RUSSIA - The Power Sector.

The power industry is the most critical link in "the chain of inefficiency" that stretches from the fuel suppliers to the end-users. Unified Energy Systems (UES), the 53% state-owned national electricity utility, is by far the largest power utility in Russia. Many of its generating plants date from the time of Stalin, with one in Samara in the eastern Volga region having recently celebrated its 100th operating year. It employs almost 700,000 people and has 72 regional power subsidiaries. It has had 101 non-power subsidiaries. It is one of the biggest debtors to Gazprom for gas supplied to its plants and its capital spending dropped from Rbs6.5 bn ($232m) in 1991 to about Rbs2.1 bn ($75m) in 1999.

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 itself is facing a big problem with unpaid bills, estimated to be worth over $24 bn. It is cutting off supplies to non-paying customers. It is said that it has about 5 terrawatt hours (TWh) of spare capacity because of the tougher disconnection policy, leaving more for exports. UES wants to become Europe's biggest exporter of power, with exports likely to reach 60 TWh in 2000 from 20 TWh in 1997.

The CEO of UES, Anatoly Chubais, wants to restructure and re-privatise the company, and the foreign investors in it have turned sour on this "once-the-darling of the West". His plan is to sell participation in some of the 72 regional power subsidiaries and stakes in potentially hundreds of generating plants across Russia. The objective is to introduce competition and efficiency into the archaic power sector and boost the level of investment. But at currently depressed prices, UES' regional companies are now valued at $4,000-$16,000 per megawatt of capacity generated. This compares with $1m/MW to build new capacity, and an average valuation in emerging countries of $1.15m/MW.

However, the foreign investors in UES are furious at Chubais. Boris Fyodorov, a minority investor representative on the UES board who first challenged Chubais' attempts to force through approval of his plan at a board meeting in April 2000, was in early July quoted as saying: "Such a restructuring may be possible theoretically, but not in this country, this year or next, with this management. Selling today would be criminal". He prefers the idea of splitting UES into a maximum of about seven competing providers. Chubais says investors calling for changes to his plan simply oppose competition and deregulation. The decisive voice will come from the Kremlin, which owns 53% of UES.

On July 31, investors representing up to 15% of UES shares sent a letter to Alexander Voloshin, head of the Kremlin administration, calling for a compromise with the state during August on proposed resolutions for an extraordinary general meeting (EGM) set to take place in September. They want assurances at the EGM that at least two-thirds of UES investors must approve any restructuring plans proposed by the company. They also want that the votes of UES' American Depositary Shares not voted by investors will not be automatically allocated to management.

UES has majority shares in most regional power producers. In February 1998 UES signed a 10-year strategic alliance with Enron Europe, in the first major foreign deal involving the Russian power sector. It was in April 1998 that the top management was reshuffled, and former deputy premier Chubais was made UES president.

UES has interests well beyond the power sector. But in 1998 it began to sell off its 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 bn just by reforming old-fashioned management practices.