February 4, 2013

A private owner may, after all, cut off the city from CHP, from warmth, — and there you go — the Mayor is “removed”…

By the end of 2013 Cabinet of Ministers is planning to have completed privatization of all thermoelectric power stations and regional power companies. The system of purchasing electricity will also change as suggests the recently adopted law "On peculiarities of the functioning of the electricity market". What these innovations mean to the society, UNIAN has discussed with an expert. Soon nearly all producers of electricity, working on fossil fuel (gas, coal) and distributors of electricity (oblenergo — regional power companies) will be private. About the results of privatization in this sphere, and how such global changes can affect individual consumers, speaks the expert of "Borysfen Intel" Center Serhiy Dyachenko.


— According to the statistics, at present all the electricity in Ukraine is being produced in two places: at the nuclear power plants which still belong to the state, and at thermoelectric power stations, which — almost all — are owned by DTEK Company. In what way is this situation good or bad for a consumer?

— DTEK does produce 67 % of electricity, which is given by the whole thermoelectric generation, and if taken together with "Energoatom" — 86.1 % from all the electric energy in the country. In fact, the fuel-energy complex — both, the electric energy system and gas branch, — is the sphere, tending to concentration. This industry is very capital-intensive, demanding huge investment problems for its normal development and that project are easier realized by large companies. In smaller countries there is objectively no room for a large number of companies-producers. Because of this tendency to concentration, demonopolization, which they are trying to carry out in the EU (first of all through the policy of division of spheres of activity), is very painful. The more so that the vertically integrated structures (speaking of DTEK) have also a lot of advantages. However, there is a limit — and that level of monopoly domination (which we have in our country) — is unacceptable, especially if we want to move to a more liberal market model. With this structure, the model of energy market, which the new government is trying to introduce, will not work.

— What will be the main point of the new model of electric energy distribution?

— The government is trying to introduce the model of bilateral contracts. At the moment we have a working model of so-called "pool". All producers sell the electricity to a single platform — Wholesale Electricity Market (WEM). Here it is bought by suppliers, for example, the same regional power companies. After the introduction of the new model, will be removed all the restrictions on the supplier’s search on the part of the consumer. If you wish — go to the electric power station and sign a contract directly. Or — if you prefer — choose intermediary suppliers. Population is likely to buy from a reseller, because retirees will not go to the station and sign a contract directly. Most likely, the objects of public sector and small businesses will use the services of suppliers. But companies will sign direct contracts with electric power stations, choosing cheaper electricity. In this sense, the relationship between production and consumption is a step towards freedom and liberalization.

 But freedom implies choice. And what choice can we have, with only two manufacturers of electrical power? Competition is the driving force of the market, which motivates the manufacturer to minimize costs in order to win the competition. Competition creates motivation for lowering prices. If we introduce the liberal distribution model without competitive mechanisms, we will get the classical monopoly market with the tendency to the growth of prices. In this case the loss to the national economy may be up to a billion dollars a year. And then we will just have to establish the state regulation. However, with all this, our antitrust laws do not classify DTEK as a monopolist — that is; there will be no formal reason to enter any mechanisms of limiting the monopolistic behavior of the company. Here is both, a problem and a threat: in fact, the market will be controlled by two structures, which most likely will pursue a coordinated price policy. And they will have between them more motivation for coordination of their price positions than for competition which involves expenses. And they will be motivated enough to hold back deliveries in order to keep high prices. That is, under the current ownership structure it is very dangerous to introduce the market of bilateral contracts in its pure form. There is another problem there: different cost structure for different types of generation, nuclear and thermal. Atomic energy is much cheaper. And different types of generation hardly compete with each other. Electric energy has to be not just produced, it has to be generated and delivered according to a certain schedule, which has to comply with the changes of the demand. The atomic unit is switched on — and it produces a given amount of electric power. Thermal electric power stations maneuver better, get started faster, they change the characteristics of the work during the day, when electricity demand is changing, and they deliver an amount of energy which is required in this or that part of the country. At day time — a smaller amount, in the evening — the peak, to cover which hydroelectric stations help. At this the cost of electric power at thermoelectric stations higher than at the nuclear power ones. And this problem has to be solved somehow. But what is offered by the draft of the Law "On the principles of functioning of the electric energy of Ukraine", now being discussed in Verkhovna Rada (Ukrainian Parliament), — the Fund of price disproportions — is absolutely non-transparent. That is, a fund is suggested to be created. The main reason for its creation and the main criterion of the fund’s work is struggle against "unfair incomes" — de facto it means to take away from this one and to give to that one. It is easy to assume that it will be a mechanism stimulating misusing.

