Importance of so-called natural monopolies in Kazakhstan can be seen in the fact that some of Kazakhstan's largest and most powerful corporate empires, such as the Kazakhstan Electricity Grid Operating Company (KEGOC) (national transmission grid operator), KazTransOil (national oil transporter in Kazakhstan accounting to 80% of all oil transported in the country) and National Company Kazakhstan Temir Zholy (the national railway company of Kazakhstan) are officially subject to natural monopoly regulation. The development of natural monopoly regulation in Kazakhstan can, therefore, be seen as an important test case for regulatory reform issues in countries with developing market economies.
Recently Government of Kazakhstan declared its intention to introduce competition into potentially competitive areas of the natural monopoly sectors and its readiness to improve the investment climate and to attract private investments (including through PPPs) into the housing and utilities sector, as well as other industries subject to natural monopoly regulation.
If successful, these initiatives would increase bankability and investment attractiveness of many projects in Kazakhstan.
Below is a brief recap for potential foreign investors and lenders of a current legal framework for natural monopolies in Kazakhstan, in particular description of the current tariff regulation.
Definition of Natural Monopoly in Kazakhstan
The general definition is set forth in article 3(15) of the Law of the Republic of Kazakhstan 'On Natural Monopolies and Regulated Markets' No. 272-I dated 9 July 1998 (the 'NML') which states as follows: "natural monopoly shall mean the condition of services (goods, works) market, where the creation of competitive conditions for satisfying demand for a particular type of services (goods, works) is impossible or economically inexpedient due to the technical peculiarities of production and provision of the given type of services (goods, works)."
As article 1 of the NML states, that this law is aimed at (i) determination of the legal framework for the state control and regulation of activities in the natural monopolistic spheres and (ii) achievement of a balance of interests of the consumers and holders of natural monopolies. In other words, the purpose of this legislation is not only to regulate natural monopolies for the public benefit, but to mediate between the competing interests of all the parties involved, including those of the holders of natural monopolies themselves which are not conceived of as substantively different from, or less important than, the interests of any other private parties.
In accordance with the NML individual entrepreneurs and legal entities operating within certain enumerated industries which are recognised as 'natural monopolies' are considered as so-called 'holders of natural monopoly' that render 'regulated services (goods, works)'.
Such industries include:
- transportation of oil, oil derivatives via trunk pipelines;
- storing and transporting natural gas via trunk and/or distribution pipelines, operation of natural gas pipelines, usage of natural gas distribution systems;
- transportation and/or distribution of electrical energy;
- generation, transpiration, distribution and/or supply with heat energy;
- provision of electricity dispatch services;
- services relating to organizing of balancing generation and consumption of electrical energy;
- operation of main-line railways;
- provision of railway services under concession agreements;
- operation of branch railway lines;
- air navigation;
- airport and harbor services;
- provision of telecommunication services, if there is no other competing telecom operator due to technical impossibility, or economical unfeasibility, except for universal telecommunication services;
- leasing to other entities of duct banks and equipment for connecting telecommunication lines to terrestrial telecommunication network (of incumbent telecom operator);
- operation of water and sewage systems; and
- publicly available postal services.
Regulatory Agencies
Save for telecommunication and publicly available postal services industries that have their own regulator (i.e. Ministry of Investment and Development of Kazakhstan (the 'MID') as successor of the reorginised Agency for Communication and Information), the newly formed Committee on Regulation of Natural Monopolies and Protection of Competition of the Ministry of National Economy of Kazakhstan (the 'AREM'), as successor of the reorganised Agency of the Republic of Kazakhstan On Regulation of Natural Monopolies, regulates the rest of natural monopolies and maintains a registry1 of entities operating within below mentioned industries. Functions of the AREM as authorized body include control and regulation of activities in the sphere of natural monopolies (save for telecommunication and postal services), it also has the right to develop and approve by-laws that are binding for state bodies and subjects of natural monopolies.
