other cases.

Two-part tariffs are made of two parts:

-          the tariff on the use of the gas mains;

-          the tariff on the conducted work on the transportation of gas.

The normative acts do not lay down the requirements for the period of validity of the tariffs on the services for the transportation of gas through the gas mains.

d) the tariffs for the services on the transportation of gas through gas distribution networks.

The calculation of the tariffs is conducted based on the Methodological instructions on the regulation of the tariffs for the services on the transportation of gas through the gas distribution networks fixed in the Order of the Federal Bureau on Tariffs of the Russian Federation No. 411-э/7 of 15 December 2009[11].

The rate of the tariff is differentiated based on the groups of the end-consumers depending on the volumes of gas consumed.

The tariffs on the services of the transportation of gas through the gas distribution networks are fixed for the term of no less than 3 and no more than 5 years. The tariffs can be set in accordance with the schedule diagram.

e) the rate of the payment for the supply and sales services provided to the end-consumers by the suppliers of gas (under the regulation of the wholesale gas prices).

The payment for the supply and sales services is calculated based on the Methodological directions on the regulation of the rate of the payment for the supply and sales services provided to the end-consumers of gas set by the Order of the Federal Bureau on Tariffs of the Russian Federation No. 412-э/8 of 15 December 2009[12]. The rate is used for calculating payments for the supply and sales services provided by the suppliers of gas (organizations, conducting the regulated type of activity) to the end-consumers[13].

Depending on the volumes of the consumption of gas by the end-consumers, the rate of payment for the supply and sales services of the supplier of gas is set differentially based on the groups of the end consumers, which are defined by the Methodological directions.

The Main Clauses allow for the differentiation of the gas prices (except for the wholesale prices for the gas sold at the commodity markets), the tariffs for the services on the transportation of gas through gas distribution networks, the rate of payment for the supply and sales services provided to the end-consumers by the suppliers of gas, based on the groups of consumers depending on whether the latter are connected to the networks with varied pressure, price ranges, seasonality, the time of the conclusion of contracts and the terms of the contracts on the supply of gas, the regime of the taking away of gas, the volumes of its consumption and other factors.

f) the retail gas prices sold to the population.

In accordance with p. 2 of the Main Clauses, the population comprises:

-          the physical persons (citizens), who own (rent) residential housing;

-          the persons purchasing gas, including the providers of the communal services, for its use in the boiler rooms of all types and (or) other equipment for the production of electricity and (or) thermal energy in order to meet the daily needs of the dwellers of the blocks of flats, which are the joint shared property of the owners of the residential spaces in the above-mentioned residential housing;

-          other persons purchasing the gas, which is consumed by the physical persons (citizens), namely:

-          the providers of the communal services (the managing organizations, the cooperatives of the owners of housing, the cooperatives conducting the construction of the residential areas, residential cooperatives and other specialized consumer cooperatives);

-          the leasers (or the persons authorized by them), who provide citizens with the residential spaces from the specialized residential fund, i.e. the service residential housing, the residential housing from the flexible fund, the residential areas in the houses of the system of social facilities providing services to the population, the residential fund for the temporary settlement of the forcibly displaced and the temporary settlement of the persons recognized as refugees as well as the residential areas reserved for the social security of certain categories of citizens;

-          gardening as well as gardening and countryside not-for-profit associations of citizens.

In relation to that, we would like to draw the attention to the legal practice of the Supreme Court of the Russian Federation. Citizen D.V. Parakhin has appealed to the Supreme Court of the Russian Federation[14] with the application on the recognition as null and void of p. 2 of the Main Clauses with respect to the concept of “population”, referring to the fact that it contradicts Art. 2 and p. 2 Art. 4 of Federal Law No. 112-ФЗ “On the Private Household Farming” of 7 July 2003 and the preamble of the Law of the Russian Federation No. 2300-I “On the Protection of the Rights of Consumers” of 7 February 1992 and breaches the rights of the citizens who are in possession of private household farm. As pointed by the applicant, he is the owner of the premises used to house and breed foul, which are situated on the plot of land with no residential housing, thus he does not receive gas for the prices set for the population.

The court has refused to satisfy the demands of the claimant, referring to the fact that neither Federal Law “On the Private Household Farming” nor the Law of the Russian Federation “On the Protection of the Rights of Consumers” contains a norm, which provides for the possibility of supplying gas to the citizens, who possess private household farms, at the residential prices.

