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December 2, 2011

Seven Budgets for a Company. Interview with Alexander Kukhmai, general director of IDGC of the North-West, JSC

Seven Budgets for a Company

Power networks are like blood vessels: they make the life of economics body possible. It is banal, but it is fact. The networks of the Federal Grid Company of United Energy System (FGC UES) can be compared with arteries, but they are not enough to make the organism function in full. It is necessary to feed the “blood” to certain “organs”, or they can grow numb. Interregional distribution grid companies (IDGC) are like such a peripheral system. It is they that feed electric power to plants and population aggregates and enable their activity and development.

Interregional Distribution Grid Company of North-West is responsible for the major portion of regions in the Northwestern Federal District. We asked Alexander Kukhmai, director general, to tell about the networks' condition in our district and the problems the district grids are faced with.

Urban Areas As the Main Problem

New Opportunities (NO):Mr. Kukhmai, let us start with the overall review, i.e. the problems typical for every region of the Northwest Federal District.

Mr. Kukhmai: At present, IDGC of the North-West JSC is responsible for electricity network with 179 000 km of total length in the territory that is three times as much as France. The network is uneven and its density is not very high in the mean.

The great portion of network (concerning also high-voltage lines (110 kv)) is not reserved. Every dead-end feeder include from three to seven substations. And every power cut can entail the paralysis of a whole area: up to 20 000 people will be left without electricity. The feeders themselves are more than 100 km of the length. Naturally, the maintenance and removal of line faults require a lot of time and highly skilled manpower.

The main part of electricity network infrastructure in the North-West was created in the 1960s and 1970s, partly in 1980s. Then the major task assigned the power engineering specialists in the USSR was to connect every population aggregate to the electricity supply and enable the reliability of connection for every agricultural facility.

The basic principles of network construction were rapidity and the defined level of reliability for a relatively small amount of money. As a result the components with a short working life were used: they were constantly in need of repair. Of course, it entails the establishment of repair depots and the hiring of labour.

Currently, the requirements for the network reliability are much stricter. Also the pattern of electric power consumption has been considerably changed. A number of defence facilities that consumed a lot of electricity do not function any more. The rural population and a number of enterprises in the countryside have decreased. And the load of some facilities that remained in the outlying districts has dropped by 25-30 per cent.

But the load of urban areas has been multiplied and frequently up many times! Now the small-scale business is developing rapidly, especially in regional centres, and the number of household appliances used by population is also increasing.

Naturally, the electricity network infrastructure, created there in the past, requires the urgent interference. First of all, it concerns Arkhangelsk, Murmansk, Petrozavodsk, Syktyvkar, Novgorod, Pskov.

Want to Pass Through Your Flat

NO:But probably, the problems show themselves everywhere in many different ways. Where are they the most essential?

Mr. Kukhmai: Arkhangelsk is the most important area for us. The electricity network of the city is considerably overloaded. We decided to use additionally our mobile 25-MVA substation in a substation in Arkhangelsk, although it is usually used only under emergency conditions. It enabled solving the power problems for a year or for a year and a half. At the same time we lose a mobile facility.

It is necessary to construct new facilities in Arkhangelsk but over the last three years we have been faced with the incomprehension of local authorities.

NO:How does it show up?

Mr. Kukhmai:The energy facilities are widely believed to be constructed by everyone. There are so-called Territorial Grid Organizations (TGO) in our country that developed on the basis of small grid complexes responsible for networks of 0.4-6(10) kV. They are district networks and networks of companies (about 60 in Arkhangelsk Region, more than 20 in Karelia, about 50 in Murmansk Region, etc. About 180 through the federal district). Every TGO insists that it can construct a 110-kV substation. We try to explain the local authorities that the substation should be constructed only by IDGC because the network belongs to us. Just imagine that your neighbour says: “I would like to pass through your flat to go out. It is much more comfortable.”The problems are solved in the areas where we meet understanding, e.g. in Vologda Region. The governor of the region and the administration in Cherepovets addressed a request to us to construct the Yuzhnaya substation in Cherepovets. It is necessary for development of a new urban district. And we agreed though it required some changes in the investment program concerning the network development in Vologda region. The tendering procedure has been recently completed and 2012-2013 the new facility should be finished.

The situation in Novgorod region is the same. The governor is an active person who is emotionally involved with the success of his area. He tries to make the region a more attractive place to investments. And what does an investor need? Of course, infrastructure that is necessary for developing the project in the area. Currently the poultry farming is actively developing in Novgorod region which entails the construction of enormous battery farms. They need a lot of electricity, but the investors do not want to invest their money. So, the regional administration addresses a request to us to construct the necessary power engineering facilities and guaranteed that the building costs will be compensated.

And we are building. As of today three projects have been implemented. Now the main thing is to load quickly the facilities. Unfortunately, it can be differently. Yuzhnaya substation was constructed in Novgorod two years ago. It was planned that the substation would supply a promising residential district under construction. But then the economic crisis started… At present, Yuzhnaya is loaded not enough, though the new substation supplies electricity to such a large-scale business as Vodokanal of Sankt-Petersburg (a water and wastewater treatment plant).

Unequal Rates

NO:The most stable situation must be in Pskov Region, mustn't it? Certainly, there is some power reserve.

