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. Last Updated: 07/27/2016

UES Share-Swap Plan May Clear Legal Snags

Investors and bank analysts last week welcomed a revision of the country's electricity reforms, saying it would help to overcome legal snags, but some critics said they feared a return to a state monopoly.

Since 2003, Unified Energy Systems has been working to implement a plan to unbundle its subsidiaries and sell off its assets as a way of raising more than $80 billion in private investment.

The biggest single chunk of that money -- $20 billion to $40 billion -- will be needed to overhaul the high-voltage power grid. But so far, a legal technicality has prevented the Federal Grid Company from earning any money for repairs.

Energy legislation from 2003 forbids the grid company, which the government considers a strategic asset, from bringing in any investors until the state holds a 75 percent stake in the company. As of now, only 50 percent of the grid company belongs to the government, which has said it cannot afford to buy the rest.

To keep the grid running in the meantime, UES has had to dig into its own pockets, or rather, into the pockets of minority shareholders.

"There was the idea that we can sell stocks of our generating companies and give the money to [the grid company]," UES spokeswoman Tatyana Milyayeva said. "But our shareholders said, 'What's all this? Why are you selling our assets to develop a company that belongs to the government?'"

The new proposal aims to make the grid company at once sustainable and state-controlled. If UES adopts the proposal at a Feb. 9 board meeting, the Federal Grid Company will hand over about 25 percent of its stock to the government and in return the government will give the grid company its stakes in 18 gencos, the so-called OGKs and TGKs.

That way, the state will have its 75 percent stake, and the grid company will be able to sell these 18 firms and use the profits to fund its own development, Milyayeva said.

Analysts agreed that the proposal could only benefit UES shareholders, and the utility's status was "buy" at all major banks. UES investors who vote against the plan can trade in their shares for cash.

UES stock was up 8.2 percent on the week Friday.

Critics pointed out a possible new legal pitfall: the return of a state-controlled monopoly. Anti-monopoly laws built into the original reforms forbid vertical integration, and thus make it illegal for the grid company to control both the dispatch and the generation of electricity.

Although Milyayeva conceded that the grid company would be in breach of these laws, she said it would only be "for two or three years," or until it sells off its 18 gencos. But that assumes there will be enough investors to buy them.

With at least 10 power-sector IPOs planned for this year, many observers fear market saturation will come long before all the gencos have had a chance to go public.

"In the electricity system ... investments are very long term because they are so huge. You just don't have the fast returns investors want," said Gianguido Piani, a St. Petersburg-based energy expert. "An additional organizational layer does not change that reality."

The firms that are not sold will remain in the hands of the grid company, which may be tempted, critics said, to give its own generators privileged access to the grid, while unfairly handicapping the independent ones.

If that happened, the reforms, or at least the market principles behind them, would be back at square one.