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Plan to reform electricity utility seen causing possible crisis in Russia


CEP20021202000339 Moscow Informatsionnoye Agentstvo Ekho Moskvy in Russian 0944 GMT 26 Nov 02

[FBIS Translated Text]


[No dateline, as received] Electricity tariffs in Russia at the present time are, relative to the country's GDP, inflated by 100 or 200 per cent, Russian presidential aide for economic issues Andrey Illarionov has told Ekho Moskvy radio in an interview.
  According to him, all payments for electricity presently being made in Russia are 6 per cent of GDP, while in the USA the figure is 2 per cent. He said that in addition to this, in the first six months of 2002 electricity prices for industrial consumers in 12 regions of Russia exceeded those in six foreign countries - Germany, Finland, France, New Zealand, Norway and the USA.
  In his view, in the event of the project to reform the Unified Energy Systems of Russia joint-stock company being approved, the draft of which has been submitted for approval to the Russian State Duma by the company's management, electricity tariffs will rise many fold and "the state will pay a high price for this". He said that in such an event there could be a new economic crisis in Russia. He added that "sooner or later it will be considered".
   Another draft plan to reform the electricity sector developed by a working group from the Russian State Duma "is a much more effective and much less scandalous alternative. This is an option on which national consensus exists", Illarionov said.
[Description of Source: Moscow Informatsionnoye Agentstvo Ekho Moskvy in Russian -- press agency associated with Radiostantsiya Ekho Moskvy -- influential private radio station known for its fast-breaking news coverage and exposes of high-level officials, controlled by Vladimir Gusinskiy's Media-Most group]

THIS REPORT MAY CONTAIN COPYRIGHTED MATERIAL. COPYING AND DISSEMINATION IS PROHIBITED WITHOUT PERMISSION OF THE COPYRIGHT OWNERS.





Unclassified

Russia: Presidential aide criticizes planned power grid reform


CEP20021129000387 Moscow Informatsionnoye Agentstvo Ekho Moskvy in Russian 1201 GMT 26 Nov 02

[FBIS Translated Text]


[No dateline, as received] "The management of the Unified Energy Systems of Russia [USE] is ineffective and this resulted in serious consequences for the capitalization of the company", Russian presidential aide for economic issues Andrey Illarionov has told Ekho Moskvy radio.
  He said that the company's capitalization value had fallen by 9bn dollars in the four year's of this management's work. That is, instead of attracting investment reduction of the existing investments, their confiscation to be precise, has taken place.
  Illarionov noted that "it was strange and absurd, that a number of people who worked in the company took part in making decisions in August 1998. Then, 40bn dollars worth of foreign investment was taken out of the Russian economy".
  He stressed that the rise in company share values is in no way connected with what is happening in the country. "In those four years the whole market has risen by 15 per cent. This once again says that the situation is caused by the actions of the company's management. Besides, just as the authorities began to interfere in the company's operations its capitalization began to rise," he said.
  Illarionov said that the UES management's plan to reform the power grid will result in serious consequences for the company itself, the energy sector and the entire country. "What is being proposed is aimed not at creating a market but at monopolizing the power grid, getting rid of stable electricity supplies and raising prices, which are already overinflated compared with the level of our development. This cannot be allowed to happen," he said.
[Description of Source: Moscow Informatsionnoye Agentstvo Ekho Moskvy in Russian -- press agency associated with Radiostantsiya Ekho Moskvy -- influential private radio station known for its fast-breaking news coverage and exposes of high-level officials, controlled by Vladimir Gusinskiy's Media-Most group]

THIS REPORT MAY CONTAIN COPYRIGHTED MATERIAL. COPYING AND DISSEMINATION IS PROHIBITED WITHOUT PERMISSION OF THE COPYRIGHT OWNERS.


Unclassified

Commentary on Suggestions For Reform of Russian Electrical Power Industry


CEP20021121000376 Moscow Vedomosti in Russian 21 Nov 02

[Commentary by Aleksandr Lebedev, president of the National Investment Council (NIS) and the National Reserve Bank (minority shareholder of RAO YeES); Aleksandr Nekipelov, co-chairman of the NIS Council of Trustees and vice-president of the Russian Academy of Sciences: "Power Industry: Reform Without Anguish"--taken from html version of source provided by ISP.]

[FBIS Translated Text]
    The question of reforming the electrical power industry became a hot topic practically from the very moment of its emergence.   And although today the discussion has already reached the level of consideration of draft laws, critical comments are being heard from the federal departments, and from the State Duma, and from portfolio investors.   At the very least, this testifies to the fact that the program of reform is still far from ideal, and requires considerable revision.

    The purpose of any reform is to improve the existing situation.   The reform of such a monopoly as RAO [Russian joint-stock company] YeES Rossii must have at least three goals.   The first of these is to create an effective competitive market in electrical energy.   The second is to reduce, or at least hold down, the growth of prices on electrical energy.   And finally, the third goal is to increase investment attractiveness of the electrical power industry specifically, as well as of the Russian economy as a whole.

    How successfully the process of reform takes place in this complex technological sector will also largely determine the probability of our economy's making the transition from the group of risky [countries] to the group of countries which are attractive from the standpoint of investment.

    The main problems of the electrical power industry for the present day are physical deterioration and obsolescence of the fixed capital, as well as the decline in demand for electrical energy which took place in the 1990's (which inevitably led to a decline in the level of investments into construction of new electrical power plants).   According to the favorable scenario presented by the Ministry of Energy, the level of electrical power production which corresponds to 1990 will be achieved only in 8 years.

