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Russian Power Reform Dies A Death Of 1,000 Power Cuts
January 21, 2003

MOSCOW -- Weakening of Russian plans to create a market for electricity may buy re-election for President Vladimir Putin and his parliamentary supporters but may also increase the risk of a California-style crisis in five years' time.

Amendments crafted last weekend to a package reform bills remove the deadline for the introduction of a wholesale power market (it was to have been Jan. 1, 2005) and stipulate that household prices will stay regulated for three years after wholesale ones have been freed. Those amendments should now see the controversial bills getting through parliament without costing lawmakers their jobs this autumn or Putin his next year.

Some say it's only a short-term fix. "They will replicate the California experience, where the local utilities go bust and generators make vast profits," says Charles Henri Hirsch, managing director of Equinox Finance in Moscow.

Hirsch represents minority shareholders of AO Kostromskaya GRES, a wholesale generation company built around relatively new thermal power stations. Kostromskaya would be one of the first to profit from a California-style crisis.

Only a couple of weeks ago, it seemed that the government would push through the bills with a commitment to a free market by 2005. However, widespread heating and power failures at New Year - during which as many as 28,000 people were left without heating in temperatures as low as -30 degrees Celsius - appear to have led the government to keep a cap on household prices in particular.

The new amendments "may have been included in good faith...but mean (the government) will fail in its fundamental aim, which is to make the sector attractive to private investment," warned Derek Weaving, an analyst with United Financial Group in Moscow. "The California experience shows you cannot be half-hearted about liberalization."

The dilution of the draft laws represents a calculated gamble by the government that the Soviet-era electricity system isn't as close to collapse as was once thought. Hartmut Jacob, an analyst with Renaissance Capital, calculates that Russia's reserve margin - the gap between production capacity and peak consumption - was 27% in 2002.

Electricity Supply Risks 5 Years Away

Jacob, like Equinox's Hirsch, calculates that the real risks to Russia's electricity supply are about five years away. Hirsch's investment rests in part on the assumption that "less than 10%" of the country's thermal plants will keep operating as long as those of Kostroma's.

Some say the government can thus afford to slow down the reforms for a year or so to get the legislation right if that is its real agenda. Others argue, however, that the current overcapacity would help keep prices down as prices are freed.

Some feel that the removal of the deadline for the start of the market is just a tactical retreat and that the deadline will be decided by the government just as soon as Putin is re-elected in 2004.

"Of course (the new amendments) bring uncertainty into the market and investors may not like it but it represents a kind of consensus that can bring reform in the long run," said a spokesman for RAO Unified Energy Systems of Russia (R.UEN), whose chief executive, Anatoly Chubais - a keen reforms supporter - has been a lightning rod for criticism from politicians, minority shareholders and industrialists alike.

This barrage of criticism suggests the reforms offend too many people at once. Despite the failure of central planning and state regulation to sustain investment in the sector, there are still many who would prefer to have politicians setting prices to encourage the building of new power stations and lines.

"Where are the most dynamic investment programs in electric power in the world right now?" said Viktor Kudryavy, a vice president of the Russian Union of Producers lobby group. "In China, Vietnam and Iran and they're all state programs."

Like many Russians, he remains spooked by the experience of deregulation in the west and considers the current reform efforts a reckless experiment. "California was a crisis of comfort...three, six or nine hours without air conditioning," he says. "In Russia , it's life or death,"

The amended bills are now due to get their crucial second reading in the Duma Feb. 4 or 5, the news agency Prime-Tass quoted a senior Duma deputy as saying Tuesday.

UES shares ended down 6.3% in Moscow and its American Depositary Receipts down 7.4% in London Tuesday.

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