11 October 2002 – The Russian parliament has given its approval to a much-delayed set of proposals, which will overhaul the electricity sector, following the first reading in the Lower House.

The bill will allow for the break up of state power monopoly RAO Unified Energy System into a transmission company to run the national grid, a system operator, and 10 wholesale generation companies. All of the new entities will be distributed to existing shareholders – including the government, which owns 52 per cent of UES – on a pro-rata basis.

The bill has the support of President Vladimir Putin who has made overhaul of Russia’s electricity and gas monopolies a centrepiece of his drive to overhaul Russia’s economy. It has been delayed due to considerable opposition from those who fear rocketing power prices, foreign control and job losses.

Underfunded and inefficient, UES needs at least $3bn a year in investment if it is to continue serving the needs of Russia’s growing economy, according to analysts’ estimates. It currently gets less than $1bn. Meanwhile, state-regulated, artificially low electricity prices provide a massive subsidy to Russian industry, which one Moscow brokerage firm says comes to between $3.3bn and $6.6bn a year.

The new bills, which require two more votes in the lower house of Parliament, one in the upper house, and the president’s signature before they become law, should encourage investment by introducing competition among generating companies, liberalizing the wholesale-electricity market and moving from regulated pricing to a market-based system.

Minority shareholders in RAO UES are pressing for an extraordinary general meeting to challenge the position of UES chief Anatoly Chubais, a former Kremlin chief of staff. The shareholders are concerned that the sale of assets as part of the restructuring is depriving them of value.

Chubais tried to reassure jittery markets last month by declaring a moratorium on asset sales. He said no part of the company would be disposed of until agreement had been reached on how to value its core assets and divide up proceeds from sales.