Prime Minister Vladimir Putin chairs a meeting of the government commission on electricity generation while at the Sayano-Shushenskaya hydroelectric power station


“Russia has not commissioned this many power facilities per year in a quarter of a century. All this is the result of these large-scale programmes that we have approved, and that we have been consistently implementing over the past few years, even in spite of well-known problems associated with efforts to overcome the crisis of 2009-2010. This is the result of the joint work of the government, the regions and the business community...”

Vladimir Putin’s opening remarks:

Good afternoon, colleagues.

The Sayano-Shushenskaya hydroelectric power station has seen its fifth hydropower generation unit come into operation. Importantly, this new unit was built after the accident to more advanced specifications, including higher safety standards and increased reliability. The plan is to replace all the plant’s 10 turbines over the next three years. Some of the new units have already been delivered to the plant, and are waiting to be installed. The overhauled plant will come back on stream by the end of 2014. As you can see, it is already operational, but the repair work is to be completed by 2014. Let me stress that over 80% of the new equipment will be supplied by Russian engineering companies, mainly the Power Machines Group. I have visited the plants regularly to monitor progress. I should say how much I appreciate everyone’s contribution to the station’s repair and modernisation, including the workers here at the dam, those working at power engineering plants, as well as the road builders who built a whole new road enabling these large units to be delivered. I would like to thank everyone for their valuable and effective work.

Today we have an opportunity to discuss not only issues arising during the repair work to the Sayano-Shushenskaya dam, but also the development targets for Russia’s power generation industry and the way it influences the national economy on a broader scale. A series of large and important energy projects are currently being implemented in Russia. They are in part financed by companies, such as the hydropower generation modernisation programme, while others use project-financing schemes (the Nizhne-Kureiskaya hydroelectric power station in the Krasnoyarsk Territory and the Leningradskaya pumped-storage hydroelectricity plant). But there is a third group of projects that are aimed at boosting the reliability of power supplies to towns and villages. These projects have a high degree of social significance and are therefore entitled to government financial support. This is naturally only appropriate, so we will continue this work.

This includes the Nizhnyaya Bureya Hydro Power Station, the Zelenchuk Hydro/Hydro-Accumulation Power Station, the experimental-commercial Severnaya (Northern) Tidal Power Station, as well as small hydro power stations in the Stavropol Territory and the North Caucasus. I would like to ask the Ministry of Finance and Vnesheconombank to look into determining sources of funding, so that we can facilitate the additional capitalisation of RusHydro and implement investment programmes in line with a list of protected companies. This list should also be modified.

For its part, RusHydro must reduce selling prices for consumers by 12.5% in 2012. These figures have been calculated, they are feasible, and I am asking you to carry this out.

On the whole, the power industry is showing good results by the end of the year. I would like to thank you once again for this. Power units have been commissioned at the Yaivinskaya and Sredneuralskaya (Middle Urals) state district power stations, the Surgut State District Power Station No. 2 and the Nevinnomyssk State District Power Station in the Urals and in southern Russia. A week ago, we commissioned a new one gigawatt reactor at the Kalinin Nuclear Power Plant. This facilitates a more reliable power supply to Central Russian regions. The first stage of the Boguchansk Hydro Power Station has been completed here, in Siberia. I would like to remind you that construction of this station was launched in 1979. Subsequently, the entire project was abandoned, as has happened often in the past few decades. We resumed work on the project later on. To the best of my knowledge, this took place between 2005 and 2008. The Boguchansk Hydro Power Station will already be put on stream in the summer of 2012. This means that the Siberian power grid will receive an additional gigawatt of electricity being generated by a cost-effective hydro power station.

In all, an additional capacity of over six gigawatts of new power-generating facilities were commissioned throughout 2011. I would like to draw your attention to the fact that this is the most that the national power industry has seen since 1985. Construction projects were implemented until 1985. After that, the process began to slow down, eventually stopping completely. Russia has not commissioned this many power facilities per year in a quarter of a century. All this is the result of these large-scale programmes that we have approved, and that we have been consistently implementing over the past few years, even in spite of well-known problems associated with efforts to overcome the crisis of 2009-2010. This is the result of the joint work of the government, the regions and the business community, as well as direct and sometimes tough dialogues concerning the fulfillment of our companies’ investment obligations. I remember meeting here at the Sayano-Shushenskaya Hydro Power Station. I seem to recall that we did not meet in this hall, or perhaps it has been renovated because it was not as beautiful in the past as it is now. So, we met at this station and discussed, among other things, the need for companies involved in Russia’s power industry, as well as private companies, to fulfill their obligations. As far as I can remember, the discussion was quite tough. I would like to note that you have fulfilled virtually all of your obligations, which are worth 2.2 trillion roubles. Thank you very much for this.

