The RAO UESR Reform
In a surprise move, Anatoly Chibais, CEO of RAO UES of Russia, proposed a radical change to the energy market liberalization plan during the annual investor conference held by Brunswick Wartburg UBS on September 28. By all appearances, the time for a drastic transition from the old model to a free electricity market was not selected by chance: the government is to formulate its opinion regarding the energy reform by December 2; so there should be enough time to develop the new plan details.
A Shortcut Is Straight Ahead
The new and old RAO UESR structures are distinctively different: initially the free electrical energy market, which will turn one year old on November 1, was expected to be gradually expanding. The competitive energy market share, which is currently limited to 15% of the total domestic power generation, was to reach 50% with a possible future termination of government price regulation in the electric power market. However, specialists realized in early 2004 that it was pointless to involve a wider circle of vendors and buyers in a virtually pilot market model, as it was meant for voluntary participation of energy producers and customers. Consequently, prices in this market segment should always be lower than those determined by set tariffs, otherwise, the deregulated segment is unlikely to gain popularity, provided there is a free choice. On the other hand, the competitive sector proved to be in demand in one year of operations on the Sales System Administrator’s (SSA) floor incorporating by now both the free and FOREM sectors: the market volume reached 40 bln. kilowatt-hours or 10% of the total power generation in Ciscaucasian Russia and the Urals where the free sector had been launched, whereas a question of joining Siberia is yet to be discussed. By trading volume, the Russian competitive market ranked 9th in the world and 5th in Europe, the volume of transaction reaching $1.3 bln., average energy prices 7% lower than the FOREM tariffs. The buyers’ interest was evident, but it had to be taken up to a qualitatively new level.
That is what Anatoly Chubais did when he proposed a general transfer of all electricity suppliers and customers to direct contracts instead of a mechanical expansion of the free market sector. Tactically, the move came at the right time: Mikhail Fradkov, who is skeptical about the electricity reform, was badly in need of a “fresh” idea. So, the suggestion was made for the Minister of Industry and Energy and the Ministry of economic development to have enough time for reviewing the new scheme which is impossible to implement without their agreement in principle. Besides, the proposed substitution of an instantaneous dip into a free market whirlpool with the use of long-term bilateral agreements was perhaps the only option in view of a protracted conflict between RAO UESR and Oleg Deripaska’s Basel. It looks like Chibais was only able to win the aluminum oligarch’s loyalty regarding the energy reform by offering the opponent (by the way, invited by Fradkov to participate in the energy reform debate at the Prime-Minister’s council for competition and enterprise) a fixed price for five years ahead. However, whether or not Deripaska took a liking to the conception of direct agreements will be clear on December 2 or later. He has not commented on that so far. Anyhow, Chubais, for his part, did not hesitate to announce at the investment forum that the conflict between the two companies over a number of Siberian TPPs had been settled, the settlement to be secured with some agreement. Besides, putting all power generation and all users on direct contracts means that there is no more question of joining Siberia to the free market sector; as a matter of fact, the market is becoming single by itself; simply, a single trading floor takes into account completed long-term contracts (see the interview of Oleg Barkin, Deputy Chairman of the SSA Management Board).
A Most Direct Agreement
By a recent tradition, the government is reluctant to comment on the power reform. The Minister of Industry and Energy and the Ministry of Economic Development so far have little to say regarding the transition to direct contracts, working consultations are still going on. It is worth mentioning here that the idea is not so fresh, it has been successfully used in Europe for a long time including as a desired remedy for reducing violent price fluctuation risks while liberalizing energy markets.
The idea seems quite reasonable to electricity consumers. To tell the truth, most of those questioned by “Ú” refused to comment on it saying they had little knowledge, if any, of the details which were not finalized anyway. Indeed, the RAO UESR scheme suggests dividing consumers into three groups: major energy-intensive, socially responsible and all others. Each group should be treated differently: major consumers may be offered the longest possible term (3 to 5 years) contracts. Although for such users, the price should be objectively higher than the current one as the cheapest power generation rates would primarily apply to underprivileged users, such as the general public and state-financed organizations. In addition, neither big companies nor small dealers are supposed to be able to choose suppliers; the process would be controlled by the Federal Tariff Committee (FTC), and every supplier would be offered a balanced package of bilateral agreements where cheap and expensive generation rates are mixed to get an appropriate final price. Because, otherwise, major consumers with great lobbying capabilities would snap up cheap power generation leaving only expensive rates to others, developers speculate. And the most important thing is that the electricity volumes secured in a bilateral agreement would decrease every year. Also, the customer can withdraw from the agreement at any time, if it is no longer happy with the free market prices.
Thus, the free market sector is supposed to grow smoothly every year. And when the government stops regulating the industry, customers will have a choice of either renewing the contract or moving to the free market completely. On the whole, despite a slight price rise for large energy-intensive production industries (especially metallurgical), the overwhelming majority of customers would be in no disadvantage: prices would clearly tend to go down. But even this situation can cause problems. For example, it happened in England in 2000 when electricity prices started falling. Customers should have been happy. However, due to cheap rate offers, power plants with more expensive generation turned noncompetitive and went bankrupt, but building new plants was not economical for the same reason. That even lead to a small deficit of electricity. Of course, Russia is unlikely to suffer the same fate: no English authority, but the market regulated direct agreements, whereas the FTC will supervise the process in Russia. Besides, another idea of RAO UESR’s will probably be implemented — a guarantee fund for utility investments to provide security against such negative scenarios. Let us remind you, that the government will have to cope with cross subsidy - another curse of the power reform. Even though the direct agreement system itself needs refining: it is necessary to determine, firstly, a procedure for selecting and bringing together power vendors and buyers; secondly, an order of priority for transmitting electricity from different providers, given the power line restrictions, and, finally, a criterion for classifying enterprises as energy intensive. There are a lot of outstanding issues, but most experts agree that the direct agreement system is much more progressive than the current market model, and the issues will be resolved, if further looked into. Chibais to Get the Stabilization Fund Money
Yesterday, the Minister of Industry and Energy suggested that some of the stabilization fund resources be channeled for creating a guarantee fund to help raise utility investments and that $250 mln. be allocated for developing civil aviation. In addition, the Ministry suggests that the government sponsor RAO UESR’s foreign expansion: $1.3-1.4 bln. to buy energy assets in the Middle Asia.
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