Russia’s electric power industry is about to undergo extensive structural changes. However, the concept of the reform - the so-called “Chubais’plan” (A.Chubais - the head of RAO United Electric Power Systems (EES JSC) presented by the state energy corporation, is still the subject of controversy. There are objections not only from the left and some of moderate politicians but from representatives of big business as well.
The editorial board of Eurasian Metals did not remain silent and held its own round-table discussion. Opinions of its participants quite fully reflect uneasy expectations of metal-producing enterprises, which are the main consumers of electric power resources.
The participants of the discussion were:
Anatoly Sysoyev, president, Association of Industrialists of Mining & Metallurgical Complex of Russia (AMROS);
Serafim Afonin, chairman, Union of Metal Products’ Exporters;
Yaroslav Shvyryayev, State Duma deputy, deputy chairman of the committee on industry;
Dmitry Govorov, vice president, EvrazHolding;
Alexei Semeshko, advisor to UMMC’ general director;
Vladimir Kalchenko, first vice president, Association of Aluminum Producers of Russia;
Igor Ryapin, chief expert, EES JSC;
Valery Lankin, deputy general director, BAZ-SUAL;
Yevgeny Shashkov, editor-in-chief, Eurasian Metals magazine

WHILE DEPUTIES ARE DEBATING...
Lankin: The time has come to reform Russia’s electric power system. Today it is represented by EES JSC (electric power supplies) and Gazprom (production and sales of natural gas), which are making decisions to change tariffs and suspend power supplies with no regard to consumers’ opinion.
The principal controlling body in this area is Russia’s Federal Energy Commission (FEC). Recognizing the need to create a genuine energy market and develop competition FEC is trying to de-monopolize activities of these companies by bringing new energy suppliers to the market. However, the problem is far from being solved. In particular, there are obvious gaps in the legal system.
The State Duma passed in the first reading draft laws on reforming Russia’s electric power industry. Nevertheless, even after that there are still a lot of contradictory provisions affecting consumers in the first place.
It seems to us that the federal law "On electric power industry" should provide a reliable protection of consumers’ rights as well as separation of authorities between the Federation and its subjects with respect to regulation of relations in the electric power industry. At the same time it should be taken into account that the unified electric power system is a component of Russia’s federal energy systems, which are under the exclusive jurisdiction of the Russian Federation. It is also necessary to specify the procedure of introducing restrictions on owners’ rights on individual electric power installations including those that will be built in the future with private investments.
There is a need to work over with special care the Provision on reliability of the power supply system that is particularly important to metal producers as major consumers of electric power and gas. The world experience proves that reforming of energy systems makes them less reliable. And it is twice as meaningful for Russia, where a sufficiently reliable unified energy system was set up in the past that is still functioning.
So, while realizing the need to reform the electric power system we have to keep in mind that its implementation should not be forced. There has to be a transitional period during which the state regulation of prices and tariffs on products and services of the energy complex should secure the balance of interests of power generating enterprises (stable operation, dynamic development), industrial enterprises and service industries (reliable power supply, satisfactory level of profitability) as well as purchasing capacity of consumers.
Questions of reforming the gas industry are no less important. Just a few figures: so as to provide a stable economic development, production of natural gas should increase in 20 years almost 1.5 times (from 580 billion cubic meters in 2000 to 850 billion cubic meters in 2020). To this end it is necessary to invest approximately $107B as well as about $50B more in developing gas transportation systems. Gas will inevitably start getting more expensive. By estimates, the average (model) cost of self-financing (transportation costs not included), which in 2000 amounted to $13 per 1000 cubic meter, will reach $46 in 2010 and $73 in 2020.
The metals industry accounts for about 8% of the natural gas consumption volume (that in itself is very much) but with the use of the electric power system taken into account this share increases even more. The rise in gas prices by 1.5 times will result in the growth of electric power costs by 1.9 times and of thermal power costs by 2.1 times. Having costs like these most industrial enterprise will simply stop operating.
The gas and electric power industries are components of the country’s unified fuel-and-energy complex. And the concepts of their reforming should be closely tied together.

