| May 2005 |
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Which came first – the egg or the chicken? The reformers were first driven by a desire to smooth out frictions between power producers and consumers and a hope to tap new sources of funds for the power industry. But it’s easier said than done. As the starting pistol went off on a cross-country race for the free market, the runners poised in a close pack scampered in different directions along footpaths and shortcuts they knew best. Some sprinted for high profits capitalizing on their monopolistic position in the market, others tricked creditors of their profits by playing penniless. Today Russian companies are consuming oceans of electricity because they are operating outdated power-hungry machinery and care little about huge losses of power in antiquated transmission lines. Power consumers are charged differently. Manufacturing industries pay the highest dues, with farmers coming second, and the public, a distant third. They call it cross-subsidizing. In another, less common, practice, power-surplus regions actually subsidize power-deficient areas when they run their power distribution networks at peak load. In the old command economy, subsidies flowing down transmission lines from power providers to power consumers were just ignored when the creditors and debtors settled their accounts, or rather written off to give the impression of the national economy running at a profit throughout. Nowadays it’s not clear how to settle the accounts. There are no pricing tools at hand, and making new ones could take much time. Worse still, no one knows definitely how much is “much” or how little is “little” in pricing. And still less what’s “just right”. And again, the answers are not as easy to give as it may seem. The way prices are set by the Russian power industry today shows that this branch of economy is closer to the old communist system than to free-market economy. Its basic principle is recouping manufacturing costs and making planned profits. However, everything was planned in the communist system, including energy prices upon which power production costs were calculated. The costs were determined out of thin air, for years ahead, long before the product was made. Power providers have always claimed they are short of funds, and consumers have always complained that they are grossly overcharged. The trouble on both sides is that the pricing practice has disregarded solvent demand as a counterbalance to market supply of goods and services. Habitually, electric power has always been generated here not as much as could be sold, but as much as was needed by industries, offices and the public together, at consumption rates that existed in the communist age. Here, too, the planners know how much each industry and, in fact, the population require. Their requirements are so tight that they could not be contracted any further, particularly (and understandably) in the case of the public. It is only natural then that the power producers’ ability to deliver what is expected of them and the prices for their output and services are given a back seat. Relationships between power consumers and power producers have, in fact, been at an edge, with the cart put before the horse. That idea was behind Lenin’s electrification plan: power first, money later. Any kind of money, roubles or quasi-roubles, or any product or commodity carrying a money value. Hence the huge debts owed by all kinds of consumers to power producers – approximately 150 billion roubles in payment arrears alone today. Indeed, what can be done about the domestic economy having such high power consumption? In the fateful year 1998, when all economic indicators took a deep nose dive, the production index for manufacturing industries as a whole plunged to 46 percent and that for agriculture, to 57 percent from what it was in 1990. It plummeted to 37 percent for major industrial enterprises, but only dropped to 76 percent in the power industry. Even though a third of the Russian population live below the poverty line, they all have electricity in their homes. There is enough electric power to go around for everybody, after all. After the industry reached its highest ever point in 1990, with capacities peaking at 213.3 million kW, it has not lost a single kilowatt ever since, and even edged up a little, to 214.8 million kW in 2001. True enough, power output slid back appreciably, from 1,082 billion kWh to a record-low 827 billion kWh in that same 1998, then rebounded slightly to around 890 billion kWh and stayed about the same in the last two years. It means that the economy has, in principle, been better supplied with power. So now, as also in the past, the problem of shortage of solvent demand is still at the top of the nation’s concerns. A word from the power producers The question now is, what’s burning to make the reform of the power industry so urgent? It clearly involves a certain amount of risk, and market pricing system cannot be an aim in itself. It’s really a shame to first give people something (like electric power in this example) as a gift, or a social boon, one of many promised by Lenin, only to start, decades after, toting up the missed profit and tallying future takings, and besides using different accounting rules than those the preceding generations have come to live with. Hear the power producers’ arguments, and you will see they talk sense. Really, what is a gift or godsend from the past today may cease to be that tomorrow. One reason, if we take statistics at its face value, is that Russian power industry, for all its deceptive stability, is actually on the ropes, or about so. Today between 30 and 40 percent of the resources used to generate electric power are lost directly all the way from the wellhead or coal mine, refinery or dressing plant, pipeline or rail car to voracious burner. Besides, the consumption of energy per unit of the production is three to four times as much as in economically advanced countries. The proportion of the power industry’s fixed assets requiring replacement has been rising for decades. Between 1970 and 2000, it rose steadily from 23.2 percent to 52.9 percent. And more, beginning from 2000, it has been growing faster than the national average for manufacturing industries. Over the 30 years plus, the rate of the renewals in power indastry has dropped from 8.3 percent to 0.9 percent, and has averaged 1.6 percent while the average rate for all of the manufacturing industries is 10.6 percent. This showing puts the power industry in the last slot together with the chemical, petrochemical, engineering and textile industries. And, last, customer defaults. The power engineering specialists hope that market reforms will at least offer an approach, if not a solution, to their nagging problem. Power sharing and regulation The reform is destined to change the whole energy system, a unique sector of the nation’s post-communist