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President of Russia Dmitry Medvedev: Colleagues,

We are holding this State Council Presidium meeting today to discuss the problems in one of our most important sectors – the electricity sector. I think that all of the regional governors present have problems in this sector and have their own views on what is going in this sector. This is all the more so as this meeting is taking place today in a highly symbolic place that is at once a great source of pride and also a source of sorrow, due to the terrible accident here that we have not forgotten.

In Russia, as in any other large country, ensuring reliable electricity supply is one of the prerequisites for sustainable economic development and therefore for improving our people’s living standards and giving our country and society the security it needs.

Worn-out and technologically outdated infrastructure is one of the major problems in the sector. We all know this. Equipment that has been in operation for over 30 years now accounts for around 40 percent of generation equipment, and more than 50 percent of the grid infrastructure. Aging equipment has been the cause of several big accidents and disasters over recent years. They include the accident at the Chagino substation in 2006, and the devastating accident at the Sayano-Shushenskaya Power Station in 2009. This was also the cause of problems in the St Petersburg electricity grid in 2010, and in Moscow Region and in a number of other central Russian regions this winter.

On the one hand, investment in and launching of new capacities seem to be on the rise which is the positive results of the economy modernisation, but there is not enough control over how effectively this money is being spent. Efficiency in the sector has scarcely increased at all over the last 20 years. This is a very worrying indicator, especially if compared to the improvements we have seen in other sectors.

The share of fuel consumption at steam stations has not dropped over this period and remains at around 5 percent. The share of electricity consumed for the electricity sector’s own needs has dropped only slightly and now comes to around 17 percent of total energy consumption. The number of substations in the grid network with no capacity for connecting new consumers comes to around 10 percent of the total.

Another point that has been the subject of much discussion of late is the real threat that rising electricity prices pose to our economic growth. I have discussed this matter with the regional governors and with business community representatives. This is a real danger. The average rates have more than tripled since 2000, though our companies and households still pay less than is the case in many countries. They pay less for now, at any rate, but if the current trend continues, the analysts forecast that by 2014 electricity prices in Russia will be higher than in the United States, Finland, and a number of other countries.

What’s more, prices are expected to reach a level when it will become more profitable for a company to build its own generating capacity rather than buying electricity from the grid. Judging by what I have heard today, in some regions a number of industrial enterprises are already finding it more profitable to follow this road, saying, ‘We do not want to buy electricity; we want to build our own generators’. But what are we aiming to get, a purely subsistence economy? Yes, it is true that Russia is a unique country with vast territory, but there are limits nonetheless to easing integration ties, beyond which development comes to a halt.

According to the information I have, electricity costs already exceed all reasonable figures, especially for small and medium-sized businesses. Last January businesses using the low tension grid were paying 6.5 rubles or 15 euro cents per kilowatt/hour in Kursk Region, for example. I already cited this figure today. Even in Italy – the country with the biggest electricity sector problems in Western Europe — companies pay 11 to 11.5 euro cents. Kursk Region, it seems, is richer than most of Europe.

If we take Kaluga Region, electricity prices have increased by around 50 percent compared to January 2010, and the rates regulated at the regional level account for almost all of this increase. Many executives seem to have it firmly in their heads that we are much wealthier than our European partners, and that we should therefore pay more and more money. Most of the price hikes are at the distribution grid and sales end of the sector.

Even more of a scandal is the way that rates for electricity transmission via the grid network in the different regions have been set for 2011. There are two-fold and even three-fold differences in tariffs from one region to another. This is unacceptable. What explains these differences in rates? The answer probably lies in the degree of effectiveness of the grid operators in the particular regions. I have heard a lot of complaints on this subject and received many proposals. I hope you will share these proposals today and suggest what we can do with these grid operators. This is an issue that requires thorough attention. Our consumers simply cannot afford such a big jump in electricity costs, not to mention that this kind of situation also frightens off potential investors from putting money into the electricity sector, and therefore has a reverse effect.

Before we start exchanging views, I want to outline a few priorities for our work.

First, no matter what the circumstances, we must step up the efforts to modernise the sector and build new generating capacity using the latest technology both to replace obsolete facilities and provide us with the capacity required to cope with growing demand. According to the information I have, far from all of the planned facilities will be ready to come on line as scheduled. The memo I have lists numerous power stations of various types belonging to different investors, and they are all lagging behind schedule. All of them! In some cases there are no doubt objective reasons for these delays, but in some cases it is probably also a question of how the main investors perceive their own performance. They seem to think it is all not so important and imagine that the state authorities will close their eyes to the problems and forgive the delays, citing the crisis and saying that they were forced to postpone this or that, but will catch up on everything later. If most of the investors think that the approved plans for launching electricity sector facilities should be revised, we could make changes. But both the state authorities and the business community must meet the commitments they have made. We have foreigners investors in this industry too, and why is it that they manage to get their part of the work done on time? Did they not go through the crisis too?

