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

By Alexei Didevich, March 20, 2008

markets came into play. The wholesale power market switched to regulated agreements between consumers and generating companies, and a spot market (the “tomorrow market”) was launched. Following a decision of the Russian government, by 2011 the regulated agreement system will gradually switch to free (unregulated) agreements. The new rules envisage gradual retail price liberalisation accompanying wholesale market liberalisation. Power prices for private consumers will remain regulated until 2014.

According to the plan, on July 1, 2008, the sector will start gradually implementing the Regulated Asset Base (RAB) tariffication, a long-term tariff regulation strategy. Anatoly Chubais, the man behind the energy reform, says that this will ensure fixed profitability of the capital investment of distribution companies. Initially, the new principle will be introduced in four to five companies, and in January 2009, up to 20-25 companies will follow. Analysts predict that a new system of tariffication will attract major investments in power grids while preserving state control over grid companies.

“We actually have a trillion rubles of private investments, 600 bn of which are already credited to energy companies’ accounts,” said Anatoly Chubais in a New Year’s Eve interview with the Ekho Moskvy radio station. “If energy sector doesn’t get this money, it could lead to a catastrophe,” he added. He also insisted that the energy sector is a slow-response area, and the results of the reform will play out for years to come. In RAO UES’ investment program, industry modernization and capacity building requirements will exceed 3.38 trillion rubles. As of now, less than a third of the amount required for “GOELRO-2” has been raised.

After the completion of structural reform, the state will own an over-75 percent share of the Federal Grid Company and the System Operator, over 50 percent of HydroOGK and Inter RAO UES (the company in charge of RAO UES’ foreign assets), and an approximately 52-percent stake in MRSK Holding (an organization that unites interregional distribution grid companies) and Energy Systems of the East.

“It is very important that power transmission is separated from power generation,” says Evgeny Yasin, Research Director of the State University, Higher School of Economics. He explains that the main objective of RAO UES’ recent reform is to build a market in which prices are determined by competition rather than by tariff management and cross-subsidies, which had previously undermined effective management and the industry’s investment appeal.

A competitive market is exactly what the new power generation structure aims to create. However, the assets of generation companies are mostly in the hands of state companies and corporations like Gazprom, or other companies that want inexpensive electric power. This poses risk to other players in the market. So, the rise of electricity prices seems inevitable, particularly if you account for increasing gas prices, gas making up more than 60 percent of the fuel used for power generation.

The Ministry of Industry and Energy of the Russian Federation (Minpromenergo) and RAO UES have developed a general plan for erecting energy facilities through 2020. The plan