Power Industry 1991-2000

The Russian power supply system today consists of 72 regional power companies. All of them have the same type of name: first letters from the name of the region and ending with "energo." The only exception is the Kaliningrad power system with the melodious name of Yantar'energo.

RAO UES (Unified Energy System)

Russia can be considered a unified system only in a relative sense: the Far North and Kamchatka, say, are not part of it. Nevertheless, it is the largest power supply system in Europe and the fourth-largest in the world after the U.S., China, and Japan. Absolutely all civilian enterprises and the majority of defense enterprises depend on UES of Russia's operation.

Power lines of all voltage classes extend for 2.6 million km. Nearly 300 billion kWoh per year are transmitted through UES of Russia's network, and its enterprises employ 670 000 workers.

The Rosenergoatom concern is a separate link of the unified energy chain. The operating basis of the Russian electric power industry consists of 440 thermoelectric and hydroelectric power stations with capacities of 132.1 and 43.8 million kW, respectively, and 10 nuclear power plants with a capacity of 2.7 million kW. Nuclear power accounts for about 15% of overall electric power output-23% in the European part of Russia.

HISTORY: 1991-2000

The entire development of Russian business is reflected as in a mirror in the ten-year history of RAO UES Russia. Many domestic companies could recognize themselves in the story of how a sliver of state property first evolved into a state concern, then into an association of debt extortionists, finally into a state company, and ended up with an attempt to become just a company.

1991
The history of the industry began on a summer day when Deputy Minister of Fuel and Power of the USSR Anatoly Dyakov was appointed Minister of Fuel and Power of Russia by decree of Boris Yeltsin. Dyakov's first major project in this post was a plan for creating a fuel and energy exchange jointly with allied departments. However, as a result of the collapse of the USSR, the exchange never became a reality.

In November, the first major power energy crisis hit the Far East. By then, Vladimir Lopukhin had become the head of the Ministry of Energy, whose task was to work out a unified reform concept for the fuel and energy complex (the electric power industry was part of the complex then) by May 1992.

In December, the first attempt was made to legalize an open coal market. Gaps in the legislation allowed the authorities in Kuzbass to start a "coal marathon," a campaign for open sales of coal and coal export licenses to anyone who wanted one. However, there were hardly any buyers. The "holes" in the laws were closed, and liberalization of the coal market had to wait another five years.

1992
On April 15, the Russian Energy Company (RECO) was registered; its founders included the Soviet state concern Energoatom, which was renamed Rosenergoatom on the eve of registration; eight nuclear power plants; applied research institutes; and the Brokinvest brokerage office. Evgeny Ignatenko became the head of RECO. This was essentially the nuclear industry's first attempt to play independently on the energy market. A second attempt at "energy separatism" was made only in 2000.

In May, Vladimir Lopukhin presented his reform concept for the fuel and energy complex (FEC); according to the concept, the government would continue to regulate gas and electricity prices, but would liberalize oil prices. He was opposed by Minister of Economics Andrei Nechaev, who was in favor of administrative regulation of all prices in the FEC and smooth price increases. Boris Yeltsin did not approve the concept and dismissed Lopukhin in June. Viktor Chernomyrdin replaced Lopukhin, and electric power became the domain of Anatoly Dyakov, Chernomyrdin's deputy. In the end, Lopukhin's strategy won, but only after three years, when Chernomyrdin became Prime Minister.

In summer, entire regional power systems were turned into joint-stock companies with a name ending in "energo" (AO-energo). On November 16, Boris Yeltsin signed the decree "On Measures to Implement an Industrial Policy upon Privatization of State Enterprises," in which the stocks of strategic energy companies were consolidated as state property and could not be privatized separately. It was a question of creating some kind of energy holding to which controlling blocks of shares of AO-energos would be transferred.

On December 31, the Russian Joint-Stock Power and Electrification Company (RAO UES Russia) was registered. RAO UES got all assets of the Ministry of Energy associated with electric power: the unified energy system (UES), which had existed since 1961; 70 regional power supply systems; 100 hydro power supply systems; more than 600 heating and power plants; and 2.5 million km of power transmission lines. Chernomyrdin appointed Anatoly Dyakov to head the company.

1993
In summer 1993, the Constitutional Court of Russia declared the "separate" privatization of Irkutskenergo legal and Boris Yeltsin's decree stipulating the creation of RAO UES Russia unconstitutional.

In December, the RAO UES Russia acceptance house was created, a structure that within the next three years accumulated about 40% of the funds in the country's electric power system by consolidating control over its paper circulation.

On December 17, the government announced the privatization of RAO UES Russia. The first block of 20% of its shares was put out at a check auction.

1994
On February 8, following another doubling of RAO UES Russia's electricity rates, Vice-Premier Oleg Soskovets demanded that Anatoly Chubais, head of the State Committee for the Management of State Property (GKI), fire Anatoly Dyakov. Soskovets accused the power company of "building communism for one industry." However, Chubais did not fire Dyakov.