— Are the reform of the electric energy system and privatization only for the sake of introduction of some market component and giving the distribution of the electric power to a new owner, or are they going to improve the management of the electricity sector?

— As a matter of fact, the main privatization of regional power companies took place some 10–15 years ago. The circle of the owners is known-regional power companies are distributed among Akhmetov, Grigorishin, Surkis brothers, and Babakov.

The previous privatization, traditionally for us, was held in order to fill the budget. But neither the question of filling the budget (competitions were not transparent), nor the question of a strategic investor’s coming have not been properly solved. Though in 2000 foreign (French, Spanish and American) investors were still looking attentively at our generation and distributive companies, showing interest to them, but there was no fuss around oblenergos (regional power companies). True, Americans then bought Kievoblenergo and Rivneoblenergo. So one western company is present at our energy market. The rest was in an old Ukrainian tradition — by hook or by crook a private owner was wriggling into this sector. A Slovak company bought a number of oblenergos, but it turned out later to be not quite Slovak — the headquarters for making decisions were in Moscow. It became clear later that in such a way Babakov entered our energy sector. At present the state has not much assets in the energy sector: seven oblenergos and two generating companies (producers of electricity) — Centrenergo and Donbasenergo. The most interesting of energy assets have already been sold. Therefore I can assume that the remaining packets in power companies will be bought by the minority shareholders of these companies. DTEK also may take part in some сompetitions, if it finds an object interesting. For example, in case if the company has generation powers in that region and it will want to deliver electric power through its own network.

— The oblenergos which have to be privatized by the end of the year are old transformation stations, power lines and meters, aren’t they? I have read about the experience of privatization of Lugansk Oblenergo. This company belonged to Grigorishyn. After 9 years of management, the company was brought to bankruptcy.Consumers complain about the poor quality of services. Where is the guarantee that all the other power companies will not suffer the same fate? According to the principle, "All profits to the owner, all losses — to the state and no upgrade whatsoever…"

— The situation with Lugansk Oblenergo is different. Lugansk Oblenergo was taken away from its owner at a very tricky contest and given away to "Lugansk Energy Association", which now belongs to another owner. That is why Lugansk Oblenergo had been dead for years. But I don’t think this scheme will be repeated. Owners of oblenergo won’t ruin them on the principle, "came — squeezed everything there was to — left", because this is a stable and good business: whatever you do — money comes in. Nobody can pass you by — everyone needs electricity. I think, oblenergos will maintain their power lines at the failure-proof level, do repair works, but won’t be working too hard on their modernization. Being a monopolist allows a quiet life — no competitors, everything manages to work somehow, so let it work.

But how does it work? This should be controlled by both, the state and the Antimonopoly Committee…That is how I would estimate an electricity transporting business.

Talking about enterprises producing electric power, problems here are very sharp and wear of equipment is colossal. 82 % of the equipment of thermo-electric stations has crossed the line of physical deprecation. If their modernization does not begin now, in the nearest few years 30 to 40 % of them will have to be closed.

We have actually eaten our energy system. We have not been doing anything for decades; have not been investing into its modernization. I can see a possibility of serious modernization only in switching on a serious state mechanism — the mechanism of guarantees for "investments into capacity". It suggests payments to the investors through the mechanism of guarantees. The mechanism of guarantees for investments would allow to solve the problem of pricing disproportions, as well as that of forming a new generation. It would allow this branch of energy system to develop harmoniously. That is, at the basis of long-term contracts the constructers are guaranteed that they will profit from their investments. The existing old electric power stations are guaranteed a minimal amount of payments which will ensure their existence, even if they stand idle from time to time. The mechanism of guarantees for investments into capability could help to solve the problem of pricing disproportions, as well as the problem of formation of a new generation. It would allow the industry to develop harmoniously. This would suggest that contracts on investments would ensure a harmonious work of the whole electric energy system, not just one type of generation.

This mechanism has been introduced by Poland and Russia, the possibility of its introduction is being discussed in other countries, Great Britain for one.


— A lot was written about theft in gas delivery and distribution. And what about illegal making money on selling and distributing electricity? Is the theft of the electric current as profitable as stealth of gas?

— To steal really serious amounts in the energy system, a few factors are needed: monopolist position, control of measuring functions, non-transparent system of distribution and price formation, price disproportions included (different prices for different categories of consumers), control over the system of bookkeeping.