Forms of Regulation and Control
The regulatory regime contemplated by the NML includes two major elements: (1) regulation per se, and (2) supervision and control in the form of pre-approval of certain acts intended to be engaged into by the holders of natural monopolies.
Forms of Regulation
Provisions that reflect general approaches to regulation are contained, in particular, in articles 5, 6, 7 of the NML ("Restrictions of activities of holders of natural monopolies", "Rights of a holder of the natural monopoly" and "Duties of a holder of the natural monopoly") that are, in essence requirements:
- to provide equal conditions to consumers of services (goods, works) manufactured in the conditions of natural monopolies (except for provision of benefits to certain categories of consumers in accordance with the legislation);
- to ensure quality of services for consumers taking into consideration prices set by the regulator that supervises activities of holders of natural monopolies;
- to apply efficient production methods and technologies;
- to submit to the regulator that supervises activities of holders of natural monopolies reports on their activities.
State regulation of the holders of the natural monopoly under the NML is performed through:
- the approval of a tariff (price, fee rate) or a maximum limit thereof including by applying a comparative analysis method, differentiated and investment tariffs (prices, fee rates);
- the approval of a tariff estimate;
- the approval of a temporary decreasing coefficient;
- the approval of a special procedure for incurring costs;
- the approval of a procedure for keeping separate records of income, expenses and involved assets by each type of regulated services (goods, works) and for the other activities in general;
- the approval of accounting policies;
- the approval of temporary compensating tariff.
Forms of Control
The holders of natural monopoly are subject to specific restrictions and additional obligations, for instance, the holders of the natural monopoly cannot (save for limited exceptions as specified in article 5 of the NML), inter alia:
- render services and perform other activities not relating to natural monopoly spheres;
- own property unrelated to the production and provision of regulated services (goods, work);
- hold shares (participation interests) or otherwise participate in the activities of commercial organizations;
- charge for the regulated services (goods, work) in excess of the established amounts; and
- charge additional payment or otherwise impose additional obligations unrelated to the subject of services;
- prevent the excess of the funds provided for by items of the tariff estimate approved by the competent authority by more than five percent, except for regional electricity network company, and cases of increase in expenses for the used strategic goods, as well as natural and man-made emergencies;
- include in tariffs (prices, fee rates) or their maximum limits for the regulated services (goods, works) costs unrelated to their provision;
- allow unauthorised use of the funds provided for in investment programs (projects) approved in accordance with the established procedure;
- classify as commercial secret the information: (i) contained in the tariff estimate; (ii) on expenditures for procurement and installation of metering devices for regulated public utility services and the mechanism of collecting charges, procurement and installation of metering devices for regulated public utility services; (iii) on provided regulated public utility services (goods, works).
It worth mentioning that for the purpose of flexible regulation of low-capacity enterprises, the NML envisions a simplified procedure for so-called 'low capacity natural monopoly entity' that is a natural monopoly entity that provides, for instance, services of production, delivery, distribution and/or supply of thermal energy from heating boiler-houses with a total installed capacity of up to twenty Gcal/hour inclusive.
Finally, it should be noted that activities of natural monopolies in Kazakhstan are subject to stringent regulations and, for instance, holders of natural monopolies are required to obtain approval from the regulatory agencies for certain types of business transactions, in particular, sale, lease or other disposition of the assets of the natural monopoly company, designated for production and rendering of regulated services (goods, works), by such natural monopoly company, if the book value of such assets exceeds 0,05% of the book value of whole assets of the holder of natural monopoly as of beginning of respective year. For the approval of such transactions, the holder of natural monopoly must apply to the AREM and provide the latter with the necessary information (as determined by the agency) about the contemplated transaction. The regulatory agency may deny its approval if it deems that the transaction will have an adverse effect on the interests of consumers or on a competitive development of the market, in which case the applicant can appeal to the court. Similarly, a notification of the AREM is, for instance, required for any acquisition by third parties of a stake in a holder of natural monopoly giving them more than 10% of the votes on the shares of such a holder.
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Footnote
1. Such register of natural monopolies consists of the Republican (for most important companies) and local parts (for local level companies).
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
