RUSSIA - The Power Sector

The power industry is the most critical link in the chain of inefficiency that stretches from the fuel supplier to the end-user. Unified Energy Systems (UES), the state-owned national electricity utility, is one of the biggest debtors to Gazprom for gas supplied to its power plants. In Russian electricity generation, 65% of the plants use gas as fuel. Gazprom has for years been hinting that it would be prepared to swap the power company's debt for equity in UES. But this would increase the huge amount of power currently wielded by Gazprom over the Russian economy, and reformists in the government include keen anti-monopolists who think the company is already too powerful.

UES is itself facing a big problem with unpaid bills, estimated to be worth a total of Rbs129 bn ($21 bn). It has been implementing a tougher policy of cutting off supplies to non-paying customers. Earlier this year it was estimated that UES had about 6 terrawatt hours (TWh) of spare capacity because of the tougher disconnection policy, leaving more for exports. The company has plans to become Europe's biggest exporter of power, with the goal of tripling exports from 20 TWh in 1997 to 60 TWh by 2000.

UES has majority shares in most regional power producers, and a section of its top managers have for years been very resistant to modern business practices. This is changing gradually. In February UES signed a 10-year strategic alliance with Enron Europe, in the first major foreign deal involving the Russian power sector. In April there was a reshuffle of the top management, and former deputy premier Anatoly Chubais, a leading reformer, was made UES president. Deputy Fuel and Energy Minister Victor Kudryavy became its chairman. At a June meeting, Chubais presented an 80-page document including tough measures to address over a five-year period the problems facing the power sector. The plan calls for tighter financial control, among other things.

On the negative side, however, in May President Yeltsin signed a controversial law limiting foreign ownership of UES to 25%; this was seen in a negative light because foreign investors already own 30% of the company. There were rumours that Yeltsin's signature was part of an earlier deal under which the Duma had allowed Chubais to become president of UES.

UES is a massive enterprise that has interests well beyond the power sector, but it has begun to undertake measures to become more focused on electricity. Earlier this year it began to sell off its 101 non-power subsidiaries which covered a range of businesses from poultry farming to commercial banks. Its former chairman Boris Brevnov had said in December 1997 that the company could save $5-6 billion just by reforming old-fashioned management practices.