On December 15, Dyakov announced at a press conference at the company's central office that "we have accomplished the main task of preserving the unity of the power system, and all the energy supply problems in the regions can now be solved."

1995
At a press conference in March, Evgeny Ignatenko, who became first vice-president of Rosenergoatom (the idea of RECO had not justified itself), demanded a merger of the company with RAO UES Russia and proposed an alternative: to provide open access for Rosenergoatom to the wholesale market for electric power. Ignatenko was denied both, as the atomic power industry did not have a strong lobby at that point.

On April 18 in Moscow, an attempt was made on the life of Andrei Orekhov, the general director of the Grant finance company. Grant's largest and most disputed project was the organization of auctions of RAO of UES Russia shares during privatization.

In April, it was learned that the management of RAO UES Russia had created the Unified Electric Power Complex (UEPC) for carrying out a series of trade operations.

In summer, the general director of Novosibirskenergo, Vitaly Tomilov, conducted an additional issue of the company's shares, which left UES of Russia with 12% of the votes in the company instead of 63%. However, this did not prevent him from being elected to the post of general director of Novosibirskenergo for another five-year term with UES's support.

At the end of July, Russian government resolution #760 "On Certain Measures for Stabilizing Electric Power Rates" was officially distributed. The government allowed RAO UES to cut off from the power network industrial consumers named in an "additional list of enterprises not to be cut off" after 30 days of nonpayment. At the time, the average delinquency period of enterprises on this list, which included aluminum, metallurgical, and defense enterprises, was 300 days. A "war of the cutoff switches" began between RAO UES and consumers, which has continued to this day.

On June 29, the Smolensk Regional Duma addressed the State Duma with a proposal to nationalize the FEC, including RAO UES Russia. The proposal found unexpected support from many regional legislative assemblies and governors, including Eduard Rossel. Against the background of this attack, local authorities bombarded the presidential administration and the government with requests to give them control over the shares of the AO-energos belonging to UES of Russia. The first plan for dividing UES of Russia into "regional, vertically integrated power supply systems" fell through by winter.

The coal market was liberalized, and prices for "black gold" were set free. However, the business would not flourish for another five years, when power companies began to pay for coal. Privatization of shaft and open-pit coal mines began.

In winter, the second energy crisis of the decade broke out in Primorye (the Far Eastern region of Russia). (They seem to happen every winter, but we are counting only the crises discussed by the government.). Only an extremely mild winter saved the territory from freezing.

In December, Anatoly Dyakov declared that RAO UES Russia had become "an unprofitable organization."

1996
Quotations of RAO UES stocks had been falling for six months, and UES's management took a desperate step by obliging its employees to buy stocks of the "home" power company at auctions or on the secondary market. The plan collapsed as the workers had no surplus cash. Western investors became interested in the stocks two months later, and by the end of the year, 22.5% of UES's shares were in foreign hands.

In April, the Novosibirsk regional authorities announced that due to a nonpayment crisis, Novosibirskenergo might be cut off from UES Siberia.

In August, Ivan Bokhmat, the head of UES of Russia's department of energy sales and subscription payments, announced that the company would introduce its own payment unit, the "energoruble," which would supposedly help ease the nonpayment crisis and put an end to barter in the country without any increase in inflation rates. Energorubles, whose first issue amounted to 20 trillion conventional rubles, were supposed to be accepted for budget payments at all levels. Central Bank head Sergei Dubinin froze the project as he refused to support the conversion of energorubles into rubles.

In September, miners in Primorye, seeing the inevitability of another energy crisis in the Far East, demanded the resignation of the top management of Dalenergo and RAO UES Russia. In summer, a commission of the Russian president's Main Supervisory Department headed by Aleksei Kudrin had already uncovered the causes of the energy crises the local administration headed by Evgeny Nazdratenko had been spending budget funds earmarked for the regional FEC. The miners demanded that Nazdratenko fire a number of vice-governors and that Dyakov fire Yury Basharov, the head of Dalenergo. Boris Yeltsin supported the miners' demands. Neither Nazdratenko nor Dyakov heeded the demands, and the crisis, turning from a purely economic into a political one engulfed the Far East for the next four years.

At the beginning of October, the head of GKI, Alfred Kokh, announced preparations for the issue of convertible debentures on 7.5% of the state-owned shares of RAO UES Russia. The CSFB Bank was the organizer of the issue. The transaction did not take place because, as an official version has it, of the consultant's excessive curiosity in asking for access to confidential company information. Kokh then announced a simple auction for 8.5% of the shares that would be open to foreign investors.

In November, Anatoly Dyakov expressed his opposition to the special auction. The State Duma also appealed to the president and the government not to do it, but nothing helped. In December, the shares were sold to the National Reserve Bank.

