2 September 2002 – The Russian parliament on Friday blocked government plans to introduce major reforms to the country’s electricity industry insisting that the state retained total control over grids and other units of utility UES in a new law.

Private investors currently own 47 per cent of the RAO UES and no indication was given how these stakeholders would be compensated.

The government, which owns the other 53 per cent, has promised shareholders they will receive a stake in the companies split from the utility in proportion to their UES ownership.

Moscow wants to split UES into power generation firms, a grid monopoly and a system operator, which will direct power flows as part of its plan to reform the decrepit system and attract badly needed foreign investment.

However, lawmakers rejected the government plans on dividing the assets.

“We are voting against (pro rata distribution of shares) because we are not ready for this kind of asset distribution,” the deputy chairman of the lower house’s budget committee, Georgy Boos, told reporters at the Duma, or lower house.

Boos and other lawmakers from the lower house, which refused to debate the reform in the spring, had been meeting government officials to discuss amendments to draft laws which must pass both houses of parliament.

Minority shareholders were already nervous about their interests in the government’s planned carve-up of the industry, and after Boos comments UES shares fell and ended down more than one percent.

The government says it needs to liberalise the power market, where UES is currently selling power below production costs, to attract investment needed to upgrade crumbling infrastructure.

Regional leaders oppose reform because they fear electricity prices will rise if the government lifts heavy power rate regulation, a move which could infuriate voters. Elections to the Duma are scheduled for next year.

The government decided last year the market would be liberalised in 2004 if the UES split goes ahead.

Lawmakers had already promised to challenge tariff reform and on Friday Duma members said they will attempt to expunge a the 2004 deadline for liberalising electricity prices which has been written into the draft law on power sector reform.

The government official in charge of the reform, Economic Development and Trade Minister German Gref, said he would quit the process if the deputies amended the laws to ban pro-rata distribution of shares in the grid company and system operator.

“UES can’t be divided up non-proportionally,” Gref said. “I will get out of this process. I don’t want my name associated with the mess that will result if it is.”