[BETA] Fortnightly

THE RUSSIAN FEDERATION WANTS U.S. UTILITIES AND businesses to know investments are welcome and that processes soon will ensure the safety of American ventures there.

Nevertheless, it appears to favor traditional, American-style utility regulation, setting rates of return and limiting profits.

The Federal Energy Commission of the Russian Federation wants to create competition wherever possible, according to Andrey F. Zadernyuk, the first chairman of the year-old commission. The energy sector, formerly a state monopoly, is slowly privatizing, said Zadernyuk, whose organization is akin to the Federal Energy Regulatory Commission. This process has created joint stock companies and set up regional energy commissions, similar to state public service commissions in the U.S.

Zadernyuk, in an interview at the U.S. Energy Association in Washington, D.C., explained that the Russian Federation is looking for a model to follow as it introduces competition. Zadernyuk visited California in early 1998 but was disappointed that he was too early to see competitive markets in action due to the delay of restructuring there.

Zadernyuk pointed to the USEA/USAID partnership program that joins Russians (and members from other countries) with U.S. utilities to gain experience in their methods of utility regulation and business operations. In fact, it was because of Zadernyuk's experiences with the Illinois Commerce Commission and subsequent knowledge of regulation that he was appointed chairman of the Russian FEC. Through these relationships, he was able to organize seminars with commission staff and introduce concepts such as rate design and conflict resolution.

Old-Fashioned Rate Regulation

The reality of what is occurring in the Russian Federation is complicated. Zadernyuk acknowledges economic decline, but noted that in 1997 early signs of a growth spurt arrived. He believes a rational energy rate policy is important to Russia's development. He said his FEC is taking all measures to reduce energy rates. For example, it cut electric wholesale rates by 5 percent on Jan. 1 and another 5 percent on April 1. On Jan. 1, it cut rates for transportation of export oil 5 percent.

When asked how the FEC will determine "optimum rates," Zadernyuk replied that the "optimum price is a slippery concept in the absence of competition." His commission will be creating procedures to set prices.

Zadernyuk said the rate must be economically justified, the price must be such that the costs of production will be recovered while allowing a reasonable rate of return, and that excessive profits at the expense of ratepayers must be excluded. He added that the optimum price is a balancing act between customers and producers, and yet should not frighten away investors.

Zadernyuk said the method for setting rate of return is still unresolved. While a majority of regulatory bodies sets a percentage figure, the rate of return that is set often is in the negative figures. It is an arbitrary process. Only now is Russia moving to a cost-of-service-based approach that uses asset valuations.

Complete with Federal/State Conflicts

Natalia Fonaryova, chairman of the Anti-Monopoly Committee of the Russian Federation, said that it will handle the immense size of Russia by establishing regional bodies that regulate on