Speeches

Transcript of Speech by RAO UES CEO Anatoly Chubais at All-Russia Meeting of General Directors of RAO UES Entities

Good afternoon, friends and colleagues!

We are holding our regular meeting in our usual composition in accordance with our routine procedure. The people present here are the chief executives of all our companies-generation, power grid, dispatching and wholesale entities-and the chiefs of engineering centers. Our task today is to sum up the results of the winter period just ended.

In fact, it seems we did not have a winter this year. Some people even say that the global warming has already started. I don't think so. We have only been given a breather after the previous winter, which, as you remember, was the coldest winter on record for the past 60 years. So we had a breather, and now have a lot of serious things to do and think about.

Even if we leave out the factor of winter, the past half-year has seen the most dramatic changes in our activities, the most important ones during the entire sector reform period. The thing that we discussed at length at our meetings, the goals of all restructuring efforts in the electricity industry, the objective of the sector reform, namely, the inflow of private investments, has come true. The change is not merely on paper, in plans, in methodology recommendations or discussions: we have raised half a billion dollars in private investments as a result of the first IPO in the Russian electricity sector carried out by OAO "WGC-5". It was followed by an additional share issue by OAO "WGC-3", which raised another USD3.1 billion for the electricity industry.

All discussions are now over. We have achieved the goal we have been working towards for six years-not even since the adoption of the Law On the Electric Power Industry, but Government Resolution No. 526, which was adopted before the Law. All our decisions to restructure the regional energos, to carry out functional unbundling, to establish the Federal Grid Company and System Operator, and thousands of other most complex decisions were intended to achieve that goal. Today, that goal has been accomplished.

At our previous meeting, we designated our "IPO astronauts team", and the first ones intended for launch-Anatoly Bushin, Director General of OAO "WGC-5" and Maxim Kuznetsov, Director General of OAO "WGC-3". It was the Astronautics Day yesterday, so I think we should applaud our colleagues for their great accomplishment.

At the same time, it is clear that in the sector restructuring, just like in space exploration, a great deal of work needs to be done to achieve such a result. Among the contributors were not only each of the people present here, but dozens of thousands of people who work in the country's electricity industry.

I should say that it was during the past half-year that a number of breakthrough decisions was taken, which made it possible to attract private investments in the sector. As you know, during this period a number of key meetings was held with the Russian President and Government to address the reform issues. It was during these few months that some very important decisions were taken at the very top of the Government.

Firstly, at its meeting held 30 November 2006, the Government determined the specific figures and its stance on the long-term forecast of electricity demand, a measure that is fundamental for the sector. Speaking loftily, this is what we are supposed to give to the country. I would like to draw your attention to the fact that the forecast approved by the Government envisages an absolutely different dynamic. During the previous years, electricity consumption in Russia grew by an average of 1.7 percent; now, after long discussions and disputes, the figure was approved at 5 percent, a threefold increase. I think that such level is reasonable and well-thought. By the way, the electricity consumption in 2006 grew by 4.2 percent, despite the warm winter at the end of the year. This is an absolutely new scope of work. We are well aware that even a tenth of a percent, to say nothing of a percent, is a very big amount.

In light of the challenging tasks set before us-meeting the demand from the national economy, we have taken our next step: we decided on a rather large-scale review of our entire investment strategy. The logic is simple: if electricity demand grows 5 percent annually, there is no other way to meet that demand but to increase investment and the amount of such investments will be have no precedent in the history of Russia's electricity sector.

I think all of you know the key parameters of our revised five-year investment programme: the total amount of investments has been increased to RUB3.1 trillion from RUB2.1 trillion. We are to bring online 40,900 MW of installed capacity by 2011.

What is important for me is that it's not just a set of intentions, but an absolutely understandable and meaningful list of investment projects. In the power generation domain alone, there are more than 120 such projects, each worth on average about half a billion dollars. This list of new power plants to be built in Russia has been thoroughly thought over from the viewpoint of transmission of power and the development of the power grid as a whole, including distribution networks and the UNEG facilities. On the whole, the investment programme is well-balanced in terms of "machinery" and technologies, as well as in terms of economy and finance. Each of these projects has been or will necessarily be presented to investors. There is no shrewder and more impartial judge than the private investors. It is impossible to deceive them by presenting nicely written reports. The only way is to convince that an investment project will be effective.

In fact, this is what was done by our colleagues at OAO "WGC-5" and OAO "WGC-3". They acted according to very simple logic: you approach the investment community with an approved list of projects. And you will be asked an exhaustive list of questions on each of the projects by the best financial professionals who are least of all interested in megawatts and are more interested in rubles. Talk about it with you colleagues who have already gone this way. They will tell you how thoroughly they were questioned on each project: about the cash flow, net present value, IRR, pay back, and other such things which are buzzwords among investment and financial consultants.

