Legal Regulation On Introducing Competition In China’s Natural Gas Industry

Monopoly and competition emerged as a long-debated topic in economics. Since the 1970 s, developed countries have witnessed the deregulation of their monopolized industries covering telecommunication, electricity, railway, civil aviation, oil and transmission of natural gas. As competition was introduced, market potential was released. Deregulation refers to loosening or canceling excessive regulatory regimes including the review of market access and exit, governmental pricing of product and service, restrictions on industrial investment, and finance and accounting, etc. Such deregulation aimed to promote competition.In China, natural gas and other monopolized industries have not been deregulated and competition has not been introduced. Given the wide scope of such industries, relevant legal studies can be carried out from different perspectives. This paper focuses on natural gas industry under the theme of legal regulations in promoting competition, and covers major issues as the theory and legal barriers in introducing competition in China’s natural gas industry, the path and legal regulations of European and American countries, the path selection, the regulations on industry law and competition law, and the conflict and coordination between industry policy and competition policy.This paper begins with describing basic theory of monopoly and competition, and digs deep in the legal regulations in introducing competition in domestic natural gas industry. It proceeds as follows: the theory of introducing competition in monopolized natural gas industry, the monopolistic elements and necessity of introducing competition, the legal barriers in this field, the legal pattern of European and American countries’ liberalization of natural gas market, the path selection of introducing competition in China, the regulation on industry law, the regulation on competition law, the relationship between industry policy and competition policy, and the conflict and coordination between these two policies. Based on this structure, this 150,000 words paper is divided into five chapters excluding exordium.Chapter 1 The theory and legal barriers in introducing competition in China’s natural gas industry. This chapter devoted to presenting theories in promoting competition in this industry, analyzing its monopolistic elements and necessity of competition, and identifying legal barriers hindering the process. Such theory analysis lays a solid foundation for the thesis of this paper. This paper points out predominate problems and the monopolistic elements of domestic natural gas industry. This industry is characterized by oligopoly market structure, entry barriers, and natural and administrative monopolies in upstream, midstream and downstream. Such analysis leads to the economic necessity of introducing competition. However, this process is hindered by legal barriers which are elaborated later. Four sections in this chapter lay the foundation for economic theory, industrial realities, and legal barriers in this process, presenting the thesis of this paper.Chapter 2 The legal regulations of European and American countries in introducing competition and our choice.The path and legal regulations in liberalizing natural gas industry in EU(European Union) and the U.S(the United States of America) are reviewed, and lessons drawn from them provide us with path selection based on our realities. This chapter employs empirical and legal analysis to study the following questions:First, the legal path of liberalizing EU’s natural gas industry is reviewed, and directives enacted to deregulate this industry and enhance competition are elaborated. Then legal analysis is employed to analyze regimes of market access, pricing, opening up pipeline infrastructure and third party access(TPA), and operate transparency. German’s natural gas industry enlightens us that the supervision system should be reformed by deregulating the industry and introducing competition on the one hand, and a fair marketplace should be guaranteed by implementing competition laws on the other hand. How the competition laws in EU functioned to guarantee a competitive market is then analyzed.Second, the legal path of introducing competition in America’s natural gas industry is studied. This paper looks at the Gas Directives formulated in this process and other regulations enacted into them governing upstream, midstream and downstream in this industrial chain. It analyzes measures taken in various links to increase competition in pricing and pipeline infrastructure. Besides industry law, the competition law of America is also studied, and typical cases are cited to present a clearer picture of its legal regulation.Third, the lessons drawn from the liberalization of EU and the U.S natural gas markets are summarized. Following this, the path selection of introducing competition in China is considered based on our realities. The paper argues that the liberalization of a matured market enlightens us that we should: 1). Strengthen market-oriented and competition awareness and further free the natural gas market;2). Build a regulatory system complying with the liberalization of natural gas industry;3). Formulate industrial rules based on the merits of different links in industrial chains to liberate this industry; and4). Introduce competition in the legislation process of this industry.Forth, the path selection of introducing competition in domestic natural gas market is presented. This paper pints out that, apart from the legislation in this industry, the institutional reform of energy management should also be carried out to successfully enhance competition at this economic transformation process. The established system of energy management is far from making the energy industry market-oriented. The absence and mismatch of energy management authorities hinder the natural gas and other industries from being market-oriented and competition-driven. Furthermore, since industry policy always has an advantage over competition policy, it should also enhance competition to achieve the final goal.This chapter concludes that laws can promote and protect competition in natural gas industry, the development and legislation of foreign countries can be drawn to solve our own problems in introducing competition. Such basic researches lay the foundation for digging deeper into the legal regulations in this regard.Chapter 3 The regulation on industry law in introducing competition in domestic natural gas industry.The focus is steered to the core problem of this paper: how to formulate legal regulations and how to formulate industry law of those regulations. This paper points put three predominant defections in the structure of existed legal regulations:1). The decentralization of legal regulations and the absence of vital system;2). The absence of independent supervise institution in charge of increasing competition; and3). The absence of a information sharing system in this industry.Based on this analysis, this paper outlines several systems that should be improved in our legal regulations to build a more competitive natural gas industry.First, the market access system of upstream in natural gas industry should be improved. This paper argues that, to open up the market, government should decontrol the entry in exploration and production, embrace new entrants, and absorb non-governmental capital, thus forming a competition-driven market. The exploration in upstream should improve the access system including the qualification and conditions of the enterprises, make the access standard transparent, level the playing field for any market entity, and foster emerging ones.Second, the system of opening up of the pipeline infrastructure and TPA should be improved. This paper speculates that the TPA for the infrastructure of pipeline network is essential