1997
In spring, having learned its lesson from the auction of 8.5% of RAO UES's shares, the Duma drafted a bill "On the Specifics of the Disposal of Federal Property in the Power Supply Industry" to try and prevent similar actions from happening in the future. The bill was approved by the Duma and the Federation Council, but Boris Yeltsin vetoed it.

On April 1, Boris Brevnov, a banker from Nizhny Novgorod, became first vice-president of RAO UES Russia on the recommendation of Vice-Premier Boris Nemtsov. Another Nizhny Novgorod banker, Sergei Kirienko, became deputy minister of fuel and power two months later under the same patronage.

On April 28, the president signed Decree #497 "On the Main Provisions for Structural Reform in the Spheres of Natural Monopolies, Including RAO UES Russia." Until mid-July 2001, the main provisions of this Decree dealing with reforms in the electric power industry remained exclusively on paper.

At the end of April, Boris Nemtsov announced that Boris Brevnov might head UES of Russia's board of directors. However, at a shareholders' meeting on May 5, he moved even higher: Anatoly Dyakov remained as chairman of the board of directors, and Brevnov took over his position as president and chairman of the governing board.

On July 3, on Boris Yeltsin's instructions, RAO UES's account was transferred from TEMBR-Bank and Megavatt-Bank to Sberbank RF. Dyakov was dealt a severe blow and began to gather compromising material on Brevnov.

On August 14, Brevnov prohibited UES of Russia from accepting bills of the Unified Electric Power Complex bill center and the UEPC interbank association without monetary accompaniment. Market players estimated the total amount of the issue at about 500 billion rubles, which was the main source of revenues for Dyakov's team. However, these measures immediately paralyzed the clearing system at RAO UES.

On December 8 Brevnov, along with the heads of a number of other companies with large budget arrears, was called to the Interim Extraordinary Commission (IEC) on the issue of payment discipline. It was stated at the meeting that the financial situation at RAO UES had worsened.

In the final months of 1997, Brevnov and D'yakov threw embarrassing material each had accumulated on the other to the press. Both managers lost in this fight in 1998.

The third crisis broke out in Primorye. A mild winter again saved the region.

1998
In January, UES of Russia's accounts payable exceeded its receivables for the first time.

On January 14, at a meeting of the IEC, the decision was made to replace Rosenergoprom's management as the company's debts were more than 5 billion rubles. The decision was carried out only after the August crisis.

In the afternoon of January 27, the "board of government representatives at RAO" under the leadership of Minister of Fuel and Power Sergei Kirienko met at UES of Russia. Anatoly Dyakov sharply criticized Boris Brevnov. The board gave Bernov "one month to remedy the situation." That same evening, exactly one hour after the meeting of the board of government representatives had ended, Dyakov held a meeting of UES's board of directors at which Brevnov was fired. Naturally, Dyakov was appointed acting chairman of the governing board in his place.

On the morning of January 28, Dyakov was not allowed into UES's offices. Sergei Kirienko told the press that the decision to fire Brevnov was illegal. Dyakov held his own press conference, at which he repeated what had already been written in paid articles in the press for three months: Brevnov spent too much money on himself. In the afternoon, Brevnov in turn authorized his portion of smear material. Interestingly enough, Dyakov and Brevnov were mostly telling the truth about each other.

On February 4, Kirienko arrived at Viktor Chernomyrdin's dacha in Barvikha to discuss the scandal at UES. On the same day , the board of government representatives at UES struck Dyakov and six of his associates from the roll of state candidates on UES's board of directors. For Dyakov, the fight was over; several months later, he consented to head the board of directors of Stavropol'energo.

At the end of February, sensational rumors appeared that the head of the governing board of UES would be no other than Anatoly Chubais. As it turned out, he had negotiated the matter of his appointment at UES with Prime Minister Chernomyrdin and President Yeltsin. In March, the president put forward Sergei Kirienko's candidacy for the post of prime minister; however, the Duma twice refused to confirm him. His appointment was finally approved but at the price of a public announcement that Anatoly Chubais would not take up the post of chairman of UES's governing board.

On March 25, Boris Brevnov submitted his resignation.

On April 2, under opposition pressure, Chubais was excluded from the list of state representatives on UES's next board of directors; Aleksandr Livshits replaced him. Chubais also lost the post of first vice-premier. Deputy Minister of Fuel and Power Viktor Kudryavy was nominated for the post of chairman of the company's board of directors.

On April 3, UES's board of directors complied with Boris Brenov's resignation request and appointed his deputy Oleg Britvin, who had worked at UES since Soviet times, as acting general director.