As for the power-generating industry, one can safely say that the country has overcome all crises. The nationwide parameters that have been attained exceed even Soviet-era volumes. Over the next three years, an additional three trillion roubles will go towards these purposes. There are plans to invest one trillion roubles in the grid infrastructure from 2012 to 2014. And 1.9 trillion roubles will be invested in the creation of new power-generating sources.

We need to create a powerful energy foundation for our overall national development and industrial growth, and to develop new territories and the vast expanses of our country, to facilitate a reliable base of power-generation for the operation of the housing/municipal utilities infrastructure and the social sphere. Moreover, we should not forget that the modernisation of the power industry’s infrastructure creates a substantial demand for science, engineering centres, as well as such affiliated sectors as engineering and the construction industry.

In the past ten years, nationwide power consumption has soared by almost 20%. Analysts believe that such a trend will continue, and that power consumption will increase by 20-22 gigawatts by 2020. The Russian economy is showing sustained growth, and we must facilitate its development by creating adequate national energy resources. Aside from building new power generating facilities, we must prioritise the modernisation of the so-called old facilities. I would especially like to point out that we must make principled and timely decisions on the decommissioning of such facilities in the event that there is no economic rationale for their modernisation. In particular, this should be done in order to minimise consumer expenses, because all old power generation facilities are less effective than new ones, and their expenses are ultimately taken on by the consumers. And of particular importance is that we need to continue shaping a modern energy market that will function according to clear, transparent and predictable rules for both businesses and consumers.

There are a few points I'd like to make here. First, we need to continue addressing problems, removing limitations that stem from a deficit of generating capacity and underdeveloped power grids, and we need to introduce a strategy to integrate the different price zones to shape an integrated national energy landscape.

These changes need to take place step by step. This cannot happen overnight, it cannot be done in a single stroke, but we should do our utmost to try to avoid a many-fold difference in electric bills across the different regions of one country. To remedy this situation, we need smart coordination between energy companies’ plans and regional development programmes.

Unfortunately it sometimes happens that regional governments take a perfunctory approach to this problem. As a result, many new facilities, such as industrial companies and construction sites, are not connected to reliable sources of power. Their problems then have to be addressed as emergencies. The reverse also happens – a power station is built and connected to grids, but large consumers do not emerge for another few years, if at all. So they say, okay, we'll build it and start by exporting the electricity initially. And so the industry works for foreign customers instead of developing the national economy. I would like to ask regional leaders to take more responsibility when working with energy companies, and to provide them with well-reasoned regional development programmes, which should set targets for capital investment in local power grids and generation facilities.

The second issue has to do with introducing new rules for power distribution. I will say more about this later. I have asked the Energy Ministry to inspect some of the distributors. The ministry experts have performed some preliminary analyses; unfortunately, the impetus behind these inspections came not from official proposals such as from the Energy Ministry or the Federal Tariffs Service, but from complaints and requests from consumers.  Wherever I go and whomever I speak with, they always talk about energy problems, and the generation of electricity in particular. It looks as though the entire country is complaining about this, and with good reason, as the inspection results indicate.

We made a series of important decisions when we met here a month ago, including the cancellation of fines for failure to withdraw the contracted volume of electricity. This issue is especially sensitive for small and medium-sized businesses and for farmers. They have voiced most of the reasonable complaints about the take-or-pay power supply contracts, and they are continuing to do so. These contracts hindered the development of business, and brought undeserved profits to power distributors. Moreover, as of December 1, distributors are now required to start using new information disclosure standards, most importantly transparent pricing formulas.

The government resolution I am referring to introduced other important policies for consumers that should help small and medium-sized companies in agriculture and other sectors. Starting April 1, 2012 retail power consumers will cease to be categorised based on the number of hours of electricity that they use (capacity utilisation hours). The new disclosure regulations will also eliminate the capacity balance effect, because the same time will be set for calculating peak consumption on the wholesale and retail electricity markets. Everybody present here certainly knows what I am talking about. This is being done to avoid peak load pricing.

Power supply contracts will no longer have to include hour-by-hour consumption planning in price zones. They will not include payments for idle time or for deviations in the effective consumption and the contracted volumes on the wholesale and retail electricity markets. My point is that consumers will only be paying for electricity that is actually supplied, and not for some average consumption level.

