NIS, USEA working together shoring up stricken energy sector
Republics are developing market economies and looking outside their borders for equipment, administration, aid
By Ann Chambers, Assistant Editor, and Albert Skeath, USEA
The United States Energy Association (USEA) began working with the New Independent States (NIS) in 1992, sending teams into the NIS to determine the scope of US government assistance efforts for these countries. The teams found a critical need to expose senior managers of the NIS energy sector to market-based decision-making frameworks and management systems.
In response to this need, USEA and the US Agency for International Development (USAID) jointly developed the Energy Industry Partnership Program (EIPP) for the NIS (Table 1). Through this program, similar energy companies in the US and the NIS are matched in a management exchange program aimed at enhancing the ability of the NIS energy sector to make the transition to a market economy.
USEA, through an agreement with USAID, manages the EIPP and funds travel, lodging and other out-of-pocket costs incurred by both US and NIS companies. Participating companies provide time and management expertise, plus access to sites and services. To date, 15 US companies are partnered with NIS utilities in seven NIS states, establishing long-term cooperative relationships.
The EIPP matches US and NIS utilities according to common technical characteristics, common business interests or on the basis of previous interaction. Participating utilities sign cooperation agreements and develop a workplan of activities under USEA guidelines and budgets.
On average, a utility partnership workplan involves four to six activities per year. The majority of the activities are conducted in the US to minimize time that US participants spend away from their jobs and to provide maximum exposure to US management systems for the NIS participants.
Common issue areas addressed in the programs include:
– cost/benefit analysis,
– customer-service/customer-information systems,
– demand-side management,
– financial management,
– general utility management,
– human resources,
– least-cost planning,
– plant management,
– rate setting,
– regulation and
Success is already being seen in the NIS as free markets are taking root. There are now 20,000 major enterprises and 100,000 small businesses in Russia alone that have been transferred to private hands. The private sector in Russia now employs 78 million workers.
There is, however, resistance to change and weakness of popular knowledge of how free markets work, which hamper reform. In the next few years, these republics will focus on seven key issues:
1. developing capital markets,
2. establishing equity and commodity exchanges,
3. forming responsible regulatory agencies,
4. instituting modern financial and accounting standards,
5. drafting commercial laws,
6. establishing a fiscally sound tax system and
7. completing a comprehensive land-reform program.
The NIS power sector covers one-sixth of the world`s land surface and has the largest combined proven energy reserves of any region in the world. But it has problems. There is an energy crisis; there has been a decline in energy production; and nonpayment for fuels and energy is skyrocketing. Many of the power sectors are bankrupt, and inadequate electricity rates do not cover the cost of producing the power (Table 2).
A variety of factors have contributed to the crisis, including destruction of economic links between the republics, a slump in the production of energy resources and a lack of adequate investment in the industry. There is not enough funding to pay for the essential components of the energy sector–fuel, maintenance, repairs and capital investments. Development of the NIS energy sector has the potential to make a significant contribution to meeting the world`s energy needs. Efficient development of these resources will require unprecedented cooperation within the international energy industry; and, therefore, will provide enormous opportunities.
Problem areas tend to be uniform from republic to republic. The age and status of the thermal power plants is one the biggest problems. Most of the thermal power plants are between 30 and 40 years old and nearing the end of their useful lives. The thermal sector was neglected under the Russian regime, as a higher emphasis was placed on nuclear plants, with the intention of phasing out the thermal facilities.
Fuel cost is also a problem. Many of the republics do not have indigenous fuel supplies, making them dependent on the other countries. Also, much of the coal is of low quality and difficult to mine. For example, coal in Ukraine rests 2,000 feet below the surface in seams 14 inches thick, which lie on a 45-degree angle. Once mined, the coal has a high ash content, high moisture content and a low heating value.
Spare parts are also a problem. One eight-unit power plant in Georgia has only three units running, as the other five are being used for parts. Safety programs for workers are lacking, and environmental protection equipment, such as dust collectors and precipitators, are noticeably absent.
Maintenance is poor because plants do not have the technology or know-how to utilize preventative maintenance. Water quality is also poor, as many plants use no chemical treatment of the water going into the boilers.
Instrumentation is out of date with slow response, and bill collection processes often include bartering rather than cash. Still, approximately 30 percent of the residential customers do not pay their bills, which in many countries are only 0.5 cent per kilowatt.
But the republics are working to overcome these many crippling difficulties, and the USEA program is helping them. They are working to modernize their existing energy systems with life extension programs and modifications to the transmission systems and controls and instrumentation. They would like to add pollution controls. The utilities are learning many aspects of running a business in a market economy, including ways to raise foreign capital and acceptable bookkeeping methods.
In late 1995, a four-person delegation from the Ukraine visited Otter Tail Power Co. to learn more about the free-enterprise system and open-market economy. The delegation represented Crimenergo, an electric supplier from Crimea, located in the southern peninsular section of the Ukraine. Crimea is in transformation from a state-owned electric system in the former Soviet Union to a free-enterprise arrangement. The delegation`s week-long agenda included meetings with several work units at Otter Tail`s offices in Fergus Falls, Minn., USA; tours of Hoot Lake and Big Stone plants; visits to the company`s repair shop and testing lab at Wahpeton; and a meeting with Otter Tail`s board of directors.