It is at this point that the electricity industry and economy overlap. It is the point where we raised an unprecedented amount of private investments for the investment programme to create 40,000 MW of capacity.

That is why the new investment programme forms the core of what we are going to do. In fact, what we are already doing it, and continue to do within the investment process. Generally, I think that the key assessment criterion for the work of a chief executive, whether in power generation or in grid companies, will be their ability to implement investment projects. I would like to emphasize once again that under no circumstances does one have to wait until an IPO, as we already have in place the investment programme and the list of projects. Now we understand what tremendous amount of work has to be done before the first pile is driven into the ground. A most complex and enormous amount of work needs to be done professionally: a pre-feasibility study, a feasibility study, and project documentation. It is necessary to start doing all these things now, before ordering equipment and starting the construction. And I know the process is in full swing at virtually every generation company.

The task of launching new facilities within a very short time frame is extremely difficult, but this is the only way to accomplished it.

As you may remember, it was at our meetings that the phrase "master plan for the development and location of energy facilities until 2020" was used for the first time. The idea was backed by the Government. As you know, at the coming Government meeting scheduled for next Thursday, the Minister of Industry and Energy will report on the Master Plan for the Location of Energy Facilities Until 2020. This document will become sort of a constitution for the energy industry. I am sure that these are not just another two documents, they are in fact a reinstated system of planning for the electricity industry based on market principles. That's what they are. In my view, these documents are exactly what I have said - both in the five-year and fifteen-year perspective.

I would like to dwell upon one more event. It is difficult even to rank its importance. I am speaking about the launch of the wholesale and retail markets. Without exaggeration, this event is the core of our reform. You know that very well. I am not exaggerating, we would not have received any private investments, no billions or millions of dollars, not even a single dollar, if we had not done this.

It might seem an insignificant experience-a mere seven odd months. Nevertheless, those who are actively involved on the market understand that the market is not just up and running, but we are learning some very important lessons from it. When I say "us", I mean all of us, myself included. Both on the producer and consumer side. It is important that we see what lessons we have learned from the market over the period. We will discuss this subject thoroughly. We were expecting that, if we launched the market in September, we would get a positive price movement in September, October, November and December. But the result was quite the opposite: September, October, November, December - look at the first and second price zones (the data is freely available on the ATS website), the prices are moving down, down, and down. Why? Because we had no winter. The market proved to be wiser. The market saw it, felt it, and gave us the dynamics which reflects the reality. We had not expected it, but the market demonstrated it. The conclusion is that we should be prepared for all sorts of scenarios.

The second lesson is almost obvious, but, nevertheless, is of key importance. You all see the daily price dynamics. The morning maximum, evening maximum, night minimum. And in Siberia, the prices were close to zero over long periods of time because of the high water on the rivers, which means cheap electricity. The daily price dynamics influences the consumer, who is beginning to analyze: if you can shift the consumption from the peak hours, at least to the half-peak during the day, do, it is economically advantageous. If you can shift the consumption from day to night, do, it is also economically advantageous.

Of course, I understand that this message has not yet fully come across. And I see that the share of the market segment, which today stands at 17-20 percent, is the sprout which is growing in the right direction. They will teach us and the consumers how to shift the production and consumption, respectively.

Also, there are certain results, no less important, yielded by the market launch: response to restrictions of gas supply which led to a switch to fuel oil. I was very much interested in what the market reaction would be. And the market reactions was like this: I assume part of the costs of fuel oil-based generation and include them in the price, i.e. pass these costs through to the consumer, but I do not assume a certain part of the costs. You've got to find your own solutions.

I think that these lessons are extremely important, they are proof of the old truth which is evident to industry professionals and economists: the market is the mankind's greatest invention over the past 2000 years of its existence. It can deliver the result which state planning will never give. This is especially true of our area of work, the electricity industry. Instead of the flat rate set for the entire country we get a flexible, reliable, efficient and effective instrument which gives, 24 hours a day, 7 days a week, absolutely correct signals to electricity consumers and producers for 3000 nodes of the country's power system.

I would like to thank, and send my respect to, the entire team headed by Yuri Udaltsov, member of the Management Board of RAO "UES of Russia, who did that, and Larisa Shiryaeva, Head of the Market Department at RAO "UES of Russia". It would not be an exaggeration to say that the dispatching staff made a major contribution to the result-a thing we sometimes forget. In fact, what was done at the System Operator to get the market to work was a complete reengineering of the entire production and dispatching process. This includes [development and deployment of] new software and staff training. A major effort was undertaken at NP "Administrator of the Trading System" (ATS) headed by Dmitry Ponomaryov. ATS now supports, on a nearly 24-hours a day basis, the operation of this mechanism for the first and second price zones. Their work deserves the highest praise. From what I know about the global electricity markets-there are dozens of them in the world today-the market we have created in Russia is, if not the best, undoubtedly one of the best electricity markets in terms of technological structure.

