A senior government official angrily called up Dominique Fache, the Russia manager for Italian utility giant Enel, to complain that the electricity had recently been cut off to his apartment because of overdue bills.
"I couldn't help him with anything — just advised to pay on time," Fache said, smiling, in an interview. "Everyone's equal."
Electricity suppliers across the country are cracking down as the number of delinquent private and corporate customers surges. They have little choice.
The dilapidated industry is mired in debt linked to unpaid consumer bills and the multibillion-dollar investment programs that investors signed onto when they acquired electricity assets from the state during the privatization of Unified Energy System, which wrapped up just weeks before the financial crisis struck. A chunk of the industry also operates on a system of short-term loans — funds that have dried up in the crisis.
The situation threatens to grow worse as winter approaches and the crisis spreads into the real economy. Russian and foreign investors alike are hoping for help from the government, which in turn has shown a lack of enthusiasm about getting involved.
But the problem cannot be ignored as electricity providers teeter on the brink of bankruptcy. Rebuilding the largely inefficient industry is vital to ensuring continued economic growth, and the heating that power plants generate is equally important in a country where the chilly winter months far outnumber the sunny days of summer.
So when a consumer — even if he is a senior government official — fails to pay his bills, electricity providers are reacting fast.
"The remedy in such a case is simple — to cut the power supply," said Fache, whose Enel holds major stakes in power generator OGK-5 and RusEnergoSbyt, the biggest private electricity distributor in the country.
Electricity distributors alone will need some 30 billion rubles ($1.1 billion) in the fourth quarter to refinance debt, Mikhail Slobodin, the president of Integrated Energy System, or IES, the country's largest private electricity producer, said at a round table last month.
"They will all be bankrupt in the first quarter," Slobodin said.
OGK-2 chairman Stanislav Neveynitsyn said late last week that he expected the distributing companies to "blow up" soon. "The distributors will be bought up by the generators because they won't be able to survive independently," Neveynitsyn said.
Mounting Debts
The Tver electricity distribution company, for one, has a consolidated debt of 500 million rubles ($18.5 million) and no sources for refinancing its loans, said company spokeswoman Natalya Yefimova.
Distributors' debt to generators reached 22.7 billion rubles ($840 million) in the week of Nov. 7 to 13, an increase of 1.3 billion rubles from a week earlier, the Market Council, a government watchdog for the sector, said in a statement Friday.
Consumer debt to the Tver distribution company stood at 900 million rubles ($33.3 million) at the beginning of this month. "Unfortunately, the sum is increasing," Yefimova said, adding that payment delays have grown by as much as 20 percent over the past two months.
Other companies have seen up to half their consumers fail to pay on time. The Vologda electricity distribution company has filed 474 lawsuits on its consumer debt of 97.5 million rubles.
The Tver company, like dozens of others, plans to suspend its investment program for next year and cut all other planned extra expenses.
The electricity distributors have found themselves between a rock and a hard place. They buy electricity on the wholesale market and pay on the day of the purchase, while the consumer only pays once a month. To survive in an imperfect system, the distributors used to take short-term bank loans, which have become inaccessible in recent months. The distributors do not have much to use as collateral, which has complicated borrowing from Sberbank, Gazprombank and VTB, three state-connected banks offering bailout funds.
Enel's Fache said factories tend to put their electricity bills at the end of their monthly expenses. "When they rank who they should pay first when they don't have enough money, we are at the very end of the list," Fache said, sighing. "It's very unjust."
IES has a similar problem with late payments, taking money alloted for repayment out of the system and making it difficult to prepare for winter, said Slobodin, who heads the Council of Electricity Producers, which comprises all major electricity generators.
"The industry is using a legal loophole that prevents us from cutting them off from electricity supplies immediately," Slobodin said in an interview.
Another issue is demand, with big consumers like metals and car producers slashing production. Overall demand slowed down by 6.3 percent from Nov. 7 to 13, compared to the same period last year, according to the Market Council.