economy, a holdover from the old regime that was fully integrated and controlled from a single centre. The power system draws it strength from a few colossal generating plants sited near the sources of fuel. In 2001, the three largest plants generated 16 percent of the country’s power output, and six of them churned out nearly a quarter of the national total. About 20 percent of the power is given by the giant hydroelectric power plants, another 10 percent – by the nuclear power plants. Among the thermal power plants heat-and-power plants prevail. For this reason alone, most regions depend on interregional power flows and transfers. Clear enough, the collapse of the planned economy in this country created a threat of utter dislocation of the nation’s power system. To prevent this happening, a step-by-step approach was applied to salvage the status quo. For a start, the power system was placed in the hands of a holding company, the Russian Unified Energy System, or RUES, in which the national government got the biggest stake. The new holding company took control of all major intersystemic power generating plants, except for nuclear power plants that were all corralled in a state-run Nuclear Power Concern (NPC). After the power pie had been sliced up, RUES was left in control of almost 80 percent of the nation’s generating capacities and nearly all system-status and other high-tension grids in the country. Power plants that eluded the RUES net were integrated in regional power companies. The federal wholesale power market (WPM) was instituted to organize the wholesale trade of electric power. Today, nearly a third of all power generated in the country is traded in the WPM. Prices on the WPM floor are rigidly regulated by the Federal Power Commission (FPC) that oversees bidding by each power plant. Power prices for regional power companies are set by regional power commissions (RPCs), with the FPC acting as a watchdog. Right from the start, everything seemed to click – the power system did not topple over and price hikes did not set off a stampede for profits. No sooner had this been done than producers and consumers were at each other’s throats, a situation discussed earlier on in the article. The scuffle gave the country’s reformers an opportunity to lobby for competition within the industry. Do monopoly and competition mix? From the outset, debates over the reform of the power industry focused on the necessity of keeping power generation and transmission apart. In principle, their separation could be worked out from the natural monopolies law we already referred to in passing, which labels power transmission by high-tension lines over long distances as natural monopoly, that is, an economic activity where, by market criteria, competition is counterproductive to the purposes a natural monopoly serves best. There are no two ways about it. There is no sense for a big power plant to run two parallel trunk transmission lines or split an existing line in two or three, just for the fun of it. This rationale also applies to trunk oil and gas pipelines, railroads, and highways. After all, power generators can, if they want to, compete among themselves, particularly in the interregional power traffic format typical of this country. This reform concept has a plausible alternative, however. It is supported by, of all people, Andrei Illarionov, the president’s economic adviser in his conflict with RUES chief Anatoly Chubais and his levy. The idea is rounding up all trunk line operators into one organization to make it virtually a monopoly that could confront power producers in the regions, each claiming to have an unrivaled competitive edge. Which bidder receives a contract will be left to the RIPS to decide. It makes more sense, therefore, to follow the regional principle, instead of exploding the industry from within, breaking it up into power producers and transmission line operators. Apart from anything else, this approach can give major local companies an incentive to invest in the power industry’s fixed assets. As things stand now, however, both concepts are riddled with contradictions. That is not all, though. Some big companies have developed a taste for stocks in power companies. One of them is the giant LUKoil Oil Company, whose president, Vagit Alekperov, admitted having blocking share holdings in four major regional power systems in the Perm, Volgograd and Sverdlovsk regions. In another development, the Surgutneftegaz Company has started building its own gas-turbine power plants. Quite many big industrial enterprises are hacking their ropes to RPCs and jumping on board the Federal WPM, which offers them lower power prices. This newest wrinkle has spread to several regions, including the major industrial cluster on the Middle Volga. Host region authorities, in their turn, feel they ought to reciprocate by giving the most-favoured-customer treatment to the defectors. To recoup the costs of accommodating the turncoats, they hasten to raise power prices they charge to the public. To hold back the overzealous regional authorities, President Putin suggested that they stay within 14 percent a year, a figure consistent with personal earnings growth rates. Actually, however, power prices are being hiked much faster at rates varying from region to region. Whether they want it or not, the legislators are tempted to tighten their reins on prices. The recent Electric Power Unified Law gives the government a 75 percent stake in the authorized capital of the Integrated National Power Grid Control Organization and the System Operator. It also empowers the government to slam a ceiling on power prices every year in a budget line added expressly for the public benefit and to put a seal of approval on the basic principles of WPM regulations. But the public is wary that the power providers’ scramble for higher profits and faster renewal of their fixed assets and the federal and regional budgetary authorities’ obsession with pruning utility subsidies might make electric power bills too heavy a burden for a great majority of consumers to bear without harming themselves. One that could strip the public of most of their meager earnings and throw many companies out of business. Money, we know, is the oil that keeps the wheels of the economy turning. To end on a cheerful note, Russia generates 6 million kWh per person a year, almost double what Portugal does, with about 3.5 million kWh. Remember, Portugal is a country that is running just ahead of us in everything else. Before parting, let me give you a quiz: how much power will Russia be producing or, putting the question the other way round, what will be left of the population of Russia after it has outdone Portugal economically? |
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Russia generates twice as much
power per capita as Portugal, but it will hardly be able to catch up
with the Iberian country on other counts in the next 15
years