Tariff Policy

Pursuant to the Federal Law "On State Regulation of Electricity and Heat Tariffs in the Russian Federation", electricity and heat tariffs are subject to state regulation.

Regulation of Tariffs on the Retail Electricity Market

On the retail electricity market the tariffs for different groups of end-users are regulated by the Regional Energy Commissions (RECs).

The principal emphasis in tariff policy of RAO "UES of Russia" was on liaison with the RECs. As a result, the tariffs were reviewed in all regional energy systems in 2002. The approved average tariff for regional energos of the Holding Company grew 24.0% for electricity and 23.6% for heat. At the same time, the problem of delay in including all external price-raising factors in the tariff still remains unsettled. Regular delays in updating tariffs result in abrupt increases in electricity prices, hampering normal development of energy companies.

An important step to address the problem of timely tariff regulation was the Resolution "On Price Setting with Respect to Electrical and Heat Power" passed by the Government of the Russian Federation in 2002. The Resolution brings into effect the new Foundation of Pricing and Rules for State Regulation and Application of Electricity and Heat Tariffs in the Russian Federation. These regulations enable electricity enterprises to recover their reasonable costs from the planned proceeds.

One of the positive trends in 2002 was the actual tariffs approaching the cost reflective levels, i.e. reducing cross-subsidiziation among consumer groups. Nevertheless, the tariff levels are still far from truly reflecting the actual costs of supply to various consumer groups. The regulatory authorities still adhere to the policy of setting lower tariffs for agricultural producers and state-financed organizations. The actual average annual tariff for households, taking into account price reductions to certain categories of consumers, was 48.77 kopecks per kWh, whereas the tariff for large industrial consumers reached 64.85 kopecks per kWh. This means that with the tariffs for households remaining lower than the tariff for industrial consumers, the industry has to bear the burden of cross-subsidization, pushing large consumers to leave the retail market served by regional energos and purchase electricity on the wholesale market.

Often, the actual average tariffs for households turn out to be much lower than the ones approved by Regional Energy Commissions due to existence of price reductions to certain groups of households. Such reductions have been introduced without determining the source of funds for their compensation. The amount of electricity payment privileges for households is estimated at RUB 14.0 billion annually. The situation may be remedied either by ensuring payment of compensation to energy companies from the corresponding regional or local budget, or by directly subsidizing such consumers from the same sources.

Changes in average annual tariffs for electricity and heat supplied to consumers by major regional energos

Regional energos

Electricity tariff, kopecks/kWh

Heat tariff, RUB/Gcal

2000

2001

2002

2002 к 2001, %

2000

2001

2002

2002 к 2001, %

20.4

24.8

34.5

139.1

114.1

163.3

258.0

158.0

25.9

36.0

44.6

123.9

104.7

140.9

180.5

128.1

33.6

53.4

67.6

126.6

124.9

201.8

258.8

128.2

39.2

54.1

64.0

118.3

139.1

195.7

238.1

121.7

43.0

49.9

63.4

127.1

130.3

164.1

194.5

118.5

30.7

48.9

63.3

129.4

117.1

194.6

239.3

123.0

33.6

43.8

61.6

140.6

111.4

135.0

172.5

127.8

40.6

52.0

66.4

127.7

143.4

155.3

183.8

118.4

36.9

45.4

57.4

126.4

96.3

110.7

163.8

148.0

37.8

45.2

52.5

116.2

113.6

134.4

162.2

120.7

39.9

57.3

80.2

140.0

124.6

146.3

179.9

123.0

37.1

48.9

57.9

118.4

94.5

107.2

126.0

117.5

37.1

52.0

66.5

127.9

122.0

132.2

145.7

110.2

Regulation of Tariffs for Electricity Bought and Sold on FOREM

The tariffs for 29 federal thermal and hydroelectric power plants supplying electricity to FOREM were not adjusted in 2002 and remained at the level established for them at the beginning of 2001, and even in 2000 for some of them.

