20.03.2003 Interview of Arkady Yevstafyev, general director of AO MOSENERGO
Mosgorenergo is not a competitor to us…
Uneasy relations between AO MOSENERGO and the Moscow government are much spoken about. What are the reasons behind the confrontation between AO MOSENERGO and the Moscow government?
We are not confronting anybody. Our goal is to provide heat and electricity to Muscovites and Moscow region population, and we implement this goal.
But you do not provide it for free. For example, effective March 1, tariffs have been raised once again. Prices have always been the bone of contention.
Last year, when the Regional Energy Commission (REC) set artificially low tariffs, we appealed to the Federal Energy Commission calling for the abolition of this unreasonable move. FEC admitted that we were right and reviewed the tariffs. We wanted to raise tariffs by 30%, but they allowed us only a 15% hike. [Moscow Mayor] Yuri Luzhkov says that they need to construct residential buildings with area of 5 million square meters. Very well, but to achieve this we have to construct so many transformers, lay so many cables and heating lines, which can be done only if we raise tariffs by 30%. Unfortunately, it is not only economics that have an impact on tariffs, but also politics, especially as elections approach. As for economic considerations, the lowering of tariffs by 15% means that we would construct fewer power facilities, roughly by 15%.
So, you do not agree with new tariffs?
Tariffs are approved by REC. We only submit justifications. So when they blame new tariffs on us, it does not correspond to the truth at all. Powermen do not raise tariffs, regional authorities do. Those who blame high tariffs on us forget to say that gas tariffs grew 20% (gas costs account for almost 40% of AO MOSENERGO's costs), industrial inflation reached 18%, while tariffs were raised only by 15%. This only attests to the fact that AO MOSENERGO is underfinanced.
Your opponents claim that current electricity costs make it possible to invest in any new facilities.
Opponents may say whatever they want. The 2002 results show that AO MOSENERGO's profitability reaches 9.5%. That's not much. This will only suffice to make up for last year's breakdown at the Kashira power plant. To restore a 330 MWt power unit they will need around 3 billion rubles.
The Moscow government claimed that it is illegal to include investment costs in tariff calculation, as the Moscow government allocates sufficient funds for constructing new power facilities.
Sometimes they build electricity lines and subtransformers. But City Hall cannot operate them, as they need sophisticated infrastructure to do it. Very often we carry the costs.
The Moscow authorities offered to conduct a rights issue to compensate for City Hall's investments in the authorized capital of AO MOSENERGO. Why did you refuse to compromise?
Decisions like these are not in management's powers. Only the owners of the company can resolve this issue. There are many owners: RAO UES has a 50.87% stake in AO MOSENERGO, City Hall – 2.95%, investment funds including foreign-based – around 22%. There are also major German utilities. As soon as they put this issue on the agenda it may turn out that AO MOSENERGO investment claims are too high.
They suggested going to court.
Legal action is a normal way to settle disputes. But by law, the rights issue has to be approved by 75% of owners plus 1 vote. It is not about RAO UES being unwilling to support this move. I doubt that foreign investors will support it either.
How serious is the threat from Mosgorenergo – a new competitor which was set up by the Moscow Government?
It is not a competitor, but another reseller. It means an additional markup for every Muscovite. The new company will have to incur considerable administrative, personnel and transportation expenditures.
But does the Moscow government plan to establish not only an alternative seller but also an alternative producer?
I’ll draw you an example. One power unit costs 3 billion rubles. Now when the Moscow budget is not in best shape, there is probably no sense in recklessly wasting money.
But what if Mosgorenergo offers lower tariffs?
How? They will have to purchase this power from AO MOSENERGO and then resell it. Yes, REC may rule that you should sell electricity to everybody for, say, 10 kopecks, but to Mosgorenergo – for 5 kopecks. But my production cost is 9 kopecks. You observe a similar situation when resellers force peasants to resell their potatoes at lower prices. In addition, Mosgorenergo may face a different problem if they are unable to meet their obligations. They can generate neither heat nor electricity. What would they do in the winter at 30 degrees below zero? Should people wait for them while they look for heat and electricity?
They will probably be able to buy it somewhere, from you, or elsewhere.
And if they won't? Who will protect customers from such failures? As far as I know, Mosgorenergo's authorized capital is only 100,000 rubles.
But the utilities restructuring provides for several sales companies to be created in each region, which should compete with each other?
Yes, in the future Mosgorenergo may become a sales company. For that they will have to obtain software, create branches ensure the collection of money. They do not currently have all this. It is unlikely that they will get it soon.
What is your view of the power system in the future? Which sources of power will be most in demand?
Gas has no alternative in the mid-time perspective. We could certainly try to supply electricity from a nuclear power plant, but what we will do in the wintertime?
They say that the future belongs to autonomous boiler plants…
It is possible to implement this idea in individual cottages by buying costly automated equipment. But for mass consumers it is too expensive and unreliable.
How will electricity consumption change in Moscow and the Moscow region?
I think growth rates will stay where they are at the present level: 5% per year. We face the need to increase power generation already at the present stage. Supply and demand are balanced right now. But we have 2–3 years to put new capacities into operation.
US and Europe are switching from gas turbines to steam and gas turbines. What about us?
We have not even started yet. It is principally new technology that makes it possible to drastically reduce costs and increase production. We plan to launch a new steam and gas plant at TEZ-27 near Mytischi. The draft design has already been developed.
What will happen to AO MOSENERGO as a result of power reforms?
As a result of reforms, one or two generation companies will emerge, which will comprise AO MOSENERGO's power stations. There will be at least one sales company, one grid company, one heating company, and one repairs company (though there might be several repairs companies). At the first stage, stakes in these companies will distributed in proportion to current AO MOSENERGO stakes. However, the government wants to retain grids by forming a monopoly company. So, as a result of the inevitable exchange of stakes, the government will consolidate 100% of the grid company, while the government share in other companies will significantly decrease. Later, the remaining government stakes in these companies will be sold at open auctions and these companies will be fully privatized.
When will AO MOSENERGO's restructuring start?
I can only say one thing: AO MOSENERGO's reform will not lag. We cannot live anymore under total regulation, which is often based on political, not economic decisions. I agree that they should take care of low-income citizens, but why are they imposing these problems on us? Let them subsidize them from the city's budget. But they don't want to do this!
Supporters of the reforms say that consumers will gain from competition while opponents of the reform say that as a result of the reform the tariffs will grow 3–4 times. What is your forecast?
Much will depend on energy prices. If they remain at the present level, tariffs will not explode. Indeed, market-oriented companies will try to cut costs by providing a wider range of services at lower costs.
Your opponents argue that tariffs will depend on costs of the least effective (not the most effective) producer. At the same time, lucky owners of power plants will reap windfall profits?
The market does not have such a black-and-white mechanism. However, the reform has a social aspect. The unfolding of your scenario may lead to a considerable growth in electricity and heat prices. Naturally, nobody will allow this.
Today we’ve spoken much about the need to cancel cross subsidizing. Will this be reflected in prices?
Surely so. Until now, the distortion was extremely high. The industry paid for the population. Now this distortion is being gradually corrected. The economic experience points to the fact that tariffs for the population should be higher than for industry. Industry provides work places, wages and taxes.
So, tariff adjustment means higher prices for the population?
… and some tariff growth for industrial consumers.
By Andrei Kamakin, Itogi |