Mr. Kukhmai: Indeed, the situation in the region is a kind of disaster for us. There is the most extensive network (46 000 km). At the same time, the so long lines (50-60 km) feed quite small population aggregates. And we have to keep the lines in operation that feed places even with a sole resident (who can live there, for instance, only in the summer). Moreover, one third of electric power is consumed by inhabitants.

So, we have heavy costs with the low power consumption, the lowest one in the North-West. Maximum power consumption in the coldest weather is 300 MW. Total power consumption is 1.5 billion kWh annually. At the same time, Murmansk region disposes of 6 000 km network with the maximum power consumption 1 800 MW, and total consumption 11 billion kWh. It means that the network in Murmansk region is eight times less and power consumption is ten times more than in Pskov region.

It is clear that the cost of every kilowatt in Pskov region is multiplied up many times, and the rates, accordingly, too. The electricity rate is here very high. As a result, although Pskov is a quite comfortable place to live and to do business (owing to its proximity to the border), the investors prefer Novgorod, Karelia, Vologda and others.

There is a different problem in Murmansk region: big business (mining and smelting industry) acts as the main consumer of the region. The share of industry makes up 70 per cent in total electric power consumption, and the share of inhabitants 10 per cent.

Naturally, the region administration tries to cut energy charges for enterprises to support them. As a result, the high-voltage rate offered by local authorities is here lower than the rate of the FGC. Thereby, the companies are subsidized by low-voltage consumers that pay for a kilowatt seven times more. The difference in the other regions is only 3 or 4 times.

Jump off the Last Mile

NO: Recently, the so-called last mile problem is widely discussed. Does the North-West suffer from it?

Mr. Kukhmai:I believe that everyone suffers from it. The point is that the FGC is regulated by the Federal Tariff Service, the investment programme and costs for the FGC are approved by the Russian government. A separate rate is worked out so, that it is lower than the regional one. The FGC sends the rate to regions and get their money under contracts with IDGC.

And now, imagine that a number of large-scale businesses signs contracts directly with the FGC. It is profitable for enterprises because they can pay less. But what effect does it have on regions? The part of money that is not paid by the enterprises (the difference between the federal rates and regional ones) is shared between remainders. According to legislation, the rate should not be unprofitable also for us.  It means that total payments remain invariable, but the number of payers goes down.

It is good, if the number of companies fed directly by the FGC is quite small –for instance, 5-7 per cent as in Arkhangelsk region. What to do if it is more than 40 per cent as in Vologda region? In this case the rate for remainders increases by 60 per cent! There is the same situation in Karelia. If three largest consumers of the Republic of Karelia conclude the direct contracts with the FGC, the load is shared between the remainders including, for instance, the local aluminium producer that does not have a direct contract with the FGC and is connected to the IDGC network. That may mean death for the plant.

To be honest, it is not clear for me why the FGC schedules its own rate. According to the normative documents, there are only four levels, i.e. high voltage (110 kV and more), medium I voltage (35 kV), medium II voltage (6-10 kV), low voltage (0.4 kV). It means that the high voltage implies the only one rate, regardless of network’s belonging.

The reasons are clear to me: the matter is 70 billion roubles that are redirected from energy sector to industry. Of course, large-scale companies only gain by it. But can they solve their problems in such manner? It is doubtful. And we cannot solve our ones for sure, as well as small and medium enterprises that have no opportunity to be connected to the FGC network. As for me, there should be a common electricity rate for the whole Russia. All countries regulating the rate on the principle strive for that. For instance, Scandinavia. Previously, the territories of Denmark, Norway, Sweden, and Finland were four price zones. The zones were formed naturally because it was impossible to transmit electric power between them. Accordingly, there were some areas with different rates. They undertook the task of removing transmission restrictions to achieve equal terms for consumers in every region.

We have a separate rate for every region. The IDGC of the North-West serves seven areas, and has seven budgets. We try to spend money from the area where we gain them. But sometimes it seems to be problematic. For example, we need to construct a substation in Arkhangelsk region, but we do not have any resources there. If the rate was common for the whole territory, we could do it. I think the infrastructure should be equally available for everyone. Currently it is not so.

Back to Survival Budget?

NO:Our conversation comes round to investments again. What about your investment programme for the next few years?

Mr. Kukhmai: The investments of the IDGC of the North-West that were planned for 2011 total five billion roubles. In 2012 the sum of investments should be doubled. But at the present time the real investments total only 4.5 billion roubles.

Why? There is a progressive tariff regulation method – RAB (Regulatory Asset Base) - that enables making a considerable loan on the rates to be. So, it is possible to construct today, but pay back tomorrow.

We succeeded in persuading our branch offices in Vologda, Novgorod and Pskov regions to work according to the method. The remainders have rejected. It stems from the fact that the use of the method implies inevitably the increase in rates (even if it will be delayed). It can’t be helped if there are no other resources to pay back a loan. It is possible to get some money at the expense of the increase in electric power consumption but, as practice shows, it is only two or three per cent annually.

In the middle of the year, as it known, the Government made a decision to cut electricity rates and fix them till 2014. Accordingly, the investment program of the IDGC was also revised. There was a very good rate in the Republic of Komi and the investments remained there quite solid. But we cannot find money to invest in the other regions (Republic of Karelia, Murmansk and Arkhangelsk regions). If the situation does not change, we will have enough means only to support ourselves more or less. The problem needs to be solved. The resources can be found in the budget or by consumers. And if we save money today, we must pay twice as much tomorrow.




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