Russian Natural Monopoly Regulation
Legal Framework
Natural monopoly regulation in Russia is governed by the Federal Law on Natural Monopolies (No. 147-FZ of 17 August 1995), which defines natural monopolies as states of the commodity market in which the creation of competitive conditions for the satisfaction of demand is impossible or economically inefficient due to technological features of production. The law establishes the legal basis for state regulation and control of natural monopoly entities operating in sectors where competition is not feasible.
The regulatory framework identifies natural monopolies by their structural characteristics: the existence of significant economies of scale, high barriers to entry, and the non-substitutable nature of the goods or services produced. The Law on Natural Monopolies was amended substantially in 2015 to strengthen regulatory oversight and to harmonise its provisions with the general competition law under the Federal Law on Protection of Competition (No. 135-FZ of 26 July 2006), which provides the overarching framework for Russian antitrust regulation.
Sectors Subject to Regulation
Article 4 of Law No. 147-FZ identifies the specific sectors in which natural monopoly regulation applies: transportation of oil and petroleum products through trunk pipelines; transportation of gas through pipelines; railway transportation; services at transport terminals, seaports, and airports; public telecommunications and postal services; electric power transmission services; and services for the operational dispatch management of the electric power industry.
The list of regulated sectors has evolved since 1995. The addition of airport and seaport services in 2004 reflected the growth of commercial transport infrastructure. The exclusion of certain sub-sectors through government decisions has occurred where technological developments or market changes have made competition feasible. The Government, on the recommendation of the Federal Tariff Service, determines the specific natural monopoly entities within each sector and the scope of regulation applicable to them.
Federal Tariff Service and FTS Regulation
The Federal Tariff Service (Federalnaya Sluzhba po Tarifam, FTS) was the primary body responsible for the regulation of natural monopolies until 2015, when its functions were transferred to the Federal Antimonopoly Service (FAS) through Presidential Decree No. 373 of 21 July 2015. The merger of the FTS into the FAS consolidated competition and tariff regulation within a single authority, reflecting a policy decision to integrate price regulation with competition enforcement.
The FAS exercises the following functions in relation to natural monopolies: approval of tariffs (prices) for the goods and services of natural monopoly entities; control over compliance with tariff discipline; approval of investment programmes; regulation of access to the services of natural monopoly entities; and control over compliance with the Law on Natural Monopolies. The FAS issues tariff decisions that are binding on natural monopoly entities and are subject to judicial review.
Tariff Regulation Methodology
Tariff regulation of natural monopolies is based on the principle of economically justified costs (ekonomicheski obosnovannye zatraty) plus a reasonable profit margin. The methodology for tariff calculation is established by Government Decree No. 115 of 29 February 2000 on the pricing of goods and services of natural monopoly entities. Tariffs are set to cover the entity’s operational costs, depreciation, and investment requirements while ensuring accessibility of services.
The FAS applies several tariff methodologies depending on the sector and the specific characteristics of the regulated entity: the cost-plus method (metod ekonomicheski obosnovannykh raskhodov); the indexation method (metod indeksatsii); the benchmarking method (metod sravnitelnogo analiza); and the long-term tariff method (metod dolgosrochnogo tarifoobrazovaniya), which sets tariffs for periods of three to five years with predetermined indexation parameters.
The long-term tariff method, introduced in the 2010s, was designed to provide regulatory predictability and incentivise cost reduction. Under this method, the regulated entity retains efficiency gains achieved through cost reduction during the tariff period, creating incentives for operational improvement. The method has been applied most extensively in the electric power and gas sectors.
Transport and Energy Regulation
The gas transportation sector, dominated by Gazprom, is subject to the most comprehensive natural monopoly regulation. Tariffs for gas transportation through trunk pipelines are regulated by the FAS. The regulated entity must provide non-discriminatory access to the gas transportation system for third-party suppliers, subject to available capacity and technical conditions. Access disputes are resolved by the FAS.
In the electric power sector, Federal Grid Company (FGC UES) and regional distribution grid companies are regulated as natural monopolies for transmission services. Tariffs for electric power transmission are set by the FAS and regional tariff authorities. The sector is governed by the Federal Law on the Electric Power Industry (No. 35-FZ of 26 March 2003), which establishes the regulatory framework for the wholesale and retail electricity markets.
Railway transportation services are dominated by Russian Railways (RZD), which operates as a natural monopoly for railway infrastructure and certain transportation services. Tariffs for freight and passenger transportation are regulated. The Federal Law on Railway Transport (No. 17-FZ of 10 January 2003) establishes the framework for tariff regulation, access to railway infrastructure, and competition in railway services.
Control over Prices and Investment
The FAS exercises ongoing price control over natural monopoly entities. The Service monitors compliance with approved tariffs, investigates complaints of tariff violations, and issues orders to correct violations. Price control extends to the entity’s procurement activities: natural monopoly entities are subject to the Federal Law on Procurement by State Corporations and Natural Monopolies (No. 223-FZ of 18 July 2011), which requires competitive procurement procedures and transparency.
Investment programmes of natural monopoly entities are subject to regulatory approval. The FAS reviews investment programmes for consistency with tariff regulations, economic feasibility, and the entity’s capacity to finance the proposed investments. Unauthorised investment or investment inconsistent with approved programmes may lead to tariff adjustments or exclusion of the investment costs from the tariff base.
Services Accessibility
Article 7 of Law No. 147-FZ establishes the principle of accessibility (dostupnost) of goods and services of natural monopoly entities. The FAS is required to ensure that tariffs and access conditions do not create unreasonable barriers to the use of essential services. The accessibility principle is balanced against the need to ensure the financial sustainability of natural monopoly entities and the investment required for infrastructure development.
The accessibility obligation includes the requirement for natural monopoly entities to provide services to consumers on a non-discriminatory basis. The FAS may issue orders requiring a natural monopoly entity to conclude a contract with a consumer where the consumer meets the technical conditions for service. Refusal to provide services without objective justification constitutes a violation of Article 10 of the Competition Law (abuse of dominance).
Responsibility for Violations
Violations of the natural monopoly legislation carry administrative liability under Article 14.31 of the Code of Administrative Offences (KoAP). The FAS may impose penalties for: violation of approved tariffs; non-compliance with access obligations; failure to provide information to the FAS; and obstruction of FAS inspections. Penalties for legal entities include fines calculated as a percentage of the entity’s revenue from the regulated activity, up to 15% for the most serious violations. Officials of natural monopoly entities may be disqualified for up to three years for repeated violations.