Regional Level

Regional Energy Commissions (RECs) set tariffs on the electricity and heat delivered by power suppliers to various groups of consumers within the jurisdiction of respective Federation members based on AO-Energy computations ("Guidelines for the Rating of Electrical and Thermal Energy on the Consumer Market" approved by the FEC on April 16, 1997).

Throughout recent years, government regulation of the tariffs on power industry products and services, aimed at curbing them, was not only an instrument for smoothing inflationary processes in Russia but also an important factor in the stabilization and resumption of general economic growth. At the same time, electricity and heat rates, which lagged behind industry prices, precluded the normal operation of power facilities.

By way of illustration, industrial product prices grew by a factor of 39,700 between 1990 and 2000, fuel industry product prices grew in the same period by a factor of 76,600, and energy rates, by a factor of 20,800. After August 17, 1998, the situation of the first inflation wave of 1992 was repeated: a surge of industrial product prices and virtually unchanged electricity and heat tariffs. From August 1998 to December 2000, price advance in industry was 276.2%, while the rise of tariffs for electricity for industrial consumers with an installed capacity of 750 kW or more was 181.8%. During the same period, consumer prices rose 279.9% and household electricity tariffs rose 237.6%.

As a result of tariff regulation, starting in May 2000, the growth of electricity and heat prices began to outpace the growth of industrial product prices. From December 1999 to December 2000, industry prices grew 131.6% and electricity rates, 140.5%. This kind of tariff regulation changed the situation for the better: the number of loss-making AO-Energos was 17 in 2000, down from 19 in 1999, and the number of underperforming ones (with a profitability of not more than 5%) was 16, down from 20 in 1999. On the whole, power industry prices grew 1.9 times slower than industrial manufacturers' prices in 1991-2000. According to returns from the first half of 2001, 20 AO-Energos were loss-making, and 13 entities had low profitability (not more than 5%).

In 2001, there was a turning point in the downward trend in the profitability of the power industry. While in 1990-2000, the average profitability of power entities decreased from 37.2 to 11.7%, with that of the production, transmission, and distribution of electricity going down from 50 to 15.3%, in the first six months of 2001, average profitability was 14.2%, with electricity production showing a profitability of 16.4%.

A number of regional power industry enterprises sustain considerable financial losses because tariffs are not reviewed for over a year or, when reviewed, not raised enough to ensure stable power system operation. Primorskii krai is a good case in point. The krai administration's and REC's policy of establishing unprofitable, economically unsound tariffs resulted, in the period 1994 to 2000, in a shortage of funds of over three billion rubles, even if federal budget subsidies are taken into account. This fact, first and foremost, is behind the fuel shortages experienced by regional power plants and frequent outages.

An analysis of the state of tariff regulation by regional energy commissions in Federation members reveals that virtually no region, when establishing electricity tariffs by consumer group, complies with the "Guidelines for the Rating of Electrical and Thermal Energy on the Consumer Market" with respect to the rate making by voltage level. As a consequence, one of the problems in tariff regulation is imbalances in electricity tariffs by consumer group (cross-subsidizing), which is compounded by the subsidizing of households, public organizations, and agricultural consumers at the expense of other consumer groups, who pay higher tariffs.

Recently, the level of cross-subsidizing (the ratio of the household electricity tariff to the industrial consumer electricity tariff) has been coming down. In 2000, household electricity tariffs were up 44.2% and industry tariffs, 37.7% on 1999. Between 1995 and 2000, the cross-subsidizing coefficient doubled, from 0.29 to 0.59; it was 0.647 in the first half of 2001, an economically justified rate being 1.5-2.0. Although this coefficient is steadily growing, the subsidizing of households by industry remains a topical issue.

The Russian government repeatedly decreed to phase out cross-subsidizing in the power industry and to bring the household electricity tariff down to its actual cost. The applicable regulation is Decree of the Government of the Russian Federation no. 418, of May 30, 2000, "On the Rates of Tariffs on the Electric Energy Used by the Population", which says that these tariffs are to be set according to the "Methodology for the Calculation of Minimal Tariffs for Electric Energy Used by the Populations of Russian Federation Members," approved by FEC Decree no.36/4, of July 21, 2000.

At the same time, actual selling tariffs for households, agricultural commodity producers, individual industrial branches catering for agriculture, and public organizations prove to be much lower than REC ones on account of numerous concessions, which are introduced without considering a compensation source. The amount of energy concessions is estimated at about 14 bln rubles a year (VAT included).

In addition, for lack of an articulated government policy of implementation of federal laws and other statutory acts providing for energy tax concessions for certain consumer categories, AO-Energos suffer extra losses. As they regulate tariffs, RECs do not take into account AO-Energos' decreased revenues owing to household concessions, and federal, regional, and local authorities do not lay out necessary funds to make up for missing AO-Energo revenues, which occur because of household concessions granted by regulations in force.

Reduced tariffs for various consumer categories should be established subject to the compensation for energy suppliers' lost revenues, made out of a regional or local budget, or else to direct subsidizing of such consumers out of the same budgets; in practice, however, no compensation is paid.

Another serious impediment to establishing economically justified energy tariffs is the imperfection of the existing regulatory and legal framework of tariff regulation and rating approaches.