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. Last Updated: 07/27/2016

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The recent major problems in the Russian power sector raise once again the question to what extent market opening could help solve them. In a number of Western countries, electricity market liberalization has often been a solution for a non-problem; in Russia it would mostly be a non-solution for a much too real problem. The main goal of market liberalization — the reduction of the price of electricity — can hardly be achieved in Russia, where prices already barely cover generation costs and leave no room for badly needed capital investments.

The national electricity holding Unified Energy Systems believes that only a major internal restructuring and a competitive electricity market can solve the present problems. However, the proposed restructuring plan is based mostly on ideology (leaving all solutions to "market mechanisms"), lacks objective data and envisions steps that are too vague to actually be implemented. And it is not short: At 9,300 words it is much longer than the much more precise European Union 1996 directive on power market liberalization (e.g. German version: 5,980 words). The only explicit provision in the UES document — mimicking Western reforms — is the unbundling of power generation, transmission and distribution. All other major issues, from an independent control authority to the new rules for market participation, are mostly left unresolved. Even the proposal for building the market is very peculiar: UES would be responsible for creating all market participants (!) as well as the "collective control organs" that would take the place of a sector authority. In the capitalist world, it would be unthinkable to let regulated companies openly participate in their control institution.

The UES plan is full of vague expressions. Does "market mechanisms should be introduced to solve the problem of network limitations" mean that new power lines must be built? If so, the associated new capital investments will hardly press down the price for electricity. And what about the "formation of means to address the social protection of those users who are unable to pay, without distorting market signals?" Should the least affluent citizens feel secure, or will their electricity supply be cut off? By comparison, existing Russian legislation on the power sector is much clearer and defines a better balance of interests between the utilities, customers and the state.

The protracted discussion surrounding UES's 9,300-word proposed restructuring plan is an expensive waste of time.

Contradictions litter the reform plan from beginning to end. All "cross-subsidies" must be cut, it maintains, but then it proposes changes in state fiscal policy to attract more investments (tax-rebate levels, grace periods and the point of view of the Finance Ministry are left unmentioned). Other key issues remain in the dark, hidden behind expressions like "formation of conditions," "policy implementation" and "barrier reduction" that are never followed by any actual figures or analyses of possible difficulties and alternative solutions.

The plan makes clear that its success depends on the possibility of receiving full cash payments for all delivered energy. If this happened today, the utilities would already be much better off financially and much less in need of any radical reform. In fact, the UES reform plan is preposterous. If UES really wanted a competitive power market in Russia, it could introduce one without waiting for the reform to be approved. Russian legislation does not foresee exclusivity rights for UES and its subsidiary companies to build power plants and sell electrical energy, i.e. anybody else can also do it.

A bulk energy market, FOREM, was introduced by a 1996 presidential decree, with UES empowered to manage it. Instead of developing it into a full open market, UES has made FOREM merely a clearing mechanism for power transactions carried out according to a generation schedule determined by UES itself. How credible is it then for UES to carry out any further market opening? UES could accomplish almost all of the goals stated in its own reform plan just by following existing legislation. It could start a real bulk power market by selling its stakes in its regional subsidiaries and opening up access to FOREM to third parties. In this case, however, "market mechanisms" would no longer be under UES control.

The long debate about the UES plan fulfills an entirely different purpose, shifting the solution of contingent problems from the hard realities of engineering and financing to the more nebulous realm of organizational management. Consultants — especially foreign ones — thrive on such situations. But praising the virtues of liberalized power markets neither extends the usable lifetime of Chernobyl-type nuclear reactors nor improves the environmental impact of power generation nor increases the reliability of electricity distribution in Russia nor helps warm those currently freezing in Siberia and the Far East. All these problems have very little to do with the UES organizational structure and no change in the latter would solve them.

The best and most realistic option for the power sector would be to end the discussion about UES reform altogether and instead to focus directly on the issues to be solved. These can be approached more than adequately by normal methods of engineering and finance. Capital investments, for example, could be raised with project-specific financing, as was the case with the Northwest power plant in St. Petersburg. Only by showing sound fundamental economic management skills will Russian utilities be able to improve their credibility and rating, increasing their chances of attracting equity investments. The protracted discussion of the UES reconstruction plan is just a useless and expensive waste of time.

Gianguido Piani works in the energy sector in St. Petersburg. He contributed this article to The Moscow Times.