Impact of RAO UES Split Rivals Lenin's 1920s "Electrifikatzia"

By Alexei Didevich, March 20, 2008

The business is attracting major investors, mostly European companies (E.On, Enel, Fortum, RWE and others). New industrial facilities are being built. The changes are so significant that they remind experts and the media of GOELRO, a plan that led to the major success of the Soviet Union’s electrification program in 1920-1931.

Reforms in the Russian energy sector were badly needed in the mid-1980s. In the 1990s, with the general economic crisis in post-Soviet countries, they were even more necessary; electricity consumption dropped and there was no capacity renovation. In terms of specific fuel consumption, average equipment efficiency, and operating capacities, Russian power plants started to lag behind their analogues in industrial countries. These factors, as well as a high accident rate, prompted major changes in the electric energy industry.

Reforms started in 2003, with the pilot restructuring of three AO-Energo companies (electricity and heat generation and distribution joint-stock companies located in different regions). By 2007, the companies with the target structure were almost finished. Projects to reform 70 of 71 AO-Energos were approved, six heating wholesale generating companies (OGK) were created, the structures of 14 regional generating companies (TGK) were completed, and AO-Energos were reorganized into 55 supergrid companies (of the 56 under the initial plan).

The past year saw extensive sale of distribution companies. Tenders had variable success, which some attributed to an unlawful agreement among potential customers, asset-related risks, or the variable appeal of companies. Thanks to a number of successful tenders, RAO UES gleaned the considerable sum of 13 billion rubles. I witnessed, in summer 2007, a distribution company in Povolzhye going for a price several times the initial one. Over 40 bids, each of them $1 million more than the last, were placed before the lot was sold.

Even so, the most attractive power distribution assets are up for sale this year. Specifically, in May 2008, the energy holding plans to offer shares of its three biggest distribution businesses in Moscow, St. Petersburg and Tyumen.
During the reform, the industry structure changed drastically: the functions of natural monopolies, such as power transmission and dispatcher management, were separated from those potentially subject to competition, such as generation and distribution, repair and service companies. Vertically integrated companies gave way to those dedicated to specific operations. The generation, distribution and service companies are being privatised and will compete. At the same time, the state is tightening its control over natural monopolies.

After the self-dissolution of RAO UES, the Federal Agency for Energy (Rosenergo) under Dmitry Akhanov (a former colleague of the Holding’s manager Anatoly Chubais) will spearhead further reform in the industry and help create a new management system. Rosenergo will probably assume many coordinating functions, such as technical regulation and communication with energy market players, forecasting, planning and energy market security control. According to Akhanov, his agency will primarily focus on security as well as the coordination of operation centers accountable for uninterrupted power supply to consumers.

On September 1, 2006, new regulations for wholesale and retail energy