By John Helmer, Moscow
When the electricity bill goes up in Russia, that is called “liberalization”. Editorialists in countries which don’t enjoy cheap electricity call that a good thing. By which they mean that Mother Nature’s special discount for Russia should be erased, and its competitive advantages in global trade destroyed.
Inside Russia, it’s election time, and if electricity costs are to go up, the government is trying to make sure that voters don’t feel the pinch – at least, not until after they cast their votes. So to lift the power tariff, but protect the poor voter, there has been a series of rules changes and government decrees. These are fine pieces of bureaucratic gobbledygook; but their meaning is crystal clear to one of Russia’s most favoured electricity consumers – Oleg Deripaska’s United Company Rusal. As everyone knows, smelting aluminium metal out of alumina powder requires electricity – so much of it, in fact, that aluminium might be termed a solid form of electricity. And if Rusal faces rising electricity costs, Deripaska also faces sharply diminishing profits.
So he is in favour of cheap electricity to keep the light on in his pocket. He is against cheap electricity for everyone else if that means there is less for him, or higher costs for Rusal. Naturally, that sounds so undemocratic, not to say monopolistic and unpopular, the fact that Rusal has mounted a court and lobbying campaign to stop it happening is not widely known, neither among consumer organizations, nor even among the Moscow investment house analysts whose job it is to observe every new move in the regulated electricity market.
The open secret, then, is that the Russian government is ordering the price of electricity to go up, and to neutralize the impact on retail consumers, Rusal must pay the difference between its specially discounted long-term tariff and the new “liberalized” electricity price. Rusal refuses, so Deripaska has ordered his men into court, where, even if the company loses to the judge, the legal proceedings and appeals may be stretched out for long enough that, once the elections are past, Deripaska will be able to keep the favouritism, and other consumers foot the bill for him.
A Rusal lawyer confirms that this is standard operating practice for the company. It has been a tactic successfully used, he said, in dozens of domestic court cases to challenge the state-owned Russian Railways’s attempts to end preferential cargo discounts and raise rail freight rates for Rusal and its subsidiaries.
Two lawsuits were filed last week in the Moscow Arbitration Court, one by Rusal’s Bratsk Aluminium Plant , and one by its Krasnoyarsk Aluminium Plant ; they are the largest and second-largest of the company’s aluminium smelters in Russia. The defendant in both claims is the Market Council, the state company which has legal responsibility for regulating the electricity sector. Both cases have been set down for Judge E.A. Ananyina. She has postponed all action on the cases until May 20.
The texts of the Rusal submissions are not accessible on the court’s website archive. Rusal doesn’t answer this correspondent’s questions, and has also refused to answer questions about the court claims from the Moscow business press.
The Market Council’s spokesman, Oleg Larko, also refuses to respond to questions about the Rusal challenge, claiming his organization has yet to see the court papers more than a week after they were filed. The energy sector analysts for three leading Moscow investment banks claimed they either don’t know anything about the legal challenge, or don’t want to discuss either side of the contest. Investment bank analysts focusing on Rusal are certain that a sizeable amount of energy cost outlay is at stake for the two smelters, and for the company countrywide, but noone is hazarding an estimate of what the new rules will cost Rusal if the court challenge fails.
A newspaper calculation is that if the new pricing and cost transfer regulations are upheld in court, the two Siberian smelters are facing a first-year increase in costs of their electricity of Rb1.5 billion ($54 million). A much bigger amount than this is apparently at risk for Rusal’s balance-sheet. But the arcane detail of how its power discounts and electricity supply contracts are written make the calculation difficult without inside knowledge of Rusal’s accounting.
In rough sequence, what has happened is this. On December 27, 2010, the Russian government issued a decree changing the regulations for the wholesale electricity market. The effective date was April 1. On April 8, the Market Council followed up with its own new regulations.