"We expect consumption to fall by about 30 percent next year," said Yefimova of the Tver distribution company.
Fache said the reasons for slowing demand were more psychological than physical. "There are two factors: the psychological, noncontrollable domino effect of a snowball and everyone's incomprehension of what is going to happen next," Fache said.
Slobodin predicted a wave of job cuts and production optimization throughout the electricity sector as soon as the difficult winter period ends.
Denis Detinkin, general director of the Udmurtiya electricity distribution company, said he planned to cut the company's costs by 25 percent in the fourth quarter by "optimizing the management structure" but was not going to cut any jobs so far.
Looking to the State
Detinkin and the other people interviewed for this report said they were pinning their hopes on help from the state.
"We hope that the government will take measures to prevent the electricity market from being influenced by the crisis," Detinkin said.
Enel hopes that state support will include tax measures and reduced bank loan rates.
Last month, electricity producers wrote an open letter to Deputy Prime Minister Igor Sechin, who heads the government Commission on Electricity Sector Development, asking for up to $50 billion in cheap loans to finance their investment programs. In the privatization of the sector, investors agreed to spend 4 trillion rubles in the construction of new power stations under strict deadlines.
"As a result of the crisis, the opportunities for securing loans from banks have significantly decreased," the generators wrote in the letter, a copy of which was obtained by The Moscow Times. "The search for the model of getting out of the crisis … demands the strengthening of the government intervention."
The signatories suggest that the money be distributed by Vneshekonombank, the state-controlled bank in charge of handing out billions of dollars in bailout funds.
The government, however, is in no rush to announce rescue measures for power producers. Energy Minister Sergei Shmatko has even downplayed the distributors' problems, dismissing them as "technical." The ministry's press office did not reply to repeated requests for comment over the past two weeks.
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Finding themselves up against the wall, the generators have begun to talk about delaying the construction of new power stations as demand slows. If a generator does not build a station by the deadline stipulated in its investment program, it could be fined 25 percent of the station's construction cost.
Generators will face an overall deficit of $27 billion to $28 billion in implementing their investment programs by 2012, said Konstantin Gulyayev, a utilities analyst with Kapital Investment Group.
OGK-1, the only generator that UES failed to sell to a private investor, seems to face some of the toughest challenges. It must invest 31.5 billion rubles in building new stations next year — funds that other generators partially raised by issuing additional share emissions.
"We are considering all kinds of financing and are actively working with the state-run banks," OGK-1 said in a response to e-mailed questions.
"We are waiting for the help from the state in buying our additional share emission or setting aside discounted loans," it said in the statement.
Gazprom-controlled OGK-2 and Mosenergo will face investment problems as well because of high demand in undersupplied regions like Moscow and the need to replace worn-out equipment, Gulyayev said. Up to 80 percent of the power-producing equipment in the country is outdated.
While the companies may be short of cash to replace equipment in tough financial times, Deloitte & Touche is creating a program to help generators cut costs for electricity and heat production by 20 percent to 30 percent.
Generators in the program will exchange information on commercial, technical, operational and pollution data of their power stations, said Barry Dyson, the Deloitte & Touche partner in charge of the program. "The exchange will be absolutely anonymous and will be made through us," Dyson said. "This way, generators will understand how good their performance is."
The next step would be to optimize production. "We will recommend to the companies what infrastructure software to install at their power stations," Dyson said. "Modern IT will at least facilitate the diagnostics of the museum-exhibit equipment."
The last step will be demand and supply management. "From 30 to 40 percent of energy consumed in Russia may be saved," Dyson said, suggesting that the state pay for the installation of smart meters in homes and factories.
Despite the hard times, at least one company is not thinking about cutting back. State-controlled electricity trader Inter RAO announced last month that it would spend at least $5.5 billion on acquisitions in Latin America, Asia and Africa in the next two years.
"We see the financial crisis as a danger but also as an opportunity," Inter RAO chairman Yevgeny Dod said at a shareholders meeting in October that saw Sechin elected to the board.