    At the present time, RAO YeES Rossii controls most of Russia's generating capacities (approximately 72.5 percent).   However, slightly over 20 percent of the generation is in 100-percent ownership of the holding company.   At 34 AO-energos [energy joint-stock companies], the RAO owns over 51 percent of the voting shares, at 36--from 25 percent to 49 percent, and at two--less than 25 percent.   The shares in the AO-energos which do not belong to the RAO are, as a rule, distributed amongst foreign and Russian companies, as well as local agencies of state power.

    In the practical plane, the creation of an environment in the power industry which would be attractive to investors presumes, first of all, the development of such a packet of legislative statutes which would provide effective producers of energy the opportunity to earn the market standard of return on capital (incomplete rules of the market may undermine the financial position of its participants from the very outset).   At the same time, state regulation must be reduced to the minimally necessary level.   And secondly, generating companies must be created by means of "mirror" allocation of shares in new companies to shareholders of RAO YeES and AO-energo, which would serve as a good sign for portfolio and direct investors.

    At the same time, in our opinion, any deals on sale of assets in the company to third persons must be excluded prior to the completion of reform.   All facilities in the electrical power industry, including the so-called assets of non-profile description, must be accounted for in the course of the transformations.   Moreover, the moratorium introduced by the RAO YeES management is not enough to fulfill this necessary condition.   Especially when the representatives of the RAO themselves allow the possibility of sale of up to 10 percent of the company's assets.   (If we use the roughest estimate based on the market capitalization of the RAO YeES, then the value of 10 percent of the holding's assets is calculated at several hundred million dollars).   In order to avoid accusations which are unnecessary for reform, we must introduce a legislative ban on sale of the company's property until such time as the reform is concluded--until 2007.

    The implementation of "secondary privatization" of property of the electrical power companies may do irreparable harm to the investment image of the Russian Federation.   It may also close off the road to large investment resources for the corporations created in the course of the reform for a long time to come.   And in a number of cases, it would be expedient to expand the previously performed deals on sale of RAO YeES assets--such as the sale of property belonging to a branch of the OAO Rostovenergo, the Shakhtinskiy TSTs [central heat and power plant], to the Energoperspektiva Southern Section Company.

    As for the reform of the electrical power industry itself, in order to avoid delay in formulation of a competitive environment, holding companies may be created within a short time.   [These holding companies] would be the owners of the shares in federal power plants belonging to the RAO YeES and those power plants which are presently under 100-percent ownership of the RAO.   At the same time, it is necessary to proportionately distribute the shares in these holding companies among the RAO shareholders without delay.

    Such a scheme is also applicable in relation to objects of the electrical power industry where the RAO owns the controlling or near-controlling packets of shares.   The voting shares of the new holdings could be distributed between RAO shareholders, as well as among minority shareholders included in the holdings of subsidiary companies.   These [subsidiary companies] would be offered a share exchange on the basis of a coefficient determined by results of a market appraisal.   The packet of shares in small regional companies of the RAO could be introduced into the statutory capital of the holding's generating companies, and these holdings could effectively be divided up amongst the shareholders on a proportional basis.

    The questions of reform of the power network management deserve separate review.   Considering the experience of analogous companies in other sectors of the economy, network assets in the electrical power industry could bring considerable revenue to their shareholders.   For this purpose, it is necessary in the nearest time to secure within the legislative statutes the right of owners of network assets to earn the market standard of profit on capital.   At the same time, the question of ownership may be resolved quite easily if traditional market mechanisms are used.   For example, the Federal Network Company may ask minority shareholders to redeem their shares at market value in exchange for bonds which it issues.   This would allow small-scale shareholders to withdraw from the company already at the early stage, at the same time realizing the full value of their shares.   Meanwhile, the state would receive over 75 percent in the FSK [Federal Network Company], all the while not infringing upon the rights of the shareholders.   At the very least, this would require completion of reform of the network management (for now, the FSK is a 100-percent subsidiary company of RAO YeES, and division of shares among the actual owners of this property has not yet taken place).

    The task of transferring the main power networks from ownership of the AO-energos to ownership of the FSK may also be resolved without infringing upon the rights of the minority shareholders.   For this, it is enough for the network company to propose to the regional companies that they exchange the assets belonging to them for FSK bonds.   This same scheme may also be used for redeeming the distribution networks from the AO-energos.

    Fulfillment of the proposed measures would make it possible to retain a positive appraisal of reform, while at the same time creating a wholesale market in electrical energy, because the probability of infringing upon the rights [of investors] would be excluded.   RAO shareholders would receive proportional participation in the capital of the companies separated out of the holding, without fearing a risky sudden liquidation of YeES Rossii in 2004.   At the same time, the state would become the owner of significant (sometimes controlling) packets of shares in each generating company, which it could then sell to investors at its discretion and at the necessary moment.

    Simultaneously with this, if the bond scheme of state redemption of the network management of the current AO-energos is realized, the state would concentrate in its hands over 75 percent of the shares in the FSK.   This would rule out the possibility of private investors--owners of the new energy holdings--exerting influence on the wholesale market in electrical energy at the initial stage.

    As for the reduction or curtailment of growth of tariffs, until the wholesale market in electrical energy begins to function, it is necessary to consider in the legislative base a statute on formation of prices on services of power producers based on their expenditures.   Moreover, the experience of German reforms may be used as an example.   There, in amending tariffs, consideration is given not only to the specific expenditures of the company, but the so-called standard principle is also used, comparing the effectiveness of production in one company with that in another (as a rule, a more effective one).   Thus, in making the decision to increase tariffs, this principle makes it possible to understand the reason for the increase in production cost of a product--whether it is the price of the raw material, or ineffective management.

[Description of Source: Moscow Vedomosti in Russian -- Business paper published jointly with The Wall Street Journal and Financial Times; reportedly friendly with Kremlin.]



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Unclassified

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