ON WHOSE SIDE THE PROFIT IS?
Afonin: It turns out so far that EES JSC, Gazprom and those, who support them, are on one side of the barricades and consumers are on the other. Why on earth is there such an antagonism?
The matter is that today Russia’s electric power and gas industries exist as though they work for themselves and they are being looked at with interests of EES JSC and Gazprom JSC taken into account in the first place. In principle, the position of these companies is quite understandable. However, one should not forget that they were set up to satisfy needs of all the economy. Their further growth, their ability to meet these needs as well as needs of the population make us all the interested participants of the reform. And because of it goals and substance of changes should be clear to all of us. But there is much confusion in this respect.
For example, energy tariffs are being formed now. In this connection some "world prices" are constantly mentioned. But such a thing as "world price of electric power" does not exist. Prices on energy carriers and electric power as one kind of energy are formed differently in different countries. They have one prices in the U.S. and others in Europe. That is why it would be more appropriate in this case to talk about regional, local or "zonal" prices as they are often called.
It is clear that the main criterion for assessing this or that change in the economy should be the competitiveness of the national industry, agricultural sector and other major sectorial complexes or, in other words, the country’s economy as a whole. But since everything becomes recognized by comparison, we often compare our indicators with those, which are achieved in countries with a more developed economy. Let us try to be more objective on this.
Experts calculated costs of electric power for industrial use in Russia and the U.S. at purchasing power parity of their national currencies. It turned out that today electric power in Russia is already costing more than in the U.S. In spite of this, we are still being told to get ready for an even bigger increase of tariffs. Where will it lead the rest of the economy? Other participants of our discussion have already mentioned it.
Free market rules with regard to generating capacities are acceptable. But simultaneously many conditions should be met. Here is an example.
There is a large modern aluminum mill in Dunkirk, France. There is a nuclear power plant nearby having eight power-generating units with the total capacity of 1.5 million kW. But however many times I asked about tariffs on supplying electric power, I did not get the answer. They just would not understand me. The mill and the plant are regarded there as a single entity. Profit of the power generating enterprise directly depends on metal producers, i.e. on aluminum prices on the London Metal Exchange.
So, the efficiency of the national economy can be the only yardstick for evaluating the efficiency of the electric power industry. It does not mean that the industry is called upon to act as a source of irrevocable credits to other industries. Like any other excesses the infinitely cheap energy entails laziness. In the 1970s, when the world energy crisis struck, we in Russia were living quietly: we had plenty of resources. But the result was that we missed the whole stage of technological modernization in metals industry.
I agree that there should be a transitional period and that there should be a concrete participation of the State at this stage. Its task is to work out such a strategy in energy that will promote economical use of energy resources through laws and market mechanisms.

R   E   F   E   R   E   N   C   E The volume of electric power generated in Russia from January to July 2002 amounted to 502.9 billion kWh. Most of it – 293.5 billion kWh - was generated at thermoelectric power plants. Hydroelectric power plants generated 101.4 billion kWh. Nuclear power plants accounted for 77.8 billion kWh. The share of other producers equaled 30.2 billion kWh. The volume of electric power consumption throughout Russia reached 497.5 billion kWh.

A POWERHOUSE AND A MILL AS A SINGLE COMPLEX
Kalchenko: It should be admitted that the share of expenses on energy in the structure of production costs of the aluminum industry is very big: from 17% to 30 %. That is why we are very much worried by the forthcoming reform of the electric power system.
An aluminum plant is quite an advantageous partner. It consumes high-voltage electric power; it is located in the vicinity of a generating capacity (we are literally "sitting at terminals of powerhouses"); it sticks to exceptionally steady - hourly, daily, seasonal - schedules of electric power consumption. There are a number of other specific advantages, because of which electric power systems get economic benefits from working together with a large aluminum production installation.

Zainsk federal fuel power station (Tatarija)

That is why incorporation of aluminum mills in the so-called energy industrial complexes was practiced not only in the West but in Russia as well. Today 84% of Russian aluminum is produced with a relatively cheap electric power generated by Siberian high-capacity hydroelectric power plants. This is an advantage that ensures competitiveness on world market despite the remoteness of these enterprises from Russia’s Western and Far-Eastern borders.
Everywhere in the world aluminum mills are offered reduced tariffs: 15% to 25% of an average tariff existing for the rest of industrial consumers. But in our case the draft of the reform does not say a single word about a possibility of a similar practice.

