Utilities network to catch money of Russian people

16.03.2011 — Analysis

The past winter was a devastating blow for utilities of the Ural Region. Over the first few months in 2011, Ekaterinburg alone reported nearly one hundred utility breakdowns. Utilities operators cast blame on temperature extremes and low rates that are not sufficient to ensure timely maintenance of pipes. The municipal authorities, in their turn, require better investment in services. The "RusBusinessNews" columnist decided to find out what makes utilities burst at the seams.

Utility rivers

Split pipes, rivers of hot and cold water flowing along the streets, frost-breathing apartments became a sad reality for many Russian communities. Ekaterinburg is not an exception. The explanation is apparent, though it is under the ground: by early 2011, the city utilities had been worn out by 60% - the average level in Russia. 

Vladlen Prokofiev, expert from the Institute of City Economy, told "RusBusinessNews" that 4% of heat and water supply pipelines must be replaced in Russia annually, which means that the service life of the pipe is twenty five years. The actual replacement rates are twice as low; in the 90s they reached at best 1.5%. "Numerous accidents result from sluggishness of infrastructure owners. Previously, municipalities acted as owners, whereas now private companies rule the roost. Therefore, what is going on is very understandable and predictable", - V. Prokofiev sates.

Trying to find excuses, utilities owners speak about the lack of investment funds. The largest portion of the money intended for pipe replacement and repair is included in the consumer rates; however, they account for only half of the required funds. "To struggle against infrastructure obsolescence, we need to invest annually at least 1.2 billion rubles in maintenance and repair. The existing rates allow investment of 600 million rubles at maximum", - we have been told by the Press Service of the Sverdlovsk Heat Supply Company, OJSC, (STK). 

In 2010, SK spent 595 million rubles on repair and replacement of 8 kilometers of Ekaterinburg city utilities. However, when the first frost came, pipes started breaking one after another. Facing the threat of utility collapse, the city administration demanded that financing should be increased 2-2.5 times, but the electric utility company fenced with the statement that they had no funds. The "cold war" finished after the company had switched over to the RAB regulation when consumers' payments are fixed in at least three-year estimates. Due to the new rate policy, STK will be able to raise additional funds, including borrowed funds, in 2011. 

The Rosvodokanal Management Company, LLC, which operates businesses in the seven regions of Russia, also sees the reason for massive deterioration of utilities in long-lasting money deficiency. Putting the caps onto consumers' payments has aggravated financial sufferings of supplying companies. "In Russia, the water rates have no economic grounds, while the investment markup is either very low (not more than 4%), or is completely absent. Therefore, suppliers are not able to invest substantial funds in repair and upgrading of networks and facilities", - the company representatives pointed out. 

Rosvodokanal states that the investment markup added to rates reaches 50-70% in European countries. In Germany, the population's water payments amount to 3.1% of the total price cost of utilities, whereas in Great Britain they are 5% and in Sweden - 6.2%.

In the meantime, the rate "diet" does not prevent some suppliers from splashing consumers' money around. For example, the management of Vodokanal-Ekaterinburg, overpricing their repair work, spent millions of rubles on building of private cottages.

"Tariff" morass

Absence of transparent mechanisms to estimate utility payments and spend funds is the main trouble of the Russian housing and public utilities. The representatives of the Sverdlovsk Regional Energy Committee (REC) agreed to shed the light only on the general composition of the rates. They consist of operating expenses (fuel, electricity, wages, and routine repairs) and capital (investment) expenditures of utility suppliers. Investment expenditures include expenses on improvement and construction of networks and facilities, being formed through profits.

The investment component of the rates raises most questions. Every year supplies inform REC about their recommendations that are analyzed and calculated. "We have to proceed from the federally established escalation limit on consumer payments. If a company is not able to stay within these limits, it cannot expect any investment in the networks", - REC representatives said. 

On the other hand, experts remind that the government introduced tariff restrictions only in 2010. However, utility prices had increased seven times over the previous ten years! For example, in 2009 members of the Ekaterinburg City Duma made amendments to the investment program offered by the Vodokanal Municipal Unitary Enterprise, due to which by 2020 the water supply rates were to increase by 43%. Through consumers' money the company would have been able to increase the amount of its investment more than 20 times! Fortunately, these plans failed - the government blocked the investment ambitions of the utility monopolists.

Vladlen Prokofiev thinks that the connection between the rates and improvement of facilities, which suppliers refer to, is very vague. "No one knows whether the established rates are sufficient to achieve investment goals set by companies. The reason is in their virtuality. "The rates are composed of regulations rather than actual expenses of companies", - the expert notes. 

This approach makes long-term investment in infrastructure unprofitable. Every season, patching one and the same pipe, companies simply "eat away" funds. 

Boiler house for each

To make a step into the bright future, quality assessment criteria for housing and public utility services should be established and investors' liability should be increased. There about 20 widely understandable assessment criteria worldwide, but none in Russia.

According to V. Prokofiev, the consumer should see the actual outcome resulting from each increase in rates. "For example, is the price for heating has gone up, the quality of heat supply must improve. The quality can be assessed by the number of breakdowns per one kilometer of networks or by the duration of heating emergency shut-offs during the heating season", - he says.

Competition can become an impetus for investment in infrastructure improvement. Vladlen Prokofiev understands it in his own way, though. "The consumer cannot choose the pipe, which deliver supplies. However, in Finland, people may refuse from centralized heat and water supply, opting for autonomous supply. Competition forces network owners to optimize expenses and decrease rates", - the expert points out. 

Svetlana Besedina, Deputy General Director of the Institute of Housing and Public Utility Economy, thinks that, first of all, the responsibility for provision of consumers with public services must be clearly specified: "Today, the obligation to provide population with water and heating still rests upon municipalities. At the same time, they do not have efficient leverage over private companies - suppliers". However, as she points out, the assiduous investor can get the utility infrastructure up and running, by investing its own or borrowed funds, while using the rates to receive return on the investment. Then increased payments will be well-grounded and understandable to consumers. 

Suppliers have their own recipes for utility welfare. The simplest one is to change the methods of rate making. "It is necessary to establish a long-term two-rate tariff that would include fees for supplies and fees for maintenance of facilities. The latter will factor in operating expenses, wages, and different mandatory expenses of a company. The financial burden on consumers will depends on depreciation of fixed assets in each region and requirement for investment", - according to Rosvodokanal MC LLC.

On the contrary, the Sverdlovsk Heat Supply Company JSC suggests that financial burden should be increased, however, being incurred to this extent by the government rather than consumers. "Rates for population cannot be increased without the relevant compensations. Therefore, the government should find another way to reimburse expenses on rehabilitation of infrastructure: provide direct financial support or give some tax benefits. One of the ways to increase investment in infrastructure renovation can be profit tax abatement", - the company representatives think. 

Such ideas of suppliers sound somewhat odd to experts. Nothing is wrong in participation of the government in infrastructure upgrading. However, if it wants to do so. "Nobody dragged private companies to the industry. They would never get involved if it were not profitable. If they are in business, they must fulfill their obligations without reservation. The government has many other things to worry about", - Vladlen Prokofiev says. 

The fact that STK does not mind having control over the Ekaterinburg heat supply proves that the market of utilities is still interesting to investors. The company intends to become the "single suppler" that will supervise operations of all the involved suppliers and providers, while retaining its sole responsibility for collection of payments from the citizens. Here is the true reason. What do the Russian "utility" entrepreneurs need - getting an access to money of population or a smoothly operating water and heat supply system? There is only one answer to this question so far - and that is money.

Marina Sirina