Some other state-run companies, however, feel less confident. The country's only hydroenergy producer, RusHydro, said it had created a special "commission on liquidity" within the company. "The commission is working to create a cushion of liquidity that we can use in case of a potential problem with payments," it said in an e-mailed reply to questions.
RusHydro chief executive Vasily Zubakin said Friday that his company might dismiss up to 17 percent of its staff in the first quarter of 2009.
Moscow Integrated Power Company, which is 84 percent controlled by the Moscow city government, said last week that it would suspend its 7 billion ruble investment program for next year to refinance loans of about 6 billion rubles. The company also will delay installing new heating pipes in Moscow on expectations of zero profit this year because of high temperatures last winter.
Shareholder Disputes
The crisis has sparked sharp conflicts between shareholders in some generating companies. TGK-2, 45 percent owned by Senator Leonid Lebedev's Sintez Group, has refused to pay 15 billion rubles on an offer to buy out minority shareholders in July. Sintez has blamed the reversal on its business partner, German utility RWE, which in September backed out of its planned acquisition of a 49 percent stake in TGK-2. RWE had insisted that Sintez make the buyout offer to the minority shareholders. Sintez filed a $1.4 billion lawsuit against RWE in a London arbitration court earlier this month.
In a similar case, billionaire Mikhail Prokhorov, owner of about half of TGK-4, has stepped back from a 15 billion ruble buyout offer to minority shareholders in July, citing a government decision to place the company on a list of natural monopolies because it owns a gas pipeline in the Ryazan region. The listing means that Onexim, Prokhorov's Cyprus-registered investment vehicle, would need government permission to increase its stake in TGK-4.
The share prices of both TGK-4 and TGK-2 have plummeted since July. The buyout offers were backed by financial guarantees from Sberbank for TGK-2 and Rosbank for OGK-4.
The two companies' minority shareholders — mostly foreign portfolio investors — wrote an open letter to President Dmitry Medvedev last month asking that he help resolve the disputes.
"We urge you to take immediate action to protect the integrity of the Russian market and the Russian legal system and correct this scandalous corporate government abuse," the shareholders wrote.
The Kremlin has yet to reply, said signatory Alexander Branis, head of Prosperity Capital Management, an investment fund that holds stakes in both TGK-2 and TGK-4.
"We think Prokhorov and Lebedev are only finding pretexts not to pay for the offers," Branis said.
Branis said he believed that Sberbank and Rosbank would pay for the shares of both companies' minority shareholders by the end of the year. "The banks will then have to deal with Prokhorov and Lebedev to get their money back," he said.
The Moscow Arbitration Court, however, ruled last week that Rosbank should not pay the minority shareholders of TGK-4. The lawsuit, filed by Prokhorov, challenged whether he had to go through with the buyout offer. Spokespeople at the court and Rosbank declined to elaborate on the ruling.
Onexim spokesman Igor Petrov said the company was discussing its next move.
Prokhorov wrote on Onexim's corporate blog that the shareholders' public outcry "was caused by their desire to withdraw their money from Russia as soon as possible."
Branis insisted that he still believed in the attractiveness of the electricity sector. "Russian electricity companies' capitalization is less than what the firms have on their balance sheets, and the demand for electricity will always be there, so from our viewpoint the electricity industry is a very attractive sector," he said.
Anatoly Chubais, the former UES chief and architect of the sector's privatization, has thrown his support behind the minority shareholders. "I'm not happy about the position of Sintez and Onexim," Chubais told Bloomberg at a gathering of industry leaders in Cannes earlier this month. "If you don't treat minority shareholders well, you risk losing your reputation. Even in times of crisis, you should keep this in mind.''
Sintez spokesman Alexander Levin said the company was acting within the law.
If there is a silver lining to the crisis, it might be that it has united foreign and domestic electricity investors, said Fache of Enel. "We are facing a choice — either leave the boat or get together," he said. "The only solution is to join forces."
