Power Grid Reforms Sidelined By Crisis

The financial crisis has forced a delay in pricing reform of the power grid business, a move certain to disappoint investors who staked billions of dollars on the changes, executives and experts said on Tuesday.

Andrei Lukin, head of strategy and development at state-controlled grid giant MRSK Holding, said the transition to so-called regulated asset base, or RAB, pricing for electricity grid firms will not go ahead as planned.

"Certain regulators said: 'Let's wait on this. Why risk it now?'" Lukin said. "Those pilot projects that we were working with are now, if not frozen, then certainly suspended."

Responding to Lukin's statements, an adviser to the management of MRSK Holding, Pavel Shpilevoi, said it was the grid firms themselves that had requested a few technical delays. "All of our ideas are getting support from the government."

As part of the country's sweeping reform of the electricity sector, all of the regional grid companies were to transfer to the new pricing system by the end of 2010.

Modeled on the British reform of the its electricity sector in the 1990s, the scheme sets a stable power-distribution tariff every three to five years at a rate that guarantees fair returns on the grid firms' investments and encourages spending on new technology.

But as financial turmoil batters domestic industries, First Deputy Prime Minister Igor Shuvalov told MRSK Holding to work with the Federal Tariff Service to come up with a new plan for switching to the RAB scheme at a later time, Lukin said.

"The old one has been scrapped," he said.

Shpilevoi, however, said the original plan was still more or less on track. "It is still our goal to transfer all of the regions to RAB by end-2010 -- at least the largest regions."

Portfolio and institutional investors have pumped billions of dollars into the 11 interregional grid companies, or MRSKs, all of which are controlled by MRSK Holding.

"This was the main stimulus for the growth of the grid business. About 90 percent of the investors [in these firms] were depending on the fact that as soon as RAB was set the returns would start flowing," said Alexander Kornilov, a utilities analyst at Alfa Bank in Moscow.

Grid firms in three regions -- Perm, Tver and Astrakhan -- have already been transferred to the RAB system, and Lukin said these would not be forced to go back to the old pricing methods.

Twenty more regions were to make the change as of Jan. 1, however, with the first in line being the regions of Tula and Belgorod. Lukin said this would no longer be possible.

The overall plan to transfer most of Russia's regions to RAB pricing by 2010 was also unlikely, he said.

The new plan, to be delivered to Shuvalov by July, must lay out when and how to continue transferring Russia's regional grid companies to RAB pricing, with the next wave of transitions on July 1, 2009 in the best case scenario.