RAO Unified Energy System

[Copperfield]

Fradkov Unplugs Power Reforms
Monday, June 28, 2004

http://www.themoscowtimes.com/stories/2004/06/28/001.html

By Lyuba Pronina
Staff Writer Prime Minister Mikhail Fradkov pulled the emergency break on energy reform Friday, halting any and all sales of generating assets until his government can determine how privatizing huge swaths of the electricity sector will benefit society.

The government had been expected to approve a plan drafted by Unified Energy Systems to group dozens of power plants scattered across the country into 10 wholesale generating companies, six of which would then be auctioned off for cash or UES shares.

But Fradkov announced Friday that the government is temporarily freezing reforms because it is concerned not only about the plans to privatize wholesale generating companies, known as OGKs, but also about how restructuring of the sector as a whole has been handled since 2001.

"At a government meeting at the end of the year [we will] thoroughly analyze the efficiency of the work that has been done since 2001 and determine what further steps need to be [taken]," Fradkov told reporters after a meeting with senior government officials, Interfax reported.

"The issue of separating OGKs is an element of energy reform and the government should start to make a decision on this issue after a comprehensive assessment of this reform's progress," he said.

The OGK issue is at the center of a years-long government drive to introduce elements of competition -- and thus private capital -- into the electricity sector by overhauling and then breaking up state-controlled UES and selling off some of its assets.

Many wealthy industrialists have spent the last year building up small stakes in UES on the expectation that they would be able to swap them for bigger stakes in specific generating assets that would fit well with their existing business interests, such as aluminum production. Foreign investors have also been along for the ride, which has seen UES's share price rise from 15 cents since early 2002.

Now, however, all those plans are in doubt. In the minutes after Fradkov's announcement, the price of UES shares dropped some 4 percent on MICEX, and some analysts now expect the market value of the world's largest electricity company by installed capacity, currently just over $11 billion, to be cut in half in the coming weeks.

"Chubais had staked everything on the OGK plan. Now the whole reform has practically ground to a halt," said Andrei Zubkov of Trust investment bank. "It makes no sense to talk about liberalization now that there won't be any competition."

Zubkov said it was hard to see why investors would want to hold on to their UES shares now that it looks unlikely that those shares will be able to buy generating assets any time soon. "You don't have to go to a fortune teller for that," he said.

For five straight months, the UES board, citing "technical delays," failed to make a final decision on the makeup and auction conditions of the OGKs.

This time, however, the delay does not "look technical," Zubkov said. Rather, it looks like a "political delay" by "some people in very powerful circles who do not want OGKs to be privatized," he said, adding that the recent developments surrounding Yukos may have played a role.

"It may well be that [President Vladimir Putin] does not want to see the same mistakes that were made in privatizing the oil industry repeated in the electricity industry," Zubkov said.

Chubais, the UES chief, oversaw the bulk of early privatizations and has been called the father of the oligarchs for his efforts. Interestingly, Fradkov said that one reason for the indefinite delay in UES reform was that the OGK issue was "attracting special public attention."

"The concern of investors is clear, and the resolution of this issue is important for investors to further identify their economic strategy," Fradkov said.

Earlier this month, metals magnate Oleg Deripaska, owner of Russian Aluminum, the largest corporate electricity consumer in the country, called on the government to delay creating and selling the OGKs because he said it would cause chaos in the industry.

"We are pleased the government agrees with our position," said David Geovanis, who represents Deripaska's holding company, Basic Element, on the UES board.

"We are all in favor of reform and a free market for electricity, but the kind of chaotic, shooting-fire process that is going on now is irrational," Geovanis said by telephone. "[Fradkov's decision] is good news for shareholders and good news for the country," he said.

Other minority UES shareholders, however, said just the opposite.

"This is alarming ... very disappointing," said former UES board member Alexander Branis, director of Prosperity Capital Management.

"From the shareholders' point of view, the proposals on reform are not ideal and could be further developed. But it should not take six months," Branis said.

Chubais himself played down the developments, although he said he and other UES executives were becoming increasingly frustrated.

"He did not say a single word about stopping energy reform," Chubais said in a conference call with investors, referring to Fradkov. "No doubt, the fact of delaying major decisions on the reorganization of the company cannot but frustrate management and everyone else who is concerned."

"For us, the task of reforming the electricity industry can only be accomplished with the clear, complete and unambiguous support of the government," Chubais said. He added, however, that there are two key pillars to the reform blueprint -- strengthening government control over the national grid and other infrastructure, while simultaneously creating and privatizing large generating companies that will compete with each other.

"Rejecting either of these ideas would devastate the entire [reform] concept," Chubais said. Some analysts, including Sergei Suverov of Zenit Bank, said it was unlikely the reform effort would be derailed for good.

"It may be that the government just decided to review the structure of a few OGKs, such as those with large gas-powered stations so that Gazprom could play a larger role in the industry," Suverov said.

"It would not be beneficial to the state to curb the reform, otherwise it will have to finance the upgrade of facilities [itself]," he said.