There is one more question that still remains unanswered. As is known, nuclear power plants are a federal property. Why, then, the largest electric power installations, such as the Bratskaya, Krasnoyarskaya and Sayanskaya hydroelectric power plants remain in the private ownership? We believe that there is a need to specify either a level or a list of installations owned by the State. The State should own no less than 75% of authorized capital stock of the newly created companies, both network and network operating ones. This state property is to be formed on the basis of a dividing balance when reorganizing a joint-stock company as what EES JSC is today.

Shashkov: The potential of a successful interaction between the electric power industry and metal producers can be illustrated not only with the example of Western countries. There is an interesting experience on this score in CIS countries as well. Thanks to the reform, tariffs in Kazakhstan’s electric power industry went down almost twice as much. But it did not happen at once. At the start, the electric power industry was being reorganized according to the similar scheme that EES JSC is preparing for us today. As a result, the unified system was destroyed and companies of "energy barons" were formed. They in fact put the whole mining-and-metals complex on its knees. The direct intervention of president Nazarbayev became necessary. By his order it was permitted to include electric power plants in structures of large mining-and-metals companies.

Dispatching, Ust-Ilimsk hydroelectric power station

The Bukhtarminskaya hydroelectric power plant became a subdivision of Kazzinc. An entire electric power company was formed within the Eurasian Industrial Association. Ispal Karmet acquired its electric power base. The first thing that new owners did was to make necessary investments and put to rights these generating capacities achieving their efficient operation. It goes without saying that as consumers they are not interested in overpricing electric power. And since these same electric power plants are supplying electricity to other production installations, social infrastructure facilities and whole cities, then, all others also use an opportunity to pay moderate tariffs.

SECRETS OF ACCOUNTING
Shvyryayev: First of all, it is necessary to realize that we do not have a law on reforming EES JSC whatsoever. But there is a law on joint-stock companies. Its article 15 forbids reforming joint-stock companies called natural monopolies in any way other than the one set by the law on such a reform. The law on specifics of handling shares of EES JSC and similar companies also forbids to freely pawn or to transfer these shares. A separate federal law is required for this. In this connection I personally have a question: why does the government propose to the parliament to pass the package of laws, which mean change of ownership through the substitution of concepts?
Officials of the electric power industry argue: there are no enough funds for investments. I cannot agree with that. When we looked through calculations of other expenses in the prime cost composition, we discovered that in the last year they increased almost 4 times. Capital investments in non-core business activities grew up 3 times and by the volume they exceeded permanent investments. Capital investments per unit of power climbed up from $750 to $1,750. They amounted to $1,000 even in the Russian nuclear power industry, where providing protection requires major expenses.
I do not condemn the management of EES JSC. Their actions are quite logical, as they push forward their corporate interests. But the government should have absolutely different tasks! That is why I think it premature to pass the package of laws in its present form.

Shashkov: It is well known that there is an old thermoelectric power plant operating in Novokuznetsk. It was constructed 70 years ago together with the Kuznetsk Iron & Steel Works (KMK). It is claimed that the plant generates electric power five times as cheaply as electric power generated by Kuzbassenergo. Is it this true?

Govorov: True, there is a thermoelectric power plant there. It is a small plant with the generating capacity of 70 MW. It supplies heat and electricity not only to the works but to downtown Novokuznetsk as well. Some time ago the management company EvrazHolding, which controls both KMK and the thermoelectric power plant, decided to objectively evaluate the plant’s financial indicators. A calculation center was set up. And here is what they found: although the plant, which was constructed in 1932, is dilapidated and needs repairs as well as modernization, it is more profitable than any of KMK’s production installations.
On the other hand, there is a quite modern thermoelectric power plant, which was constructed for the West Siberian Steel Corporation. It supplies electric power to this very enterprise but is incorporated in Kuzbassenergo. The plant’s current owners are constantly complaining about its low profitability. EvrazHolding proposed, half in jest and half seriously, that they become their own managers and find out what was happening to profit. Naturally, our partners refused.
As far as we are concerned, electric power engineering is a non-core business for us. We are not going to make profit on it but we should have a clear long-term program to provide metall production facilities with electricity and heat. That is why we will surely make investments. This scheme looks much more reliable for all including other enterprises and population.
In our opinion, that part of the energy system, which, as a result of the reform, will be detached from EES JSC for sale, should be offered on a priority basis to companies, which incorporate large power-consuming enterprises. It has been rightly mentioned here that enterprises of the aluminum industry were founded and operated being closely tied to generating capacities, i.e. powerhouses, thermoelectric power plants, hydroelectric power plants. The same is true for the steel industry. So, metal producers should be given a priority right to buy out these facilities because of it.
The government should better consider a possibility for power-consuming enterprises to participate in acquiring generating facilities on the basis of priorities and preferences.