to promote competition in natural gas market, and it can empower the gas users to select suppliers freely. Such access should be phased in by allowing the third party accessing the pipeline network first and then accessing Liquefied Natural Gas(LNG) terminal and storage. The TPA requires two preconditions:1). Distinguish between natural monopoly business and contestable business; and2). Decouple the production and transmission of natural gas.Only by constructing an independent pipeline network can we realize TPA in infrastructure.Third, the pricing system of natural gas should be improved. This paper analyzes established pricing systems worldwide, and points out that although the price reform has been carried out and netback pricing employed in China, the pricing system remains to be improved:1). Get the relation between domestic and non-domestic use of natural gas right;2). Strike a dynamic balance between the pricing of natural gas and that of alternative energy;3). Establish the price formation for transporting and storing natural gas; and4). Establish spot markets and nationwide trade centers for natural gas.This paper also mentions that the pricing reform, as a part of overall institutional reform, should be integrated with other measures including the opening up and access of upstream, the independence of pipeline infrastructure and TPA, the supervision and distribution of pipeline by governmental organs, and the introduce of competition in downstream, to transform the monopolized natural gas industry into a market-oriented industry. Therefore, the pricing reform should be phased in comply with overall plan by following market rules.Forth, the system of supervision law should be improved. The general review of market reform in foreign countries indicates that a professional and independent supervision institution is essential to introduce competition in natural gas industry. In China, an independent supervision institution should be established to help the government separate its policy-making and supervise capabilities. Meanwhile, the institution should draw a clear line between its responsibility and scope: it should be responsible for increasing the exploration efficiency in upstream, and supervise the natural monopoly in midstream, and sales and distribution in downstream. This paper also analyzes a system of transparency under which the supervision institution is obliged to provide open trade information in the market, make the information about pipeline network and TPA accessible, and reduce the information costs for the traders.Based on the improvement of system in every link in the industrial chains, this paper switches to how singular legislation can promote competition, envisages such process, and demonstrates its importance. Industry policy, which enjoys a predominant position in economic development, has a bearing on promoting competition in natural gas industry. This paper then focuses on how that policy can make the industry market-oriented.Chapter 4 The regulation on competition law in introducing competition in domestic natural gas industry.This paper moves on to the core problem of this paper: how to formulate legal regulations and how to formulate industry law of those regulations.This paper reviews the implementation of Anti-monopoly Law of the People’s Republic of China(hereinafter referred to as the Anti-monopoly Law) in natural gas industry is the first place, and proposes that the contestable business should be distinguished from natural monopoly business, and the Anti-monopoly Law is applied to those two businesses, though to different extents. From this point of view, this paper identifies three behaviors that should subject to the Anti-monopoly Law.First, the administrative monopoly in natural gas industry is identified. This kind of monopoly includes the monopoly on mining right, stringent access of upstream market, and the monopoly on midstream and downstream. The Anti-monopoly Law has not been strictly implemented in natural monopoly industries. This paper points out that the Law should be reinforced to regulate administrative monopoly targeting specific industries, and list the type of administrative monopoly and supplement the format of legal responsibility.Second, the abuse of dominant market position to restrict monopoly in natural gas industry is discussed. This paper indicates that regulation on this point requires a reformed energy system, an improved legal regulation, and independent business operation of upstream, midstream and downstream. Besides, the Anti-monopoly Law should be reinforced in monopolized industries. From the perspective of anti-monopoly, to keep the pipeline infrastructure operators from abusing dominant market position, the natural gas industry should be reform by splitting up different businesses, and strengthening governmental supervision and the implementation of the Anti-monopoly Law. After such market reform, the Essential Facility Doctrine can be employed to ensure the fair and open access of the pipeline infrastructure. The abuse of dominant market position by enterprises in this sector should be listed in Natural Gas Law and Energy Law.Third, concentration of business operators in natural gas industry is identified. This paper argues that the merger between enterprises is beneficial to promoting their competitiveness and the Principle of Reasonableness can be employed to prevent enterprises from eliminating or restricting competition. The merger of these enterprises should subject to the Anti-monopoly Law in declaration type, declaration standard, examination period, consequence of violating the law, and legal relief, etc.The regulation on Anti-monopoly is followed by how competition policy and competition promotion can enhance competition in this industry. This paper summarizes that competition policy can facilitate competition among different energy industries, among different links in the industrial chain, and among different market entities of such links, thus promoting the international competitiveness of domestic natural gas industry. This paper argues that this industry has not been liberalized, therefore, we should emphasize the influence that competition promotion has on building a sound social environment during the reform. Measures through the enforcement of non-competition law should be taken to make competition acceptable and accessible.Chapter 5 The conflict and coordination between industry policy and competition policy.The last question under the thesis of the legal regulation on introducing competition in natural gas industry is devoted to the conflict and coordination between those two policies. To a broad extent, the industry law can be incorporated into industry policy, while the competition can be incorporated into competition policy. As a result, the conflict between those two laws is in essence that between those two policies. This chapter focuses on the conflict and coordination between such policies. The characteristics of the conflict result from the fact that the competition has not been introduced, and the competition policy which requires competition in natural gas market has not been implemented to guarantee and promote competition. This paper argues that the coordination between industry policy and competition policy should take the industrial realities into consideration. First, their conflict in the process of policy-making should be avoided, and then the industry policy should be prioritized and phased in.The significant coordination between industry policy and competition policy requires the coordination between supervision institution and enforcement institution of competition law. This paper argues that the relation between these two institutions depends on their corresponding policies, on the legal regulations and competition law, and on the governmental behavior of industry regulation and the enforcement of competition law.