On April 6, at an extraordinary annual meeting of UES's shareholders at Konakovo, Viktor Kudryavy became chairman of the company's board of directors. Boris Brevnov and Anatoly Chubais were included on the board by the votes of foreign shareholders. As is well known, Chubais was expected to be the main candidate for the post of chairman of the governing board of UES.

On April 15, the State Duma overrode the president's veto of the law on the specifics of the disposal of RAO UES Russia's shares, which had been in effect for exactly a year.

On April 30, UES's board of directors confirmed Anatoly Chubais in the post of chairman of the company's governing board.

On June 19, at UES's regular annual shareholders' meeting, Chubais was again elected to the company's board of directors. His supporters got most of the seats on the board.

On June 29, UES's board of directors elected a new governing board to be headed by Anatoly Chubais. At the government dacha in Arkhangelskoye, Chubais' team worked out a plan for pulling UES out of its crisis.

On August 20, there was a fire at UES's central office on Kitaigorod proezd 7. Anatoly Chubais in a firefighter's helmet personally took part in fighting the fire, which happily consigned to oblivion a large part of the archive documents on UES's financial operations during Dyakov's time.

Following the crisis which broke out on August 17, Sergei Kirienko was fired, and the State Duma refused to confirm Viktor Chernomyrdin in the post of premier; rumors were circulating in the corridors of the Duma that Boris Yeltsin would propose Anatoly Chubais as the "third candidate" for the post. Chubais declared that he was not leaving UES of Russia.

In October, Leonid Melamed, an advisor to the Minister of Fuel and Power, was appointed general director of Rosenergoatom. Evgeny Ignatenko was appointed his first deputy.

On December 9, Chubais was called to the State Duma together with Minister of Fuel and Power Sergei Generalov to report on the state of the country's power supply industry. The Duma was expected to demand Chubais' resignation. However, the presentations of the Minister and the head of UES, in which they demanded stronger state control over the power industry, shocked even the Communist opposition. The hearing ended with a request to Chubais that he voluntarily resign.

1999
On January 14, Evgeny Primakov sacked First Deputy Finance Minister Aleksei Kudrin who on January 22 became Chubais' first deputy at UES.

On January 28, Prosecutor General Yury Skuratov demanded the cancellation of the deal for the sale of 8.5% of RAO UES Russia's shares to the National Reserve Bank.

On February 22, a criminal case was initiated over abuse of finances at Rosenergoatom. The accusations were made mainly against the ex-head of Rosenergoprom Evgeny Ignatenko. However, the case came to naught, while Ignatenko died in a car accident in May 2001.

On April 2, the State Duma gave Anatoly Chubais a gift by passing a bill making the bankruptcy of the power enterprises impossible: the path of regional authorities' opposition to plans to restructure UES was closed.

On June 25, UES of Russia's management significantly strengthened its position at a shareholders' meeting. Now, Chubais could only be dismissed by a qualifying majority of votes and only at a shareholders' meeting. Boris Fedorov joined the board of directors; later he became an opponent of UES on the question of restructuring the company.

In July, UES of Russia proposed a plan for uniting large energy producers and metallurgical plants in order to obtain cash payments for electric power through sales of aluminum on foreign markets. The first such project was EMO Sayany, a merger of the Sayano-Shushensk Hydroelectric Plant and Siberian Aluminum. Oleg Deripaska, the head of Sibal, was regarded as Anatoly Chubais' business partner.

In October, the Ministry of Taxation made the decision to arrest property of UES of Russia for nonpayment of taxes. In response, UES announced that it had the right to arrest the property of debtors who owed the company ten times more. Luckily, there were no arrests, but a critical point in the slump in UES's business had already been passed: collection of payments was approaching 100%, of which payments in cash amounted to 50%.

October 26 was the day of the first armed incident between a UES subdivision, which cut off the lights of defaulters, and a debtor. The military units of Altai Territory seized Altaienergo substations so that the power company could not cut off the electricity to local military bases (the military owed Altaienergo 44 million rubles). Such conflicts remain a serious problem for UES to this day.

In November, inspired by the successes of the Ministry of Railways with Transtelekom, UES of Russia established a telecommunications holding called Enifkom in St. Petersburg. The holding has so far not repeated the success of Transtelekom, probably because UES has prudently not invested huge amounts of money in it as the railways did in Transtelekom.

There was a fourth crisis in Primorye. Evegeny Nazdratenko publicly called Anatoly Chubais a "thief and scoundrel" and promised to arrest UES bureaucrats on their arrival in Vladivostok. "Primorye is going to be a problem for a long time," Chubais admitted to journalists in January.

2000
In January, Leonid Melamed left Rosenergoatom and became first deputy to Anatoly Chubais.

At the end of January, UES published the first documents on restructuring the company. The plan was briefly as follows: the division of generating and network facilities, state control over the networks, and liberalization of prices for electric power..

On April 1, due to decreases in gas deliveries, UES cut off the electricity to dozens of Russian enterprises.

