 It took years, but lawmakers finally gave the government what it wanted Friday, approving by an unexpectedly comfortable margin the key legal components required to begin reconstructing the world's most capacious power company.
The State Duma passed in the key second reading a total of six bills that pave the way for industry-wide modernization, the creation of a free market for electricity and the breakup of Unified Energy Systems' sprawling monopoly.
"Russia is now on the list of countries that have managed to create a [free] market in the power sector," Economic Development and Trade Minister German Gref told reporters after 260 deputies voted in favor of the first and main bill, the "Law on Electricity," which was debated for several hours.
"Two-hundred and sixty votes -- that is more than we expected," Gref said.
Before President Vladimir Putin can sign the bills into law, the bills must pass a third reading, considered a formality, and the Federation Council, which is expected to resist only the bill that calls for an end to the price-setting regional energy commissions.
The reform package had been delayed several times since October as lawmakers weighed the costs of the potentially politically explosive reform package and jockeyed for position ahead of upcoming elections.
Prime Minister Mikhail Kasyanov warned deputies Friday that a failure to pass the bills would "inevitably lead to a crisis in the sector."
However, despite Putin's public support for the legislation and Kasyanov's assurance that the government -- and not the deputies -- would take full responsibility for the reform, several deputies in pro-Kremlin centrist factions were still undecided early Friday.
Fatherland-All Russia, for example, threatened to sink the bills if the government failed to curb rises in electricity prices, which have jumped 53 percent in some regions in the last month alone.
Although the federal budget calls for a 14 percent cap on electricity tariff hikes, regional energy commissions have free rein to set their own rates. Fatherland-All Russia demanded -- and got -- legal changes that will put the federal government fully in charge of tariff hikes.
"The government's flexible position in depriving the regional energy commission's absolute influence on tariff increases predetermined the success of the vote," said Fatherland-All Russia leader Vyacheslav Volodin.
Gref said Kasyanov had already ordered the Economic Development and Trade Ministry to analyze and present concrete proposals by Tuesday on how to prevent excessive tariff hikes in the regions.
"Now the government will be in charge of tariffs and bear whole responsibility for prices," Volodin said.
"Tariffs must be brought under control," Gref agreed.
Andrei Sharonov, Gref's deputy and the government's pointman on the UES revamp, said the third reading would likely be scheduled for Friday.
The overhaul of UES is one of the most complicated reforms Russia has ever tried to tackle, and delays have been due not only to the unprecedented complexity of the revamp, but also because it involves the vested interests of nearly every major economic player in the country.
Ahead of Friday's vote, for example, "mystery buyers" representing powerful financial-industrial group MDM and, reportedly, Base Element amassed as much as 17 percent of UES' stock in an apparent effort to influence the restructuring.
The run-up to Friday's vote also saw a high-profile assault on controversial UES CEO Anatoly Chubais by Putin's top economic adviser, Andrei Illarionov, who more than once called for Chubais to be sacked.
Added to the mix were several influential minority shareholders, including foreign investors, who collectively control some 10 percent of UES. Some had decried earlier versions of the UES bills, based mainly on Chubais' plan for the sector, as a blatant attempt to allow assets to be sold for a song, similar to the loans-for-shares scandal Chubais orchestrated as privatization tsar in the mid-1990s.
On top of it all were the political interests of regional governors keen to keep their hands on a major lever of power.
With so many hurdles in the way of avoiding a collapse of the industry, Putin made Kasyanov personally responsible for pushing the bills through the Duma after lawmakers refused to vote on them in December.
The support of the key centrist factions was later assured after Kasyanov ordered new amendments to the bills.
The amended package approved Friday gives the government the power to make all major decisions, including when and where liberalization will take place. The government will also regulate all volumes and prices for electricity sold under long-term contracts and dictate the volume sold on the free market for an unspecified transitional period.
Gref said Friday that prices for domestic consumers will be regulated by the government until 2008 -- which would be the end of Putin's second term in office -- to avoid any potential social unrest.
In fact, the bills passed Friday have been transformed to such a degree that Chubais can no longer be considered the author of the reform.
UES was less than elated over the new restructuring blueprint.
"I can't say this is a holiday for us," said deputy CEO Vyacheslav Sinyugin.
"However, it is good that there is some definition on the future of the industry," he said.
Critics say the plan does nothing to encourage efficiency in the sector, nor does it set out exactly when and how it will be liberalized.
Bill Browder, chief executive of Hermitage Capital Management and a UES minority shareholder, said the concept for pro rata distribution of UES shares after the giant is broken up should calm fears of asset stripping and let investors get down to the more important business of lobbying for tariff reforms.
The bad part is that there is no clear timetable for when the government stops, and the market starts, to set prices.
The debate on UES has also created strange bedfellows.
Members of the Communist and Yabloko parties, normally on opposite ends of the political spectrum, were united in opposition to the government's plan -- although their styles of dissent were starkly different.
Members of both parties protested against the bills in front of the State Duma early Friday, the Communists waving their red flag and Yabloko members wearing Chubais-inspired red wigs.
Meanwhile, across the street, draped over the Hotel Moskva, hung a huge banner featuring Communist leader Gennady Zyuganov and his deputy Vasily Shandybin side by side with Fredrich Engels, Karl Marx, Lenin, Stalin, and Boris Berezovsky.
The banner, the brainchild of the Putin youth movement Moving Together, was ostensibly a birthday greeting in honor of the Communist party's 10th anniversary, but Zyuganov demanded in the Duma that it be taken down before the UES vote began.
The banner stayed.
| Major Points of Electricity Sector Reform |
The Market
- The power market may not be liberalized before July 1, 2005. Until then, the government will set limits on heat and power tariff increases by the beginning of the next calendar year as part of the annual budget.
- Up to 35 percent of all power produced must be sold to one or more "guaranteed suppliers" under long-term contracts at government regulated prices, even after liberalization. This is to control the price charged to households and public services.
- Some power trade will be allowed during the transitional period until liberalization.
- The government decides which parts of Russia are ready for free power trade before full liberalization.
- The government may set the volumes of power sold at unregulated prices during the transitional period.
- Retail prices may not undercut those to suppliers in long-term contracts.
- The government may set retail price caps during the transitional period.
- The gap between the regulated contract prices and wholesale prices is to be gradually closed year by year during the transitional period.
The Players
- UES, the state utility that produces 70 percent of Russia's power, will be divided proportionally among its current shareholders into separate grid, generation, marketing and dispatch units. The decision to split up UES will be taken by a simple majority of shareholders, meaning it is up to the government as the 53 percent owner.
- Some thermal power stations whose main function is to produce heat will be reclassified as boilers to ensure heat supplies.
- The government must maintain its stakes in hydroelectric power generators and may not privatize structures through which it holds hydro plants.
- No single owner may control more than 35 percent of generating capacity in each of the country's price zones in order to prevent monopolies. If such local monopolies arise, they can be placed under price regulation for six months or broken up.
- The government must retain a controlling stake in the national grid, treated as a natural monopoly.
- Electricity dispatch functions must be separate from the national grid.
- Distribution networks must be split off from the national high voltage network. These networks can function as guaranteed suppliers.
Regulation
- The government and Cabinet can issue decrees that will serve as additional legislation to regulate the electricity industry. The government must issue a decree on the rules of the power market.
- The regulator oversees guaranteed suppliers to ensure stable supplies.
- The regulator sets the maximum retail mark-up which suppliers can charge consumers.
- The government will set rules for cutting off nonpayers. -- Reuters
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See also:
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Energy Sector Reform
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