A price limit has been introduced for loose-price contracts that guaranteeing suppliers sign. They will only take into account earlier contracts that lower the price for consumers; currently, when signing new contracts, they often look at the upper price limit. All of these measures should have a positive effect on the electricity market, as I said, mainly for farmers and small and medium-sized businesses, as well as individuals and other consumers. I hope that these improvements will eventually make the prices that consumers pay for the supply of energy fairer and more transparent.

Instructions were also issued to analyse power distribution companies’ performance results and their influence on the justification of electricity prices. The first results obtained by inspecting a number of guaranteeing suppliers, which control 70% of the retail market, have suggested a few fair conclusions. One of the key problems in the sector is the fact that its reform was never completed. As a result, a gap emerged between the wholesale market and consumers’ interests, and certain players hurried to cash in on that discrepancy.

I would not like to fling mud at those who have drafted and implemented the energy sector reform, but it is clear now that this reform is incomplete, to say the least. Capacity prices are being manipulated. Distributors are gaining marginal interregional profits that exceed the regular retail mark-up by two or three times, while guaranteeing suppliers’ capital investments stand at just 7%-8%.

Occasionally we do not know the real shareholders of some sales organisations: everything is hidden in offshores. Meanwhile, ladies and gentlemen, these guaranteeing suppliers account for 67% of the market. And this, of course, is a problem in general. The growth in revenue for suppliers from power sales between 2008 and 2010, taking into account a transition to the liberalised market, was – do you know how much? – 279%, while dividends grew by 312%! And the total debt to creditors is as follows: the suppliers owe 56%; the housing and public utilities system owes 15.5%; the public owes 18%; and state-funded organisations owe 3.4%. In other words, the government is paying for you, while the suppliers are responsible for 56% of the debt.

At the same time, these companies do nothing but collect energy revenues. I think the Ministry of Energy should devise some mechanisms for organising this work that are more simple and transparent. Moreover, consumer electricity payments are directed to offshores, where part of it remains, and the rest is returned to Russia. What kind of work is this?

Our aim is to create an objective and economically justified mechanism for power pricing. The consumer should pay a price that is fair, not one that is simply pulled out of a hat. No one is saying that a system should be devised that will ruin the electrical energy industry or the power sector in general. No, of course not. But there is no justification for having exorbitant prices either. Otherwise we are creating insurmountable obstacles for our national economic development. The consumer must pay a fair price, not one pulled out of a hat, as I said. I ask the Federal Antimonopoly Service, the Federal Tariff Service, the Ministry of Energy, and the Market Council to constantly monitor the sales sector and to arrange hotlines in order to receive feedback from all categories of consumers. To stabilise the operations of sales companies, I think it is necessary to devise a support mechanism on the federal level to help clients of problematic guaranteeing suppliers, if, of course, the guaranteeing suppliers are facing these issues.

We should ensure that the interests of consumers are 100% guaranteed. Please report the relevant proposal today. It is also critically important that we use the following approach in calculating the target electric power prices. The forecast must be constantly adjusted, not approved once every six months, a practice that spurs inflation and encourages greed. If it were done once every 12 months, inflation would be guaranteed, or at least a push towards inflation. I understand that it is more difficult to conduct routine adjustments of these parameters, but this must be done. It is crucial to prescribe clear and stable pricing rules in the power sales market so that consumers and economic players can confidently make long-term plans and investment programmes.

Another important problem concerns the power industry debts. We need to work out their nature once and for all, and put things in an elemental order. Repayment discipline must improve, cash withdrawal to offshores must be stopped, and the opaque payment system must be corrected. No one forgets to draw his dividends, colleagues, but debt repayment is a big problem. Either no one pays, or payments amount to just a trickle.

There should be strict requirements involved in the management of power companies with public shareholdings. It is no secret that the risk of corruption is potentially very high in this sphere, as is the likelihood of a clash of interests. Above all, this applies to the allotment of orders to so-called puppet suppliers, construction companies, design organisations, and so on. It seems fair that the heads of these entities, their family members and close relatives be required to inform the Ministry of Energy about their income and property status. These heads should be dismissed if some shady connections are uncovered.

I told your minister as much on several occasions, and I would like to reiterate this demand right now, the more so since your own analysis says a great deal in itself. We cannot allow the corruption tax and all sorts of kickbacks to form a burden for consumers and lead to an unjustified increase in the cost of our construction projects and facilities. Prices are increasing in the housing and amenities sector as well, including on account of the reasons I just mentioned.

