Russia 111005 Basic Political Developments

RusHydro posts 1H 2011 net profit of 27.053 billion Roubles

http://rt.com/business/news/rushydro-profit-roubles-energy-041/

Published: 5 October, 2011, 10:14

Edited: 5 October, 2011, 10:14

Hydroelectricity generator, RusHydro Group, has posted a 1H 2011 net profit of 27.053 billion roubles under IFRS.

The bottom line is up 26 % from the 21.46 billion roubles reported for 1H 2010, with adjusted 1H 2011 EBIDTA up 18% year on year to 41.436 billion roubles, despite revenues dropping 20% year on year to 164.343 billion roubles.

RusHydro said electricity sales fell by 21% with sales of generating power down by 19%, but that EBITDA growth was a result of increased proportion of sales at unregulated prices due to the termination of the transitional period in the liberalization of the wholesale electricity market.

COMMENT: Russian struggles with electricity tariff reform

http://www.bne.eu/storyf2933/COMMENT_Russian_struggles_with_electricity_tariff_reform

Sergei Bubnov of Renaissance Asset Managers
October 5, 2011

Bad news for Russia's utility sector after the government got its calculations wrong for the second time this year. On January 1, Russia's utility sector switched from the crude "cost-plus" calculation to set electricity prices, to a "regulatory asset base", or RAB, for power distributed by 
network companies.

 But now poltics has put the whole RAB policy into question.

Before you nod off, it is worth reading on a little as while the power sector is notoriously boring, getting the price for power right is one of the biggest challenges for Russia's government and will determine the pace of economic growth for decades to come. The battle that has broken out to increase the tariffs for power is, well, maybe not exciting, but at least very important to Russia's near-term future.

And the government has already fluffed it. The generation part of Russia's
 power sector has already been broken up in an extremely successful privatisation, which must count amongst the biggest sell-offs in the world's history. However, the network and distribution part (wittily dubbed the "discos") that actually connects houses and factories to the grid over the "last mile" has not been reformed and can't be sold until a formula to determine how much they can charge for their services is decided on.



Everyone hates the cost-plus formula, as all it does is drive up costs without actually bringing greater efficiency. So the switch to tariffs linked to the value of assets should have been a big improvement, as the discos would have an incentive to invest in their companies and make them more valuable.

The government spent the second half of 2010 negotiating with these
 companies before finally settling on a formula that was launched on January 1 this year; under the new system, tariffs should have increased by 15-20%. Trouble is, no one had explained to the Kremlin just how much prices were going to rise – and in an election year too.

When the plan in all its glory was finally shown to Prime Minister Vladimir Putin in February, he was caught by surprise and said the tariff hikes were "too much." Everyone started back peddling quickly. The government had already got egg on its face at about the same time from a hike to social taxes that everyone now agrees was too high and has hurt consumer spending this year. The Federal Tariff Agency is responsible for calculating tariffs, but maybe the PM didn't get the memo, as it refused to take responsibility for the actual level of the tariffs.

Power politics

Russia's power industry is badly in need of more capital that it can earn from higher tariffs. Over the last two decades it has been starved of investment funds as the government held down tariffs as part of its drive to bring down inflation. That aim was achieved at the start of 2008 when inflation fell to single digits for the first time in modern history.

The state has since turned its attention to creating cash for investment and switched to the RAB system ahead of a new round of privatisation in which the regional distribution grids,
grouped under MRSK Holding, will be sold off. These discos have remained in majority government ownership on the grounds that as there can be no competition in distribution, they must therefore always be regulated.



MRSK Holding was included on the list of major state-owned companies earmarked for sale in March of this year: the proposal was that the 
government's stake would be cut from 53.69% to 50% plus one share. However, when the final list was approved by the government in early August, the privatisation plans for MRSK were made subject to confirmation.



The tariff regime is a crucial prerequisite to the privatisation of the discos, but as autumn closes in on Moscow the government has backtracked on RAB and suspended the new tariffs, allowing power tariffs to rise at the slower pace of about 6% so far this year and grid companies' tariffs will be hiked to 11% from July 1 next year.



Now the whole RAB policy is in question. The government has already said that the RAB programme needs to be revised, but there is no clarity 
on how this should be done.



Under the RAB system, assets are valued and the tariffs are then set for five years, after which the assets' value is assessed again. As most of the assets were valued before the 2008 crisis struck, there is clearly room to reassess them (downward) and so the tariffs will almost certainly fall.

The government is expected to make its recommendations by the end of this year and actual changes to be effected in the regions in the 
second half of 2012.

Activity in the Oil and Gas sector (including regulatory)

06:42 05/10/2011ALL NEWS

Rosneft may appoint a BP manager as its VP -- paper

http://www.itar-tass.com/en/c154/239895.html

MOSCOW, October 5 (Itar-Tass) — Several managers who are working with the British oil and gas corporation BP may change their place of work and join the Rosneft oil company, the newspaper Kommersant reported on Wednesday.

It has become known to the newspaper that Larry Bates, who earlier worked at the Moscow office of the BP, where he was in charge of a failed deal with Rosneft, may be appointed as a new vice-president in charge of Rosneft strategic development.

The paper's interlocutors say he may be officially appointed to the position towards the end of this year. A Rosneft executive confirmed in an interview to the newspaper that Larry Bates' candidacy "is under consideration" but he did not specify Mr Bates' future capacity.

The Kommersant points out that work is under way in Rosneft to form a new managerial structure, in which up to 20 new vice-presidents may appear in the Company. A Rosneft official confirmed that "the Company is looking for highly qualified specialists in the field of shelf (exploration) projects, as well as those that are (deemed) essential for its international development". A source, who is familiar with the current reorganization processes, said BP managers are also under consideration for the positions of a vice-president to be in charge of the petroleum processing segment and an adviser to Rosneft President Eduard Khudainatov.

The opinion of Kommersant's interlocutor is that appointments of foreign specialists to positions in Rosneft are a "good sign". "Western experience enables Rosneft to improve communication with potential partners," the interlocutor said.

-pop