“Currently, it is easier not to pay to energy companies in our country”
The amendments to the Law on Electric Power Sector and the Law on Joint Stock Companies were approved by the Federation Council at the year’s end. The amendments are to eliminate the cross-subsidies affecting the Russian energy companies. Victor Rogotzkiy, a member of the Federation Council economic policy committee, shared with “Peretok” his views on whether these amendments will end “the last mile” era, what tariffs would look like and what measures the lawmakers consider to apply against persistent non-payers.
– Mr. Rogotzkiy, what is your assessment of the expiring year in terms of energy law making?
– I can’t call this year too productive. The year was average, so to say, in regard to law making decisions, since a number of the government’s directives are still not implemented, including measures on cross-subsidizing and the heating energy market. We do have some achievements regarding electric power, but we still have a lot of issues concerning the heating energy. At the same time, the amendments to the Law on Heat Supply are prepared for debates and approval.
This year shortcomings include a growing number of non-payers. Unfortunately, we were forced to speak loudly on the issue that was almost erased in our memory.
On the positive side, we have started dealing with the issue of “the last mile” in order to reduce cross-subsidizing. Currently, it’s not only the talking, since the government took this problem seriously (the issue also exists in the West, but it is dealt with by taxation authorities, and the tariff regulation system is involved). I would say it is our heritage of the so called developed socialism era. Both the tariffs and the tariff policy should be adapted to the modern environment.
– Some amendments to the Law on Electric Power Sector and the Law on Joint Stock Companies dealing with the cross-subsidies issue in the electric power sector were approved by the Federation Council recently. Do these amendments eliminate “the last mile” issue completely, or further legislative are required?
- Let’s have a more thorough look at the statistics that say that the major enterprises including Mechel, the Novolipetzk Steel (NLMK), Rusal, the Chelyabinsk metallurgical factory and so on (with their voltage class of 220 MW) overpay about 10% due to “the last mile” that equals to about RUB 52 bln (based on the data provided by the Ministry of Energy).
Generally, the current scope of the cross-subsidizing is estimated at about RUB 230 bln. The elimination of “the last mile” should have started earlier. But we acknowledge that if there is some fall-down, there should be some improvement, too. If the entities that funded the cross-subsidizing experience some losses, those who benefitted from the subsidies, including
the residents, will have to get something.
At the same time, the lawmakers started to deal with the issue. Just a reminder: in accordance with the law the Russian regions were divided into three groups with the key group consisting of 63 regions. In the most of the regions “the last mile” notion will be eliminated by January 1, 2014. The remaining four regions, including the Jewish Autonomous Region and others, where almost everything is connected to the railways, can’t implement this measure for now.
Generally speaking, I am an advocate of a consistent approach and I don’t like half-measures so if you do something, just do it. But in the regions we are talking about everything is related to the Russian railways. At some point I even joked during the committee session that it is easier to award the honorable railway worker status to all the residents of the Jewish autonomous region to finally solve “the last mile” issue. The problem is complex and can’t be solved at once. In another cases, the government has to find some vast additional financial resources. Of course, it’s no good news for the railways, since it is obvious that their revenues decrease due to the government tariff policy. This is true not only for the Russian railways, but also for all natural monopolies.
– The law deals not only with the industrial consumers’ interests. As Alexander Novak, the Minister of Energy of the Russian Federation said, the government “has to act cautiously in this regard since it is related to the residential tariffs”. What measures are undertaken to prevent a rapid retail tariff hike?
– We can’t act like the authorities did during the Stalin era, for example, telling everybody that starting April 1 the food prices will be lowered. I remember the times when the ‘Pravda” newspaper reported on the prices reduction, and that was not true, since the food and other goods were in short supply.
At the same time, we all don’t like higher tariffs. But it is inevitable with the current inflation processes in the economy.
Electric energy, heating energy, natural gas, and water supply are being consumed, and there are industrial facilities that also require resources.
The natural gas accounts for about 60% of 1 Gcal of the heating energy. If the natural gas prices will go up, so will the heating energy prices. The tariffs can be frozen to ensure the gross domestic product growth for a year or two. But after that the government will have to defrost them since the energy sector requires evolution meaning investment programs, upgrading, and so on. And I’m not talking about the staff wages that have to be increased respectively as well. The issue is really complex, and as a regular citizen I don’t want the tariffs to increase. But unfortunately, with the inflation processes in the national economy, we can’t forecast the tariffs’ decrease. Still we can predict some relative reduction. It is not the same, but sadly it is not clear for the residents.
– You have mentioned the problem of non-payments at the retail electric power markets in one of your speeches. As you’ve said, the accumulated debt has already exceeded RUB 100 bln. Are there any legislative solutions to the problem?
