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Interview

with Dmitry S. Govorov, Director, Association of Power Consumers (NP-ACE

07.03.2013 / Energyboardroom

A number of experts have stated that the Russian retail electricity market continues to exist as a monopoly. What is your stance on this point of view?

The main complaint of consumers is the monopoly of guaranteeing suppliers on the retail market. With the approval of the Directive 442, some of the issues faced by consumers –such as the entry barriers to the wholesale market– have been addressed now. Certain problems do persist nonetheless, such as the fact that there are different rules of competition between guaranteeing suppliers and other independent retail companies. This is a very important issue because there are many differences in the requirements for independent companies and for guaranteeing suppliers with regards to the provision of services. The very institute of independent retail companies is still not developed enough to allow for consumers to turn to big players who are in fact really independent.

One of the goals of the Association is to improve the functioning of the electricity market regulations. Have you had success in the past in actually introducing member suggestions into ratified legislation?

If we talk about regulatory legislative acts regarding the retail market, then with our participation the Directive 442 has been passed. One of our other successes is that today it is no longer a requirement to provide the “Certificate of Socio-Economic Consequences” for entering the wholesale market. This was a document that was required by the administration of the relevant region in order for the consumers to have the right to enter the wholesale market, and was strongly linked to cross-subsidies. Another success is that, at least temporarily, we have blocked a regulation that made consumers pay the maximum capacity produced instead of capacity actually consumed.

This was something the Minister of Energy and the representatives of other organizations really insisted on. The problem is that for some industries, this could mean that the price for electricity could double, especially the network component, according to our estimates. And this is about the network tariffs and not generation tariffs.

What do you identify as the biggest challenge for the retail electricity market to become more competitive?

First we have to deal with the problem of the status of guaranteeing suppliers. The problem lies at the beginning of the reforms where the guaranteeing suppliers were assumed to become so-called “suppliers of last resort”. Guaranteeing suppliers are still strictly regulated by the government. They provide services to the population and consumers that did not –or could not– sign contracts with independent retail companies. This is what what the reform wanted to achieve, but unfortunately reality turned out differently. We believe that consumers –like in other countries in Europe and in the U.S.– must have the right to choose.

There is another issue we consider quite important: retail consumers are not fitted with enough electricity meters. At the same time, we also think that the requirements for commercial accounting in the Russian market are too high and overcharged. We should move towards a system with simpler equipment.

Investments are needed on the capacity side. Many generation companies, however, argue that tariffs are not high enough to justify these investments. From a consumer perspective, do you understand this concern? What do you see as an acceptable growth rate in tariffs for the coming years?

We do not agree with the price growth rates that are being provided by the Ministry of Economic Development. We believe that in the energy sector there is enough money to modernize generating capacities as well as to build new ones.

An important issue is the price structure. For consumers, the important thing is the final price, which as we know comes from the value of electricity and capacity plus the network component and the investment and expenses on infrastructure. In Russia, the structure of the final price on the energy and capacity market –which is what generators actually make– equals 50%. Of that, 40% is the network component, and the additional retail charges that come from the guaranteeing suppliers account for about 6-7%. We looked at foreign markets and we understand that there the network component does not account for more than 20% of the price structure, and now it is even down to 10%.

What we want to achieve, is to develop network tariffs. As for modernization and new infrastructure, we do not need to implement non-market mechanisms such as the “Agreement on capacity supply”. We think those are not market mechanisms and therefore unnecessary. That is a 2008 agreement and therefore must be carried out to completion, however new non-market mechanisms like those are unnecessary and quite counterproductive.

We think that the government does not provide for accurate forecasts regarding the growth in energy demand. We think these government estimates exceed reality. We estimate that the real growth in demand stands at around 1.5%. Taking into accounts the building of personal capacity and the implementation of energy efficient technologies, we think 1.5% is actually an optimist estimate. The government, however, works with estimates of roughly 2%.
As a result, there are new inflated investment programs to build new capacity. However, that new capacity will not be used because the market does not need it. According to the Market Council by 2018 there will be 27 GW of unnecessary capacity. Actually according to our estimates there even can be 40 GW. This is a capacity paid by the market yet unneeded. We must develop a system of distributed generation, which must be built through direct contracts with those consumers who need that capacity.

Another issue on the market is the total absence of direct contract between consumers and generating companies. Our wholesale market consists of the capacity and electricity market and we see this as a disadvantage. This is because the presence of a capacity market does not provide a stimulus for generating companies to sign direct agreements with consumers. Namely, if they have always guaranteed money they have less of an interest to sign long-term contracts. However, it is with these long-term contracts that we could think about building new capacity, and in general a foundation for attracting investment. Long-term contracts would therefore be much more comfortable for generators in our view.

The tariff liberalization in the market is in fact still quite recent. To our readers, less familiar with the Russian retail market, can you explain how tariffs are set, and what the break-down in mark-ups is?

As I mentioned, the structure of final prices are set the following way: the network sets about 40% and that is the Federal Grid Company (FSK), which is the main network, and the Interregional Distribution Grid Company (MRSK), which is the distribution network. Then there are several territorial network companies. Then 50% is the electricity itself, and that is what producers of energy receive. And finally about 6% is what the guaranteeing suppliers receive.

Looking at the different regions, are there significant differences in retail market conditions?

There are two price zones in Russia. They differ in trading and average prices. The first one reaches till the Urals and upholds higher prices, whereas the second zone goes from the Urals to the Far East at lower prices.

Every subject (region) of the Russian Federation also deals in its own way with important issues, such as cross-subsidies for example. Another difference is the prevalence of one generation source or the other. Some regions have cheaper hydro energy, others are stronger in coal, gas, and so forth.

The Association was only established in 2009. What have been some of its key achievements in these 3 years?

Though the association was established in 2009, the core team actually started its operations only last year. As for our activity, we try to take part in all working groups and expert councils at a government level.

At the end of last year, the Russian government has taken unprecedented measures for price control and the further regulation of prices for the final consumer. I must say that these measures implement a manual regulation of prices, so it was not about systemic reforms. The perspectives of the development of the energy market as well as the perspectives of price changes in the sector remain unpredictable.

In the coming weeks we are meeting government officials in the power sector. If you could ask one of the officials a particular question, what would that be?

A very important issue for us is the aforementioned investment program of the network companies. We have serious questions about this. Therefore we want to ask those government organizations dealing with this program to have public processes, to be transparent and to have independent experts for an objective analysis.

Another issue that I believe is relevant is that lately a lot of attention has been dedicated to issues we do not deem so important, such as who owns the assets transfers of “Rosneft” or the mergers of many companies into one. A lot of efforts have been carried out to discuss and solve these issues while we think that we should divert the attention to other goals, for example to the creation of long-term market rules, rules for consolidated tariffs for network companies and measures to increase competitiveness on the market.s

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