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Transneft Estimates Losses from Change in Tariff Regulation

Date of publication: 18 July 2019

Losses will be incurred only in case of unapproved expenses, assures the Federal Antimonopoly Service.

Transneft has estimated losses from possible passing of the draft bill on the state regulation of tariffs, developed by the Federal Antimonopoly Service (FAS) and the Ministry of Economic Development. As estimated by the Company, the maximum loss in case of changing the depreciation accounting alone may exceed RUB 250 billion, a representative of Transneft told Vedomosti.

Vladimir Putin tasked to change the regulation of tariffs in August 2018. Now tariffs are regulated by more than 20 federal laws and 100 regulations thereunder, according to Deputy Director of the FAS Sergey Puzyrevsky interviewed by Vedomosti: the draft bill should enforce “unified rules of the game”. The draft bill prioritises the method of comparative analysis or reference (benchmark) expenditures. However, the draft bill does not suggest any benchmark calculation methodology. The latter implies the identification of factors influencing the Company’s performance; among them a number of groups are earmarked, with an average or reference tariff attached to each of these, says Deputy Executive Director of the National Water Supply & Drainage Association Aleksandr Epshtein; there is a separate regulation for each sphere. It is suggested that tariffs are to be fixed for five years ahead, rather than one year, as is the custom now. The only exception is tax growth or tariff reduction because of the failure to implement investment, production and repair programmes.

Transneft mentions the possible losses in its feedback to the draft bill that was developed by the order dated 14 June 2019. Vedomosti has reviewed the draft bill copy, its authenticity confirmed by a Transneft spokesperson. The person did not specify who exactly requested feedback. The FAS did not receive the document, a representative of the Service said to Vedomosti. The Ministry of Economic Development received and reviewed the petition, noted the Ministry’s spokesperson.

The Company’s losses can be caused by a change of accounting for depreciation in tariff calculation, according to the feedback. Right now, these expenses are recognised as operational, but the draft bill proposes their transfer to investment expenditures. They can be limited by the government, according to the draft bill. This change will result in incomplete accounting for depreciation in regulated tariffs, according to Transneft. The Company estimates depreciation for 2019 at RUB 255 billion, said a spokesperson of Transneft. A shortage of funds for infrastructure restoration and revamping cannot be ruled out because of the changes, according to the Transneft response. Meanwhile the Company plans to spend RUB 247 billion on these needs in 2019.

The depreciation will be included in the tariff if the investment programme is financed from this money, explains a representative of the FAS. As a result of this approach, companies are deprived of the opportunity to allocate these funds independently, using them for operational needs, warns Director for Legal Matters at Russian Utility Systems Grigory Teryan. The risks of artificial tariff reduction and extra control of expenses also arise, he adds. The Ministry did not propose to recognize depreciation as investment expenses, says a spokesperson of the Ministry of Economic Development.

It’s hard to say anything certain about the Transneft tariffs calculated in accordance with the new rules, says Dmitry Marinchenko, Senior Director at the Fitch Corporation Section. The accounting for capital expenditures incurred by the Company that can theoretically be financed from loaned funds is not quite clear, he explains: here the government reserves some room for manoeuvre. The bill guarantees the reimbursement of funds invested prior to its enforcement by those standards that existed at the time of their investing, assures a representative of the FAS. After the document comes into force, depreciation will also be taken into account in tariffs, when the investment programme is being approved, he specified: losses may arise only in case of unapproved expenditures. “We do not foresee any losses,” briefly commented a representative of the Ministry of Economic Development. Unbridled accounting for depreciation in tariffs causes ineffective investments as well as a remarkable increase in the cost of services and in their poorer quality, a representative of the FAS recapitulates.

Transneft also referred to other potential losses in its feedback. Among them is the lack of opportunity to use approved markups and incomplete accounting for capital investment expenditures. The Transneft spokesperson could not specify financial losses on these items of expenditure.

The Company suggests in its feedback that the state budget should make up for these losses. The Ministry of Finance’s spokesperson said the Ministry did not regulate tariffs and readdressed the issue of possible compensation to the FAS. The latter’s representative protested, saying that the FAS was not authorised to regulate budgetary relations. Aleksandra Suslina from Economic Expert Group assures that making up for the losses of different companies is not the federal budget’s prerogative. While some companies may incur losses, others may benefit: it’s not quite clear what policy should be pursued in respect of the latter either, she argues.

The letter says that Transneft’s objections were wholly supported by the Energy Ministry: the Russian Union of Industrialists and Entrepreneurs as well as Gazprom, Russian Railways and Rosseti put forward their follow-on revision proposals as well. The Ministry and the said companies did not respond to Vedomosti’s inquiries. A representative of the FAS corroborated the receipt of numerous objections from Transneft and some of these objections were found justified. The revised version of the draft bill was submitted for the government review in April (Vedomosti examined its content). Regulatory additions to this bill are also discussed, says an interviewee of Vedomosti, well familiar with the course of their elaboration.

Benchmarks facilitate the tariff development, since they allow to assess how high or low the tariffs actually are, explained Irina Bulgakova, Head of the Expert Board under the State Duma Committee on Housing Policy and Municipal Services. Yet the bill’s current version gives preference to the average, not the best, says Epshtein. The idea of using the new methodology hardly comes down to a substantial change in tariffs, says Marinchenko: they should obviously take into account the investment expenditures incurred by companies.

A theoretical reduction of tariffs by RUB 250 billion year after year might cause the income and operating cash flows of Transneft to drop, he points out: the Company’s EBITDA would have plummeted by more than twice. In 2018 EBITDA stood at RUB 434 billion. If the draft bill adoption is fraught with such huge losses, everyone will wonder how justified it is, Suslina adds. New rules should supposedly facilitate economic growth instead of stifling it. But it cuts two ways, the expert notes: businesses always oppose any changes or stiffer regulation. They are normally willing to engage any lobbyist resources, Suslina continues, so it’s important to weigh whether the losses are so significant indeed, or this is just a pretext for bargaining.

Most likely, the authorities will seek to maintain the balance of interests and to grope for a compromise between the regulated businesses and consumers of their services, Marinchenko concludes. “I do not think the draft bill will be passed, if it is fraught with serious losses for companies, such as Transneft or Gazprom,” Suslina agrees. “The national economy is to a large extent dependent on natural resources, these companies being major drivers of its growth. Nobody has a stake in stalling this growth, that’s for sure.”

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