Anatoly Chubais and the future of electricity sector restructuring

In this article, we attempt to consider the progress and consequences of electricity sector reforms by looking at Anatoly Chubais the individual: the question is whether he will stay on as Russia’s chief privatizer. What would happen if Chubais is dismissed?

In Russia, any and all events become political: a flood, an election, a rise in bread prices, an explosion at an electrical substation. Following the blackout that hit the city of Moscow, the Moscow region, the Tula region, and the Kaluga region, most of the discussion has focused not on the decline of the electricity sector, but on prominent political figure Anatoly Borisovich Chubais. In this article, we attempt to consider the progress and consequences of electricity sector reforms by looking at Chubais the individual: the question is whether he will stay on as Russia’s chief privatizer.

Without him

The oligarchs who have invested billions of dollars in buying up the shares of electrical power stations of all types are likely to make a lot of money.

Only the iron will of Chubais, Russia’s most hated political figure, has managed to overcome the opposing opinion of the Duma, the Cabinet, and hundreds of thousands of electricity sector workers. If Chubais goes, no one else would be able to withstand the wave of resistance – headed by nationalist-oriented companies, and the security and law enforcement agencies (siloviki). If they get their hands on RAO Unified Energy Systems (RAO UES), reforms would probably continue, but they wouldn’t be as radical, and they would be oriented towards people as well as profits. The Kremlin would rid itself of the time-bomb that has the potential to blow up the political situation over the next two or three years. Remember the upheavals in Primorye (the Maritime territory) due to power failures? Mayors and governors were replaced, and the people were setting up roadblocks.

So the state really has reached the point where it is ready to reclaim control of the electricity sector. Enough of playing the role of poor relation in one’s own home.

Everything in Chubais’s past will be held against him:

– he opposed appointing Vladimir Putin as prime minister in 1999;

– he personifies the Yeltsin era, having become the “godfather” of the ailing Boris Yeltsin and secured Yeltsin’s re-election for a second term;

– he controls the huge revenue flows of one of Russia’s five “big money” sources: RAO UES. (The others are Gazprom, Russian Railroads, the petroleum sector, and the federal budget.)

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Viktor Kudriavyi, a former deputy energy minister, sets out the argument in favor of dismissing Chubais for professional incompetence rather than for political reasons:

If the power failure occurred when cold season was in full swing it would have overturned the entire country.

In the last few years Mosenergo encountered deficit of power capacity for the first time. In three years it grew sevenfold to 1.7 million kW in winter. Yes, Moscow was growing and energy consumption was growing too. It already reached the level of 1989. Along with this, almost no upgrading of substations and grids was done. Why if RAO UES possesses enormous financial resources? Mosenergo alone was collecting 6 billion rubles annually from its clients. However, practically nothing returned to the energy sector of the region. Money was spent on construction of power stations in the Russian Far East, Siberia and other regions where reserves of power capacity already reached 50%.

In the Executive Board of RAO UES and its Board of Directors there is not a single professional having experience of management of large energy systems. In the last few years managers of RAO UES did not conduct a single emergency training! Both in the center and in the regions managers of Chubais do not as much current job as endless reforming. Their wages directly depend not on how reliably and efficiently the energy system works but on how well they fulfill the plan of reforms. Average monthly wages in Mosenergo are not bigger than 14,000-15,000 rubles. Chubais is paid approximately a hundred times more. He covers his errors with dishonest public relations.

Why was it necessary to split regional energy companies into numerous smaller entities? Mosenergo was split into 14 parts and Tyumenenergo was split into 7 parts. Why were delivery departments excluded from the companies and why was their close connection with power stations, grids and large consumers was broken? As a result of the reform delivery departments become kinds of branches of the administrator of the trading system and fulfill market orders with damage to reliability of energy supply. Articles of association of the newly established companies do not even say that the companies are responsible for energy supply to the region.

The assets that according to the plan of reforms are reassigned to the state actually do not belong to it. In the Federal Grid Company the state owns 0% of shares. Situation in the system operator is the same. The key elements of the energy system actually became property managed by managers of RAO UES.

After seven years of destruction of the electrical energy sector it is impossible to correct everything overnight. In any case, it is necessary to take emergency measures. It is necessary to reassign delivery departments to regional energy companies. We need not split but need to enlarge energy companies like this has been brilliantly done in Germany. Of course, we also need to return professionals to the electrical energy sector.

With him

Investment of RAO UES money and federal funding in the facilities to be eventually privatized by oligarchs will continue.

