Russian public utilities will go through freezing

17.04.2012 — Analysis

The Russian government at last has paid attention to the public utility "swamp". The inefficient and extremely costly sector is going to be revived through sweeping measures - by freezing utility rates. The experts interviewed by the RusBusinessNews columnist note that the "frozen" public utilities sector will perish, if the government does nothing to tame the appetite of managers of electricity and utility companies.

Elena Nikolayeva, the first deputy chairperson of the RF State Duma Committee for Housing Policy and Public Utilities, has outlined gloomy prospects for the fuel and energy sector. According to her, right after the inauguration Vladimir Putin intends to freeze prices for energy commodities and lock in the utility rates for three years. The Russian government believes that these measures will make the companies operating in the respective sector optimize their business and give up the habit of putting their hands in consumers' pockets when occasion offers.

Andrei Khorshev, the head of the laboratory at the Energy Research Institute at the Russian Academy of Sciences, thinks that, technically, it is possible to freeze utility rates for three years (together with locking in prices for energy commodities), if the government has a reliable source of investment in the industry. Today, this source is represented by utility rates. The companies that received energy generating assets during the reform are concerned mainly about "skimming the cream off" the already existing production facilities. They do not take risk with investment in modernization of production and technical facilities, as their returns cannot be guaranteed by anyone. Besides, most of the companies operating in regions are not able to accumulate financial resources required for upgrading within a short time without support of the government and municipalities.

Proponents of the freezing can encounter additional problems when it comes to practice. Igor Yushkov, an expert of the National Energy Security Fund, thinks that the free market that is presently being built does not allow for price regulation. Apart from frozen prices, the ongoing reforms in the electric power industry have already brought a lot of problems, as the rates for selling of electricity to the population are set by the government, while retail electricity companies buy it on the market at free market price. This arrangement results in cross-subsidization, which the government has been trying to get rid of for many years, though without any success so far. Freezing of the utility rates will put even a larger burden on business, as electricity will effectively rise in price annually. This situation can drive utility companies into a trap: They will not be able to adjust the rates for inflation and are most unlikely to outlast with the deficit for three year.

Vyacheslav Geide, the head of the directorate for energy and capacity supplies at the Sverdlovsk Power and Gas Company, OJSC, thinks that passing of actual expenses on energy resources from some groups of consumers onto other consumers seems to be inevitable, as Russia cannot have the totally market-based electric power industry. However, everything should be done competently, taking into account interests of all the segments in the chain - from the producer of primary energy resources to the end consumer of utility services, - using not only means of government regulation, but also government support. The task is not easy and requires thorough preparation and long time for accomplishment.

V. Geide is sure that well-weighted and coordinated actions of the government will not affect business of electricity companies, as any enterprise should always think about reduction of its own costs and improvement of quality of products and services. Long-term fixed prices (rates), generally, increase loyalty between the producer and the consumer of energy commodities. Trust-based relationships have a positive impact on payment discipline and on joint promotion and implementation of energy-saving projects, having clear and totally predictable efficiency. Companies have a new impetus to further growth.

Denis Pasler, the general director at GAZEX, CJSC, showed it in practice by promising to leave unchanged the rate for gas transportation for the Sverdlovsk Region's consumers in 2012. At the same time, the company intends to increase its investment in the production by 18% as compared to 2011. The top manager states that the company can increase the investment amount due to the upgraded networks, construction of new gas supply facilities and effective management structure.

GAZEX is ready to freeze the rate, provided that Gazprom, OJSC, does not increase prices for fuel for the population by more than 15%. However, no one can guarantee that. I. Yushkov says that the gas monopolist needs money for numerous projects, including money for gasification of regions. Whether President Vladimir Putin will be able to keep gas prices down in these conditions is highly questionable. On the other hand, even if the government shows its will, frozen prices may not produce any effect: Experts do not see any direct relationship between rates and efficiency of companies.

Vyacheslav Geide is sure that fixed rates alone will not result in substantial optimization of the business operations of utility companies. The government should encourage companies to take advantage of advanced and efficient technologies; it may have to participate in financing of individual types of operations - for example, in financing of upgrading of heat supply systems of cities and settlements.

The problem is that the government has no money for modernization. Igor Yushkov points out the fact that even the state-owned MRSK Holding has developed its investment program for 1.8 trillion rubles for the period of 2011-2015 with consideration for a 20% annual increase in the rates. The government is unlikely to turn down the request of energy generating companies: They do need sizeable funds for upgrading of the obsolete equipment. The country's energy security depends on this: At present, Russia has no resources to replace large electric power plants, and if any plant stops operating, there is nothing to replace it with.

Experts see increased transparency of electricity and utility companies as an important solution to the problem of resources, including increased accountability of executive managers for using the money received from consumers. Whether the government authorities will venture on this step is still not clear. The Kremlin has always preferred to "freeze" hot-button subjects, including corruption. It looks like that now it is the turn of the public utility sector.

Vladimir Terletsky