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. Last Updated: 07/27/2016

FEC Against More Utility Price Hikes

The chief of the Federal Energy Commission, which regulates wholesale gas and electricity prices, defended recent price hikes at a Friday press conference, but came out against a proposed additional 15 percent price increase for natural gas, news agencies reported.

Andrei Zadernyuk said gas-price rises of up to 39.5 percent and a corresponding increase in wholesale electricity prices by 35 percent this month had been necessary to cover costs and attract much-needed foreign investment to the energy sector.

However, he said he was not prepared to support an additional 15 percent gas-price increase proposed by Gazprom, which would take effect in August should the FEC approve it.

Analysts said the 15 percent price hike would affect consumers, but would do little to change the basic state of the gas and power generation industries.

Gas and electricity prices are closely linked, as most of the country's power plants are gas fired.

Low gas prices helped spark a bitter feud between national gas monopoly Gazprom and national power grid Unified Energy Systems. Gazprom has exported ever-greater quantities of gas for hard currency, even as its production has decreased, leaving domestic power stations to deal with a gas shortage.

Last year, Gazprom exported roughly 37 percent of the 480 billion cubic meters of natural gas it produced, according to Gennady Krosovsky, oil and gas analyst for the NIKoil brokerage in Moscow.

Then-President-elect Vladimir Putin personally intervened in April, publicly calling for the two sides to settle the dispute and demanding that differences be settled within two days.

Even so, a UES spokesman said Friday the issue was not fully resolved yet.

"We are prepared to pay 50 percent more for gas," Gennady Yezhov said. "A more serious question is that Gazprom does not want to sell us gas even for that price."

Russian consumers pay roughly $11 per 1,000 cubic meters of gas, less than one-tenth of what consumers in the West pay, Krosovsky said.

Analysts said this month's price increases would have only a marginal effect on the financial health of the gas and electric energy sectors.

"The government has not changed the price of natural gas since the early 1990s," Krosovsky said.

"It is too late already, but too late is better than never," he added.

Electricity prices have also remained flat, said Mikhail Seleznyov, utilities analyst for the United Financial Group brokerage in Moscow.

UES head Anatoly Chubais has ambitious plans to upgrade the nation's dilapidated electricity infrastructure. He has sought much higher price hikes than those approved in order to lure foreign investors.

The FEC-approved hike only affected wholesale prices on the Federal Wholesale Market of Electricity and Power, or FOREM, market, which has little effect on the prices regional producers are allowed to charge consumers.

Consumer prices are determined by regional energy boards, which use a cost-plus formula to set prices, meaning that profit margins remain static.

It was the gas price increase, rather than the FOREM increase that pushed regional energy boards to allow electricity hikes.

"Any price increase allowed because of an increase in gas prices will have little effect on the overall financial health of the regional electric companies," Seleznyov said.

Even so, the hikes may help the industry's long-term prospects for attracting foreign investors, which want to see higher electricity prices before investing in the domestic power generation sector, he said.

For example, Kubanenergo, a major regional electricity producer won a 19.3 percent rate hike from the regional power board in response to this month's gas-price increase. Previous increases had been in the low single digits, Seleznyov said.

Zadernyuk, the FEC chief, said foreign investment would materialize only when prices reached 3 cents to 4 cents per kilowatt-hour. They average about 1 cent now, he said.