On April 4, UES's board of directors held a meeting in the Kremlin on the initiative of the board's new chairman, Aleksandr Voloshin. UES's reform plan was adopted as a basis and sent for revision. Thus began a six-month covert struggle to reform UES of Russia, which sometimes surfaced through the efforts of Andrei Illarionov, Vladimir Putin's future economic advisor.

On April 5, there was a meeting of the heads of the largest Russian natural monopolies, Rem Vyakhirev and Anatoly Chubais. On summing up the meeting, Vyakhirev stated that gas deliveries to power companies in the European part of Russia would be decreased.

On April 13, acting President Vladimir Putin invited Chubais and Vyakhirev to the Kremlin. They concluded a three-month truce; but from that moment Vyakhirev's dismissal became unavoidable.

In June, the plan for EMO Sayany was finally buried, and the partnership between Oleg Deripaska and Anatoly Chubais and even the very idea of creating energy-metallurgical combines was acknowledged as "inopportune" at UES.

In July, there was a sharp increase in market quotations for Irkutskenergo shares, and there was a vigorous buy-up of stocks that grew 50% in ten days. The stocks were consolidated by Russian Aluminum and the Siberian-Ural Aluminum Company (SUAL).

In mid-July, foreign shareholders of RAO UES Russia tried to convene an extraordinary meeting of the shareholders in order to remove Anatoly Chubais from his post and to block the restructuring of UES. On July 29, Aleksandr Voloshin summoned them to the Kremlin and declared that the government would vote against these proposals. This quelled the "shareholders' revolt," in which Boris Fedorov played no small role.

In August, Yury Basharov, the former head of Dalenergo, who had been fired during one of the energy crises, became head of LuTEK at Evgeny Nazdratenko's insistence and Yury Likhoida became head of Dalenergo.

On December 15, there was a scandal at a government meeting. Andrei Illarionov accused Messrs. Kudrin, German Gref, and Chubais of attempted forgery of documents relating to the restructuring of UES. The covert battle reached its peak: newspaper editors were flooded with documents with various commentaries on reforming UES, whose authenticity was nearly impossible to prove.

On December 22, 2000, in the Bolshoi Theater, Vladimir Putin opened a ceremonial gathering dedicated to the 80th anniversary of the adoption of the State Electrification of Russia's plan (GOELRO, the plan had been accepted by Vladimir Lenin in the very same hall on December 22, 1920). Putin demonstrated his support for Chubais' plans as "today's GOELRO". The security guards did not allow Andrei Illarionov into the meeting's presidium.

Several days after the meeting of The State Council, Prime Minister Mikhail Kasyanov ordered a revision of UES of Russia's restructuring plan to be finished by March 1, 2001. The plan worked out by Anatoly Chubais' team was ratified, but it was already the next century. Prime Minister Mikhail Kasyanov ordered a revision of UES of Russia's restructuring plan to be finished by March 1, 2001.

by Dmitry Butrin


PRESENT

Many outstanding events have occurred in the Russian power industry in the past year. However, all of them were connected either directly or indirectly with one important event-the restructuring of RAO UES Russia and the imminent arrival of investors in the power industry.

Victory for the Reformers
Last year was a turning point in the development of the Russian power industry: Anatoly Chubais, a founder of Russian capitalism, has managed to launch his megaproject for reforming RAO UES Russia. The program stipulates the division of the monopolistic and competitive components of the industry, i.e., a network company whose operations are regulated by the state and generating and sales companies operating according to market rules. The removal of power generation and sales from under state regulation should lead to the appearance of a competitive market and make the two sectors attractive to strategic investors. However, before launching this mechanism, Chubais and his team had to overcome a lot of obstacles.

The disputes over the restructuring of RAO UES Russia lasted for more than a year. Two opposing camps formed during this time: advocates of "reform a la Gref and Chubais' and their opponents, the most of important of whom was presidential advisor Andrei Illarionov, who compared the plans of the Ministry of Economic Development and UES with the power-industry reform project in California and predicted that if the project went ahead, power cutoffs would fan out all across the country.

Mr. Illarionov was able to raise the question of reforming UES with President Vladimir Putin at least three times. One of these addresses to the president was the creation of a State Council commission headed by Viktor Kress, the governor of Tomsk Region. This commission was instructed to prepare a "unified approach to power-industry reform."