In general, then, I expect the following proposals to be formulated in short order: how to regulate power companies, including the skill level of their employees; how to improve the payments system in the power industry and make it clear and transparent; how to step up federal oversight over regional power companies and regional investment programmes that should likewise become an element of the general power-industry development plan; how to devise and introduce a mechanism for a single federal guaranteeing supplier; how to legally require declaration by the company management of their personal pecuniary data and how to handle the information obtained in this way; how to sell the IDGC Holding and its power-selling companies; and how to devise a mechanism for mandatory network redundancy payments by new power plants.

Today, I would also like to touch upon a fundamental issue which concerns the power industry and the entire Russian economy. If we want to create a normal investment climate in this country, then, certainly, it’s impossible to tolerate offshore schemes in infrastructure sectors. I would like to stress that those wishing to keep their profits after taxation here in Russia or abroad are free to do so because the law does not ban this. But financial resources must not be removed from departmental circulation through front companies. We must do away with the offshore vestige of the wild privatisation era. Otherwise there can be no talk of a normal business environment and trust in us. As you know, I frequently meet with foreign partners. Recently, I was somewhat surprised and then disappointed when many major companies and the CEOs of major companies told me personally that they were ready to implement specific measures, but they didn’t know whom they were dealing with, and that they also didn’t know the end beneficiary. Taking the Russian economy and its strategic sectors out of shady offshore zones is our high-priority task for the upcoming period.

I have already talked about the preliminary audit conducted by the Ministry of Energy at my request, and I can briefly familiarise you with its results. The audit focused on 352 senior officials of the power and energy sector. Of this number, 169 persons, or almost 50%, are affiliated with 385 commercial companies, except those currently employing them. In many cases, the power and energy sectors of entire Russian regions become subordinated to full-fledged family clans. Notably, the North Caucasus energy grid is largely controlled by one family, that of Mr Kaitov. Consumers transfer power and energy payments to the accounts of affiliated companies acting as agents of companies that sell power and energy. Furthermore, part of the assets received is cashed out through front companies or is appropriated by family members.

Similar schemes also run in West Siberia. Joint investigations involving law enforcement divisions have established that a group of top managers from the major power distribution company Tyumenenergo, headed by Director General Yevgeny Kryuchkov, has created a chain of affiliated organisations repairing power sector facilities. Such facilities are often repaired by Tyumenenergo divisions. The assets received by affiliated companies are invested in various businesses, including a family hotel business in Surgut city. They are also used to buy real estate in Russia and abroad. The relevant contract prices are included and approved by the Tyumen Region’s Energy Commission.

Mr Gennady Nikitin, a top manager of the Federal Network Company of Unified Energy System (FSK UES) and Director General of the Basic Electric Grids of Urals (MES Urals), has also founded five commercial companies directly linked with repair and construction projects and technical maintenance of the entire Urals and West Siberian energy sector. In all, the subsidiary’s head and his relatives have registered 16 commercial companies with turnover of more than two billion roubles. Everything is clear, right? He acts as manager, pays affiliated companies, and they earn profits. It appears this scheme is legal. It is outwardly legal!

Private individuals take out loans. Large sums are transferred to individuals abroad, so that they could buy real estate, etc. Of course, the above-mentioned transactions and the nature of such organisations’ cooperation with the regional energy sector need to be checked in order to find out whether they are justified and legal.

I would like to draw your attention to the fact that all these officials and affiliated companies are linked with offshore companies in one way or another, and that they work through them. Their motives are quite clear.

For instance, the relatives of Alexei Sannikov, a top executive of the IDGC Holding and the non-profit partnership Energostroi, own several dozen companies overseeing installation of electrical equipment and power transmission. One such company is affiliated with two offshore firms. This makes it possible to channel financial assets abroad on outwardly legal grounds.

A study of economic and financial ties of companies directly linked with the power and energy sector shows that the power and energy sector in the Nizhny Novgorod Region is completely controlled by companies affiliated with the family of Mr Sannikov, that top executive.

Shady trans-border operations involving promissory notes and loans have also become standard practice for RusHydro. Notably, RusHydro has been issuing multi-billion loans for several years and buying interest-free promissory notes from some Cyprus-based offshore company. Does this mean that it has become so fascinated with this company and buys its promissory notes? These promissory notes must be very reliable. And what makes them so reliable?

