Russian Power Liberalization Moves with a Ponderous Sense of Caution Among Old Stakeholders

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Researched by Industrialinfo.com (Industrial Information Resources, Incorporated; Houston, Texas). At a difficult period of transition from centralized planning to market economy norms, the Unified Energy Systems of Russia (UES) was established by decree in August 1992 as an industry wide holding company with broad responsibilities, including ensuring regular electric and heat supply to industries and the population, centralized management of the electric power wholesale market and implementation of investment programs.

In 1998, a program was put in place to increase the efficiency and promote reforms in the energy sector after uncertain progress in the years following 1992. After moves to strengthen administrative and management systems in the UES holding company and preparing for competition in the electrical power supply and power generation sector the Russian government is now planning, in May 2003, to approve the dismemberment and partial sale of UES.

Shareholders have until May 25 to make proposals on changes to the plan for the world's largest utility ranked by installed capacity, which include the spinning off of generation, distribution and marketing from UES to create an electricity market while leaving the transmission grid in state hands. The deputy minister of economic development and trade, Andrei Sharonov, is reported to have said that the rules by which the wholesale market would operate should be approved by the second quarter of 2005. He claimed that there had been "no harsh criticism of the plan when the commission discussed it." He would say that wouldn't he?

It is proposed that when the UES monopoly of the grid is spun off in 2004, the shares in the new federal grid are to be distributed among current UES shareholders of which the state is the largest with 53%. A wholesale generating company will be patched together from large units now being run by UES. Up to 35% of all power produced must be sold to one or more "guaranteed suppliers" under long term contracts at government regulated prices. This inhibited "liberalization" move is to control the price charged to households and public services.

Some power trade will be allowed during the transitional period up to and through. The government may set the volumes of power sold at unregulated prices during the transitional period.

Minority shareholders want a complete ban on asset sales in the scheme, saying that management will be too absorbed in restructuring to conduct fair asset sales and that sell-offs could breed corruption or delay the restructuring process. There is a certain lack of candor on all sides with shareholders welcoming "discussions" while they maneuver to absorb more shares and consolidate their positions for the future while the UES and state interests move crab-wise to protect their considerable self interests.

The UES holding company coordinates the operation of thermal and hydro power plants with a massive total installed capacity of around 160,000 MW. In 1998, these plants generated a total of 603.8 billion kWh. UES controls over 72% of Russia's total installed electric power generation capacity, including 93% of the installed capacity of thermal power plants and 63% of the installed capacity of hydro power plants. The holding company operated 43,294 kilometers of high voltage transmission lines of 220 kV plus with regional power systems operating in parallel and the Russian Far East operating independently.

UES sells electric power from its grid on the Russian border to Norway, Latvia, Lithuania, Estonia, Turkey, Mongolia, China, and Finland. Electric power is also exported to the ex-Soviet countries of Ukraine, Kazakhstan, Belarus, Georgia, and Armenia. At times, the holding company has had 20,000 MW of unused generating capacity available with an export potential of 40 to 50 billion kWh per annum.

The "Russian outlook of total production by fuel from 2000 -2020" reports the following electricity estimates in annual TWh: 2000 - 876; 2005 - 970/1,020; 2010 - 1,055/1,180; 2015 - 1,135/1,1370; 2020 - 1,240/1620. The industry has a total of 2.67 million kilometers of transmission lines that includes 150,690 high voltage lines.

Under the government proposals some UES thermal power stations whose main function is to produce heat will be reclassified as boilers to 'ensure heat supplies'. The government must maintain its stakes in hydroelectric power generators and may not privatize structures through which it holds hydro plants. The government must retain a controlling stake which will be treated, as a natural monopoly and distribution networks must be split off from the national high voltage network. These networks can function as guaranteed supplier...and so on and so on with government decrees, overseeing regulations and rules which express a ponderous sense of caution as the prospect of liberalization is approached with shares being held by the 'right' hands.

In 2001, the energy minister said that the government's energy strategy would require between $500 billion and $700 billion in investments over the next 20 years. This represents more than ten times the amount needed to save the electricity system alone. If international energy capital is to be attracted to contribute capital and partake in the process the opacity and the devil in the small print detail and the big domestic player interests will need a strong light shone on it.