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. Last Updated: 07/27/2016

Luzhkov and Chubais Forge Power Alliance

Itar-TassLuzhkov, left, and Chubais at the presentation of the $14.8 billion investment plan at Mosenergo's offices Thursday.
A year to the day after a major blackout left swaths of Moscow without light, bitter rivals Mayor Yury Luzhkov and electricity chief Anatoly Chubais buried the hatchet Thursday and agreed to invest $15 billion in the city's ailing electricity grid.

At a televised ceremony at the headquarters of power utility Mosenergo, a stony-faced Luzhkov stood side by side with Chubais as they unveiled a five-year plan to overhaul the network.

Together, City Hall and Chubais' Unified Energy Systems plan to raise more than 400 billion rubles ($14.8 billion) for the construction and upgrading of generators to add 5,800 megawatts of new capacity -- 10 times more than that added over the last five years.

The grid will also be augmented by more than 160 kilometers of new power networks, UES said in a statement.

At the time of last May's blackout, Luzhkov and President Vladimir Putin blamed Chubais, the architect of a free-market experiment to liberalize the country's electricity market, for the crisis. After a fire at a substation, a rolling blackout saw up to 2 million people in the capital plunged into darkness for several hours. The blackout also shut down metro lines and disrupted everything from the stock market to water supplies.

But it was not until bitterly cold weather in January threatened to send temperatures to minus 30 in millions of Moscow apartments that Luzhkov and Chubais apparently realized they had little choice but to work together.

"After the blackout a year ago, Luzhkov blamed Chubais for running the system badly, but the situation in Moscow in the winter convinced them to work together," said Alexander Kornilov, an analyst with Alfa Bank. "Luzhkov realized that a lot depended on electricity, including his political position," he said.

"They both understand that the main thing is to keep the lights on in Moscow," said Dmitry Bulgakov, an analyst with Deutsche UFG. "They know they have to help each other."

The two exchanged pleasantries at Thursday's meeting, complimenting each other on their efforts to resolve the problem.

"We are grateful to UES again for the very interesting solution of mobile power stations," Luzhkov said at the signing ceremony, RIA-Novosti reported, referring to 10 small stations recently acquired by UES as back-up supply for key areas.

Chubais thanked Luzhkov for his "fruitful assistance," noting that their relations had been more known for polemics in the past, often on the issue of energy.

By the end of the news conference, they even managed a few laughs as Luzhkov caught himself quoting figures in dollars, a practice the State Duma is trying to outlaw among state officials.

While Chubais is a die-hard liberal, Luzhkov has often been associated with the so-called Red Directors, a caste of veteran officials known for their Soviet-style management.

After the blackout last summer, Luzhkov had threatened to sue Chubais. And last November, a suggestion by Chubais that power would have to be cut to industrial users during a cold spell provoked a fierce response from Luzhkov. The events of January appear to have convinced him of Chubais' logic, however.

UES subsidiary Mosenergo, the city's main electricity provider, insisted that the winter crisis proved the effectiveness of its strategy.

"The danger was very successfully dealt with," said Mosenergo spokesman Vasily Zakharov.

Limited restrictions for industrial users were introduced to avoid a system overload as increased electicity usage during record cold temperatures threatened to overwhelm the system.

Within a month of the cold snap, Luzhkov and Chubais were seen in public together for the first time in years at the groundbreaking ceremony for a new power station in the city

The standoff between UES and City Hall first surfaced in 2001, when Luzhkov publicly attacked the power sector reform undertaken by Chubais and resisted the ouster of then-Mosenergo chief Alexander Remezov, a Luzhkov ally, hoping to retain control of the city's main power utility. Some commentators earlier speculated that Luzhkov was considering the creation of a rival power company in the city.

On Thursday, Luzhkov said the two saw eye-to-eye on the development of the city's electricity market. "The only thing that's unclear is financing," Luzhkov said, with a wry smile.

As part of Thursday's deal, UES agreed to raise 250 billion rubles ($9.3 billion), with City Hall finding the other 150 billion rubles ($5.6 billion), Luzhkov said.

Mosenergo is considering issuing shares in itself or three newly created subsidiaries to raise up to $1.4 billion, Bloomberg reported, citing company documents.

UES owns 51 percent of Mosenergo, while Gazprom owns about 30 percent and City Hall has 7.5 percent.

Chubais said UES would tap all possible sources of finance, including the sale of land freed up during the upgrade of existing power stations.

The UES statement said that part of the money would come directly from the budgets of UES and City Hall, respectively.

"We have to [raise this money], or we can forget about the development of the city," Luzhkov said.

"Everyone agrees that Moscow's energy network needs significant upgrading. The challenge is raising and spending the money efficiently," said Derek Weaving, an independent energy analyst. He said past experience showed that money invested by the city or the federal government was likely to be used inefficiently.

The investments raised by City Hall and UES would not likely influence the city's electricity supply for two to three years, the time required to get a new generating station up and running, leaving the capital to depend on various band-aid solutions.

The UES board decided earlier this spring to order 10 mobile power stations running on expensive aviation fuel. Other short-term solutions include gradual cut-offs to industrial users during critical periods and new infrastructure to tap the capacity of surrounding regions, Deutsche UFG's Bulgakov said.

But these solutions are not foolproof by any means, and Muscovites will have to sit on their hands and hope for the best as infrastructure is gradually upgraded.

"We are still in danger territory," Bulgakov said. "Much still depends on the climate, on factors that cannot be predicted."