"If facts contradict thetheory, so much the worse
for the facts"
Presidential Economic Aide Andrei Illarionov is a well-known opponent of the Energy
Reform Program adopted by the Russian Government and the package of [energy] bills being
considered by the State Duma. In support of his objections, he zealously tries to draw the
public attention to the "poor", in his view, performance of RAO UES management.
These objections concern a number of major issues:
Tariffs. According to Mr. Illarionov, the electricity tariffs for Russian consumers
(2.1 cents) are nearly the same as those in Germany (2.2 cents), while the income levels
of the population in the two countries are entirely different. From this Mr. Illarionov
draws a conclusion that the electricity prices in the country are inflated.
In fact, Mr. Illarionov compares quite incomparable things: 2.2 cent per kWh is
the basic price on the wholesale electricity market in Germany. The peak wholesale
price (i.e. in a period of maximum energy consumption) is nearly 1.5 times higher than
that. Prices for different end-consumer groups in Germany range from 5 cents per kWh (for
industry) to 16 cents (for households). At the same time, the 2.1 cents per kWh in Russia
referred to by Illarionov are the average tariff for ultimate consumers, while the
average wholesale price is almost twice as low.
For the information of Mr. Illarionov, the electricity expenses account for just 12% of
the total production costs in the energy-intensive industries, such as aluminium industry,
which is 2 times lower than the worldwide average for this industry. As to "ordinary
citizens", the electricity bills on the average do not exceed 1-2% of people's
income, with the public utility bills representing 3-4% of overall income (while amounts
spent on tobacco and alcohol make 5.3% of income of an average family).
Mr. Illarionov tries to substantiate his statement about excessive electricity prices
in Russia by comparing the share of electricity expenses in the GDP of Russia (5.5.%
according to Illarionov's data) and the USA ("slightly more than 2%"). Actually,
these figures primarily point to high energy intensity of our economy (i.e. energy
consumption per unit of production). Energy intensity of Russia's GDP is 2.5 times higher
than in the USA, 3 times higher than in Japan, 4 times higher than in France, and 4.5
times higher than in Great Britain and Germany. Moreover, the energy intensity in Russia
is higher than in the CIS countries, where the electricity tariffs are also much higher
than in Russia: it is 3 times higherthan in Armenia, 2 times higher than in
Belarus, and 1.5 higher than in Moldova.
It is significant, that from 1992 to 2001 (when the tariffs growth was lower than the
overall price rise in the industry), the energy intensity of Russia's GDP increased 1.5
times. With low power tariffs enterprises do not have the incentive to save electricity
and invest in energy-efficient technologies. Mr. Illarionov apparently prefers not to
see it.
Fuel. Mr. Illarionov claims that the fuel price hike should not result in higher
electricity cost. At the recent Russian Forum "The Fuel and Energy Industry in XXI
Century", he gave a detailed analysis of the issue of fuel oil prices, admitting that
the prices grew 2.6 times over the past year. However, this growth in his opinion does not
have a serious effect on the tariffs growth, as "fuel oil accounts for 4.6% of all
fuel consumed by RAO UES, while gas accounts for the rest".
Indeed, gas is the main fuel used by RAO "UES of Russia": its share makes
60%. And Mr. Illarionov cannot be unaware that the gas tariffs increased almost 40% in
2002, and will grow by another 20% after 1 January 2003. Compare it with the average
electricity tariff, which increased 25% in 2002 and will grow not more than 14% in 2003.
Production. Mr. Illarionov reproaches RAO UES management of inefficiency, stating
that the electricity production in the energy system will increase by a "mere"
0.9% in 2002, as compared to 1997. Further, he holds up as an example
"Rosenergoatom" Concern and AO "Irkutskenergo", a company independent
from RAO UES, both of which significantly increased their energy production in 2002.
I am afraid I will have to remind of the things that even a school pupil ought to know.
Electricity is a kind of commodity that cannot be stored in a warehouse. One cannot
produce more electricity than consumers are ready to use. How much electricity is
generated only means that consumers need exactly that volume, and not a kilowatt more.
Mr. Illarionov also ought to know, that the cost of electricity generated by
hydroelectric power plants, which make up the core of "Irkutskenergo", is times
less than production costs at the power plants of RAO "UES of Russia".
