Chubais Driving Pace of Energy Restructuring

VedomostiAnatoly Chubais says everyone now sees the need for restructuring and is ready to engage constructively.
Over the past year, Anatoly Chubais has managed to send his plan for reforming Unified Energy Systems well on its way to fruition. The government has approved the plan, a running battle with minority shareholders has fizzled out almost entirely and representatives of Russian financial and industrial groups are taking an interest in the opportunities that the restructuring process might offer.

True, the strategic, international investors that Chubais mentioned a year ago have yet to get on board. But he has abandoned his tendency to idealize domestic investors. No longer does the head of UES believe that every major energy consumer will take an interest in developing the sector. And the impending redistribution of property will only take place "through a tender and with strict investment conditions," he says.

Q:It's not just UES managers and officials who are involved in reforming the electrical energy sector. A special working group has been set up to consider this question at the Union of Industrialists and Entrepreneurs, and there is a committee for reforming the energy sector established within UES itself. Could you explain what these organizations are doing?
A: This is a natural process -- when each interested group receives a certain platform from which it can protect and lobby its interests. The committee at the Union of Industrialists and Entrepreneurs represents the industrialists, or, as they are disparagingly known, the oligarchs, whose interests are quite clear. You have Oleg Deripaska [of Siberian Aluminum] for whom energy costs account for 30 percent of the production cost of his goods. So his interest is quite clear. The same goes for [Severstal general director] Alexei Mordashov who has entered wholeheartedly into this process. [Troika Dialog's chief] Ruben Vardanyan is the head of the committee. And it is absolutely proper for this post to be occupied by a person who represents business, who has no direct interest in lowering or raising energy tariffs. His priority is that financial flows and markets should take shape around the energy sector.

The UES restructuring committee under the UES board of directors has a completely different structure -- it is made up of shareholders, investors and UES representatives -- and it has completely different interests. The group is headed by David Hern of Brunswick Capital Management, who could never be accused of being a "UES agent."

Could this group have been "captured" by appointing myself or [UES deputy chairman] Valentin Zavadnikov as head? Yes, it could have been. But this would have been wrong.

It is important that this group includes representatives not just of minority shareholders, but of international financial structures such as the EBRD and the Finnish energy company Fortum. Fortum is a strategic investor and the biggest energy company, not just in Finland, but in Europe as well. It thinks along different lines than speculative investors.

Q:Does the Fortum company have a practical interest in the restructuring process? A year ago you said you were negotiating with a number of Western energy companies that might invest funds in the Russian energy sector. Can you say anything more concrete about this today?
A: I can't boast that we have moved our negotiations with any of them to the stage of a full-fledged project.

But last year we went through an important transition -- we separated out those investors who generally interested us from those who generally didn't. The former include a number of major companies such as EdF [France], EON [Germany], Union Fenoza [Spain] and Enron [the United States]. We met with the president of the Tokyo Electric Power Co., and there is interest from the major Japanese trading houses, including Marubeni. Generally, they are interested -- they want to see concrete projects and they are prepared to devote time and effort to this end.

I sat with the president of EON in this room for four hours, drew him flow charts, told him about the various stages of the restructuring. The next stage is to move from general talk about the restructuring to specific investment projects. To get beyond this, we had to put serious money into developing serious projects.

PricewaterhouseCoopers was involved in producing what we call our 5,000 megawatt program. It incorporates 12 projects, four of which are completed and the remainder of which will be finished soon. We have prepared detailed presentations of them with complete financial assessments and technical sections with experts' opinions.

Almost all of these projects will help complete ongoing construction projects. We're not, of course, talking about $5 billion in investments but several hundred million. In terms of the energy sector, these aren't big projects -- but they're set up and ready for implementation.

Q:How much is this program expected to cost?
A: They aren't finished yet, so I don't have any final figures. But I do have four complete packages of documents about the projects that I will put in my briefcase and take with me on a road show from Moscow to Buenos Aires and then, I hope, on to New York and London.

The International Energy Congress will be taking place in Buenos Aires, at which strategies are gathered from all over the world. The main thing at such a large gathering is not so much the presentation I give as the opportunities for dialogue with the heads of the biggest energy companies in the world. This won't be a conversation along the lines of "So Ken [Kenneth Lei president of Enron], how do you feel about energy restructuring in Russia?" Rather, it will be "here are four projects, they cost such-and-such, how much time do you need to give me a yes or no answer?"

Q:How might these projects affect the AO-Energo or RAO UES ownership structure?
A: They won't affect the ownership structure of UES one bit. They could affect the ownership structure of AO-Energo, however. This is because they are realized at the starting phase of restructuring. A number of projects, for example, are connected with modernizing the existing stations that are part of AO-Energo's assets.

