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. Last Updated: 07/27/2016

UES Set To Lose Some of Its Power

In the largest meeting of its kind, more than 150 of the nation's biggest producers and consumers of electricity packed the World Trade Center on Wednesday to hammer out a plan to create Russia's first independently regulated wholesale electricity market.

As part of the sweeping overhaul of the national power grid that President Vladimir Putin signed off on in July, the government has until the end of September to come up with a way to introduce competition into the industry and break Unified Energy Systems' distribution monopoly.

Deputy Prime Minister Viktor Khristenko, the government's pointman on the project, has turned over that task to industry players themselves, giving them until Sept. 15 to put a blueprint on his desk.

Faced with the daunting task of forging a consensus across the industrial spectrum in such a short time frame, top executives of the companies -- after six hours of highly charged negotiations -- decided to elect an 11-man working group to come up with a single concept and charter for a nonprofit partnership to be called the Administrator of Trade System.

The ATS, which is modeled on the country's main stock market, the Russian Trading System, will be in charge of regulating the electricity market and mediating conflicts and payment disputes.

Of the 11 members of the working group, five represent the nation's largest electricity consumers, five represent the nation's largest producers, and one -- Arkady Volsky -- represents the powerful Russian Union of Industrialists and Entrepreneurs, which he heads.

The consumer faction includes executives from Russian Aluminum, or RusAl, the petrochemical giant Sibur, which is controlled by Gazprom, oil pipeline monopoly Transneft, the Mikhailovsky and Lebedinsky ore-mining complexes and the Urals Mining and Metals Co., or UGMK.

The producer faction includes UES, state-owned nuclear power monopoly Rosenergoatom, and regional utilities Irkutskenergo, Tatenergo and Bashenergo.

All federal ministries involved with the electricity market -- Economic Development and Trade, Energy, Anti-Monopoly, Nuclear Power and the Federal Energy Commission -- are prohibited from participating directly in the working group, but have appointed officials to advise it. Deputy Economic Development and Trade Minister Andrei Sharonov said "the government doesn't have to participate directly in the creation of ATS, as far as it is not a direct producer or consumer of energy."

But while no top government official was allowed in the working group, a former government official was -- Alexander Livshits, former deputy prime minister and finance minister. Livshits, who is now deputy CEO of RusAl, the world's second-largest aluminum producer, was elected to head the group.

Livshits called the gathering of so many companies from such a wide scope an "unusual spectacle" and a "first," but said the work ahead would not be easy.

"Everyone has his own interests and vision on how the ATS should be created and, I think, we have a lot of work to do," said Livshits. In addition to the Khristenko deadline, the plan has to be feasible enough to be up and running by next summer, he said.

Deputy Nuclear Power Minister Bulat Nigmatulin called for emphasis to be put on transparency mechanisms so "there won't be any price collusion."

Most participants agreed that the main task would be to guarantee ATS's independence from the natural monopolies and other industry participants by limiting their participation in the ownership and management of ATS.

The existing wholesale regulator, the Federal Wholesale Market of Electricity and Power, or FOREM, was established by presidential decree in 1996 at a time when the problem of creating an open energy market was high on the government's agenda. UES was given an 80 percent stake, with the other 20 percent going to Rosenergoatom.

Instead of developing it into a truly open market, as was intended, UES turned FOREM into a clearing mechanism for power transactions carried out according to a generation schedule set by UES itself.

UES currently distributes energy from the producer to the consumer according to its own will. So, producers cannot choose consumers, and consumers cannot choose producers.

"The creation of the system will eliminate the conflict of interest existing now, with UES being the parent company of FOREM," said Ilya Marshak, NIKoil analyst.

Analysts, including Marshak, were at a loss to explain why UES is willing to go along with a plan that will obviously weaken its influence, if not its bottom line.

UES board member Vladimir Dorofeyev said Wednesday that his company "is not going to pretend to try to claim a dominating role in ATS," and insisted that all players would be represented equally. "If we create a new open market, FOREM must delegate all its power to ATS," he said.

"In order to defuse the situation, UES will have to share," said Livshits.