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With 680,000 staff, the company is the largest and most inefficient power generator in the world, analysts say. Now the former Kremlin chief of staff wants to privatise it.
Unified Energy System controls 100 gigawatts of capacity across the 11 time
zones of the Russian Federation, with some equipment dating from before the
revolution in 1917.
After months of fierce lobbying, public outcries and more than one crisis
meeting chaired by President Vladimir Putin, the Russian parliament will
vote on plans to dissolve a company with 680,000 staff, possibly the
largest ever corporate break-up.
The critical second reading in the Russian parliament of legislation
designed to liberalise the electricity sector also comes against the
background of disastrous reform elsewhere in the world.
The collapse in wholesale prices after deregulation has, for example, led
to black-outs in California. In Russia's harsh climate, mangled reform of a
vast generating, transmission and distribution entity - in which the state
will still hold 52 per cent - would not only damage the country's fragile
market economy; it could also prove lethal.
Anatoly Chubais, the former Kremlin chief of staff under Boris Yeltsin and
the current chief executive of UES, is pushing for a definitive break with
the past. "Electricity still operates in the Soviet style," he says. "The
consumer is chained to the producer. There is no choice, no competition and
no stimulus to save costs or to invest."
Mr Chubais is pushing for the full liberalisation of the power sector by
eliminating the politically influenced energy commissions that set prices.
He wants to see UES broken up, along with the existing regional, vertically
integrated power companies in which it holds usually controlling stakes
into competing generation and distribution businesses.
There is a widespread consensus in favour of reform. Fedor Tregubenko,
utility analyst at Brunswick UBS Warburg in Moscow, describes UES as both
"the largest and the most inefficient power generator in the world".
Its generating assets are inefficient, on average 30 years old, and high
staffing levels leave productivity well below its peers in other emerging
or transition markets.
Revenues are equally distorted. Regional and federal tariff commissions
control prices. At best, that produces a cost-plus system that offers no
incentives to cut costs and insufficient revenues to generate profit and
stimulate investment.
At worst, political interference ensures that subsidised electricity goes
to influential customers.
Some progress has been made in improving efficiency and shifting from the
barter agreements that, as recently as 1999, accounted for almost
two-thirds of the company's bill settlement. But Mr Chubais, whose
management team took over in 1998, is seeking more radical reform.
But Mr Chubais' reputation as a "Bolshevik", willing to take messy and
ruthless decisions, adds to the complications of the reform process.
He has some formidable personal and political opponents, and he has to take
account of the interests of outside investors who bought into UES and the
regional energy companies when they were part-privatised during the 1990s.
Moreover, the federal parliamentary elections looming in December have led
many politicians to express fears that liberalisation could lead to price
rises and power supply problems.
More basic interests are also at work. One lobbyist says the leader of a
parliamentary group asked him for tens of millions of dollars in exchange
for his support. "Some deputies understand that this is Russia's last gravy
train and we won't have such a fundamental law again for a long while," he
says.
Mr Chubais shares this analysis and warns that without substantial new
investment soon, the system faces crisis. "Reform and liberalisation is the
only realistic way to cut prices and create incentives for energy
businesses to cut costs," he says. "Nothing in the past 2,000 years of
world history has been more effective for that than competition."
However, questions remain about the pace of the proposed changes. "You need
reform but for it to be successful you also need an independent regulator
and you should not have the monopolist itself in charge of the changes,"
says Christof Ruhl, chief economist at the World Bank's Moscow office. Both
conditions are open to question in Russia.
Given the country's recent history, dominated by powerful oligarchs, weak
institutions and few hard-and-fast rules, Mr Chubais' supporters argue that
he is one of the few men capable of forcing through the reforms.
"He is trying to finalise the peaceful revolution begun in 1991," says a
long-time colleague. "This is the final step. He understood you have to
restructure UES if you want to create a market economy. We must finish the
reform."
Since his appointment four years ago, Mr Chubais has helped change UES'
corporate culture, introducing tough new management information systems and
more transparent accounting, and eliminating corrupt barter transactions.
But the company's shares, once the flagship of the Russian stock market,
have underperformed its peers.
Andrei Illarionov, President Putin's economic adviser, recently dubbed UES
"a national disgrace". He argued that Mr Chubais has devised the power
reform in a way that furthers his own political goals and will leave him
with continued monopolistic power over the electricity sector in the future
through control of the grid.
Grigory Yavlinsky, the head of the liberal Yabloko party and a
long-standing political rival, warns that politically influential oligarchs
may buy up large parts of the sector - at the expense of minority
shareholders and customers alike. "Chubais accepted the creation of bandit
capitalism and so long as he is in power, the backdoor will always be the
widest," he says.
Mr Yavlinsky argues that none of the regional energy companies created by
electricity reform should have a single investor owning more than 40 per
cent. "It's extremely important for our democracy and for the development
of small and medium-sized business to undermine oligopolistic control," he
says.
Recent interventions by Mr Putin suggest that the laws on power reform will
be passed soon. But, in a compromise, the drafts circulating suggest the
government - and regional governors - will now have the final say on the
timetable for implementing liberalisation.
Hodson Thornber, a former power consultant who is now a managing director
at the Moscow investment bank Renaissance Capital, says the result looks
promising. But he warns: "Russia won't be reformist for ever. The lesson of
electricity reform everywhere is that it gets stuck. The question is when
it stops."
See also:
Energy Sector Reform
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