– The real amount is about RUB 150 bln. Legal experts always argue on what is more important and fair – to make punishment inevitable or to make it harsh. Generally, lawyers say that it is the inevitability of the punishment. But as of now, we act in just the opposite way by making the punishment rougher. All new laws propose more serious and harsh sanctions. May be, it’s just our time that requires to tighten the nuts.
Let me remind about the economical situation 20 years ago… Defaulted payments of the times are still a nightmare! And now we face just identical problems!
What is their origin? Believe me, it is not the high tariffs, it is the complete disorderliness and the lack of the payment discipline. For our country, it is easier not to pay that to pay, even with all the costs taken into account. Even from the business point of view, in order to make a payment you need to go to a bank to get a loan with an interest rate of 18-25% for the short-term borrowing. Why do you need it? You can avoid payments to the power suppliers for six months, and if you pay the debts in full, you’ll be honored like a king. At the same time, the energy companies have to pay for the natural gas, metal, pipes, and so on. By the way, the energy companies have the same bank loans interest rate!
Retail companies also need the loans to buy electric power at the wholesale market for further sale. So for now in order to change the situation (and I’m not talking about the complete removal of the issue) we at the Federation Council’s committee approved in principal the draft law against the non-payment. The law will be titled “On amendments to some legal acts of the Russian Federation on order to improve payment discipline by the consumers of the energy resources”.
First of all, the law proposes more severe liability for each day of the payment past due.. Secondly, it deals with the “untouchable” and the “non-disconnectable” categories of the consumers. If you disconnect these consumers, you’ll be immediately summoned to the prosecutor’s office. Usually, it is not in the energy companies’ interests. We think that the list of the non-disconnectable consumers should be revised by the Russian government and specified locally. As of now, we are thinking about the ways to do it. The regional authorities should carry joint responsibility.
If, say, a hospital #5 was assigned with a “non-disconnectable” status and does not pay consistently (why should it pay if it will not be cut off anyway?), the regional authorities should be responsible for their decision on the hospital’s inclusion into the list of the non-disconnectable consumers. Also, there is one more issue that indirectly relates to the non-payments and deals with the financial liability for non-authorized connection to any supply networks including electric power, natural gas, or heating. The amount of sanctions is to be increased 20 to 25 times!
– Recently hearings were held at the State Duma on the results of the energy sector reform. It was noted that the existing legislation requires amendments to optimize the technical connection to networks in order to minimize the risks the grids face due to the simplification of the connection procedures. What steps do the lawmakers take?
– It should be acknowledged that during some time our country was the global anti-leader in this regard. There were two obstacles in order to get connected. The first one is the time since it took about a year to get a connection. The second one was bureaucracy since the request has to be cleared by more than a dozen agencies. As the Russians, we can understand the local environment, so it would be pretty easy to cut into somebody else’s power line. But how would you explain it to a foreigner? He would say: “I’ve brought some investment, so let’s build a small plant”. And our reply is: “OK, let’s do it. The only thing is that you have to visit some authorities for about a year, you have to get approval from some 15 regulators, you have to pay $2 million as gratuities, and so on”. Obviously, we have lost a lot of investors with no chance of them coming back.
The President of the Russian Federation required to reduce the connection process time to 45 days maximum within two years, and the numbers of the regulation bodies should be decreased triple-fold to include just four or five of them. These are the concepts, and we may make some different decisions for specific groups of consumers. For example, small enterprises will enjoy softer regulations.
– The retail market also needs some reforms as the bankruptcy of Energostream showed vividly during the start of the year. What is your assessment of the current situation with the retail companies? Is the competitive selection of the last resort providers system efficient? And what are the upcoming legislation improvements?
– The respective legislation was adopted in 2003 when the competitive business was separated from the monopolies. Generation facilities and retail companies were included in the first group, and the second group included mostly the grid companies.
A number of enterprises emerged at the retail market making it competitive. The enterprises offer different conditions and different prices. Still, there is the term of the last resort provider. It is our national know-how, and I’m not sure if other countries have something like that. The purpose of the last resort companies was to have some companies that can not reject a power supply contract with any consumer.
Currently, there is a battle for the last resort company’s status among the grids. If the grid companies will get the right to provide retail services, the competition at the retail market might be gone. This is totally unacceptable since our goal is to reduce the tariffs as a result of competition.
– Do you expect any breakthroughs in the energy sector legislation next year?
– I think we have to make some decisions on the territorial heating generation companies. We also have to make some progress in regard to modification of the fuel and energy resources payment procedure. In addition, I envision not only a law but a comprehensive program of the energy sector development for the foreseeable future that might be designed as a roadmap containing specific measures and activities.
The regional authorities are to receive some additional jurisdiction over energy sector. This concerns both the grids and the small-scale power generation companies.