Privatising Russia’s electricity

In May 2003, the shareholders of the Russian Joint-Stock Company "Unified Energy Systems of Russia" (UES) agreed to a plan to break up the company and privatise most of its subsidiaries.

UES, the world's largest utility, has been burdened by a decaying infrastructure, bureaucratic waste and ruinous state subsidies ever since the Soviet Union dissolved more than a decade ago.

Some 30 to 40 percent of Russian energy is lost in production, transportation, transmission or inefficient consumption.

Price controls force Russian generating companies to sell electricity at a loss, to the tune of $500 million by the end of last year.

To sustain economic growth, electricity generation must increase by 14 percent by 2010 and 54 percent by 2020, which will require capital investment of $167 billion to $267 billion.

Reforming Russia's energy sector, like its other state-monopolised industries, will involve eliminating state subsidies and price controls, creating competition, rounding up investment money and working towards profitability.

According to the new plan signed into law by President Putin, the UES will be divided into four autonomous companies: a Federal Grid Company to control the high-voltage power grid, ten new generating companies, a System Operator to coordinate electricity transmission and a Trade System Administrator to make sure all buyers and sellers of energy are treated fairly.

Source: Leon Aron, Privatising Russia's Electricity, Russian Outlook, Summer 2003, American Enterprise Institute.

For text http://www.aei.org/publications/pubID.17983/pub_detail.asp
For more on International (Institutions and Growth) http://www.ncpa.org/iss/int/

RSA Comment: Reasons for not privatising and totally deregulating electricity provision tend to be self-contradictory. One argument is that a privatised single supplier would dominate the market and be able to charge excessive prices. Another is that competitors will enter the market and compete unfairly by targeting the most lucrative markets, leaving the former state industry with the unprofitable parts of the business. The arguments cannot both be correct. However, in the long run it is far better for the consumer to have markets free of barriers to entry and government controllers, providing an environment in which competition and the threat of competition determine prices and levels of service. (Eustace Davie, Director, FMF)

FMF Policy Bulletin/ 5 August 2003 - 20 July 2010