"I couldn't help him with anything — just advised to pay on time," Fache said, smiling, in an interview. "Everyone's equal."
Electricity suppliers across the country are cracking down as the number of delinquent private and corporate customers surges. They have little choice.
The dilapidated industry is mired in debt linked to unpaid consumer bills and the multibillion-dollar investment programs that investors signed onto when they acquired electricity assets from the state during the privatization of Unified Energy System, which wrapped up just weeks before the financial crisis struck. A chunk of the industry also operates on a system of short-term loans — funds that have dried up in the crisis.
The situation threatens to grow worse as winter approaches and the crisis spreads into the real economy. Russian and foreign investors alike are hoping for help from the government, which in turn has shown a lack of enthusiasm about getting involved.
But the problem cannot be ignored as electricity providers teeter on the brink of bankruptcy. Rebuilding the largely inefficient industry is vital to ensuring continued economic growth, and the heating that power plants generate is equally important in a country where the chilly winter months far outnumber the sunny days of summer.
So when a consumer — even if he is a senior government official — fails to pay his bills, electricity providers are reacting fast.
"The remedy in such a case is simple — to cut the power supply," said Fache, whose Enel holds major stakes in power generator OGK-5 and RusEnergoSbyt, the biggest private electricity distributor in the country.
Electricity distributors alone will need some 30 billion rubles ($1.1 billion) in the fourth quarter to refinance debt, Mikhail Slobodin, the president of Integrated Energy System, or IES, the country's largest private electricity producer, said at a round table last month.
"They will all be bankrupt in the first quarter," Slobodin said.
OGK-2 chairman Stanislav Neveynitsyn said late last week that he expected the distributing companies to "blow up" soon. "The distributors will be bought up by the generators because they won't be able to survive independently," Neveynitsyn said.
Mounting Debts
The Tver electricity distribution company, for one, has a consolidated debt of 500 million rubles ($18.5 million) and no sources for refinancing its loans, said company spokeswoman Natalya Yefimova.
Distributors' debt to generators reached 22.7 billion rubles ($840 million) in the week of Nov. 7 to 13, an increase of 1.3 billion rubles from a week earlier, the Market Council, a government watchdog for the sector, said in a statement Friday.
Consumer debt to the Tver distribution company stood at 900 million rubles ($33.3 million) at the beginning of this month. "Unfortunately, the sum is increasing," Yefimova said, adding that payment delays have grown by as much as 20 percent over the past two months.
Other companies have seen up to half their consumers fail to pay on time. The Vologda electricity distribution company has filed 474 lawsuits on its consumer debt of 97.5 million rubles.
The Tver company, like dozens of others, plans to suspend its investment program for next year and cut all other planned extra expenses.
The electricity distributors have found themselves between a rock and a hard place. They buy electricity on the wholesale market and pay on the day of the purchase, while the consumer only pays once a month. To survive in an imperfect system, the distributors used to take short-term bank loans, which have become inaccessible in recent months. The distributors do not have much to use as collateral, which has complicated borrowing from Sberbank, Gazprombank and VTB, three state-connected banks offering bailout funds.
Enel's Fache said factories tend to put their electricity bills at the end of their monthly expenses. "When they rank who they should pay first when they don't have enough money, we are at the very end of the list," Fache said, sighing. "It's very unjust."
IES has a similar problem with late payments, taking money alloted for repayment out of the system and making it difficult to prepare for winter, said Slobodin, who heads the Council of Electricity Producers, which comprises all major electricity generators.
"The industry is using a legal loophole that prevents us from cutting them off from electricity supplies immediately," Slobodin said in an interview.
Another issue is demand, with big consumers like metals and car producers slashing production. Overall demand slowed down by 6.3 percent from Nov. 7 to 13, compared to the same period last year, according to the Market Council.
"We expect consumption to fall by about 30 percent next year," said Yefimova of the Tver distribution company.
Fache said the reasons for slowing demand were more psychological than physical. "There are two factors: the psychological, noncontrollable domino effect of a snowball and everyone's incomprehension of what is going to happen next," Fache said.