On May 18, after enlisting the support of the governors (including Viktor Ishaev, the governor of Khabarovsk Territory; Leonid Roketsky, the governor of Tyumen Region; and President Mintimir Shaimiev of Tatarstan), Illarionov, who was vice-president of the commission, presented a compromise at the next government session. According to his plan, the deadlines for creating the Federal Network Company (FNC) were changed; the original version proposed to leave the network as part of RAO UES Russia until 2006. The State Council commission insisted that FNC be separated from UES as soon as possible. Entrepreneurs who owned power-consuming industrial facilities supported this idea, for example, the head of the Urals Mining and Metallurgical Company, Iskander Makhmudov, and general director of Russian Aluminum, Oleg Deripaska. However, this caused a new escalation of the battle, which led to a three-hour conversation in the Kremlin between Vladimir Putin and German Gref, Andrei Illarionov, and Anatoly Chubais on June 13. The conversation was a heated one, and the sharpness of the confrontation confirmed that the dispute was not about the theoretical purity of reform but about control over financial flows.

After painstaking work that took another month, all of the sharp edges were smoothed out, and Mr. Gref made an official announcement that the restructuring plan prepared by the Ministry of Economic Development included 80% of the commission's suggestions. The new version of the plan started with a clause stipulating that an inventory be conducted of all facilities managed by UES. This met the demands of Andrei Illarionov and his governor-allies.

However, Illarionov and his supporters advocated one more point: UES were to be divided not horizontally by separating it into network and generating companies, but rather vertically by creating interregional, vertically integrated companies. In addition, Illarionov's supporters on the Kress commission wanted to keep control over the reform process for themselves right up to the moment UES was liquidated. Mr. Gref suggested that the powers of the commission should be determined by decisions of the government and the president. Within a month, no one, not even the participants themselves, remembered that such a commission ever existed. Deputy Minister of Energy Viktor Kudryavy, who had continued to fight against reform, was reprimanded by his boss for publicly expressing opinions contrary to those of the government.

On July 11, the protracted battle of interests ended in favor of German Gref and Anatoly Chubais, as Prime Minister Kasyanov signed resolution #526 ratifying "Main Objectives of Reforms in the Power Industry" without even considering the changes in the text of the document that Illarionov had insisted on. The Federal Network Company and a system operator consisting of wholly owned UES subsidiaries were supposed to be set up by February 1, 2002. RAO UES Russia itself would cease to exist in its present form on March 31, 2004.

The Nuclear Industry Is Unified
The events that occurred in the nuclear power industry during this time were no less significant. The Ministry for Atomic Energy (Minatom) had prepared a draft concept for reforming the nuclear power industry. It essentially involved the creation of a single generating company that would unite all nuclear power plants. Anatoly Chubais had his own plans on this score: he proposed the creation of two or three generating companies on the basis of the concern, preserving the status of nuclear power plants as unitary state enterprises of the RF Ministry for Atomic Energy. German Gref even drew up a draft presidential decree on this subject, which he proposed that the government consider at the same time as the principles of restructuring UES. It fell to ex-Minister of Atomic Energy Evgeny Adamov to defend the nuclear industry's concept. He proved to the government that nuclear power plants should not be removed from the control of the concern in the interests of safety. The nuclear industry did not want to lose revenues from either the domestic market or from exports of electric power, which Minatom controlled.

Adamov did not lobby in the interests of the nuclear industry for long, as he lost the minister's portfolio at the end of March; the Kremlin was unhappy with his excessive zeal in seeking nuclear deals with Iran. In addition, Mr. Adamov's proposals for importing spent nuclear fuel (SNF) into Russia met with stiff opposition from Duma deputies, governors, and the public as a whole. Adamov was replaced by Aleksandr Rumyantsev, director of The Kurchatov Institute. Soon after his appointment, the president signed a law allowing imports of SNF. At Minatom, they calculated that Russia could earn $1 billion per year from SNF.

At the same time, the nuclear industry continued to lobby the government to create a single generating company. Anatoly Chubais and German Gref were unanimous in claiming that this would lead to monopolism on the energy market. Rosenergoatom won: in September Mikhail Kasyanov signed an order stipulating the reorganization of the concern and the creation of a single generating company on the basis of all ten nuclear power plants.

Power Plant Consolidation
RAO UES Russia began preparing for the imminent transformation by trying to increase the liquidity of its subsidiaries long before the restructuring concept was approved. For a start, it prohibited its "daughters" from accepting product payments in the form of offsets, bills or barter schemes. At the beginning of 1998, the proportion of cash payments was only 15-20%, but by the end of 2000, this figure had reached 100%. In addition, management succeeded in reducing UES's payables to 20% and receivables to 25%. Last year, for the first time in its history, UES made a profit of 8 billion rubles on its primary activity (as opposed to a 28-billion-ruble loss in 1999) according to international financial accounting standards.

As part of its work in bringing the most troubled power supply systems out of their crisis, UES created so-called power management companies. The stated objective was to unite several power supply systems so crisis management could prepare them for reform. Most importantly, the local authorities, represented by the governors, effectively lost control over the power supply systems when these management companies were created.