A scheme to accumulate the power and energy sector’s assets and to transfer them into offshore zones has been operating in the Central Federal District for the past few years. These inter-regional offshore zones simultaneously cater to the Bryansk, Belgorod, Smolensk, Kursk, Orel, Ivanovo and Tula regions. In all, over 25 billion roubles have been transferred into foreign offshore zones under transactions stipulating the sale and purchase of power and energy assets. This scheme is primarily implemented by a number of companies registered in the name of front persons and owned by an individual, a top manager of a major power generating company. This is the EnergoStream company, whose Director General Yury Zhelyabovsky is a member of the Board of Directors at the No. 6 Territorial Generating Company, and who simultaneously de facto co-owns power selling companies. At present, law enforcement divisions are investigating criminal cases in line with some of these facts.

A study of property relations and relatives of Alexander Bobrov, a board member with the Federal Grid Company of the Unified Energy System has revealed that almost all firms established by his relatives, his father and wife, are investment companies and, at first glance, have nothing to do with the power and energy sphere. However, a closer look at the financial flows has revealed that all these firms, as well as relatives receiving substantial transfers and loans from offshore firms maintaining financial ties with a number of Northwestern power selling companies, including the Petrodvorets Power Selling Company and PetersburgEnergo, are all interconnected. There is reason to believe that the assets are transferred abroad through affiliated companies and are subsequently returned and repatriated but in an entirely different form. Technically speaking, this falls within the concept of money laundering. However, this theory, of course, requires additional verification and assessment, including an assessment of the concept’s legality.

Dmitry Gvozdev from FSK UES has co-founded the company Investholding Ltd. Proceeds from Siberian power selling companies are transferred to its accounts. Mr Gvozdev has also co-founded another company that builds power industry facilities. He places the orders, pays the money and obtains profits from there. Obviously this is effective. Konstantin Podlesny, a deputy board chairman with the System Operator of the Unified Energy System (SO UES), has founded nine companies. Ahem…

As I have already said, the above-mentioned and other exposed ties with and between founders and the responsibility of the energy sector’s top managers mostly lack any signs of criminality. But, as I have already noted, they are fraught with  conflict of interests, make it possible to use corruption schemes and to obtain personal gain by manipulating prices, the system of payments, settlements and profit redistribution. They also take other steps which obviously don’t benefit the power and energy sector and the entire Russian economy.

In many regions, the system of payments and settlements for energy resources is rigidly centralised and is often consolidated around a specially established cash settlement centre. On the one hand, this should have a positive effect and facilitate controllable payments. On the other hand, this often leads to the creation of schemes facilitating financial manipulation of the price system and the system of distributing financial assets. Notably, a system for collecting payments from the population for municipal utility services and energy resources was established in the Nizhny Novgorod Region’s Balakhna District. The system involved the head of a district municipality and a joint cash settlement centre. This scheme enabled the district administration’s senior officials to dispose of the proceeds almost without any oversight and facilitated a cover-up regarding the embezzlement of the municipality’s assets. A criminal case has been opened.

A system to siphon off the population’s financial assets into affiliated offshore firms has been operating in the Vladimir Region for several years. The proceeds thus obtained are used for personal enrichment. Several chosen managing companies dominating the local market operate in the region. Notably, they act as intermediaries between the power and energy sector and consumers, whose balance is long overdue. Their debts topped 800 million roubles throughout 2011. It has been established that such companies are headed or established by the relatives of such officials. One of them is also a member of the regional legislative assembly.

Sadly, this directly influences the operation of the housing and municipal utilities infrastructure. The Volgograd Region is a graphic example of such an irresponsible stance taken by regional leaders. In the past five years, power selling companies have changed hands three times. And each of such companies conceals the mercenary interests of certain officials. I’m talking about a former deputy governor of the Volgograd Region. The debts owed to local power and energy companies total about two billion roubles.

A similar situation has taken shape in the Tver Region around the Tveroblsbyt Ltd. and Tverteplo utilities. Total debts owed to local power and energy companies are about three billion roubles. The money is collected and subsequently transferred elsewhere. Cash proceeds don’t reach suppliers. Incidentally, I have already mentioned the Market Council and its top officials. Mr Ponomaryov is here, right? Notably, he owns the Moscow Energy Exchange, which trades in electric power.

There is an obvious conflict of interests. What is this RusPower that specialises in supplying the power sector with information about wholesale operations? There are other points as well. This upsets me a great deal, colleagues. We must bring order here. And look at the profit. Two people, Mr Solovyov (Vladislav Solovyov) and Mr Sokov (Maksim Sokov) spent some time in the management of WGC-3 and then left the company; but now they are both demanding total of 324 million roubles due to changes in its capitalisation. But what did they do to increase the capitalisation? The capitalisation increased due to reforms made in the power industry and investments from the government. What does either of them have to do with this? And look at the sums! These two men want 324 million roubles for themselves. This is shameless. Sorry but I have no other words to express it. It looks like a fee for something.