The state will retain obsolete energy distributing grids and worn out substations like Chagino. Some time later public attention will be distracted by other events. Summer has also begun and people are too busy to pay attention to Chubais.

In any case, there are quite objective reasons for the authorities to preserve Chubais. He is a well checked bureaucrat: he really employed Vladimir Putin in the Kremlin after A Sobchak lost gubernatorial elections in St. Petersburg; right after the catastrophe in the very heart of Russia he undertook the blame. Prime Minister Fradkov, Minister Khristenko and the Kremlin sighed with relief; he is a guarantor of numerous financial groups including the most influential, the “family,” that they will share the energy property of Russia; The West will not forgive Moscow for another Khodorkovsky.

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Sergei Markov, Director of the Institute of Political Studies, speaks about the invulnerability of Chubais:

Most likely, despite the criticism of the President and investigation of the prosecutor’s office, Chubais will remain. First, criticism of Chubais by Vladimir Putin does not prevent Putin from considering Chubais a strong manager. They have established quite good personal relations.

Second, the President does not like personnel revolutions and prefers working with those whom he knows for a long time.

Third, economic development speed slows down in Russia and capital flight is big. After the YUKOS affair and enormous PR campaign arranged by YUKOS in the West investors have cautious attitude to Russia. For them Chubais is a symbol of liberal reforms. His dismissal will be taken as completion of reforms and signal for final flight from Russia.

Fourth, Chubais enjoys a huge political support in the economic section of the government and in the Presidential Administration. These are Kudrin, Gref and Dvorkovich. This is actually one team, its nucleus being Gaidar, the nearest ally of Chubais. Judging by the latest budget message of the President it is possible to say that this team is very strong now.

Finally, reform of the electrical energy sector depends on Chubais. His dismissal will mean at least disorganization of this process. That is why Chubais is necessary for many. The Kremlin and the government need him to prevent going of the reform out of control. Those who wish to buy tasty pieces of the energy business and have managed to reach an agreement on this with Chubais need him not to lose their benefit.

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Economist Mikhail Delyagin sums up the discussion:

When Mikhail Kasyanov was prime minister, he signed a resolution to Gref to achieve financial transparency of RAO UES, but the correspondence dedicated to this topic stopped. Gref supported RAO UES and did not wish it to be financially transparent. Because this person remains the minister, there will be no qualitative changes in the electrical energy sector either with Chubais or without him. The wish to punish Chubais as the main person to blame is correct but it will not protect from similar catastrophes. Situation will be used for capture of attractive assets by another “group of influence.”

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From the Editorial Board:

The RAO UES annual general meeting will be held on June 26. The state owns a 51% stake in RAO UES. It seems that if there is a wish there will be no difficulty with dismissal of the CEO. However, the articles of association of the company are composed so that this depends not on the major shareholder but on the wish of minority shareholders.

In any case, Chubais will hardly dare to act contrary to the will of the Kremlin. Everything will be clear when representative of the government for participation in the annual shareholders’ meeting is named. Friends and enemies of Chubais are well known.

Electricity counter-revolution

The latest technical failure in Moscow and a few other regions of Russia incurred not only moral damages but also economic damages worth many billions of rubles. Does RAO UES work efficiently, will the energy rids go to the hands of oligarchs, what will the population face when reforms of the electric monopoly are completed? After the blackout in Moscow these and other questions grew more than simply pressing.

Whom do we pay?

Payment for electrical energy is a kind of tax. Every resident of the country pays it. Prices keep growing permanently.

In the last two years, electricity prices have risen by 50-100%, and in some places by 300%. The country pays more to one company than it pays in the framework of repayment of the foreign debt: that is, approximately $15 billion a year.

Presidential economic advisor Andrei Illarionov says, “I only hear that it is necessary to increase electricity prices by at least 100%. This is not a reform. Reforms are organized to cut expenditures and not to increase them. Why should we pay more? What changes” Quality? Quantity? We answered: nothing, we simply do the reform!”

When Chubais became the CEO in the past he zealously started struggling against non-payments. Hospitals were ruthlessly cut of and once (remember!) even a missile base was cut off. Afterwards the CEO of RAO UES gladly reported on pages of our newspaper than bartering was finished. Pumping off of money was arranged. What is next? On what is this money spent?