The decision of the Supreme Court of the Russian Federation in the case No. АКПИ 13-1201 of 17 January 2014 states that p. 2 of the Main Clauses defines the concepts used in the given legal normative act, which is used as the guide for the formation of the gas prices, the tariffs for the services for its transportation through the gas mains and gas distribution networks. The Supreme Court of the Russian Federation has concluded that the disputed clauses of the normative legal act (as defined in the system of the norms of the conceptual apparatus of the Main Clauses) do not contradict Arts. 2 and 4 of Federal Law “On the Private Household Farming” and cannot be deemed as breaching the right of the citizens on the conducting of such type of farming.

The retail gas prices sold to the population are fixed by executive bodies of the Russian Federation constituent entities and calculated on a basis of the Methodological directions approved by the Order of the Federal Bureau on Tariffs of the Russian Federation No. 252-э/2 of 27 December 2011[15].

According to the Methodological directions, the retail prices are set differentially depending on the aims of the use of water (cooking food, heating, central heating). The validity of ps. 5 and 13 of the current Methodological directions was disputed in the Supreme Court of the Russian Federation.

Ms. T. Ya. Shabalina appealed to the Supreme Court of the Russian Federation demanding to recognize ps. 5 and 13 of the Methodological directions null and void based on the fact that the disputed clauses prescribe the required setting of the retail gas prices for the various goals of the utilization of gas, which contradicts ps. 8 and 15 of the Main Clauses of the formation and the state regulation of the gas prices and the tariffs for the services on its transportation in the territory of the Russian Federation approved by the Resolution of the Government of the Russian Federation No. 1021 of 29 December 2000. In accordance with the Resolution, the gas prices can be differentiated based on the groups of consumers depending on various factors, the decision whether to set the single or differentiated gas prices is passed by the regional authorities. The court refused to satisfy the demands of the claimant because the normative regulations in dispute do not breach the rights and the legal interests of the claimant, do not contradict the federal legislation or any other normative legal act, which possesses stronger legal force[16].

f) Special premiums to the tariffs on the services of the transportation of gas through the gas distribution networks used for the financing of the programs of gasification.

In order to further develop the gasification of the regions, the Government of the Russian Federation adopted the decision to set special premiums on the tariffs on the transportation of gas through the gas distribution program aimed for the financing of the programs of gasification.

In accordance with the Resolution of the Government of the Russian Federation No. 335 “On the Order of the Fixing of the Special Premiums to the Tariffs on the Transportation of Gas by the Gas Distribution Organizations for the Financing of the Programs of Gasification” of 3 May 2001, the premiums are fixed by the executive bodies of the subjectы of the Russian Federation and are calculated in accordance with the Methodology of setting the volume of the special premiums to the tariffs on the transportation of gas by the gas distribution organizations for the financing of the programs of the gasification approved by the Order of the Federal Bureau on Tariffs of the Russian Federation No. 154-э/4 of 21 June 2011[17], on agreement with the gas distribution organizations.

Premiums are set for the tariffs on the transportation of the gas for the end-consumers, while the means received as the result of applying special premiums are of targeted purpose and are directed to the financing of the works foreseen by the programs of the gasification of the housing and communal spheres in the Russian Federation constituent entities.

In order to streamline the state regulation of the prices for the gas and the raw material for its production, increase the profitability rate of the works of the gas processing companies and achieve the uninterrupted gas supply of the population, the Government of the Russian Federation adopted the Regulation No. 332 “On the Measures to Order the State Regulation of the Gas Prices and the Raw Materials for its Production” of 15 April 1995, which provides for the state regulation of the prices for the liquefied gas.

g) The wholesale prices for the liquefied gas are set by the Federal Bureau on Tariffs.

They are calculated based on the Methodological directions on the regulation of the wholesale prices for the liquefied gas for the daily needs of the population approved by the Order of the Federal Bureau on Tariffs of the Russian Federation No. 312-э/8 of 28 November 2006.

The given prices can be maximal in the cases when the market wholesale prices for the compressed gas are vacillating and the fixed regulated wholesale prices for the liquefied gas for the daily needs tend to exceed the level of the market prices.

h) The retail prices for the compressed gas sold to the population, as well as to the organizations operating housing, the organizations operating blocks of flats, the housing construction cooperatives and the cooperatives of the owners of the housing for the daily needs of the population (except for the gas for the renters of the non-residential spaces in the residential houses and the gas for the filling of the vehicles) are confirmed by the executive bodies of a subject of the Russian Federation.

The given prices are applied by the organizations conducting the regulated activity when selling the liquefied gas to the population for the daily needs (cooking food, heating, supplying hot water). Their calculation is conducted based on the Methodological directions on the regulation of the retail prices for the liquefied gas sold to the population for the daily needs approved by the Order of the Federal Bureau on Tariffs of the Russian Federation No. 129-э/2 of 15 June 2007[18].

The methodological directions foresee the differentiation of prices depending on the system of franking based on the categories (selling of the liquefied gas in containers with the delivery to the consumer, the selling of the liquefied gas from the group gas reservoir installations etc.).

