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Interview

with Natalia Nevmerzhitskaya, Chairman of the board, Council of Guaranteed Suppliers & Retailers

07.03.2013 / Energyboardroom

One of the objectives of the creation of the NPGP was to establish an effective and competitive electricity retail market in Russia. What is the main challenge in doing so?
Russia faces a very particular situation that has given rise to two specific challenges to date: the failure to pay and cross-subsidies. Some types of consumers in Russia, particularly landlords, small-scale business, agricultural enterprises, can consume electricity at decreased, unfounded price, which narrows the space for competition. To eliminate these barriers, the cross-subsidies will need to be redirected towards the cost of transmission, independent of the supplier.
In May this year, some of the administrative barriers to the retail market have been removed, yet certain technical and volume limitations persist.
The problem with regards to payments is related to the insolvency of consumers. Yet regardless of their insolvency, these consumers continue to be provided with electricity by the guaranteed suppliers.

At the public hearing this May, you spoke on connectivity problems for consumers in Russia. You stated that the current rules and regulations could be used as a point of reference, yet could not solve the current problems. In your view, how can these connectivity issues be addressed?
The first step to be taken is of a technical –rather than market– nature. It is an issue that I have been dealing with since the reforms. Since then I have observed little change. The main problem is the absence of long-term plans for territorial development, without which it is hard to forecast further progress in this area. At present, network companies cannot forecast where consumers will be connecting to the network, which results in their inability to provide forecasts that in turn can help to decrease prices and time of connection process.
The event where I addressed this issue was organized by the Agency for Strategic Initiatives, which is an agency called into existence by the Russian government to solve some of the problems of competiveness and development in Russia. Through this Agency, a roadmap has been developed to overcome some of the obstacles we currently face.

How will this roadmap exactly contribute to the issues of connectivity?
One of these roadmaps is addressing the technical side and includes technical specificities to address the current problems. This includes a series of complex measures directed towards the legislation as well as the modernization of the different companies.
The current government Energy Strategy outlines an investment need of up to USD 888 billion by 2030. What is your take on these ambitions?
In the past two decades, this sector has not followed its required investment path, even though we have seen a peak in investment in the last five years. This will create a certain pressure on the consumers in Russia, who do not only have to keep with the price but also with the cross-subsidies. Looking at the industry, we have now reached a critical limit of what can be done.

Looking at small consumers, we have to objectively agree that the price they pay is not very elevated. These prices are not high enough to justify investments in energy efficiency. Investments are highly needed and will come, but for this to happen it will also be essential to lose the system of cross-subsidies. We have to start giving impulses in terms of decision-making, especially on the side of smaller consumers.
The recent report “Key Aspects of Pricing” has concluded that the prices for large consumers have doubled since the reforms. Should these consumers be worried about this trend?
The price increase has occurred because of two reasons: new investments in the sector and the implementation of the Regulatory Asset Base (RAB) regulation. The latter was a measure used to stimulate investment, but it is clear that some of these measures have not always been clear on the consumer side. For them, it has not always been clear why their tariffs have gone up and what they were getting in return. This year, the government has not only decided to continue with RAB regulation and tariff increases, but also to increase transparency in the sector.
At the same time, the tariff increases have also been triggered by the so-called agreements on capacity supply on the generation side of the value chain. Now, the market needs reshaping and a mechanism that will reflect price levels.
Looking at the NPGP itself, what have been some of the key achievements of your organization in its first six years?
Many changes have occurred in this time span. For its first years, we have to admit that the organization did not play the role it should have been playing. Since 2010, however, some important changes have occurred. For two years now, we have experienced an increase in our membership which has also led to us playing a bigger role in the sector. We now take part in the legislative and regulatory acts with regards to the retail and housing sectors. We also provide support to our members and work together with the NP Market Council to gain a greater influence in the sector. Apart from that, we also organize different conferences and round table events.
When we speak on the competitiveness in the sector, we see that there are still many different perspectives in our discussions today. We thus see the need to enlarge our organization to not only include guaranteeing suppliers but also other organizations to better represent the interests of all parties through our platform, and increase the overall objectivity of our message.
Does this mean that the priorities of the NPGP have changed as well?

I would not say that our priorities have changed, but rather that we see a much more difficult situation today in terms of external regulation. We are now going through a period where the market is being reshaped completely. Therefore, we now have to think how we will need to adopt our role to embrace these changes. For instance, we have already dealt with several issues, such as the methodology of price formation and the social norms to reduce cross-subsidies that would eventually allow for lower tariffs. We count on the fact that we will have to take a more active role in these processes, but our tasks will eventually be defined by the new market conditions and the overall attractiveness of the sector. There are people in Russia that think that our member companies are somewhat unnecessary, which is a perception we need to change.

Why would they think that?
As the market evolved in the last few years, the guaranteed suppliers have taken a monopoly position. The general perception of the cause and effect relation of this monopoly situation is wrong however, and many think that the guaranteed suppliers created this monopoly, rather than the other way around (scarce conditions for competition created the monopoly of guaranteed suppliers).
Hopefully, the situation will change in the near future. We hold ongoing discussions with our colleagues from Minenergo, electric companies about the necessary changes of legislation, which will create conditions for the development of real competition on the wholesale and retail power markets.

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