“We were impressed by the all-inclusive and comprehensive work performed by Otter Tail Power employees,” said Michael Gavrilets, Crimenergo`s electric station director, in the capital city of Simferopol. Earlier in the year, a delegation from Otter Tail had visited Ukraine facilities. The most recent meeting of the partnership came in April when a Crimea delegation attended the Otter Tail annual shareholder meeting. Otter Tail employees will venture back to Ukraine in June.
To solidify the partnership and address Crimenergo`s interest in the structure of a joint-stock company, John MacFarlane, Otter Tail president and CEO, provided Crimenergo officials with Otter Tail Power shares. The Crimenergo managers will receive shareholder publications and dividends, have full voting privileges and follow the stock in the NASDAQ exchange. Through the stock, Crimenergo will learn how to conduct stockholder meetings, design stock reports and communicate with stock holders.
“Entering the international marketplace is both exciting and challenging,” said John MacFarlane, Otter Tail president and CEO. “Our company and energy officials from Ukraine are both benefiting from the exchange of information.”
According to Doug Kjellerup, Otter Tail vice president, “During these first exchanges ,we found the Crimenergo representatives to be sincere about helping their fellow citizens develop not only a more effective energy system but also a better economy. They were eager to learn as much as they could about our country`s market-based economy and about the way in which we operate our business.” Crimenergo is working to establish a metering system, billing process and other affiliated procedures through the experience gained in the partnership.
Kievenergo and Pennsylvania Power & Light (PP&L) forged a partnership in 1993, and they have developed a three-pronged approach to improving Kievenergo`s operations in three critical areas: plant reliability, utility safety and utility accounting. Kievenergo is working to adopt key management techniques modeled after those used at PP&L. Task teams of specialists from both utilities are developing policies and manuals covering the three focus areas.
In improving plant reliability, the task teams are working to familiarize Kievenergo with PP&L`s organizational structure, diagnostic equipment and technical analysis. Tangible results include a manual on operations and maintenance, testing and inspection procedures for increasing Kievenergo`s plant reliability.
In improving the safety of its generating stations and distribution systems, Kievenergo faces a dual challenge faced by US as well as NIS utilities:
1. establishing a safety program that increases utility safety and decreases the incidents of worker injuries and deaths; and
2. devising methods to encourage worker compliance–a flexible system of control, penalties and incentives–since many of the safety rules will be new and somewhat cumbersome for workers in the initial stages.
The Ukrainians note that the financial area is the one presenting the greatest difficulty. After decades of state operation based on anything but market principles, Kievenergo`s near-term goal is simple survival, involving tactical (rather than strategic) planning. The first step for the accounting task force is familiarizing Kievenergo officials with PP&L`s accounting structure, methods and policies in an effort to create a new accounting system based on private-sector principles. One potential problem could lie in the implementation of accounting policies that conflict with current Ukrainian legislation.
Victor Kiritchenko, Kievenergo general director said the experience with PP&L has assisted Kievenergo in its planning activities for restructuring Kievenergo company management and department responsibilities, revisions to wage systems, changes to tax policies, detailed planning and cost analysis processes, daily cash-flow calculations, rate design principles, dispatch management concepts, legislation, consumer information systems, employee benefit programs, procurement, contracts, shareholder process and safety programs.
Joseph Clifford, PP&L spokesman, said, “Our agreement with Kievenergo has exposed us to many leaders in the world energy market. And we are building relationships that could have real long-term values in the years ahead.
In 1993 Armenian utility officials who will direct the state utility, Armenergo, began the Armenia Executive Development Program, which is working to develop leaders to bring the utility through privatization and into the emerging market-oriented environment. This is being accomplished through a series of internships at various utilities throughout the US. Dr. Alexander Kocharian, Senior Hydropower and Electricity Specialist for Armenia`s Ministry of Energy and Fuel, was assigned to the US Western Area Power Administration.
His nine-week internship was designed to provide him with an intensive education in US licensing processes for hydroelectric power facilities to enable him to advise other Armenergo officials on the process of attracting private capital into small hydroelectric development in Armenia. Dr. Kocharian met with various US regulatory and utility officials who provided him with detailed information on US licensing processes, including the Florida company that was granted the first license for a hydropower project by the government of Armenia. Dr. Kocharian also gained insight through extensive site visits to hydroelectric power plants, manufacturing facilities, testing laboratories, control centers and design engineering departments in eight states.
Site visits were a key component to understanding the regulatory process through which a hydroelectric license is issued, including the process of applications and public comments before federal, state and local authorities. He was introduced to new automated control and other technologies for small, medium and large hydroelectric plants that have been developed in the US and that can be used in Armenia to increase energy production.
He also became better acquainted with the concepts of independent power for small hydro development in Armenia through meetings with private developers, regulatory agencies and financiers.
USEA is working to expand its partnership program into India, seeking US partners for Bombay Suburban Electric and Supply Ltd., Andhra Pradesh State Electricity Board and Calcutta Electric Supply Co. In the fall of 1995, USEA sent program managers to India to identify utilities for the program, as USEA expands its work into Asia, Africa and Latin America.
(Above) The Moldovagas delegation visits Yankee Gas in Meriden, Conn., USA.
(Left) Michael Gavrilets, standing, Simferopol Electric Station director, and Vladimir Cherkesov, chief engineer for the Crimean station, examine a voltage regulator during a tour of Otter Tail Power Co.`s repair shop in Wahpeton, N.D., USA.