Valentin Mezhevich, Committee of the Federal Council for Natural Monopolies
Release Date: 2009-07-23
Mr. Mezhevich, was your career related to energy from the very beginning?I’ve been working in energy since 1969 when I was involved in construction of a power plant in Norilsk, before my graduation from the Irkutsk Polytechnic Institute in 1970. I’ve been working in Irkutskenergo in 1970-1997 and was deputy Governor after that during three years. Eventually, the regional assembly sent me to work in the Federation Council.
Could you explain the role and place of the Committee on Natural Monopolies in the Federation Council?
The Committee on Natural Monopolies was established in 2001. The committees of the Federation Council (NE Upper House) are structured according to their corresponding activities and not industry: among others, the Committee on Economic Policy, Committee on Industrial Policy and Committee on Natural Monopolies. The latter cooperates and coordinates its actions with the Committees for Transport and Communication and the Committee for Energy of the State Duma (NE Lower House).
The activities of the Committee on Natural Monopolies regard the pipeline transport, sea and aviation ports, railway transport, energy and communication, as well as development of competition, together with the Committee for Economic and Industrial Policy. We also cover the nuclear industry, together with the Committee for Industrial Policy.
What is the philosophy of natural monopolies in Russia?
The notion of natural monopolies in Russia implies a monopolistic way of producing goods and services, which is regarded as the most feasible and advantageous in terms of minimum public costs. Such activities are state-regulated. For example, it would not be feasible to compete in the transmission of electric energy or in the pipeline system, as it’s hard to imagine a new alternative system in this sphere, given the big distances in Russia. The Committee on Natural Monopolies and the Federal Antimonopoly Service (FAS) regulate the monopolistic activities and the access of other producer/consumers.
The energy system used to be state-regulated, but recently, in 2003, began to undergo a gradual reform, and, as a result, the following monopolistic sectors were outlined: energy transmission, energy dispatching; the state controls 100% of nuclear energy and 51% of hydro power generation development.
One of the common features of Russia is its massive presence in the so-called strategic sectors such as energy. Why is it important for the state to control the natural monopolies, and what is its impact of this condition on the business?
Firstly, the existence of state-controlled natural monopolies in those sectors reduces total costs of maintaining the system. As I have said earlier, it’s next to impossible to build a new competitor energy network to cover the whole of Russia. Today, enormous assets are invested in more than 300,000 km of pipelines that transport gas, oil and oil products. The range of electric grids is even larger. The objective of the existing antimonopoly legislation is to provide access to these grids and ensure the balance of efficiency and reliability.
The second component is the development of competition. We cooperate with the Government groups and expert groups to ensure that competition develops. Russia has done much from the viewpoint of developing competition among the power generation companies, distribution and service companies, developing competitive market of electricity and capacity. The Committee has introduced many changes that ensure competition and control price manipulations.
The Law on Natural Monopolies was enforced in 1997. After RAO UES was dismantled, is there a need to pass new legislation adapted to this particular topic?
Firstly, I prefer not to call it ‘dismantling’: it was a programmed and structural liberalization of the sector. We have not yet fully adapted the legislation to the current situation but it is constantly being improved, as life dictates certain details that need to be corrected. For example, the Law on Electric Energy - the basic law for development of the sector - was amended very recently, in December 2008.
Secondly, we are gradually increasing the amount of energy traded on the free market. Russia is an enormous country with different conditions in different regions, what makes it difficult to forecast changes that will occur when the share of free-traded energy increases. Changes are first made by State Decrees and afterwards developed as a new standard that is introduced in the legislation. The Decrees take many challenges into account and aim at creating a competitive energy market.
You have mentioned the regional component… Is it something that will be contemplated in the future regulation of the free market?
We are forced to look for common solutions that are beneficial for all parties in Russia. The main challenge today is to upgrade the underdeveloped system of electric grids as it does not allow a free flow of capacity supply. As the grids develop, we create more opportunities for competition.
Secondly, today we have to take the territorial factor into account. There are two price zones on the free market in Russia, on either side of the Ural mountain chain - Europe and, respectively, the Far East and Siberia, with regions like Yakutia with scarce grids and insufficiently developed energy sources.
One of the tasks of our Committee in particular is to develop strategic measures and organize public activities such as conferences and parliament hearings, in order to understand the reaction of both producers and consumers to changes in energy regulation and practices, work out a consolidated opinion and issue recommendations that are presented to the Government. These measures are also discussed in the Market Council, where the Committee on Natural Monopolies and the State Duma Committee on Energy form the Chamber of State Representatives. What we propose is not a binding guideline for the Government but it is taken into account in the potential decrees, at least we hope so.
