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Perspective

Social and political attitudes toward cheap power were a major obstacle to electricity liberalization in Poland; they also may be one in Russia.
Fortnightly Magazine - June 15 2003

regulatory officials a few years to accept that capital costs needed to be included in tariff calculations. This dissuaded a number of potential foreign investors from participating in Polish tenders. But despite the problems, Poland is moving forward. Foreign investors were disappointed because their expectations were unrealistic. The Polish government also had expectations that were too high.

Restructuring of the energy sector is an unfinished work. Those that invested already (notably Électricité de France, Vattenfall, and Tractebel) have done reasonably well. The long-term indications for all three are for more, rather than less, involvement in the Polish energy sector.

Similar Problems for UES

UES is an enormous company: 155,000 MW of generating capacity, more than 70 percent of the entire Russian market, 2.5 million kilometers of transmission and distribution wires, and 245 subsidiary companies. Understanding such a sprawling enterprise is a mammoth challenge. Restructuring it cleverly, constructively, and successfully will be an even greater one.

As Poland restructured the monolithic power sector early on, so did Russia. In Poland, the separations were along lines of business: transmission, distribution, and generation became separate sectors. In the case of UES, the separations were geographic. Much of the generation and distribution assets were put into 72 different "energos" that became subsidiary companies of UES. UES itself retained some generation assets and the national transmission system. Some of the energos were sold off in part.

In April of this year, the Russian parliament (Duma) passed legislation to allow the restructuring of UES. The concept is to reorient the industry into generation companies and local distribution companies. No generating company will have more than a 35 percent share of any geographic market. UES envisions about 10 generating companies being set up that will then be put up either for sale or for management under contract.

For the Russians, management contracts avoid the stigma of selling the family silver to foreigners. For foreigners, the idea of putting large amounts of shareholder funds at risk anywhere right now is anathema. However, management contracts would allow companies with talent and expertise to generate shareholder benefits by leveraging that expertise in the Russian market.

Setting up the new generating companies will be contentious. The existing shareholders of the energos already have objected strenuously to what they view as asset stripping by UES. Still, signs indicate something will be worked out with the minority shareholders in the energos and that the new companies will be set up.

After that, the process of attracting investment into the power sectors will start. This will require actions on pricing and management control similar to those that ran into such difficulties in Poland. By understanding what those were in Poland, one can anticipate and manage them when they occur in Russia. In summary, the following lessons from Poland can be applied to the UES restructuring project:

  • Price. Adjustments are going to be difficult. UES generating companies will be squeezed between social and political pressures to keep electricity prices down, while at the same time Gazprom will be pushing hard to raise prices for gas, which it