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. Last Updated: 07/27/2016

Power Industry Faces Tighter Control

As the power industry recovers from the shock of last week’s disaster at the Sayano-Shushenskaya hydropower plant, the government was told to develop regulations to keep price volatility — for wholesale power and generators’ shares — in check.

RusHydro’s largest plant was knocked completely off line when an engine room flooded early Aug. 17, and officials have said it could take at least five months before Sayano-Shushenskaya is even partly operational. The facility accounts for some 2.5 percent of the country’s overall capacity.

On a visit to the dam Friday, Prime Minister Vladimir Putin ordered Energy Minister Sergei Shmatko to submit proposals by Sept. 10 for regulating the wholesale power market to avoid sharp price increases. The regulatory measures may be in force for up to 12 months, he said.

Analysts reacted calmly to the announcement, saying the measures would primarily affect the Siberian region and would only seek to prevent rival generators from hiking up prices.

“As far as we’re concerned, the government decree issued by Vladimir Putin will only regulate earnings by certain generators that are currently replacing the damaged hydro plant,” said Vladimir Sklyar, an analyst at Renaissance Capital. “The government is aiming to fight rising prices in the areas where some generators have become monopolists and may wish to gain speculative profits.”

The Federal Anti-Monopoly Service will curb any unjustified price increases in Siberia, its head, Igor Artemyev, said Friday at a news conference.

“We sent a warning letter to power generating companies and will keep monitoring the situation,” Anatoly Golomolzin, a deputy chief of the anti-monopoly service, told The Moscow Times. “We will see if price fluctuations are economically justified, and in case speculative activity is proven we’ll take action.”

The service will continue using the existing regulatory system to track possible monopolist activity, he said.

“Companies that abuse their dominant positions will be penalized 1 percent to 15 percent of their revenue on the market for the previous year,” Golomolzin added.

Putin’s order to protect consumers will be applied primarily in the regions where an artificial deficit of capacity was created after Sayano-Shushenskaya went off line, including the Krasnoyarsk, Tomsk, Omsk, Irkutsk, Kemerovo and Altai regions, said Sklyar, of Renaissance Capital.

But there may be no drastic price increase at all, because reserve power capacities are efficiently operating and there is a sufficient supply of fuel in stock, said Vitaly Bushuyev, director of the Energy Strategy Institute.

“The necessary energy balance has been restored, days after the disaster, while a long-term balance is being calculated now,” he said. “A price increase of 5 to 10 percent is possible because of the increased costs of fuel for energy generators, but the government needs to strictly curb speculative trends.”

Bushuyev said the government might go as far as fixing administrated prices, although that looks like the most pessimistic scenario.

“The accident has tested the principles of the free electricity market in Russia: Electricity prices in Siberia were up 25 percent on Monday, reflecting the load of more expensive, coal-fired gencos,” VTB Capital wrote in a research note Friday.

As a result, the Trade System Administrator and Federal Anti-Monopoly Service received more control over market participants and are using nonmarket mechanisms to try to calm the situation. The system administrator put a price cap of 628 rubles ($20) per megawatt hour for energy in Siberia, 45 percent above the current level, VTB’s Dmitry Skryabin and Mikhail Rasstrigin wrote.

“The devil, of course, will be in the details [of the government regulations]. … The news might be negative for stocks that have rallied of late … and positive for RusHydro, as it would need less money to fulfill its power supply contracts,” they wrote, citing Irkutskenergo, OGK-3, and TGKs 12, 13 and 14 as stocks that had gained.

Irkutskenergo, one of the main coal-fired generators in the region, said it was bracing for the winter heating season.

“Due to the recent events at Sayano-Shushenskaya and the expected growth of the burden on our power stations, we intend to increase our coal supplies by 1 million tons,” the company said in a statement Friday.

Irkutskenergo has found a supplier for the new coal and has already stockpiled more than 2 billion tons, the statement said.

The company’s stock, which jumped more than 24 percent on the MICEX on Tuesday, has since shed some of the gains but was still up 14 percent on the week.

“The authorities’ reaction is justified. U.S. and EU regulators would act similarly to protect consumers,” Sklyar said. “The state has coped with the energy deficit so far, with the relatively low demand for electricity in the summer, but as the winter heating season approaches they need to protect themselves from a sudden energy deficit caused by market volatility.”

RusHydro, which had its Russian shares frozen for most of Monday and all of Tuesday, seems to be on its way to recovery. The blue chip’s shares rose 4.5 percent on the MICEX on Friday, still 13 percent off last week’s close.

In London, its shares closed Friday up 5 percent, although still 12 percent down on the week after losses of 15 percent and 5 percent on Monday and Tuesday, respectively.

“RusHydro is a successfully operating energy company with an EBITDA of 65 percent, which may go down to 60 percent at worst next year,” Sklyar said. “It’s the most profitable company in the sector, and the decline was a temporary trend.”

Yevgeny Desyatov, head of RusHydro’s sales department, told Interfax on Friday that the company would not try to recoup its losses from the accident by raising 2010 rates. On Wednesday, he said RusHydro would alter its proposed rate for next year to include the recovery costs.

“With the full scale of the losses yet to be discovered, it is too early to speculate on possible tariff compensation,” the VTB Capital analysts said. “However, we do think there is a chance of the costs being reflected in the 2010 tariffs — and possibly for further periods — although we expect strong resistance from consumers.”