The Middle Volga Interregional Management Company (MV) was the first step. The company was headed by Vladmir Avetisyan, a protege of Anatoly Chubais. Later on, Kalmenergo (Kalmykiya power system), Saratovenergo (Saratov power system), and Samaraenergo (Samara power system) became part of the MV structure.

In March of this year (2001), a similar management company was established in the Northern Caucasus. Management of the four weakest regional power supply systems-Ingushenergo (Ingushetia power system), Karachay-Cherkesskenergo (Karachay-Cherkessia power system), Sevkavkazenergo (Northern Caucasus power system), and Kabbalkenergo (Kabardino-Balkariya power system) - was transferred to the Caucasus Power Management Company (CP). At the suggestion of UES's personnel commission, Magomed Kaitov, the former plenipotentiary of Karachay-Cherkessia in Moscow, was named head of CP.

Valentin Sanko, a member of the legislative assembly of Vologda Region and former general director of Vologdaenergo, headed the Northern Power Management Company (NP), which included Arkhenergo (Archangel power system), Kostromaenergo (Kostroma power system), and Vologdaenergo (Vologda power system).

The Far Eastern Management Company (FE) was created on the basis of Dalenergo (Far Eastern power system) and ZAO LuTEK (Luchegorsk coal energy complex). The company was headed by Viktor Myasnik, the former head of Chitaenergo (Chita power system), who had proved himself to be a tough manager as he did not hesitate to cut off power to debtors. Rasim Khaziakhmetov headed the Volga Hydropower Cascade (VHP). Finally, Grigory Berezkin, ex-chairman of the board of directors of the KomiTEK oil company, headed the Kolenergo-ESN-energo Management Company. The first experiment in creating management companies proved its effectiveness: by the start of the heating season, all of the troubled systems had not only accumulated the necessary fuel stocks, but had also significantly improved their financial situation.

The Power Systems Change Managers
In the last four years, there have been more than 60 changes of general directors of AO-energos and power stations in UES's affiliated subdivisions. Perhaps the most notable was the dismissal of Aleksandr Remezov, the general director of Mosenergo (Moscow power system). He had come to Mosenergo from the position of deputy chairman of UES's governing board in summer 2000. However, Remezov made a political mistake by cozying up to Yury Luzhkov, the Mayor of Moscow and leader of the Otechestvo (Fatherland) movement. Literally the day after the reform concept for the power supply industry was approved, SPS (Union of Right Forces - a Duma faction), Anatoly Chubais, who although not having any official post in the party is considered to be one of its leaders, made what amounted to an official announcement to the press about serious violations in the financial and economic activities of Mosenergo. The litigations lasted until the beginning of October. The story finally ended in Arkady Evstafev becoming the director of Mosenergo (the very man who had been arrested in the White House during the 1996 presidential campaign while carrying out a Xerox cartridge box full of dollars).

Still another public scandal flared up around the head position at Novosibirskenergo (Novosibirsk power system). The conflict of general director Vitaly Tomilov with UES and other Novosibirskenergo shareholders lasted for seven months. However, in July of this year, under pressure from UES, Tomilov wrote a letter of resignation. Vladimir Solovyanov, director of fuel supply and logistics at Novosibirskenergo and a neutral figure, was elected the company's general director. Right after Tomilov's resignation, the regional prosecutor's office instigated a criminal case against him on charges of abuse of official position.

The sackings of general directors Yury Likhoida of Dalenergo, and Yury Basharov of LuTEK were the two most notable dismissals. Yury Likhoida, a former vice-governor of Primorye region, was appointed as head of Dal'energo the previous year as a compromise between Chubais and governor of Primorye Evgeny Nazdratenko. Yury Basharov, a former Vostokenergo (Eastern power system) official, became head of LuTEK in August of 2000 and was also considered a compromise figure. However, shortly after Nazdratenko had tendered his resignation and the Far Eastern Management Company was created, Likhoida and Basharov found themselves out of a job. There were also losses at the central apparatus of UES. In September, vice-chairman of the governing board Valentin Zavadnikov quit the company to become the representative for Saratov Region in the Federation Council.

Changes in the Government
The last three years have been full of personnel changes in both regional AO-energos and government structures. Besides Mr. Adamov, two Ministers of Fuel and Energy, Viktor Kalyuzhny and Aleksandr Gavrin, lost their ministerial portfolios: Kalyuzhny was sacked because he tried to control the fuel and energy complex by administrative measures, and Gavrin because of the energy crisis in Primorye. Gavrin's replacement was Igor Yusufov, general director of the Russian Agency for State Reserves since 1999. Yusufov's service record showed that power-industry work experience was not a decisive factor in the president's choice of a candidate for the minister's post.

Vladimir Putin also dismissed Andrei Zadernyuk from the post of chairman of the Federal Energy Commission. Georgy Kutovoi, who had previously worked several years for Rosenergoatom, was appointed in his place. Within a few months after his appointment, he broadened the powers of the department under his control: in August, the government decided to create a Unified Tariff Agency on the basis of the Federal Energy Commission. The scope of the Agency's authority has still not been defined.