Meanwhile, according to official reports of the company, its net profit amounts to about $1 billion a year. According to officially published data, remuneration to managers amounts to $100-150,000 a year. In the past RAO UES was checked by the Accounting Chamber and auditor Veniamin Sokolov officially announced that salary of Chubais was $250,000 a year without bonuses that amounted to a few tens of thousands of dollars a year. In 2004, 15 members of the Board of Directors of RAO UES appointed bonuses worth 257 million rubles for themselves. Meanwhile, since the beginning of 2005 electricity prices grew by 18-19% and from 2006 they would be increased at least by 15% or even 20-25%.

Duma deputy Andrei Isaev says, “According to the Accounting Chamber, RAO UES spends up to 83% of its profit on the so-called non-core expenditures. It maintains television channels, newspapers and airplanes. Everyone remembers the scandal when a former CEO of the company gave a ride to his American mother-in-law on a corporate airliner. In the last few years, the number of the company’s managers grew by 10%”.

In any case, it is impossible to reproach RAO UES of complete absence of capital expenditures. However, these are expenditures not on repair of equipment but on new ambitious projects, on construction in the former Soviet republics and on takeover of attractive energy assets there.

Large power stations in Russia are currently running only at 40-60% of their capacity. However, RAO UES is actively building new ones like Bureiskaya hydro power station (on the border with China) and plans to build the Kaliningradskaya heat and power station TETS-2 and Northwestern TETS. Look at their geography. All these stations are located along perimeter of our country. What for? To be able to export electrical energy more conveniently.

How is it possible to prevent repetition of catastrophes similar to the recent blackout in Moscow in the future? Member of the energy, transport and communication committee of the Duma Boris Vinogradov says:

– For this chaos we need to take to account Minister V. Khristenko. RAO UES is a state-run company. Russia is not a corporation headed by President Putin. Hence, the government should undertake the blame too.

Ministers know perfectly well that our Russian “grid roads” fro the Far East to Kaliningrad are weak from the energy point of view and are difficult to pass. A failure on an ordinary substation unknown to anyone before looks like aortic aneurysm: it is impossible to shift reserve power from the provinces to central Russia and back.

Now the country is covered with “narrow-gauge roads,” which limits maneuvering of available capacity. The biggest bottlenecks in power transmission are in the Urals region now. Due to this circumstance losses in regional grids in the country on average amount to 30-40%. Population of the country actually acts as a tariff investor of RAO UES and its subsidiaries.

To solve this problem it is possible to return to the real united energy system: Siberia-Kazakhstan-Urals. This project was prepared in the late 1970s. Unfortunately, it is not used at full capacity. It turns out that 3 million kW is blocked in Siberia now. Full use of this line could seriously reserve electrical energy and make it cheaper.

Electrical energy under control of the oligarchs

The reform of RAO UES, about which its managers talk so much, will impact all of Russia. What is its nature? It is planned to divide the entire system of electricity supply of the country into two parts: one part will go to private owners and the other part will go to the state.

Russian electrical energy sector consists of 41 large power stations and about 450 small ones. Each large station is an independent company. Smaller stations are included into authorized capital of 72 regional energy companies. In turn, shares of these regional companies form authorized capital of RAO UES. RAO UES is actually a financial holding. It owns mostly shares. Among the physical property RAO UES owns approximately 40% of the trunk lines.

As a result of the reform all power stations and regional companies will be included into seven wholesale generating companies, which will be offered for sale. What will remain in the hands of the state? Electric grid or simply high-voltage lines. Federal Grid Company will be established for this purpose and will include 140 substations and lines more than 44,000 kilometers long, as well as five interregional distributing grid companies.

Repair and maintenance structures that now are parts of the regional energy companies will become independent. Thus, the state will have to pay for maintenance of the grids.

Grids and small substations like notorious Chagino will remain in the hands of the state. They bring minimal profit and in the future it will be necessary to pay cash for their maintenance. It is funny even to think that management of RAO UES will invest in such non-promising business.

The reform is already happening, step by step. There are 73 regional energy companies now. However, RAO UES has 100% control of only eight regional companies and 17 power stations of federal importance. All the rest is already half-sold. Even in such giants as Bureiskya and Sayano-Shushenskaya hydro power stations RAO UES already sold from 18% to 25%. Owners of large companies already bought blocking stakes in the regional energy companies. Among them are YUKOS, LUKoil, Siberian Aluminum, Interros, Renova, MDM group, Renaissance capital, Brunswick, Vostok-Nafta and others. If the reform goes according to the existing scenario, oligarchs will receive control over energy sectors of entire regions.

The reason for the power failure is the following: the unfortunate substation is part of an electrical grid that is destined to remain state-owned after the reform. That is why no money has been invested in upgrading it.