The nuclear power plants of "Rosenergoatom", for technical reasons, operate
in the so-called "basic" mode, and practically do not reduce their power output
depending on the season, weather, and other factors. As a result, in the periods of lower
energy consumption the country's energy balance is regulated primarily at the expense of
thermal power plants of RAO "UES of Russia", which have to reduce their load.
Employment. Mr. Illarionov says that the number of RAO UES employees increased from
662 thousand people in 1997 to 664.8 thousand people in 2001. That's undisguised
distortion of the facts. It is true that, by year 2001 end, the number of RAO UES
employees was 664.8 thousand people. However, it decreased, rather than increased to that
level, as in 1998, before the new management team came to RAO "UES of Russia",
the number of employees had been 671.6 thousand people. Besides, the wage increase rate in
the electricity industry is still lower than the inflation rate.
Labour efficiency. Mr. Illarionov cites data about a decline in labour efficiency
at RAO UES enterprises. However, he can't seem to make up his mind as to how big the
decrease rate is, as the latter varies between 2.5% and 14% in his statements, apparently,
depending on the audience he is addressing. These data cited by Mr. Illarionov are
contrary to fact. Over 1998-2001, the labour efficiency at RAO "UES of
Russia" grew from 899,000 to 943,000 kWh per person per annum, while in 2002 it is
anticipated at 1,044,400 kWh per person.
Investments. Mr. Illarionov keeps accusing the Company's management that the
investment level is decreasing. Clearly, Mr. Illarionov is misleading the public, as he
is not telling the whole truth. He pretends to be unaware that the investment program
of RAO "UES of Russia" is approved by the Russian Government, and it is the
Government that has been reducing allocations for investments in the energy industry over
the past few years: this was the case in 2000, 2001, and this year. The 2003 investment
program of the Company is no exception, either: according to the estimates of RAO
"UES of Russia", at least RUB 31.59 billion must be allocated for investments,
but the Government decided to limit the RAO UES investment program to RUB 23.5 billion.
Arguing against the energy reform, Mr. Illarionov says that the prospects of gradual
decrease in tariffs after the launch of a competitive market "scares away" the
potential investors. If we compare this assertion with his previous statements about the
"inflated" tariffs of RAO UES, then it must turn out that investors must rush to
put their money into today's energy industry with its "high" tariffs established
by the Government. However, nothing of the kind happens, chiefly because the current
energy tariffs do not ensure the return on investors' capital.
RAO UES power grid. Mr. Illarionov says that network losses have increased from 10%
to 12% over the last 5 years. In so doing, he modestly holds back the information about
what kind of networks are responsible for such losses and why the losses are rising. It
should be emphasized that in high-voltage lines the losses decrease rather than increase
(currently, the losses in lines of 330 kV or more are about 3.5%). Most losses, up to 20%,
occur in the distribution networks. The reasons are many, but the main ones are equipment
wear, which now makes 70%, and ordinary theft, which is largely provoked by imperfection
of the laws regulating circulation of non-ferrous metals.
Capital management. Mr. Illarionov alleges that "quite a few power plants are
sold off at half price or at no-one-knows-what-price" using "absolutely
non-transparent processes". As an example of such actions he provides the sale of
Solikamskaya CHP and Shakhtinskaya CHP.
Here Mr. Illarionov is not telling the truth again. The truth is that Solikamskaya
CHP was sold not through a "special deal", but at a public auction, i.e. in
conditions of "transparency", which is advocated by the Presidential Aide. The
resolution on sale of the power plant was taken by the Board of Directors of RAO "UES
of Russia", most members of which are representatives of the state authorities. And
it was the Board that approved the start price for the transaction, which was determined
by an independent appraiser. As a result of the auction, the power plant was sold at a
price 20% higher than the starting one.
Mr. Illarionov says, "Shakhtinskaya CHP has been sold for part of the generated
electricity". Not true again. Shakhtinskaya CHP has not generated electricity
for almost 12 years: the last electric turbine generator was decommissioned back in 1990,
and the plant was switched to the boiler mode.
Finally, in October 2001 the power plant ceased to operate in that capacity as well.
One may see that the property sold was a non-operating power plant that brought its owner,
OAO "Rostovenergo", RUB 59 million in losses annually.
Exports. Mr. Illarionov asserts that the electricity exports and their proceeds are
falling each year. However, he keeps correcting himself. From one rostrum, the
Presidential Aide declares that the exports in 2002 have fallen 57% against 1997, from
another, that they have decreased "by almost a quarter".