We must be absolutely clear about the ownership structure, beneficial shareholders and beneficiaries. This is a key sign of a civilised business climate and mature economy, and of a sense of responsibility among the domestic business community. This is not only about electricity. The same approach must be applied to all infrastructure facilities in the country. I would like the Ministry of Energy, the Ministry of Economic Development, industrial agencies and government-sponsored state infrastructure companies such as Gazprom, Transneft, Russian Railways, Sovcomflot, Vnesheconombank, VTB, and Rosatom to report on the measures taken within the next two months. This also applies to Sberbank. The Central Bank is its major shareholder, but it is still not too far from the state.

The work that has begun in the electric power sector must definitely continue. Before we finish this part I would like to tell you, Mr Shmatko (Sergei Shmatko), the following: please finish everything you have started in regard with this audit. Of course, it must be coordinated with the law enforcement agencies where there is an obvious violation of law. I rely on law enforcement agencies to take relevant decisions regarding investigations. Where there is no direct violation but where there is a conflict of interests, personnel-related decisions must also be made as soon as possible.

Ladies and gentlemen, we must think together about improving regulations in this area. I will repeat once again, we can extend them further to other infrastructure areas of economy. I have already spoken about this. Despite what I have just outlined and reported to you – which was not the most exciting information – there are pleasant things to hear. On December 22, we will celebrate Day of the Power Engineer, and I would like to congratulate you all on the upcoming holiday. Mr Shmatko, please continue.

Sergei Shmatko: Mr Putin, colleagues. One and a half months ago, we signed resolution No. 877, which we have talked about today.

Vladimir Putin: Speaking of which… Sorry, Mr Shmatko. I told you about this, didn’t I? When did I meet with you, Mr Sechin? When I told you that all affiliate schemes must be checked thoroughly. When was it?

Igor Sechin: It was November 28.

Vladimir Putin: It was November 28. We had talked about this before that and we discussed it in public on November 28. The media reported this to all interested parties. I told you clearly: please check this. Sort it out. You heard me. But no, those involved did not lift a finger. They did not shed these offshore companies nor companies of their own and their close relatives. They continue operating as before! Frankly speaking, it’s bizarre. One should at least have the slightest feeling of self-preservation. Please present your report.

Sergei Shmatko: It is necessary to study in detail the resolution No. 877 and propose a procedure for its concrete implementation. Mr Putin, you have outlined the price of the issue in your opening speech: only the guaranteed supplier markups for 2011 account for 47 million roubles. The Ministry of Energy has constructed a model of analysis of the real economic situation of guaranteed suppliers based on information from 70 sales companies, forming 70-80% of the productive supply of the first and second price zones.

According to the results of the modelling, the ratio between the marginal income from retail sales and markups was 2.3, which means that in money terms it follows the results of 2010… For example, extra sales income, on our assessment, account for 58 billion roubles, and 50 million for this year… If we include the markups, the aggregate marginal income of guaranteed suppliers accounts for some 100 billion roubles each year, and this is more than 5% of gross proceeds for the whole sector.

Mr Putin, you have spoken in detail about the decisions taken under the resolution 877: on bringing order, on creating a transparent system of retail market relations, for example. Currently, on the retail market, this resolution is justly called a revolutionary resolution (because) it calls for a number of measures for improving the operation of retail markets.

For this purpose, a governmental commission for electrical power development was established along with an interdepartmental working group under the Ministry of Energy, which works on an everyday basis. It includes everybody: representatives of the federal authorities, the Market Council, and large energy companies and consumers. The main objective is to prepare new rules for retail markets. These rules will be submitted to the government by March 20, 2012. All tasks and instructions for us, which you included in your opening speech, will be a foundation for future operation in the domestic retail market.

It is noteworthy that the economic model of sales drastically changed after this resolution. After the implementation of all adopted decisions, the sales companies were essentially denied extra income. It is common knowledge that the Russian government ruled to postpone regulation until July 1, 2012, in order to ensure sustainable work in the sales sector; therefore, the regulating authorities should rapidly develop a new concept of markup formation that would compensate for economically based sales expenses, thus creating motivation for forming a consumer protection system.

Sales companies must become professional agents that protect consumer interests and earn their funds by helping consumers to reduce power expenses. In 2012 we will conduct a thorough monitoring of the financial situation of guaranteed suppliers. Under the amendments to the Federal Law on Electrical Energy, Article 33, recently adopted following our initiative, only the Market Council has powers to monitor the price situation on the wholesale and retail market. It also makes it possible for state regulators to follow and analyse the pricing situation.

