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. Last Updated: 07/27/2016

UES Blasts Government Threat to Tax Fund

With the government threatening to abolish a $1 billion tax-exempt fund and demanding lower electricity tariffs for industry, power monopoly Unified Energy Systems hit back Monday, saying less money for investment would lead to "crisis" and that its charges to enterprises are vastly lower than in the West.

First Deputy Prime Minister Anatoly Chubais reportedly agreed Saturday with a concept for monopoly reform that would eliminate the UES investment fund -- akin to Gazprom's "stabilization" fund -- which the utility says funnels $1 billion annually into Russia's regions to lease power transmission lines.

"In this case, we see two options: either allow us to raise tariff rates from existing levels, although we already announced a lowering of tariffs in 1997, or find other financial means such as issuing stock and debt," Alexander Lopatin, UES' acting administrative director, told Reuters on Monday. Abolishing the investment fund would lead to higher taxes for UES and could pull the industry into a "crisis situation," Lopatin said.

But analysts say the fund is now used less for investment than for UES to cover nonpayment of bills from favored customers.

The move is the latest government salvo against Russia's natural monopolies. Newly appointed First Deputy Prime Minister Boris Nemtsov declared last week that the country's large industrial customers should pay less for power, and that suppliers should be allowed to sell electricity freely on the market rather than going through the UES monopoly. Residential customers, however, would pay more under Nemtsov's plan, which seeks to rebalance electricity rates and shift the bulk of monthly bills onto residential users, as is the norm in many other countries.

Vitaly Kuzmin, first deputy head of the economics department at UES, told Interfax on Monday that Russian enterprises were charged an average of 4.2 cents per kilowatt-hour and households at 1.45 cents/kwh -- a ratio company officials said they would like to reverse.

Kuzmin said that, for industrial customers, the costs compare with an average of 4.7 cents in the United States, 6 cents in France, 6.8 cents in Britain, 10.1 cents in Germany and 18.5 cents in Japan. Only Canada's industries pay less, he said, at an average 3.8 cents.

Residential customers pay an average of 8.4 cents in the United States, 6 cents in Canada, 12.4 cents in Britain, 20.4 cents in Germany, 16.4 cents in France and 26.9 cents in Japan, according to Kuzmin.

While analysts conceded that UES' industrial rates are lower than in Western countries, they said the comparison was not entirely valid because Russia's rate structure so heavily favors residential users. But they said Kuzmin's remarks, more importantly than the figures, might be a sign that the company is prepared to bargain with the government over restructuring.

"To my mind, RAO UES wants tariffs to be low," said Alexei Minaev, utilities analyst at Rye Man & Gor Securities. "[UES] represents the interests of government and state, which wants to see low tariffs in order to stimulate growth."