In reality, the exports in 2002 are anticipated at 17.9 billion kWh. It is certainly
less than in 1997 (19.7 billion kWh), but on the other hand, all exported electricity is
fully paid for, unlike the export supplies back in the 1990s. Payments collected for the
exported electricity in 1997 made 15% of the bills due, as compared to 100% in 2002. The
average export price did decrease due to the situation that emerged in the foreign
markets after their liberalization.
The Presidential Aide complains that "the price for export to Kazakhstan is lower
that the prices on the Russian FOREM". Distortion of facts again. Average
price for export to Kazakhstan is 1.46 cents, while the FOREM tariff is 1.055 cents per
kWh.
According to Mr. Illarionov, "prices for export to Georgia and Azerbaijan are 2 or
3 times lower" than the domestic electricity prices in these Caucasian Republics. These
figures used by Mr. Illarionov are also contrary to fact. In fact, the price for
export to Georgia and Azerbaijan is 1.9 cents per kWh, which is much higher than both the
domestic prices in the North Caucasus (0.8 cents) and prices on the Russian FOREM.
Financial Highlights. By "financial highlights" the Presidential Economic
Advisor for some reason means not revenues or profit of RAO "UES of Russia",
which, by the way, have increased both under the Russian and International Accounting
Standards, but mainly the "ratio of taxes to the Company's income". According to
Mr. Illarionov's calculations, this ratio is sliding. Apparently, this "ratio"
much more corresponds to some personal ideas held by the Economic Aide, than the figures
understandable to everyone else regarding the taxes paid by RAO "UES of Russia"
to budgets of all levels. Illarionov's system of "arguments" does not have
place for the fact that the Company's annual tax payments have increased more than
threefold since 1998.
Stock prices. In a biased manner so typical of him, Mr. Illarionov cites
data about a fall in RAO UES capitalization in the periods he chooses at will. And from
this he draws the conclusion that the stock market is sensitive not only to actions of RAO
UES management, but even to public statements of CEO of RAO UES Anatoly Chubais.
Actually, RAO UES stock, as the country's most liquid securities, is certainly affected
by the general trends in the international and domestic markets. Besides, the Company's
stock prices and capitalization are influenced by non-economic factors. Here are some of
the events that have had a significant impact on RAO UES stock prices:
From early March 1998 (when information first appeared that Anatoly Chubais might be
appointed CEO of RAO UES) to 4 April (when Chubais was appointed Board member) the
Company's capitalization driven by investors' expectations increased 18% (from USD 11.7
billion to USD 13 billion).
On 7 May 1999, the State Duma overrode the President's veto and adopted a law
restricting the foreign shareholders' stake in RAO UES of Russia" to 25%; after that
the Company's capitalization was falling USD 200 – 800 million daily, and on 14 May it
plunged by USD 1.4 billion against 13 May.
1998 – crash on the Russian stock market; RAO UES shares fell to 1.5 cents per share;
in 1999-2000 RAO UES shares grew together with the RTS stock index or even ahead of RTS.
For example, from 23 December 1999 to 14 January 2000, the Company's capitalization surged
almost twofold from USD 3.5 billion to USD 6.3 billion.
2001 – over the year, RAO UES stocks grew 122% as compared to the RTS stock index
growth of 98%.
2002 – after Anatoly Chubais announced the management's initiatives in shareholder
relations, the stock prices have grown 60% since September.
Consumer payments. Mr Illarionov reproaches RAO UES management of lack of modesty,
saying that all large companies have improved their collection of payments for goods and
services provided, while only RAO UES is proud of that. Yes, we have a good reason for
such pride, or rather, satisfaction with the work done. Let me remind you of the words
said by Mr. Illarionov himself, "Power industry is the neural system of the
economy". If no payments are collected in the energy sector, the whole chain is
affected: no money goes to workers in the nuclear power, coal, oil, gas, railroad, and
machine-building industries, nor to the Federal and local budgets.
The limitations of a newspaper article do not allow me to give a complete analysis of
all distortions and manipulations used by Mr. Illarionov to turn the reform in the
industry back. However, I would like to tell Mr. Illarionov one thing: following the
principle "If facts contradict theory, so much the worse for the facts" is out
of place even when one does not have any serious arguments. Clearly, this refers not only
to the energy sector.
Member of Management Board of RAO "UES of Russia"
Andrei Trapeznikov
russian