I think it's a matter of utmost importance, because it forms the basis for the development of other parts [of the market]. It is important because the market, unlike the tariff [set by the regulator], is a living organism, and we need to develop it all the time. We still have many internal problems, discrepancies, regulatory issues, software issues, organizational matters, and all of these should be a matter of constant concern. It should be a self-evolving process, or it will turn into its opposite after some time.

The things I have enumerated are at the very core of success: market, raising private investment, medium- and long-term planning. It is the core of the entire electricity industry management mechanism which we have worked on together for the past years. It started to work before our eyes, and yielded its first results.

Of course, I have not given the complete list, there were other key decisions. We finally managed to get a most important decision taken on the gas supply volumes. We discussed at our previous meeting what way we should take, and the path taken was not the most radical one, but the key point is that it has been selected. For the first time in nine years we have strict gas supply figures approved by the Government by years for 2007-2010 with an increment of 23 billion cubic meters. These are very serious targets, what remains to be done is achieving these targets. You know that we are going to transform these figures into the bilateral contracts formula, i.e. your contracts with gas suppliers. These are take-or-pay contracts, which is a serious thing. If you deviate from the target, you will have to pay both suppliers and consumers.

We are now working on the price formula; although we are a little behind the schedule, I am confident it will be accomplished. I hope this will become the core of the entire relationship between ourselves and gas suppliers. And I hope that it will work out well, that Gazprom will meet the Government targets. At least, Gazprom's chief executive confirms it, and Gazprom is not likely to back out of the deal.

Also, there is one more important decision approved by the Government over the period, the market liberalization strategy. According to various estimates, the market liberalization rate currently stands at about 20 percent, but according to the decisions taken to date, we have three years and eight months before the country's wholesale market will be fully liberalized, unless a decision is taken to shorten the period. The strategy is clear.

Those are the most important events that occurred since our most recent meeting last winter. But, in the very near future, we are going to see events of similar scale. Preparations, discussions and disputes are underway about them, in any case, this was the case yesterday in all officers of the key government officials. All this is certain to have a direct impact on us, and we will need to discuss this at our conference.

Perhaps the most important of them is the final phase of RAO UES reorganization. Let me remind you that a shareholders' meeting will be held this coming autumn, and in the middle of next year the company will cease its operations. This was what we said 7 years ago. Now it is up to you to continue our efforts. You understand very well that the reorganization is an extremely complex task, many of the people in the room know that. What is important for me is that we have been able to produce a [reorganization] model of such high legal quality. It will help us resolve a dozen different tasks. It will help us implement the consolidation of the UNEG, transmission companies and interregional distribution companies, and the consolidation of OAO "HydroWGC" and floating its shares on the stock market within a very short time frame. It will help us create a massive financial resource for the bulk transmission networks. And it is in this area that we are going to face at least one or two years of an "investment pause" before the new regulation system starts to operate. We just can't afford such a pause in the power grids.

Further, we are creating an investment resource for the hydropower generation. In this area, the situation is somewhat more complicated, as we have no plans of an IPO at HydroWGC. Government control over this company must be retained. Accordingly, we will need to find a way to provide investment for the company. We have such a plan.

It has been approved in principle. But its scope and the number of issues that need to be addressed are so great that, in addition to the approval in principle, we need the Board's resolution on some of its components. As a matter of fact, this is what we have been doing. At the last but one meeting, the Board of Directors approved the programme, and we approved measures to implement part of the programme relating to the development of the power grid. I hope that at the next Board meeting we will adopt a number of modifications to the programme.

As concerns the power grids, it is exactly the area which will see drastic changes in the very near future. As you know that we are going to review the configuration of the Interregional Distribution Companies (IDCs). Having four IDCs does not appear reasonable from the managerial perspective: the structure is complex and multi-layered, and the relationships among the IDCs and DCs are too complicated. That is why we will need to change the structure.

On the other hand, the system of government regulation in the power grids is changing. The Russian Government understands that the approach to tariff setting in the power grid sector will need to be changed. Unlike generation, it will remain regulated, but the regulatory basis should be absolutely different. We discussed that briefly at our last meeting. However, today it is not just our opinion, but the position of the Government, and, accordingly, of the relevant ministries and agencies. Process is underway to produce a new system of tariff regulation.

One more matters to be addressed in the near future is the creation of a sector management system for the period after RAO UES reorganization. I have just spoken about the planning. I think that the most important foundations have been laid. But that is not all. I will need an organizational structure for the sector management after RAO UES reorganization, both at the federal and regional levels. Since you know the situation in the regions better, I urge you to listen to our proposals and share your experience. The subject is extremely important and serious.

This is my view of what has come about over the past half-year, and what needs to be done in the near future. We have significant results, we have reached the goals of the electricity sector reform: the reform has brought investments in the sector.  

Top