What sort of recommendations does the Committee develop?
One of the problems that we are currently discussing in the Market Council is the potential effect of the increased amount of energy traded on the free market. The ratio of the amount of energy and capacity traded on the regulated market and on the free market reached 50/50, according to the new energy legislation. Unfortunately, energy consumption dropped drastically, and in some regions prices vary due to the structure of the energy system and the level of consumption. Our task is to develop anti-crisis measures to make the changes acceptable for different regions and make this transition to the free market as safe as possible. Our second task is to re-estimate the necessary generation reserves, for the consumers not to overpay for unused reserves of capacity.
Thirdly, as I personally view it, there is no agreement between producers and (industrial) consumers concerning the cost of energy. Construction of new and more efficient energy facilities is quite costly and, in the changing economic conditions, leads to increasing tariffs. But I feel that we are moving towards agreement.
Such problems had occurred in other countries before, to different degrees, of course, so what kind of model it seems interesting to take - or no existing model applies to Russia?
Before the reform in 2003, we were discussing different models and eventually worked out a basic target model. Now we’re carefully monitoring the global situation. The Federal Antimonopoly Service is monitoring changes that are taking place in the USA and other countries; the Federal Tariff Service (FTS) cooperates with the Council of European Energy Regulators; the Market Council suggests different solutions on the basis of the received information. We try to apply all the positive changes, as the foreign shareholders in Russia’s major energy companies are convincing us.
Who decides for the tariff, at the end of the day?
The Government, as a collegial body, takes the final decision on the tariffs. It considers the opinion of the Ministry of Economic Development that deals with liberalization and development of competition, of the Ministry of Energy that deals with fuel balance and energy production. It is important that the Federal Tariff Service and Federal Antimonopoly Service are directly subjected to the Chairman of the Government as independent regulation and supervision bodies.
Russia still needs more capacity. To what extent will the future development of the infrastructure depend on the tariff?
It is obvious that state activities - development of the grids, development and improvement of safety and reliability of the system and operation of nuclear power plants (NPPs) covered by the Federal Target Program for nuclear power development - will depend on the tariffs and on the return on investments. State-controlled nuclear power plants are already trading half of their energy on the free market, and this share will increase. The state will continue to have influence, and we will create conditions for the nuclear generated capacity to be paid on the free market so that the system could continue to develop safely.
There is an alternative way for the NPPs: investments in nuclear power will be done at the expense of the budget. I think that this is a goal that we will reach. The same concerns construction of hydro power plants (HPPs) in Siberia that represent the major share of renewable sources of energy in Russia that the state wants to develop. Thermal plants powered with organic fuel will develop on the free market.
We’re interested in using renewables and we will try to achieve the safest energy balance of nuclear, hydro and thermal energy, with a small share (5-6%) of solar, tidal and geothermal energy that will increase. In order to give it a start, certain preferences are already included in the new legislation on Energy Efficiency.
The reform of the electric energy system was an extremely important stage of development in Russia. Are there any other natural monopolies susceptible to changes as it happened with the electricity sector?
Similar reforms have been conducted in the railway sector: the network remains state-regulated but cargo companies can develop competition. Dramatic changes have also taken place in the sphere of telecommunications: we used to have a monopoly in wire communications; now, cellular operators compete very strongly.
In any country, there’s the law and its application. As a legislator, how do you rank Russia in terms of laws and their applicability? What are the further trends?
This reminds me of one of the Russian classics who said that the rigorousness of the Russian laws is compensated by optional compliance! Law is often just the framework and the details are developed in the Decrees of the Government. Essence is in the details, as you know!
Summing it up, I would say that we are making huge steps towards developing competition based on the balance of interests of consumers and producers of energy; at least we try to ensure it. Russia’s advantage is in its invaluable experience of creating and operating a unified energy system. During the last blackout in Moscow in 2005, power supply was restored in two hours.
Do you think Russia will manage to export electricity to China?
I think that all changes in geopolitics will lead to a common understanding that the most efficient solution is to join the energy systems.
Thank you, Mr. Mezhevich, for talking to us!
| Company: | Committee of the Federal Council for Natural Monopolies |
| Position: | deputy Chairman |
| Country: | Russian Federation |