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Interview

with Sergey Novikov, Head, Federal Tariff Service

27.11.2012 / Energyboardroom

At the beginning of 2011, then President of the Russian Federation Mr. Medvedev told the BBC that if the rising trend of electricity prices were to continue in Russia, the country’s electricity could become more expensive than in Europe or the USA, as early as 2014. How are you looking at this statement today? Would you agree?

Tariff increases are never a popular matter to discuss and few stakeholders –particularly consumers– support upward price movements. Therefore, it is a standard practice for us to cooperate significantly with regulatory authorities in the USA and Europe to collaborate and compare both price indicators on the market as well as the rules of functioning. In this way, we also take part in –and organize– conferences and seminars to compare regulatory tools and their different ways of implementation. We examine how these tools influence the price indicators on both the retail and wholesale markets.

In the period 2010-2011, we thought that the regional regulatory authorities –i.e. those functioning on the territories of constitutional entities of the Russian Federation, which are part of the regional administrations and independent from the Federal Tariff Service– would be much more careful in adopting investment programs at that time. Rather than their mistake, the discrepancy in expectations was the result of the legislation that was in force back then.

As a result, we experienced a significant increase in tariffs of electricity transmission, which particularly affected the small and medium enterprises. They saw their prices increasing abruptly, by 30 to 50%, urging us to adjust the regulatory framework. On the one hand, we clarified the requirements with regard to investment programs. On the other hand, we also increased the public factor in these decision-making processes.

The Energy Strategy 2030 has set very ambitious targets with regards to investment plans to modernize Russia’s electricity system in the next 2 decades. How healthy is the current balance between the revenues the different players can make on the market and the money that will be needed for these investments?

The most important aspect is to find a balance between the interests of the investors and the consumers of electricity. The regulatory framework all over the world has changed considerably. As a result, the structure of the sector as well as the tasks of the regulatory authorities has become increasingly complex.

Our tasks are to set the right balance between different interests in the sector. The balance is necessary to support a reliable functioning of the sector, its development, and takes into account the interests of the consumers. These interests are often very different and sometimes even conflicting. Following the different structural changes in the sector, the consumers have now become first time participants in the process, sometimes even as producers or investors themselves.

The new task of finding a balance between these different interests implies that we need to reevaluate our regulatory tools in the broader sense. We need to look at financial resources – that can both come from the market and from the budget– to develop the sector and find this balance.

Not only because the financial crisis is not over yet, but rather as a general implication, today we also have the very important task of protecting investors. Apart from finding the right balance, we therefore also need to make the right decisions. Capital structures need to be balanced out so that financing can come from tariffs, the budget or from investments.

40% of the electricity sector still has gas as its main input, drawing a certain importance to the role and effects of gas price fluctuations. Going forward, how do you see the balance between Gazprom’s desire for higher gas prices and acceptable end user tariffs to support the economic growth of the country?

The decision to increase gas prices to allow for a certain level of profitability on domestic and foreign markets has been taken six years ago. The increase is being carried out very carefully to avoid spikes. Again, there is a need for a balance between modernization processes and structural changes. It is also important to study how this affects other sectors, as many of them use gas an input too.

The electricity sector has an immense potential to increase internal efficiency in gas-to-power generation. The medium quantity of gas used to produce 1 Kwh currently lies around 330 grams in Russia, while special equipment now exists to decrease this number to 240 grams. Better energy efficiency is the main task in the energy sector today. Even though the gas price will increase in the future, better energy efficiency will limit or prevent increases in end-user tariffs.

Today, we pay close attention to the situation on the European and US gas markets.

Experts indicate that a significant part of the tariffs is still going to the grid companies. To some extent, the discussion has been started at government level to study whether Russia’s state-owned grid companies FSK and MRSK can be privatized in the future. Do you see this as a possibility? Could it affect efficiency and electricity tariffs in the sector?

First of all, looking at the structure of revenues that are being received from the consumers, this has not changed for ten years. Generally speaking, the proportion received by generating companies in Russia amounts to roughly 55 percent today. Roughly 35 to 37 percent goes to the network companies, consisting of the Federal Grid Company, Interregional Distribution Grid Companies Holding (IDGC Holding) and territorial grid companies. Of this percentage, the Federal Grid Company receives around 7 percent points. The figures only differ slightly with previous years.

What is changing today, are the tariffs for different consumer groups. To a certain degree, we observe a small increase in prices for large consumers that use electricity off the high voltage lines, where the cost of transmission is much lower, and a significant increase in price for small consumers. To find the right balance here is also important.

With regards to privatization, I share the same opinion as other regulatory authorities worldwide, which is to treat every company in the same way without taking into regards any differences concerning their ownership structures.

Footnote: On the 22 of November the President of Russia has signed a decree renaming the Interregional Distribution Grid Companies Holding (IDGC Holding) into OJSC “Russian Grids,” as per the following act: http://news.kremlin.ru/media/events/files/41d42b85ce153fff2dfe.pd

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