Slobodin predicted a wave of job cuts and production optimization throughout the electricity sector as soon as the difficult winter period ends.
Denis Detinkin, general director of the Udmurtiya electricity distribution company, said he planned to cut the company's costs by 25 percent in the fourth quarter by "optimizing the management structure" but was not going to cut any jobs so far.
Looking to the State
Detinkin and the other people interviewed for this report said they were pinning their hopes on help from the state.
"We hope that the government will take measures to prevent the electricity market from being influenced by the crisis," Detinkin said.
Enel hopes that state support will include tax measures and reduced bank loan rates.
Last month, electricity producers wrote an open letter to Deputy Prime Minister Igor Sechin, who heads the government Commission on Electricity Sector Development, asking for up to $50 billion in cheap loans to finance their investment programs. In the privatization of the sector, investors agreed to spend 4 trillion rubles in the construction of new power stations under strict deadlines.
"As a result of the crisis, the opportunities for securing loans from banks have significantly decreased," the generators wrote in the letter, a copy of which was obtained by The Moscow Times. "The search for the model of getting out of the crisis … demands the strengthening of the government intervention."
The signatories suggest that the money be distributed by Vneshekonombank, the state-controlled bank in charge of handing out billions of dollars in bailout funds.
The government, however, is in no rush to announce rescue measures for power producers. Energy Minister Sergei Shmatko has even downplayed the distributors' problems, dismissing them as "technical." The ministry's press office did not reply to repeated requests for comment over the past two weeks.
[next]
Finding themselves up against the wall, the generators have begun to talk about delaying the construction of new power stations as demand slows. If a generator does not build a station by the deadline stipulated in its investment program, it could be fined 25 percent of the station's construction cost.
 Vladimir Filonov/ MT
Power lines crossing marshy land near a OGK-1-owned station in Novy Urengoi in the Tyumen region. OGK-1 faces tough challenges after failing to be sold. |
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Generators will face an overall deficit of $27 billion to $28 billion in implementing their investment programs by 2012, said Konstantin Gulyayev, a utilities analyst with Kapital Investment Group.
OGK-1, the only generator that UES failed to sell to a private investor, seems to face some of the toughest challenges. It must invest 31.5 billion rubles in building new stations next year — funds that other generators partially raised by issuing additional share emissions.
"We are considering all kinds of financing and are actively working with the state-run banks," OGK-1 said in a response to e-mailed questions.
"We are waiting for the help from the state in buying our additional share emission or setting aside discounted loans," it said in the statement.
Gazprom-controlled OGK-2 and Mosenergo will face investment problems as well because of high demand in undersupplied regions like Moscow and the need to replace worn-out equipment, Gulyayev said. Up to 80 percent of the power-producing equipment in the country is outdated.
While the companies may be short of cash to replace equipment in tough financial times, Deloitte & Touche is creating a program to help generators cut costs for electricity and heat production by 20 percent to 30 percent.
Generators in the program will exchange information on commercial, technical, operational and pollution data of their power stations, said Barry Dyson, the Deloitte & Touche partner in charge of the program. "The exchange will be absolutely anonymous and will be made through us," Dyson said. "This way, generators will understand how good their performance is."
The next step would be to optimize production. "We will recommend to the companies what infrastructure software to install at their power stations," Dyson said. "Modern IT will at least facilitate the diagnostics of the museum-exhibit equipment."
The last step will be demand and supply management. "From 30 to 40 percent of energy consumed in Russia may be saved," Dyson said, suggesting that the state pay for the installation of smart meters in homes and factories.
Despite the hard times, at least one company is not thinking about cutting back. State-controlled electricity trader Inter RAO announced last month that it would spend at least $5.5 billion on acquisitions in Latin America, Asia and Africa in the next two years.
"We see the financial crisis as a danger but also as an opportunity," Inter RAO chairman Yevgeny Dod said at a shareholders meeting in October that saw Sechin elected to the board.