ENERGY OUTSIDE THE MARKET
Semeshko: When preparing a reform of the electric power industry it would be wise to forecast its results on the basis of modern computer technical and economic simulators. It seems to me that by creating such a simulator with input parameters of all energy components metal producers could accurately determine what would happen to certain enterprises in certain segments of the industry if concrete tariffs were raised in given regions. The simulator for Russia’s metal industry should be dynamic extending to, say, the nearest two to three years. It should have a forecasting base and should be tied to allied industries. The recent parliamentary hearings on the country’s economic strategy have proved that there is no such a strategy. And it is just impossible to work it out without having such a national-scale simulator. There is no accurately checked out data on even such major industry as metals industry.

Ryapin: Now, as regards the reform itself... We are talking about creating a new system of relations in the entire electric power industry and not only in EES JSC. EES JSC should be reformed. Notwithstanding the fact that the capital of this chief energy company was divided into shares and that there were certain structural reforms, the company was a ministry per se and it still is.
Everybody here was saying that the industry’s transparency should be increased since nobody understands how the prime cost is formed and what expenses are deferred to tariffs. But all the reform is essentially directed at making rules for forming tariffs or, to be more exact, prices of electric power absolutely clear and definite. They should be determined in the market, not so much by the impact of political deals as by demand. In other words, by the volume that consumers want to buy and the selling price that both consumers and electric power producers agree to.
Long-term agreements. We are not against such a practice. Our proposals make provision for them. The only question is their duration. I think that in today’s conditions nobody would dare to conclude agreements and fix prices for 20 years.
Along with direct agreements the market provides space for derivative mechanisms as well. For example, you conclude an agreement with a supplier, who in any circumstances should provide you with electric power. That is his problem where he has got it. It does not really matter whether he produced this electric power himself or bought it on the market. What matters is that he should fulfill his commercial obligations. These are standard contractual relations and they are regulated by civil laws.

Ust-Ilimsk hydroelectric power station

I would like to respond to the remark on low prices for electric power generated by hydroelectric power plants. Yes, it is true that this power is cheaper and it was not by accident that metals enterprises were built nearby. But now the situation has changed and EES JSC has said it repeatedly. The new tax on water use has been put into effect. Its amount is so large that neither profits of hydroelectric power plants nor their gross proceeds are enough to pay it. Do you still believe that electric power of hydroelectric power plants is so cheap?
Finally, on the State’s participation... Under the law reorganization of EES JSC is to be completed in 2005. A system operator and a federal network company will be set up by then and the State’s share will equal 52 %.

Afonin: I have one more question for you as a representative of EES JSC. Have you learned anything useful for yourself from all that we have discussed here? Is it possible to establish cooperation for reaching any goals together?

Ryapin: Yes, make no doubt about that. As far as consumption of electric power is concerned, the metals industry has two main priorities: reliability of supplies and affordable prices. We are saying the same. The most important thing is a sufficient reliability of the system’s operation. And prices should be reasonable for all. But at the same time they should ensure normal operation of the electric power industry today, tomorrow, in a year, in five years ...Prices that will make it possible to avoid collapse of our powerhouses. That is why we are open to cooperation. We are even seeking it.

Sysoyev: The first conclusion, which all speakers agree with, is that there is an urgent need to reform Russia’s electric power industry. The second one is that reforming should be done taking into account all factors that have impact on steady operation of industrial enterprises, especially the power-consuming ones.
Unfortunately, today there is no concept of such a reform that would allow for interests of both electric power producers and consumers.
There should be a clear-cut state program to reduce power inputs. It should be clear what EES JSC, the gas industry and their customers are doing in this respect.
Activities of the fuel-and-energy complex should be determined by a system of laws. I have information that there are 958 legislative acts in the U.S. today, which regulate the energy sphere. Although the most serious restructuring of Russia’s electric power industry has already been underway, efforts to prepare a legislative base for it are starting only now.
Just the combination of solutions to these problems can become a basis for a full-fledged reform of Russia’s electric power industry and for development of the national economy, accordingly.