Moscow's power struggle over the power grid

A plan to reform the state electric monopoly fits the Kremlin agenda, but risks making California's mistakes.

On the face of it, Californians and Russians have little in common.

But power outages that have left millions in the dark and reforms that send electricity prices soaring are bringing complaints that could ring as easily from Sunset Boulevard as from Tverskaya Street.

Russia, analysts warn, is trying to solve a severe electricity crisis with a plan that would repeat many of the same mistakes California made, with potentially far more serious consequences in an oft-frozen nation of 146 million that depends totally on its decaying electricity grid.

"This is critical," says Ben Slay, a senior economist at PlanEcon, a Washington-based consultancy. "People will scream and yell, and - let's be blunt - people might actually die, because prices will go up and things that used to work won't work.

"But if nothing is done, three years from now, all of Russia might go black. And how many people will die from that?"

Few question the need for drastic reform, after years of undercharging for electricity and a decade without investment or upkeep, which has left the world's largest power grid in tatters.

But at its heart, Moscow's sweeping reform plan for its giant electricity monopoly - tentatively approved on Saturday by the cabinet - is also a power struggle over power.

"You have to place this electricity battle in a larger political context," says Robert Orttung, editor of the Russian Regional Report for the New York-based East-West Institute. "It's a battle between [President Vladimir] Putin and the regional governors.

"Maybe the plan doesn't make sense economically, but it's rational if you are a former KGB officer and want to impose control over the regions," he says.

Mr. Putin has vowed to make reform of the state-controlled Unified Energy System (UES) a key economic aim this year. After months of controversy, a compromise plan will break up UES and its 80-odd regional subsidiaries that deliver electricity to virtually every Russian home.

In a bid to introduce competition, energy production, and marketing units are to be split off and privatized - as in California - while the fraying high-voltage transmission grid is to be consolidated and kept firmly in government hands. Prices for consumers will double, at least.

The state owns 52 percent of UES, but other shareholders - more than half of them foreign - have voiced anger that the value of assets may be undermined. UES chief Anatoly Chubais, architect of discredited, asset-grabbing privatizations of the 1990s, is the main author of this plan.

Brokers reported low investor confidence on Tuesday, as money shifted sharply out of UES.

The overall result is in line with Putin's broader political agenda of recentralizing state power while reining in regional governors, say Kremlin observers. Even so, Andrei Illarionov, Putin's economic advisor and a Chubais critic, took issue with the plan. Mr. Illarionov said it caters to a "small minority" of UES chiefs and "scarcely reflects the proposals and opinions of the president."

UES board member Andrei Trapeznikov counters that the reform plan would have been "absolutely impossible" to adopt without Putin's direct support - and that shutting out regional governors, who have for years set local energy prices to enhance their popular support - was the "main achievement."

"UES is the thread which must be pulled to untie the knot of all Russia's economic problems," Mr. Trapeznikov says. "Now the federal power is strong and can talk properly with the regional governors - and insist on the president's political line."

The "main task of reform," he says, "is to block, to stop, to not permit the regionalization of Russian energy."

Energy has been almost sacred here since Lenin declared in 1920 that "Communism is Soviet power plus electrification."

Empire in collapse

The UES utility - an $8 billion empire of 440 electrical power stations and thousands of miles of power lines - is one of the few things that, along with the rail and gas networks, ties all of Russia together.

But today, the world's largest electricity grid is collapsing. Last winter was the worst to date, with whole sections of Russia's frigid Far East experiencing severe blackouts and unprecedented cold. Worn pipes and wires buckled, indoor toilet bowls froze, and public outcry led to the firing of the energy minister.

If ever such reforms are to take place, this moment - when Russia's economy is buoyed by high oil prices - may be the one.

"Now there is a good chance to promote reform, although a high price will be paid for all the delays," says Trapeznikov. "Lost years will make the reform much more painful for consumers, who ultimately must pay."

But analysts warn that economic and political uncertainty, mixed with Russia's investor-chilling privatization history, may lead to a California-style breakdown. "Russia is making the same mistakes as California, but the stakes are much higher," says Mr. Orttung. "Most [regional] governors control the prices now, and naturally want to keep them low, to keep residents happy and businesses profitable. That's exactly what California wanted to do."

But the price cap the Golden State imposed on retail electricity sales couldn't absorb fluctuating wholesale prices that surged with the cost of oil last year and led to numerous bankruptcies. Likewise in Russia, ministers promise to set a retail price ceiling, so the expected doubling of electricity prices "will not be catastrophic."

A further lesson from California is that speedy reform, while feeling like shock therapy, can work best. Russia's approach is slow. "A long, drawn-out liberalization of prices ... can cause the whole reform to short-circuit," says PlanEcon's Mr. Slay. "A gradual liberalization is inevitable, in the sense that a Russian household that makes $100 a month can't afford a dramatic increase, nor can industries."

Still, there are success stories. East European countries such as Poland, Hungary, and the Czech Republic all had failing energy systems when the Iron Curtain fell more than a decade ago. "They were able to liberalize the system enough so that West European companies went in, built plants, and made profits," says Slay. "This is how it is supposed to work. California doesn't have to be the outcome."

Needed: $35 billion

UES chief Chubais won plaudits for boosting cash receipts to 74 percent last year - key to future investment. In the first half of 1999, only one-quarter of receipts were in cash. The rest were paid, often corruptly, with "butter, brassieres, and bottles of vodka," says Slay. The result had been that, until recently, internal investment was impossible in the UES, which needs $35 billion over nine years just to keep the lights working, by one estimate.

The current concern by investors means that electricity reform could be "doomed to failure," says Orttung. "It doesn't make sense to have a plan that will alienate all the investors."

Next week: Why Brazilians must conserve or face blackouts.

(c) Copyright 2001. The Christian Science Monitor

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