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. Last Updated: 07/27/2016

Chubais Stays the Course on Power Reform

bloombergUES CEO Anatoly Chubais
The power outage last month will not derail reform of the energy sector but will require Unified Energy Systems to change the way it works, Anatoly Chubais, the utility giant's CEO, said Monday.

"To talk about stopping the reform is madness," Chubais told an investment conference organized by Renaissance Capital. "But there is a need for us to make adjustments to our current and strategic work."

In the wake of the May blackout, President Vladimir Putin blamed Chubais for the capital's worst outage since 1949. Putin has also said that UES management has spent too much attention on restructuring.

On Monday, Chubais received another broadside from City Hall, which demanded that UES and its subsidiary Mosenergo provide compensation for damages caused by the blackout.

"That reform led to the accident is not correct. It's a lie," Chubais said.

Under the reform, UES is separating its generation, distribution and transmission businesses. It is also selling off generation assets to create competition and attract much needed investment in its aging infrastructure.

Chubais said the process should be completed in 2007, with private companies entering the generation business.

Also on Monday, UES presented its own evaluation of the blackout and possible solutions.

Chubais said the outage originated in a problem in the grid, and not in generation. As many as 4 million people suffered from the outage, including 20,000 people stranded in the metro and 1,500 in elevators, he said.

At the outage's worst, a quarter of Moscow's consumption was cut off -- 90 percent in the Tula region and 22 percent in the Kaluga region.

Chubais said that one of the main reasons for the blackout was worn-out equipment. Two units at the Chagino substation that were knocked out were over 40 years old, he said, and 122 more such units still remain.

"The scale of the outage was very serious, and so should our reaction to it be," Chubais told reporters on the sidelines of the conference.

Changes at UES will include a tougher approach to business planning, a shift of focus from international activity to domestic operations, the upgrade and technical overhaul of equipment and further consolidation of grid and transmission assets.

Chubais added, however, that there would be no going back on projects already agreed on, such as the acquisition of power assets in Bulgaria.

As a result of the reform, at least three or four of the 21 newly created generation companies should end up in control of strategic foreign investors, Chubais said. Finland's Fortum, which already has 30 percent in Lenenergo, a St. Petersburg utility, wants to increase its stake to a controlling one.

Chubais said he met with Germany's E.ON supervisory board last week and had been in talks with Italy's Enel.

Chubais said that he would present a more detailed plan on what needed to be done at the company board meeting on Friday.

In the meantime, City Hall stepped up its attack against UES.

"UES and its subsidiary Mosenergo should redeem in full the real damage dealt to the city," City Hall said in a statement, Interfax reported.

The city particularly criticized the State Duma's evaluation of the blackout last week, saying it whitewashed mismanagement at UES.

A Duma committee lowered the city's damage estimate from 1.7 billion rubles ($61 million) to 1.2 billion rubles ($43 million).

Despite the open animosity, Vedomosti reported on Monday that UES and Moscow Mayor Yury Luzhkov had agreed to set up a joint company that would manage $6 billion of power assets.

Chubais explained that according to a 2003 agreement, a management company would be set up to oversee the city grid, combining networks that used to belong to Moscow power company Mosenergo and City Hall.

Chubais said that only Mosenergo shareholders -- including Gazprombank, which holds more than 30 percent of the utility -- would have the right to determine the future of its assets.

City Hall, however, said on Monday that it wanted to keep control of the city grid, Interfax reported, quoting an unidentified source in its fuel and energy department.

"The Moscow government has repeatedly said that it plans to control the heat and electric grid companies spun out of Mosenergo," the source said.

"There are not very many successful joint ventures in Russia. I believe that such an arrangement might work out only if the management were effectively given to the future distribution company and if the Moscow City government did not interfere in its operations too much," said Lauri Sillantaka, utilities analyst at the Troika Dialog brokerage.

"Some kind of joint enterprise to manage the grids may be no bad thing -- particularly in light of the recent blackout," said Derek Weaving, utilities analyst with UFG.

"This still leaves, though, the more important questions of who will own the assets and, if it is to be the city administration, how will ownership be transferred," he said.