Government Waffles On Electricity Prices

The government could delay the liberalization of power prices, a key element of the electricity sector reforms that enticed investors to take on mandatory multibillion-dollar expansion programs, a state-controlled watchdog for the industry said Wednesday.

A suspension of the move to full market prices -- currently set for 2011 -- would ruin Russian and foreign investors' hopes of seeing returns on the money they have already invested and significantly complicate efforts to raise further funds to build new capacity.

"The idea of slowing down the liberalization process is now being discussed," Market Council chairman Dmitry Ponomaryov said Wednesday, the first time a government official has raised the possibility.

Several oil companies sent a letter to the government asking for a suspension of the pricing reforms, citing the negative effects of the financial crisis, Interfax reported Wednesday without identifying the companies or the source of the information.

Anatoly Chubais, the architect of the reforms, ruled out any changes in the liberalization plan in late June, just before Unified Energy System, the former state-run monopoly he chaired, ceased to exist.

"It's utterly unlikely. Something absolutely extreme has to take place [for a suspension to happen]. I think it will not happen," he said at the time.

Under the liberalization, half of Russia's electricity production is to be traded at market rates from July 1, 2009, while prices for the other half are to be set by the Federal Tariffs Service. Currently, only 25 percent of the electricity trade is deregulated.

"We have to think about the future. If the liberalization slows down, it will become hard to attract money to fund the generating companies' development," Ponomaryov said.

Power generators agreed to build 1,700 megawatts of new capacity next year under the investment programs they took on during the privatization of UES. The companies have already had trouble implementing their investment obligations because banks have drastically cut back on lending.

"The oil industry obviously has greater lobbying power than the utilities sector, especially since Chubais resigned," VTB Capital wrote in a research note Wednesday. "This increases the risk of the electricity sector being sacrificed, at least in the medium term of 2009 to 2010."

The most reasonable deal the parties could strike on the issue is "the state halting the process of liberalizing the electricity market ... but allowing generators to cut their investment obligations," the analysts wrote.

But power companies protested the delay, saying it would scare off foreign investors and all but doom the country's hopes of keeping up with rising electricity demand.

"A delay in the liberalization will lead to direct damages for generators, as the tariff does not reflect real fuel-costs growth," said Vladimir Palei, the acting deputy CEO of OGK-1. "We hope that the logic of the reform will not be changed and that competition and market mechanisms ... will help us get out of the crisis."

Derailing the liberalization "would have very bad consequences," said a top executive at a foreign company that owns a Russian generator. He spoke on condition of anonymity because of the sensitivity of the issue.

"Without market prices, we won't be able to invest in building new capacity," he said, adding that his company's budget already factored in the deregulated prices.

"Top government officials have promised us it would all go as planned," the official said. "The opposite would scare foreign investors off Russia for a long time."

Ponomaryov also said Wednesday that the Market Council would draft a blacklist of delinquent energy consumers and pass it on to the Energy Ministry this week. The council suggested that indebted companies should face power cuts and refusals from banks to extend loans.

He said he proposed having state-controlled Vneshekonombank either stop lending to consumers with unpaid bills or force them to use some of the loans to repay their debts, he said.

The Market Council's supervisory board, which includes state officials, generators, distributors and grid companies, will meet Nov. 28 to discuss ways to help the sector deal with the financial crisis.