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#8
Moscow Times
December 20, 2001
Chubais Doesn't Mind the Heat Over UES
By Alla Startseva
Staff Writer

Anatoly Chubais is used to taking heat for his ideas.

Three years into his term as head of Unified Energy Systems, Chubais says he has taken a lot of abuse for his drastic plans to restructure the electricity and heating monopoly and, thus, ensure that the very people who detest him have heat in their homes.

"Not less than 50 effigies of Chubais have been burned, and the most popular slogan at strikes has been 'Kill Chubais,'" Chubais said at a recent news conference.

The ginger-haired St. Petersburg native brushes off the public outrage. Chubais, who drew up the disastrous loans-for-shares privatizations of the mid-1990s, seems to wholeheartedly believe that he is in the right.

A glance at what Chubais has accomplished during his brief reign suggests that he could be on the right track.

The government, which has made the reform of UES one of its priorities, seems to agree. It gave its stamp of approval to a Chubais-backed restructuring program on Aug. 3.

The energy sector that Chubais tackled in 1998 had changed little from the vertically integrated structure left by the Soviets seven years earlier. The increasingly inefficient monopoly lacked competition in the retail and wholesale markets and had to operate with the funds generated by low, government-regulated electricity tariffs.

In 1998, 20 percent of energy payments were made through barter schemes. By that year, the annual shadow turnover from those schemes had reached $8 billion, about $3.2 billion of which ended up as direct losses from noncash payments, UES deputy head Mikhail Abyzov said.

Salaries faced delays of up to seven months, and protests and hunger strikes were almost daily events at local power companies.

Analysts predicted Russia would be without power in 10 to 15 years.

Then, President Boris Yeltsin appointed Chubais to put the house in order. Chubais put together a new team of top managers and drew up a stage-by-stage recovery plan for UES. The first phase, a three-year efficiency program, ended this year. The next step is a massive restructuring of the company.

Chubais is pleased with what has been accomplished, calling the results of the first phase "triumphant."

He and other company executives rattled off a list of numbers showing those results at the news conference last week. Among them:

    UES reported its first net profit under international accounting standards this year. The company posted a net profit of $16.7 million in 2000, compared to a loss of $12 million in 1999.

    Taking debt repayments into account, cash payments for energy will ring in at 115 percent in 2001.

    Investment soared from 2.8 billion rubles in 1999 to 11 billion rubles this year. If the Cabinet signs off on its investment plan Feb. 15, UES will invest 36 billion rubles in 2002.

UES will pay 41 billion rubles ($1.4 billion) to the federal budget this year, almost as much as the government earmarked for the country's armed forces.

Revenues to the Pension Fund will grow 22 percent from 2000 to 13.5 billion rubles ($450 million), or enough to pay 3 million pensioners.

Electricity exports were boosted 31.2 percent this year, with 18.5 billion kilowatt-hours delivered compared to 14.1 billion kWh in 2000.

UES's market share in CIS countries grew to 9.7 billion kWh in 2001, up from 8.6 billion the previous year. Those markets used 8.8 billion kWh, compared to 5.5 billion kWh in 2000.

CIS energy debts shrank from $647.7 million in 1998 to $391.1 million in the first nine months of 2001. Kazakhstan owes $298 million, Georgia $46.4 million, Ukraine $39.7 million and Belarus $9 million. UES deputy head Andrei Rappoport said he would soon visit Kazakhstan to settle its debts.

A corporate governance code was adopted.

Over the past three years, 78 percent of the general directors at UES' 250 subsidiaries have been changed.

Foreign investors, who hold about 30 percent of UES, are delighted with the progress. They have pushed up UES' capitalization by more than 200 percent this year. With UES shares currently trading at about $0.15 each, the company is worth more than $6 billion.

Such a growth in share price was only possible after it became clear that "the government had resolved its own disagreements about Russian energy sector restructuring," Chubais said.

The company had taken a lot of flak from minority shareholders, and Chubais conceded, "We have made lots of mistakes." UES is now trying to make amends and at the same time quash fears that its inevitable restructuring will lead to asset-stripping. The man appointed to head the committee in charge of restructuring represents one of the company's minority shareholders.

Despite the changes, Chubais would no doubt be the first to admit that a lot remains to be done.

The government holds a 52 percent stake in UES, but it has provided only limited financing. This year it gave $100 million, enough to add 80 megawatts in capacity. UES added 1,000 megawatts in capacity this year, 10 times less than what was needed, Chubais said.

The restructuring plan approved by the government in August was Chubais' second phase for UES. That revamp is to be drawn up and implemented in three steps over the next five to 10 years. The first step, which is to be completed by 2004, involves passing the necessary legislative framework and creating the infrastructure for a competitive market. It also calls for the reorganization of the ownership structure of both UES and its regional energy companies.

UES assets will be split into an independent transmission grid company, a system operator and several generation companies, with shares being directly held by the government and minority shareholders. UES stakes in regional energy companies will be consolidated into a single holding company.

In the first quarter of 2002, several electricity generating companies (gencos) are to be set up by merging 32 power plants and several regional energy companies. UES submitted its proposals for the creation of gencos to the board of directors and the government this month. A final gencos plan is expected to be approved by the government early next year.

"Hundreds of new companies will emerge in the energy sector as assets are redistributed," Chubais said. "Operations will start for the Federal Grid Company, the Administrator of Trading System and the system operator," he said.

The Administrator of Trading System, or ATS, is meant to introduce competition into the market and eliminate the conflict of interest that stems from UES' 80 percent ownership of the existing wholesale power regulator, the Federal Wholesale Power Market.

The ATS actually came into being this year. But market participants complained that UES was allowed to retain its dominant role, controlling 50 percent of the ATS until the end of 2002.

Come Jan. 25, the UES board of directors is to discuss the creation of the Federal Grid Company and the restructuring of some regional companies.

The main issue of the restructuring is to attract investment into the sector, UES said. In the first quarter, UES plans to hold tenders for 10 generating projects worth about $1.8 billion.

Chubais has said UES needs upward of $50 billion in investment to increase output and upgrade assets.

However, market experts consider to the company too risky to attract such investment at this time.

"I don't think investments into the construction of new facilities will come to UES earlier than 2005," said Kakha Kiknavelidze, power analyst at Troika Dialog. Investors remain concerned about asset-stripping, especially as regional subsidiaries are spun off, he said.

"Strategic investors will not come to UES no matter how much UES wants it until they get control over the company and are given the freedom to set tariffs," said Mikhail Seleznyov, an analyst at United Financial Group.

UES owns 30 power plants and controls 74 regional power utilities. Its 688,000 employees help UES provide power to 71 percent of the country.

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