At the same time, in the early 2002:

• the water usage tax rate increased 4 to 20 times after amendments to the Federal Law "On Payments for Using Water Resources" became effective. For HPPs, the increase in these rates resulted in an increase in the amounts paid to the budgets (both Federal budget and the budgets of the Russian administrative divisions) by RUB 730 million. The water usage tax accounts for 20% of the total tariff receipts in 2002. The amount of water usage tax exceeded the HPPs' revenues from electricity sales (excluding the revenues from the sale of capacity);
• on 1 January 2002, a revaluation of the power plants' fixed assets was carried out, which resulted in a 2.3 times increase in the amount of depreciation charges and a 2-fold increase in property taxes;
• fuel prices grew 35%-40%. Gas prices were adjusted to higher levels twice in 2002;
• other expense items increased in connection with the inflation processes in the Russian economy.

RAO "UES of Russia" insisted on the review of tariffs for federal power plants beginning on 1 January 2002. All power plants submitted their calculations substantiating the increase in tariffs with effect from 1 January 2002 to the Federal Energy Commission in time. However, during 2002, the Russian Government and the FEC of Russia adjusted the tariffs only for four thermal power plants (ZAO "LuTEK", Troitskaya TPP, Berezovskaya TPP-1 and Gusinoozerskaya TPP).

A review by independent experts showed that it was necessary to readjust the tariff values proposed by the power plants, but on the whole confirmed the conclusions by RAO "UES of Russia" about the need to review tariffs for the Holding Company's federal power plants as soon as possible.

On 25 December 2002, the FEC of Russia approved tariffs for 29 federal power plants effective 1 January 2003, which, to one extent or another, take into account all cost-raising factors: revaluation of fixed assets, higher prices of gas and other fuels, financial losses suffered by power plants since the beginning of 2002 due to untimely adjustment of tariffs, etc.

The tariffs for electricity supplied from FOREM were adjusted twice in 2002. On 1 March 2002, the tariffs were raised by an average of 20%, and by a further 2.4% on 1 July 2002. The average tariff for electricity supplied from FOREM was 33.95 kopecks per kWh, a 23.4% increase from 2001.

The average tariff for electricity supplied by the federal power plants to FOREM was 27.74 kopecks per kWh (39.84 kopecks per kWh supplied by CPPs, and 6.95 kopecks per kWh supplied by HPPs), a 16.1% increase from 2001 (CPPs –13.02% and HPPs – 23.48%). The higher average tariff for HPPs was due to a 14.5% reduction in the volume of electricity supplied to FOREM.

In 2002, the average tariff for electricity bought on FOREM was 33.95 kopecks per kWh, whereas the average tariff supplied to FOREM was 33.1 kopecks per kWh, which resulted in a financial imbalance on FOREM of RUB 1.7 billion in 2002. Taking into account the balance carried over to 1 January 2002, the cost imbalance in 2002 reached RUB 11.8 billion (exclusive of VAT).

Regulation of Subscription Fee to RAO "UES of Russia"

Effective 1 January 2002, pursuant to Resolution of the FEC of Russia of 29 December 2001, the subscription fee for the services of RAO "UES of Russia" was approved at RUB 64.82 per thousand kWh, an increase of 20.2% compared to the rate in effect on 31 December 2001. At the same time, the operating costs of RAO "UES of Russia" were not reviewed, with the increase occurring only in the investment component of the subscription fee.

With effect from 1 June 2002, pursuant to the Resolution of the FEC of Russia dated 31 May 2002, the amount of subscription fee for the services of RAO "UES of Russia" was reviewed in connection with inclusion of additional projects in the investment program of RAO "UES of Russia", reaching RUB 78.28 per thousand kWh, the subscription fee growing by 20.77%.

As OAO "UES CDA" now has a separate tariff (RUB 1.82 per thousand kWh) and the subscription fee of RAO "UES of Russia" no longer includes the costs of system operation services, the subscription fee for the services of RAO "UES of Russia" was established by the Resolution of the FEC of Russia dated 30 October 2002 at RUB 76.20 per thousand kWh effective 1 November 2002.

The amount of earmarked investment funds incorporated in the subscription fee for the services of RAO "UES of Russia" for 2002 is twice that of 2001.