Some other state-run companies, however, feel less confident. The country's only hydroenergy producer, RusHydro, said it had created a special "commission on liquidity" within the company. "The commission is working to create a cushion of liquidity that we can use in case of a potential problem with payments," it said in an e-mailed reply to questions.
RusHydro chief executive Vasily Zubakin said Friday that his company might dismiss up to 17 percent of its staff in the first quarter of 2009.
Moscow Integrated Power Company, which is 84 percent controlled by the Moscow city government, said last week that it would suspend its 7 billion ruble investment program for next year to refinance loans of about 6 billion rubles. The company also will delay installing new heating pipes in Moscow on expectations of zero profit this year because of high temperatures last winter.
Shareholder Disputes
The crisis has sparked sharp conflicts between shareholders in some generating companies. TGK-2, 45 percent owned by Senator Leonid Lebedev's Sintez Group, has refused to pay 15 billion rubles on an offer to buy out minority shareholders in July. Sintez has blamed the reversal on its business partner, German utility RWE, which in September backed out of its planned acquisition of a 49 percent stake in TGK-2. RWE had insisted that Sintez make the buyout offer to the minority shareholders. Sintez filed a $1.4 billion lawsuit against RWE in a London arbitration court earlier this month.
In a similar case, billionaire Mikhail Prokhorov, owner of about half of TGK-4, has stepped back from a 15 billion ruble buyout offer to minority shareholders in July, citing a government decision to place the company on a list of natural monopolies because it owns a gas pipeline in the Ryazan region. The listing means that Onexim, Prokhorov's Cyprus-registered investment vehicle, would need government permission to increase its stake in TGK-4.
The share prices of both TGK-4 and TGK-2 have plummeted since July. The buyout offers were backed by financial guarantees from Sberbank for TGK-2 and Rosbank for OGK-4.
The two companies' minority shareholders — mostly foreign portfolio investors — wrote an open letter to President Dmitry Medvedev last month asking that he help resolve the disputes.
"We urge you to take immediate action to protect the integrity of the Russian market and the Russian legal system and correct this scandalous corporate government abuse," the shareholders wrote.
The Kremlin has yet to reply, said signatory Alexander Branis, head of Prosperity Capital Management, an investment fund that holds stakes in both TGK-2 and TGK-4.
"We think Prokhorov and Lebedev are only finding pretexts not to pay for the offers," Branis said.
Branis said he believed that Sberbank and Rosbank would pay for the shares of both companies' minority shareholders by the end of the year. "The banks will then have to deal with Prokhorov and Lebedev to get their money back," he said.
The Moscow Arbitration Court, however, ruled last week that Rosbank should not pay the minority shareholders of TGK-4. The lawsuit, filed by Prokhorov, challenged whether he had to go through with the buyout offer. Spokespeople at the court and Rosbank declined to elaborate on the ruling.
Onexim spokesman Igor Petrov said the company was discussing its next move.
Prokhorov wrote on Onexim's corporate blog that the shareholders' public outcry "was caused by their desire to withdraw their money from Russia as soon as possible."
Branis insisted that he still believed in the attractiveness of the electricity sector. "Russian electricity companies' capitalization is less than what the firms have on their balance sheets, and the demand for electricity will always be there, so from our viewpoint the electricity industry is a very attractive sector," he said.
Anatoly Chubais, the former UES chief and architect of the sector's privatization, has thrown his support behind the minority shareholders. "I'm not happy about the position of Sintez and Onexim," Chubais told Bloomberg at a gathering of industry leaders in Cannes earlier this month. "If you don't treat minority shareholders well, you risk losing your reputation. Even in times of crisis, you should keep this in mind.''
Sintez spokesman Alexander Levin said the company was acting within the law.
If there is a silver lining to the crisis, it might be that it has united foreign and domestic electricity investors, said Fache of Enel. "We are facing a choice — either leave the boat or get together," he said. "The only solution is to join forces."