The Market Council — full name, Noncommercial Partnership The Market Council for Organization of the Effective System of Wholesale and Retail Trade in Electricity and Power – was first established in 2001. It was renamed in 2007, with additional statutory powers assigned in 2008. Its function is to administer the wholesale market for electricity; its mandate expressly requires the Council to “ensur[e] effective interaction of the wholesale and the retail market…[and to ensure] energy security of the Russian Federation, the common economic space, freedom of economic activity and competition on the wholesale and the retail market, balancing the interests of producers and consumers of electric energy and power, meeting of public needs in a safe and reliable supply of electrical energy.” The Market Council is run by Dmitry Ponomarev, a professional lawyer.
Larko explains the April 8 rule change this way: “The Market Council does not set tariffs. The tariffs are set by the Federal Tariff Service for the regulated part of the market, while the Market Council accounts for the management of the unregulated market, where the price is formed as a result of competition. The Federal Tariff Service set the new tariffs for the hydroelectric power stations of Siberia. Rusal has been purchasing cheap power due to long- term contracts, and other buyers had to purchase power at much higher prices. Now Rusal, together with all the rest of the buyers purchasing power according to direct agreements, will have to compensate for the cheaper power, thus the market will be leveled. We are talking about the wholesale market, while the individual consumers pay according to different tariffs. We haven’t seen the Rusal claim yet, and thus we don’t know the matter of their claim. That probably has to do with the corrections to the regulations, but we can’t tell for sure yet. The Market Coucil’s corrections have nothing to do with the tariffs by monopolies, it has to do with the government’s ruling dated December 27.”
Note that what the Market Council appears to acknowledge, even before it has read Rusal’s court papers, is that it is increasing competition between consumers in the electricity market, and eliminating (“leveling”) the favouritism previously obtained by Rusal at the expense of everyone else in the market. This also involves a rebalancing of the differential costs and charges for hydroelectric and thermal (coal, gas, oil, nuclear) sources of power used by different consumers. In simple terms, Rusal, which consumes one volt in every three generated in Siberia, will be obliged to pay more for the power it consumes. Judge Ananyina has been asked to rule that this doesn’t happen.
Rusal’s last financial report, released on March 31, acknowledges that electricity costs rose last year by $92 million. All the more reason for concern that this year’s electricity tariff will increase if the Market Council prevails in court.
Here’s what the company admitted a month ago: “Energy costs increased by US$92 million, or 4.9%, to US$1,972 million in 2010 compared to US$1,880 million in 2009. The increase in electricity costs over the period resulted primarily from the growth of the weighted-average electricity tariff and increased consumption. The increase in the weighted-average electricity tariff was mainly due to continued market liberalisation and increased share of electricity sold through the wholesale market. Electricity tariffs are generally quoted in RUR [Russian rouble] and increased in line with the Russian consumer price index…The largest components of the UC RUSAL Aluminium Cash Operating Costs structure in 2010 were alumina and energy at 39% and 25% respectively, as compared to the industry average of 37% and 36% respectively. Other cost items (raw materials at 17%, payroll at 6%, transportation at 4% and other costs at 9%) were roughly in line with the industry averages.”
Rusal executives have also been lobbying for price favouritism in the Urals region, arguing that without the cheap hydropower sources available in Siberia, the inevitable rise of electricity prices in line with the rising cost of thermal fuels will put Rusal’s smelters in that area out of business. What they mean is that the profit margin the smelters are making on cheap electricity will be cut.
All the more reason for Rusal to avoid putting the spotlight on Judge Ananyina’s courtroom. If state regulation has been the source to date of Rusal’s aluminium smelting advantage, compared with global competitors like Alcoa of the US or Chinalco of China, then this month’s new regulations attack Rusal and its shareholders directly. Deripaska has been doing very poorly in the courts of the UK and Switzerland – this is well-known . But this is the first time he is putting to the test at home a fundamental principle of Russian jurisprudence and constitutionalism – can Deripaska count on the Moscow court to legalize favour and monopoly profit? or to sustain the statutory and regulatory requirement for competition among equals under the law?