Interview with RAO Energy System of East’s head, Sergei Tolstoguzov: “Market on the Far East region is impossible for reasons beyond control”

Against the background of a major intensification of projects on the development of the Far East region, RAO Energy System of East, which controls the isolated power system of the region, has offered the Government to abandon tariff regulation in the local energy sector and to switch to a new mechanism that takes into account the return on investments for 20 years. For a while, a number of structures of the holding company has not enough tariff revenues even to maintain their obsolete equipment and the repayment of their debt. But general director of RAO Energy System of East Sergei Tolstoguzov sees interest in the company from Asian investors, believes in the prospects of exports to Japan and doesn’t want to get rid of even the problematic network assets.

Q- the RAO Energy System of East still works in a lack of normal market conditions, these were canceled for the rest of Russia seven years ago. Do tariff the mechanisms of the return on investment into the construction of power generation and networks in such conditions exist?

A- With the reform of the electric power industry, most energy companies received the opportunity to use market instruments; almost the entire power generation sector was divided among private and public companies. But the Far East is a separate area, where market mechanisms don’t work - this is one big no-price zone with isolated energy systems, in which there is no differentiation by type of business. There are many reasons: the topology of networks, territorial restrictions, a lack of the development of energy sources, the sparse population. The Far East region occupies a third of the territory of Russia, but it has only 5% of the population. That’s why the full tariff regulation is maintained here and, as a consequence, there is a problem of the lack of mechanisms for the return on investment.

This seriously complicates the task of upgrading and the construction of new energy facilities. Today, we should include the profit in tariffs, but it is minimal and we can’t increase the prices sharply - the consumer can’t pay more. We have developed a number of proposals, which are based on long-term consolidation of the tariff. The FTS is now considering the introduction of regulation for three to five years. But the best period for us would be 20 years – this is the only way how we will be able to disclose adequate conditions of the return on investment to potential investors, a major station can’t be covered in five years. If we talk about specific tools, we would like to see RAB-regulation in the networks, and introduction of mechanisms that guarantee the return on capital and profit in generation. We actively work on all of these mechanisms, which will allow us to provide the return on investment in the energy sector of the Far East in the future, and plan to co-ordinate them with head of the Board of Directors (head of RusHydro, Evgeny Dod), the relevant Ministries and the presidential envoy to the Far Eastern Federal District Yuri Trutnev to submit them to the Government later.

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