There are 72 regional electricity-producing utility companies – energos, for short – in the state-controlled holding known as Unified Energy Systems (UES), run by Anatoly Chubais.
None in Russia can be confident in predicting the outcome of the so-called reform of the power sector, except that Chubais and the government say they are committed to reducing the number of energos from 72 to 10; subtracting transmission business from each remaining energo, or gencos; creating new companies to buy, sell, and transmit power along the nation’s grids; and zeroing out the tariff-fixing electricity commissions of Russia’s regions, by centralizing that power in one federal body.
There are as many theories of what this process is meant to accomplish as there are interests in making profits out of buying electricity cheaply, and selling it dearly. I like Larry Woelk’s. He is a veteran of the freight-forwarding industry in the United States, and he recently wrote a brief paper explaining why the global transportation system is “so leaky it is amazing that there isn’t considerably more stolen out of the supply chain.” The Woelk Theory is that “the primary reason why there is not more theft is that there is only a limited number of thieves to go around.”
As the man who administered property theft – oops, privatization – in Russia since 1991, Chubais’s new plan for the electricity sector might be considered progressive, if it means reducing the number of thieves stealing from the state’s power resources, and if Woelk’s theory holds for Russia. The question to be debated in parliament – and ultimately to be decided by President Vladimir Putin – is whether, in the special circumstances of Russia, fewer hands on the electricity supply chain mean less stealing. Or, to consider Chubais’s record as the administrator of voucher privatization and loans-for-shares, do Russian conditions turn the Woelk Theory on its head, so that it reads: to limit the amount of stealing in Russia, it is necessary for thieves to compete. The fewer the number of thieves, the more they steal, and the greater the aggregate of their larceny.
Chubais recently said that he would deliver this month a detailed document that would describe for the next three years “not only the ownership structure, but all the basic economic parameters of [power] industry restructuring. Everything will be described and based on figures, not just words.” The distinction Chubais makes between figures and words is of passing interest. It’s a reminder that during his time in government he admitted to securing multi-billion-dollar loans from the International Monetary Fund with nothing but words, knowing the state books were rigged to allow the funds to disappear.
But let’s imagine we are able to see into the future that Chubais has calculated. Suppose there are 10 gencos, a handful of independent energos, three or four transcos, and one regulator. Remembering that the objective of the new system is to generate profit for fewer stakeholders, how can we tell when a so-called market price isn’t a theft from one pair of hands to another? And how does the so-called market created out of the new gencos and transcos assure there will be fewer thieves stealing less than they do now?
Lucky for us, the power market of the great state of California helps us answer these questions. Or, to be more accurate, civil and criminal investigations of power trader Enron have revealed how the California electricity market was manipulated, government regulators deceived, prices driven upwards, and huge profits generated for a group of corporate insiders.
Corporate memoranda written inside Enron released publicly last month illustrate how the trader was able to buy low-priced electricity where it was in surplus and sell it where it was in heavy demand in California, at a huge markup. The scheme did not violate market rules at the time, although it is now clear the transactions involved conspiracy to rig supply and demand imbalances, creating shortages with false information, and deceiving regulators with phony records. If Enron’s management had not come under investigation for accounting scams intended to create the appearance of profits, and to hide losses, boosting share prices and executive pay, the electricity fraud might not have been discovered. That is to say, those who knew the California power problems were the result of a profit-making conspiracy would not have seen the proof of their suspicions.
Allowing our minds to move forward in California, and backwards in Russia, let’s look at the figures for the 72 energos last year. Overall, UES has reported there was 30 percent revenue growth on the back of a 31 percent increase in electricity tariffs. Demand for electricity did not change. Of the 72 individual energo results, 30 reported losses which, as you all know, is the difference between costs and revenues. No surprise – the loss-making energos are concentrated in the far eastern regions of Russia, where fuel and generating costs are relatively high compared to the rest of the country, while the capacity of consumers to pay higher rates is relatively low. No surprise either – the most profitable energos, such as Lenergo and Tyumenenergo, are located in regions where fuel supply is abundant and relatively cheap.
Looking more carefully for evidence of theft – oops, discounted power transfers – you can see that in those regions where the major consumers of electricity are aluminum smelters, Krasnoyarsk and Khakassia, the net profits and profit margins of the energos are minuscule. Krasnoyarskenergo, which supplies power to the Russian Aluminum smelter at Krasnoyarsk, reported net profit for the year of $1 million, and a margin of 2 percent. Not shown on the books is Krasnoyarskenergo’s court claim for $100 million in unpaid electricity charges owed by Russian Aluminum.
Geography and geology make a difference in the underlying balance between supply and demand for energy. But as Russia aims to be a single political entity, not 89 regions, 72 energos, or 10 gencos, it is up to the political leadership, not the power managements, to decide whose interests should be served by the way electricity is distributed across the land. A good many of these politicians are elected; Chubais is not. The question that Russian politicians, as well as voters, should consider as they pore through the fine print of the electricity reform plan is whether Chubais’s record for serving the public trust is any better than Enron’s.