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. Last Updated: 07/27/2016

Electricity Producers Cry Foul at Gas Prices

Electricity producers cried foul Monday over the price for natural gas on Russia's gas exchange, and analysts said Gazprom was manipulating the market.

The exchange, founded by Gazprom in November, held its third round of trading Thursday. For many buyers, the going price of gas that day was nearly as high as the price of fuel oil, which is usually at least twice as expensive.

"Every time we go with new hopes to these sales, and every time we are disappointed," said Yana Dubeikovskaya, chief spokeswoman of OGK-1, a generating company that owns six power stations and produces about 5 percent of the country's electricity.

Natural gas accounts for about 60 percent of the fuel used to make electricity in the country. By law, Gazprom must sell a fixed amount of gas to power producers at a price set by the state. But this amount is seldom enough for producers to meet their quotas, forcing them to buy more fuel on the free market.

Because demand is so high, market prices send production costs soaring, but producers are kept from passing the cost onto their clients by the state-regulated price of electricity. This turns most of them into loss-making businesses.

"The price of gas is the fundamental question on which our business is based," Dubeikovskaya said.

"More than 65 percent of our overhead is the price of fuel, and that is climbing."

The price of gas on the exchange depends mainly on the distance it has to be transported. For the three power stations that are relatively close to gas storage centers, OGK-1 purchased a one-month supply Thursday, about 100 million cubic meters. But for the more remote stations, the price of transport was too high, OGK-1 said in a statement.

OGK-5, which owns four stations nationwide, has gone to each of the three sessions, but has come away empty-handed each time.

"Either the price of gas or the transportation cost was too high," OGK-5 spokesman Sergei Karaulov said.

Although independent gas producers such as Novatek and Itera sell gas on the exchange, the transportation costs are set almost exclusively by Gazprom, which has a monopoly on the long-distance pipelines used to pump gas to the turbines.

"This is Gazprom's trump card, and it is using it to its own advantage," said Alexei Solovyov, electricity analyst at Metropol.

The independent gas providers "can sell you as much gas as you want at any price, but you won't receive it," said Dmitry Terekhov, utilities analyst at Antanta Capital.

"Gazprom can tinker with the transport volumes as much as it wants," he said.

Although state-set electricity tariffs are being freed up little by little, analysts do not expect the generating companies to turn much of a profit until energy prices are fully liberalized in 2011.

After that, power producers would simply pass their swelling overhead costs onto the population, which will have to pay at least twice as much for every kilowatt hour consumed.