Take plans to modernize the Dzerzhinsky power station, which is a subdivision of Nizhnovenergo. To start with, the power station must become an independent legal entity; it needs to be reorganized into a joint stock company. Then we have to understand how consumers will actually use it. If it is to work on the Nizhny Novgorod market, can we conclude long-term contracts with consumers and put not just an assessment of the work, but the prices and the long-term energy supply contracts on the investor's table?

If this doesn't work out, the power station will be spun off from Nizhnovenergo and moved to FOREM [the Federal Wholesale Market of Electricity and Power]. There will be buyers in any event, and the price will be fixed by regulating bodies.

Based on this example, I have shown that not only structural changes are required, but that the future sales market with its basic price parameters must be demonstrated. Having been closely involved in this process, we now know that every project should be treated individually, requiring the efforts of all our departments, the general directors of the energy systems, even the governors. And, of course, they must be considered by the board of directors.

Q:In winter, you told Alexander Lebed, the governor of Krasnoyarsk, that you had found an investor who would finish off the Boguchansk hydroelectric station. Can you name this investor?
A: The Boguchansk hydroelectric station is nothing like the Dzerzhinsky power station -- it is a huge project that at best will be introduced in 2006-07. The cost of a single kilowatt will be about $1,200 -- three times higher than that of a normal power station. We're not talking hundreds of millions of dollars -- this would need $1 billion in investments. There is one major Russian financial and industrial group that has expressed a serious interest in the Boguchansk hydroelectric station. At this point, I can't name it -- we're not at the stage where we have a fully formed project and investment obligations.

But we do have real investments in the form of subscribers' payments, which we collect from energy systems. This is an old Soviet construction that we aren't particularly keen on, but it does exist, and as such, we have introduced order to it. Now all investments are made only in live money.

There are already examples of more progressive financing schemes. Construction of the Mutinsk geothermal station in Kamchatka is going ahead using an EBRD loan of $100 million. This is a real project that was studied thoroughly by the bank: all financial flows were analyzed, the guarantees and practical aspects of the scheme were assessed. As a result, intensive construction work is underway and the first generator of 25 megawatts will be introduced Dec. 22. The second will be introduced in the first quarter of next year.

Q:But it is surely unlikely that you will manage to attract EBRD credits for every such project -- after all, it's a very lengthy process. Are Russian investors interested in investing in the Russian energy sector?
A: Of course, the further we get with the restructuring as a whole, the more we feel the interest of Russian investors. And some of them are very interested. A whole range of major industrial companies have approached us with proposals for buying the power stations that supply their energy and that are partially located on the same territory as their enterprises.

In general, this is fine. But our position is that their participation must not be limited to making a purchase but should include investment obligations. We don't just want to transfer property from one set of hands to another, but to create a scheme that will guarantee that the station is modernized. The second condition is that even if the station has only one pretender, an auction or tender will be held. This applies to everyone ... some people even get upset and say, "But that power station is located on my territory, the steam is mine, my factory uses the power." To which I say: "Why are you afraid of a tender then, if no one but yourselves will buy it?"

Q:A board of shareholders once convened at UES but was found to be incapable of working properly. Couldn't the same happen with the present committee?
A: I remember that board well. But there is a major difference between the two of them -- not simply in terms of composition, but in general outlook. The moment restructuring was adopted, a large number of our opponents were a part of the board and they described it as "banditry," "destruction of the country," "a catastrophe for the nation" and "asset theft." Today, everyone understands that restructuring is necessary and engages in constructive discussions as to how this can be achieved.

Q:How much of the legislative base for reforming the energy sector has been prepared? When will this document be discussed by the State Duma?
A: Let's start with the most important things -- the laws. Pursuant to Instruction No. 1040, the Russian government plans to adopt five draft laws, including amendments to those that already exist as well as to the new law on electrical energy. Each of them requires considerable work. The corresponding draft laws have already been developed by the departments concerned, and our specialists are participating in discussions about the laws. The first two of them are to be put to the government in the coming days.

Q:No one would have predicted that changing the general director of Mosenergo could produce such a severe conflict. The situation was complicated by the fact that the Moscow authorities stood up for [Alexander] Remezov's interests. Can the new director that you appoint work normally if the mayor of Moscow is opposed to him?
A: Here one must follow the letter of the law. The legal standpoint is that neither the mayor nor the governors have the right on ethical or corporate grounds to stop shareholders from getting rid of their general director. They may not agree with this but they cannot forbid it. I have a standard rule -- don't appoint a general director that the governor rejects categorically. Despite all my respect for Yury Luzhkov, I insist that the governor of the region, Boris Gromov, who proposed [Arkady] Yevstafyev as a candidate, also has the right to argue his case.

It is specifically for this reason that at all levels in the process of appointing a new general director for Mosenergo, we have been trying to come to an agreement with the regional heads. And now when Yevstafyev has been legally appointed acting general director, our doors remain open for compromise.