Next, we propose to introduce licensing to formalise comprehensive requirements for sales companies with guaranteed supplier status to introduce a monitoring system. Here is Slide No. 7. Here we see the main requirements of licensed companies, and it is noteworthy that today we heard many statements on the inadmissibility of using offshore schemes and companies in our infrastructure sectors. We think that this requirement should become one of the basic requirements for licensing companies in the electric energy sector.

Payment discipline is a key issue from the point of view of keeping order. To update you: to date, debt on the wholesale market increased in 2011 from 23 billion roubles to 28 billion roubles, and on the electrical power retail market, debt rose from 94 billion to 108 billion roubles. There are serious differences between the assessments of mutual debts between sales companies and distribution companies.

To improve repayment discipline on retail markets, in our view, it is necessary to take the following measures. First, we need to strengthen the personal responsibility of the heads of utilities managing companies in making timely payments, introduce the needed changes in the Code of the Russian Federation on Administrative Offences, and develop mechanisms for preventing false bankruptcies in utilities.

Secondly, in normative legal acts, it is necessary to include budgetary or municipal guarantees to the consumers of the budget sector, which, in our view, are on par with the improvement of the payment discipline and will improve the budget planning quality.

Next, it is necessary to adopt commercial accounting rules for retail markets as well as standards for the use of consumer stimulation as a measurement of energy revenue. These rules will make it possible to considerably reduce the number of disputable situations that arise while calculating the balance of consumption.

In addition, alongside federal measures on payment default, it is necessary to instruct the authorities of the constituent territories of the Russian Federation to develop a comprehensive programme of measures, including the monthly monitoring of consumer payment discipline, which include the results of the work carried out on the reduction of energy resource default payments by assessing the efficiency of the work of the authorities of constituent territories of the Russian Federation. And finally, it is necessary to adopt a principled decision on the possibility of introducing power restrictions and cutting power in case of payment default.

We know the position of the Federal Antimonopoly Service on the need to protect consumers, but as you said, Mr Putin, debts should be repaid, and it is impossible to resolve this problem by persuasion only. Besides, we think it advisable to create a system of centralised accounting for retail markets by opening special accounts with the participation of authorised banks. The proposed scheme, by our assessment, will improve payment discipline, put an end to non-transparency and abuses and, in the final analysis, ease consumers’ burden.

The establishment of a functional customer support mechanism is essential in securing an uninterrupted power supply in the case where a sales company loses its status as a guaranteed supply company. This function is currently performed by territorial grid companies, which often lack the competence and resources to carry out this kind of work. In addition, the affiliation of guaranteed supply companies with grid companies often results in baseless increases in retail prices and dissatisfaction on the part of customers and owners of small- and medium-sized enterprises. I believe it is very important that a professional energy retailer, a guaranteed supply company, be able to help customers in case of erratic supplies by existing guaranteed supply companies. We suggest that Inter RAO UES assume this function.

Colleagues, allow me to take this opportunity to bring up several issues facing the power engineering industry that are not covered under resolution No. 877. I am referring primarily to cross subsidies. This is slide 14. I’ll provide a few figures so you can have a sense of what I’m talking about. The total amount of subsidies grew to 196 billion roubles in 2011 from 135 billion in 2008, which is about 10% of the gross earnings generated by entire industry. Cross subsidies increase price pressure on other consumers, encourage companies to leave the federal grid and compensate for the shortfall in revenue of regional grid companies. In 2009-2010, their amount totaled 6.7 billion roubles and was as high as 15 billion in 2011. The Energy Ministry has approved the list of facilities that the Federal Grid Company leased out to regional grids in 2011. This is what is known as the last mile.

According to this list, the Federal Grid Company (FGC) and regional grid companies signed a lease of FGC-owned facilities for 2012. End users will need to sign separate service agreements directly with regional grid companies. However, as the IDGC Holding learned, certain major consumers, including Russian Railways, RUSAL and others, have failed to sign such agreements. It’s the middle of December, but agreements for energy supplies in 2012 have not yet been signed. In order to speed up the resolution to the issue of cross subsidies, we propose including the term “cross subsidies” in federal legislation and tariff regulations, establishing strict control over the amounts of cross subsidies and planning measures to reduce them. The first step that should be taken in this area should include adding the amount of cross subsidies to the forecast for the social and economic development of the country and making provisions for a mandatory decrease of these amounts.

