Marta Srnic

December 08, 2000

Moscow, Dec. 8 (Bloomberg) — The Russian government said it supports a proposal by RAO Unified Energy Systems to break up its power monopoly and attract investments the state can’t provide to upgrade its aging infrastructure.

Different ministries, which reviewed the management plan to separate the national electricity grid from power generation and distribution and sell stakes in power generators, support the proposal, said Deputy Economy Minister Andrei Sharonov. The government will meet on Dec. 14 to decide whether to pass a decree to start the reform.

“The consensus on the aim and purpose exists,” Sharonov said at a conference on industry reorganization. “There are no disagreements between the participants of this process. The government cannot be the main investor, we can only count on domestic and foreign investors.”

The plan has met opposition from UES minority shareholders, pushing its share price down 56 percent since the plan was announced in March, more than the 35 percent decline of the benchmark RTS stock index in the same period.

Shareholders have said there is not enough detail in the plan on the sale of generating assets and electricity tariffs. They also expressed concern that assets could be sold to investors who wouldn’t be interested in improving those companies and urged management to wait for the market to improve before selling assets.

UES Chief Executive Officer Anatoly Chubais said this week the company foresees asset sales starting in 2002, reversing earlier statements the first sales could start as early as 2001.

Legal Protections

The government said it would seek to introduce bills to protect some groups of the population and strategic industries from power shortages because of rate increases by giving them additional financing. Russia keeps utility rates artificially low, a form of indirect subsidies to industry and population.

Sharonov said the ministries had their biggest disputes over the transmission grid, which is meant to remain state-controlled under the plan.

Critics of the plan said Russia, which has one of the coldest climates in the world, must be very careful to ensure heat supplies are secure. UES produces about a third of Russia’s heat.

“There are a range of risks that haven’t been taken into account,” said Alexander Nekrasov, deputy director of an economic forecast department at the Russian Academy of Sciences. “We could have very serious problems.”

The government will consider two documents to jump-start the reorganization at a Dec. 14 meeting, he said. The first document will describe what the new market should look like, how to create generating companies and budget spending to finance strategic users.

The second document will lay out specific steps that UES, the government and legislators should take to implement the reform and will be the program for the first six to nine months.

Russia must ensure it has relevant legislation in place before reorganization starts, said Eduard Shavrov, deputy director of power energy department at the Energy Ministry.

“We need the rules of the game,” said Shavrov at a conference in Moscow. “We don’t have any now.”

Shavrov also said the government must provide incentives for investors, such as state guarantees and tax breaks.

UES shares rose 7.5 percent, or 0.64 cent, to 9.15 cents.

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