Electricity and Heat Market
Tariff Policy
Tariffs for electricity and heat energy are subject to state regulation in
accordance with the Federal Law On state regulation of charges for electricity and heat
energy in the Russian Federation.
 The state regulation of tariffs for the products and services of
the power sector, which is exercised to limit increases, has in recent years been not only
an instrument for smoothing out inflationary processes in Russia, but one of the essential
factors in stabilising and renewing economic growth. At the same time, prices for
electricity and heat energy, which lag behind prices in industry, do not allow companies
in the power sector to function in a normal manner.Regulation of tariffs
on the Federal Wholesale Market in Electricity and Capacity. At the Federal level
the Federal Energy Commission (FEC) regulates:
- the subscription charge for services in organising the operation and development of the
Unified Energy System of Russia;
- tariffs for electricity and power, as supplied to the wholesale market in electricity
and capacity by generating stations operating on that market and regional power companies
with surplus product;
- the tariffs at which regional power companies with a shortfall of product and major
industrial consumers included in FOREM buy electricity (power).
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From October 1997 to March 1999 the regulation by the FEC of subscription charges resulted
in their being reduced by 12.6 per cent. This led to a reduction in the volume of
investment and to cutbacks in programmes for the reconstruction and re-equipping of
electricity grid installations and also in repair programmes. The FEC’s increase of the
subscription charge by 14.7 per cent since 1 March 1999 has had virtually no impact on the
situation in the sector.
Following the sharp rise in industrial goods prices in autumn 1998, the
Federal Energy Commission of Russia waited until 1 June 1999 before introducing new
tariffs for suppliers of electricity to FOREM, with an average increase of 16 per cent.
This increase was introduced without a review of the rates charged for electricity and
power sold on from FOREM. The imbalance that this created on the wholesale market was only
remedied from 1 November 1999, following an increase of 16 per cent in the tariffs charged
to consumers. The increases introduced after this by the FEC in the price of gas (30 per
cent from 01.11.1999), and tariffs for railway transport (10 per cent from 01.11.1999 and
another 15 per cent from 30.12.1999), while maintaining existing tariffs for electricity
and power caused serious difficulties to FOREM’s suppliers.
Tariffs regulation on the retail market in electricity. On the
retail market in electricity the Regional Energy Commissions (RECs) set the tariffs for
various groups of end-consumers. These tariffs also include the energy system’s costs
for subscription tariffs to RAO UES of Russia and the purchase of electricity (power) from
FOREM.
Following August 17, 1998 the situation of the first inflationary wave of 1992 was
repeated; a hike in prices for industrial products with virtually unchanged tariffs for
electricity and heat energy. For instance, from August 1998 to December 1999 the increase
in prices in industry amounted to 206.5 per cent, while the increase in electricity
tariffs charged to industrial consumers with a connected capacity of 750 kWh or higher was
only 135.5 per cent. During the same period the increase in consumer prices amounted to
235.5 per cent, and tariffs for electricity charged to the residential consumers rose by
151.5 per cent. From January to December 1999 the increase in prices in industry amounted
to 167.3 per cent, while tariffs in the electricity-generating sector only rose by 121 per
cent. Overall, during the period from 1991 to 1999, prices for products of the
power-engineering sector rose at only half the rate of prices for those of industrial
producers.
In June 1999 the major industrial producers signed an Agreement on co-operation in
stabilising the situation in the economy of the Russian Federation, intended to hold back
increases in prices and tariffs. The terms of the agreement were effectively implemented
only by companies in the power-engineering sector, while tariffs for the products consumed
by the power-engineering sector exceeded the increases specified in the agreement.
A number of regional power-engineering companies suffer significant financial damage as
a result of the practice of not reviewing tariffs for more than a year or of increasing
tariffs to an extent which is inadequate for the stable functioning of the energy systems.
The effect of cross-subsidies is, in effect, to finance the residential consumers,
state organisations and agricultural consumers at the expense of higher tariffs for
industry and other groups of consumers. Tariffs have been set at levels above the average
for industrial consumers, urban transport, and non-industrial consumers. The highest
tariff was introduced for non-industrial consumers (1.6 times higher than the average
level). Lower than average tariffs have been set for electrified railways, industrial
agricultural consumers, the residential consumers, rural settlements and resellers. The
very lowest tariff is that for resellers (1.7 times lower than average).
In order to reduce the extent of cross-subsidies, the Government of the Russian
Federation passed Decree No. 1231 of September 26, 1997 On the staged elimination of
cross-subsidisation in the power-engineering sector and the adjustment of the level of
tariffs for electrical energy paid by the residential consumers to the actual cost of its
production, transmission and distribution and Decree No. 1444 of 7 December On the basic
principles of price-formation in relation to electricity consumed by the public. Decree
No. 1444 defined the minimum and maximum tariff levels for the residential consumers. In
1999 only 50 of the Regional Energy Commissions approved tariffs above the minimum level.
However, the actual average tariffs for electricity supplied to the residential consumers
are significantly lower than those approved by the RECs, because of the privileges
accorded to various groups of the population, which were introduced without any source of
compensation being identified.
In order to take into account the interests of both the producers and the consumers of
electricity and heat energy, measures must be taken to provide a way out of the present
situation:
- the Federal Energy Commission of Russia and the Regional Energy Commissions should
approve economically sound tariffs, which allow the electricity suppliers to finance their
own activities;
- the subscription charge should be set at an economically sound level to provide the
necessary volume of investment for the most important construction projects approved by
the FEC;
- the suppliers of electricity and heat energy and the Company should observe the
principle of optimisation of the costs of producing, transmitting and distributing
electricity and heat energy;
- order should be introduced into the system of according privileges, with sources of
compensation being identified;
- there should be direct subsidies from the budget to socially significant consumers, who
are in need of privileged treatment.