TRENDS

Now that the government has ratified the main objectives of reform in the power industry, the course of events in the sector will depend on the rates at which the reforms are implemented. The Federal Network Company and the System Operator will be set up before the end of the year, and regulations guaranteeing nondiscriminatory access to the electric power market and the networks will be introduced. Then, distribution and sales components will be separated from regional power companies. The reforms are supposed to be completed by 2010.

Power-Industry Reforms
Reform of the Russian power industry is to proceed in three stages. It will all start with the internal reorganization of RAO UES Russia, the Ministry for Atomic Energy, and the AO-energos. One of the first projects is reform of the Federal Wholesale Energy and Power Market (FOREM). A so-called trading system administrator (TSA) will be created in place of ZAO TsDR (Contractual and Clearing Center) FOREM. The TSA, which is being called upon to organize trading on the wholesale electric power market, simplify its mechanism, and ensure that customers have free and equal access to the power market, should start operating by next summer (2002).

Reform of the Russian power industry is to proceed in three stages. It will all start with the internal reorganization of RAO UES Russia, the Ministry for Atomic Energy, and the AO-energos. One of the first projects is reform of the Federal Wholesale Energy and Power Market (FOREM). A so-called trading system administrator (TSA) will be created in place of ZAO TsDR (Contractual and Clearing Center) FOREM. The TSA, which is being called upon to organize trading on the wholesale electric power market, simplify its mechanism, and ensure that customers have free and equal access to the power market, should start operating by next summer (2002).

The idea of creating the TSA was for a long time the subject of heated disputes between RAO UES Russia and Rosenergoatom. The management of the nuclear power industry proposed equal allocation of places on the TSA so that no one entity together with its affiliate companies and dependents could have more than 20% of the votes. This version did not suit UES; Chubais' team insisted that the power holding's share be a minimum of 50%. With difficulty, the following compromise was reached: votes on the supervisory board of the TSA would be divided equally between producers and buyers of electric power. As a result, of all affiliate structures of UES, producers will receive a larger share of UES's quota, thus decreasing the share of UES affiliates that purchase electric power. The parent company will have one vote.

Rosenergoatom will get 15% at best, although Anatoly Chubais has promised that starting on January 1, 2003, UES will give up 25% of its votes on the supervisory board and become one among equals. By then, regulatory legal acts should be worked out.

Next, several generating companies will be formed. For this purpose, UES will need to organize presale preparation of the generating facilities themselves, i.e., power stations and power-generating equipment. By UES estimates, within the next ten years, the Russian power industry will require investments of $50 billion. The industry plans to attract the main portion of this money from strategic investors. According to the plan, final formation of the generating companies is contemplated for 2006; however, UES has already received the first funds: on October 11, the EBRD jointly with a consortium of major investment banks decided to allocate credits for 100 million euros to the power holding.

Export and Tariff Breakthroughs
Today, UES exports electric power to 11 countries, including four CIS countries (Belarus, Georgia, Kazakhstan, and Ukraine), and seven other foreign countries (China, Latvia, Mongolia, Norway, Poland, Turkey, and Finland). Total export volumes for the ten months of 2001 were 12.8 billion kWoh (this is only 2% of the total generated power). Before the end of the year, UES should deliver 18.5 kWoh. Finland and Belarus are the largest buyers of electric power from UES.

At present, the sale of electric power to Finland is UES's most successful project. In addition, delivery to foreign countries along the east-west transmission line, e.g., through Belarus and Poland to Germany, is one of the industry's priorities. UES has also started work on a joint project with Japan . Last year, Anatoly Chubais and Igor Farkhutdinov, the governor of Sakhalin region, signed a protocol on joint actions within the framework of a project to build a power supply bridge between Sakhalin and Hokkaido (Japan).

Export projects are a priority interest not just for RAO UES Russia. Rosenergoatom is also expressing its desire to enter foreign markets. For example, the nuclear industry insists that UES increase their share in the volumes of electric power exports to Finland (today this share is said to amount to only 8%). In addition, a contract between Rosenergoatom and the German firm RWE Trading GmbH, which operates on the Georgian power market, is to come into force starting on July 1.

However, UES, which controls the main transmission lines and has its own plans with respect to Georgia, has refused to service electric power deliveries under contracts signed by Rosenergoatom. The power holding has argued that according to a government resolution of 1997, UES itself "organizes (effects) electric power exports" and Rosenergoatom does not have the right to sign export contracts independently without UES's consent. As a result, Rosenergoatom has calculated that it has sustained losses of 100 million rubles.

Power companies will be working on still another important task in the near future, namely, increasing tariffs. The 2002 draft budget envisages a tariff increase of 30-32%.