Energy monopolies dig a grave for metallurgy

15.10.2012 — Analysis

Sverdlovsk manufacturers demanded transparency of natural monopolies from the Russian government. Metallurgical producers argue that they have to relocate their ferroalloys operations to the USA due to the uncontrolled rise in energy prices. Tomorrow, Russian pipe manufacturers may also find their home-based business unprofitable. As the RusBusinessNews columnist has found it out, entrepreneurs are wary about investing in energy cost saving because of enormous political risks. The situation is not going to change until monopolies lose their "appeal" to officials as profit centers.

The problems with monopolists date back to the 1990s when the energy prices started rising twice as fast as the prices for products of the heavy industry. Nevertheless, metallurgists put up with this, as the prices for gas and electricity were still lower than the world prices, thus allowing them to compete with foreign companies. The situation changed drastically at the end of the "zeroes" when the RF government decided to even up the energy prices set for foreign and domestic consumers. Monopolists were allowed to increase their rates annually by 10-15%. As a result, by 2015 the electricity prices and the gas prices are expected to rise by 52% and 63% respectively as compared to 2011.

Manufacturers assessed the consequences of the increased energy prices – and shed tears. According to the data from Anatoly Sysoyev, the chairman of the Committee for Interaction with Natural Monopolies, the Sverdlovsk Union of Industrialists and Entrepreneurs, energy costs will account for 34% in the cost of the construction products, while in the aluminum industry their percentage will reach 52%. The electrolytic production of aluminum is most likely to come to a halt, as the energy costs in a ton of aluminum must not exceed 36% to keep the products competitive.

Entrepreneurs asked themselves a tough question: Why are the rates leaping? The Sverdlovsk Region leads the pack, selling one kilowatt to manufacturers for 7 cents, while it costs not more than 5 cents on average in Russia and only 3.5 cents in other countries.

Anatoly Sysoyev thinks that the blame should be pinned on the non-transparency of pricing, which is typical of the natural monopolies. It is out of all reasons when the electricity production has decreased by 20% in the north of the Sverdlovsk Region, while the capacity rates have remained unchanged. There is no doubt that pricing methods must be easy-to-understand and clear to consumers, but none of the manufacturers has ever set eyes on it. The same is true about the gas industry: The estimates show that if generation companies bought gas directly at the gas field and then paid for its delivery, the gas-operating thermal power plants of the Sverdlovsk Region would produce electric energy at the low prices typical of hydraulic power plants.

Alexander Sobolev, the deputy chairperson of the Regional Energy Commission of the Sverdlovsk Region, offers several reasons to explain the egregious increase in energy prices. First of all, there are many intermediaries between the consumer and the supplier. For example, in the Sverdlovsk Region, according to official statistics, there are 130 electricity supply companies and more than 1,000 companies dealing with heat supply and water disposal. All of them have their own margin contributing to the final rate. Secondly, some of the consumers receive electricity at lower prices from the Federal Grid Company; therefore, the other consumers have to pay more. Thirdly, approximately 15 billion rubles are taken from manufacturers for the purpose of the lower rates to be maintained for the population. The amounts of the so-called cross-subsidization have doubled over the last five years.

The latter fact is especially aggravating for metallurgists. However, their aggravation is not that they have to subsidize private households, but that they see the cross-subsidization as a certain "black box". Manufacturers do not understand why their payments on behalf of the population are increasing, if the costs of electric power companies remain unchanged and no investment programs are in progress. Metallurgists suspect that the monopolists are using the cross-subsidization to siphon money from the heavy industry to the special-purpose profit centers opened by the government with participation of energy companies. That is why the government is so persistent in increasing the rates, turning a deaf ear to groans of the business community.

Ivan Poduzov, the General Director of UNITEX-PRO, LLC, is sure that the government will not "freeze" the energy prices and quite soon they will leave the average European prices behind. The expert thinks that manufacturers do not have any other solution but to upgrade the production and cut energy consumption. Large holding companies producing for export are well aware of the problem and have embarked on technological upgrading. Small and medium-sized enterprises generally neglect energy saving, thus boosting industrial inflation.

Mikhail Shulev, head of the Agency for Small Energy Development, says that the issue of the increasing rates can be solved at the regional level: A number of Russian regions started building small cogeneration plants that produce very cheap electricity and have only a three year payback period. Projects in Tatarstan, Bashkortostan and St. Petersburg can come to being due to support from the regional government. In the Sverdlovsk Region no one renders support to small-scale power generation. The production sector has to solve the problem single-handedly: Some of the manufacturers, at their own risk and peril, built small-sized cogeneration plants, made mistakes in their design development and gave up hope on them. Investors realized that investment in energy efficiency is too unsafe, taking into account the existing political and organizational risks.

The experts believe that small energy is impeded by large generation companies. Corruption giving rise to monstrous inefficiency results in the situation when ferroalloys operations are more profitable today in the USA than in Russia – mind you that the average wage of a Russian worker is 800 dollars!

Anatoly Sysoyev expects that the Russian economy of the present-day pattern will not live long: The profit centers very soon will leave a leveled-off field around. Metallurgists are perplexed: Is it what the government is seeking for by allowing generation companies to draw out the profit from non-energy sectors for decades?

Vladimir Terletsky