Measures to increase the efficiency of the power grid complex shown in slide 17 are another important way to slow the growth of electricity tariffs. This includes both operations and investment. To reduce capital construction expenses, we propose eliminating investment returns in power facilities that are used inefficiently from tariffs, legally limiting the cost of investment projects through the use of standard projects and benchmark prices, and encouraging consumers to refrain from using excessive power grid capabilities. In addition, we propose revising the approach to payment for new output by nuclear power plants and hydroelectric pumped storage power plants, including hydropower plants, excluding the return on capital and capital gains from power supply agreements in cases where such capital is provided from centralised and budgetary sources, and establishing limits on capital expenditure for calculations of the costs involved in the construction of new nuclear and hydropower plants based on benchmark projects and prices.

Now, a few words about the organisation of the planning process in the power engineering industry, Mr Putin. You touched upon this issue today. Five-year territorial programmes for promoting the power engineering industry are very important elements of this work. The Russian regions need to draft and approve these programmes on an annual basis. As far as we know, the requirements laid out in resolution No. 823 are not being met by many constituent entities of the Russian Federation. This is indicated in slide 20. It becomes clear upon careful examination that such documents, which are vital for regional economies, are often prepared in a formal and offhanded manner and are not agreed upon with system operators. Often, the programmes drafted by Russian regions do not include actual plans for loading the electric power substations, which ultimately leads to excessive grid construction and a substantial increase in tariffs. Therefore, we propose introducing a direct ban on including investments in tariffs charged by territorial grid organisations that are not supported by the territorial power supply scheme agreed upon with the system operator. In 2011, programme schemes were approved in 62 of the 83 Russian regions. The list of regions is shown on slide 21.

Mr Putin, I have reported about the work we have done according to your instructions with regard to the declaration. I’m not sure I have much to add to what you have already said. Anyway, we will carry on with this work. We believe that it requires solid regulatory support. You have already spoken about preliminary results today. We believe that this work will put things in order, on the one hand, and establish entirely new behavioural patterns in the industry, on the other. It will also help the industry shift to a slightly different mode of functioning.

Vladimir Putin: Certain staff decisions have already been made in southern Russia. Please submit proposals for other personnel decisions before the end of the year. Of course, all these decisions should be made within the framework of the applicable law. Let me reiterate, in cases of obvious conflicts of interest, these conflicts should be dealt with resolutely.

* * *

Vladimir Putin’s concluding remarks:

Dear colleagues, I would like to direct your attention to the fact that as of late, we have been engaged in an active and direct discussion of complex issues relating to power, and in particular, to electrical power. This honest and open dialogue has yielded results. As I mentioned at the beginning, the 2.2 trillion rouble investment is a result of that same energy reform that we have been criticising. So we must acknowledge that in this regard, the work has been done.

First of all, I would like to point out that this has been accomplished. Secondly, as I said earlier, I would once again like to thank all of the companies that took part in this process (despite our sharp discussion of this topic a year and a half or two years ago, when our foreign partners made a necessary and previously arranged step forward in accordance with earlier decisions, while domestic companies seemed to trail behind). Now, practically all obligations have been fulfilled. However, there are problematic areas that continue to exist and that require our attention. We have touched upon most of these areas today. Among them are systemic rate-setting issues, issues of payment, of finance channelling, of affixations and the performance of particular company managers working within the sub-par legal regulatory framework that is still in place today.

In particular, I would like to request here that the most effective actions and measures be taken to put personnel issues in order. In the North Caucasus these measures have already been taken; a top manager has been relieved of his duties. Everything should be examined once more and all of the decisions that have been made should be brought to fruition. However, I would like to issue a warning that everything will be examined and brought up to standards. There are many systemic challenges that we have already talked about that have to do with rates, and capital channelling. Let us work together vigorously to improve our performance and those measures that will ensure the proper functioning of the power industry in our country.

We know that this represents a substantial element of our national economy -- an essential element. I would like to emphasise that a lot has already been accomplished, but even more challenges lie ahead. I have already spoken about the plans; we have brought about a record increase in volume, and next year’s volume will also have to be increased. How much did we produce this year? Six GW, is that right? Next year we will have to produce 7 GW. Our plans are colossal! We will have to unburden the industry of everything that stands in the way of its development. I would like to ask the Federal Financial Monitoring Service and Mr Yury Chikhanchin, its head, to become involved, to actively monitor all of the projects and report to the government should the need arise to engage law enforcement agencies.

This is not the note I wish to end on. I would like to conclude by reiterating that in general we are performing at a high level, power industry is actively developing, with a pace that has never before been seen, in part as a result of your efforts. I would like to wish all of you a happy New Year, as it is unlikely that we will meet all together before the holidays. All the best!

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