Monopolist position of oblgas and oblenergo is absolutely the same. Oblenergos are even greater monopolists than oblgasses. Oblenergo deliver electric power to 80 % of consumers. Both, oblenergos and oblgasses totally control bookkeeping, actually creating regional balances. The non-transparent system of price formation with cross-subsidies and price disproportions among different industrial and domestic consumers, for whom the regulator sets quite debatable tariffs, are characteristic of both, oblenergo and oblgas. Hence the key scheme is the same too — ability to inflate consumption of cheap power in order to sell the leftovers to those who buy them at a higher price. But in the electric energy system this scheme is harder to apply because the control is more severe — everybody has an electric meter. At the moment through the mechanism of subsidy certificates about 30 billion hryvnyas are being distributed. At this even in the reports of NERC sometimes you can come across penalties for businesses who corrupt data about the amounts of the power consumed by the population.

In other words, where there are non-transparent economically groundless mechanisms of price formation, there is a feeder for dishonest clerks and directorate of businesses. But gas, of course, gives more opportunities for such things. According to the National Security Council's estimations, made at some point, annually about 3 billion cubic meters of gas and eight hundred thousand tons of oil are counter-fact volumes of energy "going free" at the territory of Ukraine. The data are old, but in informal discussions experienced gas dealers agree that such gas has not been done with.


— I used to communicate with a western researcher who is studying the electric power market of Russia. And she told me how her supervisors were amazed by the fact that the demand curve and the offer curve at the Russian electric energy market behaved in a strange way. At the peak of consumption, the offer curve could jump aside or disappear. And when asked what the matter was, she would explain that on the replacement of a regional official, the new governor had to turn all the money streams to himself, and that took time. Will we repeat this experience of Russia?

— We sure will! The monopolist position allows to regulate the offer, making it "as it has to be". If we imagine that the monopolist energy producer need to "press" an industry or a territory, our peaks — of production and consumption — will not match either. And at any time on the peak of demand electricity supply can be limited. I am sure that those Russian regional governors were pressing then on some businesses which interested them in order to make them loyal. Our authorities would not press so, but monopolist producers can do that easily. Electric energy is so much a part of life nowadays, that by limiting its supply anything and everything can be achieved.

Where there is monopoly, there should be a strict state control. Already now regulatory authorities complain that some electric stations refuse to participate in energy supplying regions of the country. Despite the formal surplus capacity, we have few viable energy units, — not many, and without modernization the surpluses won’t work. For example, thermoelectric stations are being privatized. But by their strategic importance for the country they are not inferior to nuclear power stations. In our climate this is a key problem. Because a private owner may, after all, cut off the city from CHP, from warmth, — and there you go — the Mayor is "removed"…

— At the moment a new-old myth is being spun about a state being an ineffective owner. But in reality the profitability of a company depends on the efficiency of the management, not on the efficiency of the owner. The state should remain the owner of such important powers and just find the efficient management. It is hard to believe that in Ukraine and in Europe such specialists can’t be found.

— Why are private owners thought to be more efficient? Because he is faster in making decisions. The state procedure of making decisions is more complicated. Let’s say, there is an inefficient manager at a state enterprise. One governor wants to replace him, but another clerk is against it. Remember, what Schtirlits said, — "Now a usual quarrel between the intelligence and counterintelligence will start". The same is here. The manager will find a support. The problem will be not solved for a long time. A private owner replaces an inefficient manager faster and easier. Private ownership is faster in realization of financial schemes too. Though there are more misuses and optimization of taxes is higher there. But private businesses attract more investments. The state so far cannot accumulate serious investments because western corporations reluctantly invest into state companies; they want the company to be in private ownership. But from the point of view of security at such enterprises as nuclear power stations and thermoelectric power stations, I would prefer state management. Because safety dominates there over economic effectiveness.

The nuclear electric power production has to be in the hands of the state. As well as thermoelectric stations, because in winter the problem of heat supply is a strategic and political one. The prohibition on privatization of nuclear power stations has been cancelled, and privatization of thermoelectric stations is going in full swing.

When they speak about privatization of nuclear power stations, "Titanic" jumps to mind. Why were there so many victims there? There was lack of rescue equipment — mainly lifeboats. As the tests showed, the ship was made of metal of not perfect quality. The ship was sailing at the speed inadmissible in those latitudes. Private owners will always be tempted to save on safety. Safety is expensive, it means investing into something which in 99.9% of cases will not be needed. To cut a long story short, in the turbulent history of Ukraine there have been cases when even appointed by the state directors of nuclear power stations tried to buy used equipment! A private owner has even a better motivation and more opportunities for such "economy". And the hope for state control is very little. Especially in such a corrupted state in which we live.

Iterviewed by Lana Samokhvalova