The legal analysis of the above-mentioned normative legal acts allows us to conclude that a special body of the energy legislation has been formed, which is regulating the relations on the price formation in the gas industry. The prices and tariffs set in the gas industry can be provisionally classified into groups, among which are: 1) depending on the market of the realization of gas, i.e. wholesale and retail prices; 2) based on the type of gas, i.e. prices for the natural and compressed gas; 3) based on the object of the system of gas supply, i.e. the tariffs on the services for the transportation of gas through the gas mains and the transportation of gas through gas distribution networks. The main burden in the normative legal regulation is placed upon the Government of the Russian Federation as well as on the Federal Bureau on Tariffs.



[1] RF Federal Law No. 69-ФЗ “On the Supply of Gas in the Russian Federation” of 31 March 1999. Code of Laws of the Russian Federation, 1999, No. 14, Art. 1667 (in Russian).

[2] Resolution of the Government No. 1021 “On the State Regulation of the Gas Prices and Tariffs on its Transportation in the Territory of the Russian Federation” of 29 December 2000. Code of Laws of the Russian Federation, 2001, No. 2, Art. 175 (in Russian).

[3] Resolution of the Government No. 335 “On the Order of Setting Special Premiums to the Tariffs on the Transportation of Gas by the Gas Distributing Organizations for Financing Gasification Programs” of 3 May 2001. Code of Laws of the Russian Federation, 2001, No. 19, Art. 1942 (in Russian).

[4] With the exception of the gas wholesale prices sold at the commodity exchanges.

[5] Resolution of the Government No. 332 “On the Measures to Order the State Regulation of the Gas Price and the Price for the Gas Raw Material” of 15 April 1995. Code of Laws of the Russian Federation, 1995, No. 17, Art. 1539 (in Russian).

[6] Resolution of the Government No. 333 “On Improving the State Regulation of the Gas Prices” of 28 April 2007. Code of Laws of the Russian Federation, 2007, No. 23, Art. 2798 (in Russian).

[7] With the exception of the gas wholesale prices sold at the commodity exchanges.

[8] Order of the Federal Bureau on Tariffs of the RF No. 165-э/2 “On the Adoption of the Resolution on Determining the Gas Price Formula”. Rossiyskaya Gazeta, 2011, No. 180.

[9] RF Federal Law No. 147-ФЗ “On the Natural Monopolies” of 17 August 1995. Code of Laws of the Russian Federation, 1995, No. 34, Art. 3426 (in Russian).

[10] Order of the Federal Bureau on Tariffs of the RF No. 388-э/1 of 23 August 2005. Bulletin of the normative acts of the federal bodies of the executive power, 2095, No. 44.

[11] See: Order of the Federal Bureau on Tariffs of the RF No. 411-э/7 of 15 December 2009. Rossiyskaya Gazeta, 2010, 10 February.

[12] Order of the Federal Bureau on Tariffs of the RF No. 412-э/8 “On the Approval of the Methodological Direction on Regulating the Size of Payment for the Supply and Sales Services Provided to the End-Consumers of Gas” of 15 December 2009. Rossiyskaya Gazeta, 2010, 17 February.

[13] In case of selling the gas, whose wholesale price is liable for state regulation.

 [14] Decision of the Supreme Court of the RF in the case No. АКПИ13-1201 of 17 January 2014. Available at: http://www.supcourt.ru.

[15] Order of the Federal Bureau on Tariffs of the RF No. 252-э/2 “On the Approval of the Methodological Directions on Regulating the Retail Gas Prices Sold to the Population” of 27 October 2011. Rossiyskaya Gazeta, 2011, No. 281.

 [16] Decision of the Supreme Court of the RF in the case No. АКПИ13-475 “On the Refusal to Satisfy the Claim on Avowing Null ps. 5, 13 of the Methodological Directions on the Regulation of the Retail Gas Prices Sold to the Population” approved by the Order of the Federal Bureau on Tariffs No. 252-э/2 of 27 October 2011. Available at: http://www.supcourt.ru.

[17] Order of the Federal Bureau on Tariffs No. 154-э/4 “On the Adoption of the Methodology of Determining the Size of the Special Premiums to the Tariffs on the Transportation of Gas by the Gas Distribution Organizations for the Financing of Gasification Programs” of 21 June 2011. Rossiyskaya Gazeta, 2011. No. 154.

[18] Order of the Federal Bureau on Tariffs No. 129-э/2 “On the Adoption of the Methodological directions on regulating the retail prices for the liquefied gas sold to the population for daily needs” of 15 June 2007. Rossiyskaya Gazeta, 2007. No. 159.