At the latest meeting of the Commission for Modernisation [and Technological Development of Russia’s Economy] held in Arzamas, we discussed the idea of having the big state-owned enterprises draft innovative development programmes. The Commission also set the deadlines for approving these programmes. Some of the companies had until April 15 to do this, but most of them were given until July 15. These programmes will form the basis for development not only in these companies themselves but also in the industries in which they operate. 

Taking into account the approved programmes that result, the Government will have until August 15 to draft a comprehensive action plan for introducing advanced technology in the electricity sector, with particular focus on energy-saving technology and renewable energy sources.

Second, we are to complete the structural transformations in the sector. It is time to do this. These transformations began a long time ago, but we have still not completed everything that was planned. We still have not developed effective competition on the electricity retail market, for example, new players still find it very hard to enter the market, and consumers still have practically no say in price setting. Everything is decided within a closed-off circle, among insiders, with the consumers all but excluded completely. This situation arose in large part because real consumers have no representatives in the organisations responsible for running the market and setting the prices. 

I think we should increase consumer representation on the supervisory board of the non-profit Market Council partnership. This organisation is essentially a branch of the Energy Ministry and was originally set up for other purposes. We also need to reassess the results of the reforms in the industry from the consumers’ point of view and make adjustments where required.

There are several other tasks we have to tackle over the coming months. I want you to take all necessary measures in the following areas.

First, we are to exclude payment from excess reserve capacity. Reserves are a good thing of course, but these norms date back to the USSR, and what’s more, this system simply does not always make sense in every case.

Second, we have to launch the gas exchange.

Third, tenders should be arranged when placing orders for construction of new hydroelectricity stations.

Fourth, we need to optimise investment programmes and payment principles for grid companies’ services. And at the urging of regional governors, I stress in particular that the regional grid companies currently controlled by the IDGC [Interregional Distribution Grid Companies] Holding must be transferred to regional management or privatised. It is time to do this. We will settle today the proposed deadlines and mechanisms for carrying out these tasks. These decisions should aim above all at keeping electricity and heating costs cheap for our citizens, organisations and businesses.

Fifth, we must raise the level of technical safety and anti-terrorist protection at electricity sector facilities. I gave the Government an instruction on this matter following the accident at the Sayano-Shushenskaya Hydroelectric Station and the terrorist attack at the Baksan Hydroelectric Station. These instructions concern not only the security services and law enforcement agencies, but the governors of all regions home to such facilities. All of you shall keep these facilities and their operation and protection under your constant monitoring. I hope to receive proposals on these aspects very soon, and we will then finally put together the relevant draft law.

Let’s now discuss these issues I have outlined.

<…>

Dmitry Medvedev: Colleagues,

As far as the current situation with prices goes, I want all of the regional governors and Government officials to realise their own personal responsibility for this matter. This is a subject that comes up time and time again in my discussions with people. You know this too from the things you hear from people living in your regions. You all know that along with unemployment, low wages and pensions, and rising housing and utilities costs, electricity prices are one of the biggest social issues. 

We realise that we cannot just solve everything by issuing orders, and that developing a full-fledged electricity market is a complicated process. But we should have better understanding and better control of the processes underway, than we have at the moment. The situation right now, as I said, is that we carried out reforms and then relaxed. Indeed, everyone, including the people at the top, seemed to get the impression for some reason that now industry growth would be stimulated by supply and demand without the need for any attention from the state authorities at all, forgetting that the electricity sector is still a regulated sector here. This situation is unacceptable. I therefore ask all of you to remember your place in the ranks. If there is a need, we can add the relevant representatives to the regional energy commissions. This is not a problem. The same goes for the Market Council that I mentioned before.

All of the issues the business representatives raised should be taken into account. This does not mean that we must automatically proceed as they propose, but these are demands that come from the ground, and this concerns not only big business, which is represented here today, but also the small and medium-sized businesses that suffer even more from these problems. They are in the worst situation today because all of the difficulties end up on their shoulders. We also are to look at the specific situation in each region, and at what our colleagues mentioned in relation to the issue of merging energy systems. This is a matter that remains on the agenda. 

As far as the draft instructions go, they set out directly what we heard from the working group’s and the Government’s reports. But the deadlines that have been set seem to me very generous. I think they could be shortened in a number of cases to three months. Regarding the draft federal law on the fuel and energy sector’s information system, where does it stand now? It is due to be submitted for examination on June 1, 2011. (Addressing Deputy Prime Minister Igor Sechin) Is it ready now?

Deputy Prime Minister Igor Sechin: It is almost ready.

Dmitry Medvedev: Why wait until June 1? Let’s submit it in a month’s time. Get it ready sooner. And give the instructions set out here a more compact timeframe. As I said, everyone has to get to work. This is not some technical issue, but is a matter of great social importance, and this is why I am addressing it. As we agreed, we will come back to it on Monday. 

One more thing. Today, Japan was hit by a powerful earthquake of magnitude of some 9 degrees. The earthquake has caused widespread destruction and claimed victims. Naturally, we are ready to come to the aid of our neighbours and assist them in the disaster relief effort following this major earthquake.

A state of emergency has been declared in our own territory – on the Kuril Islands and in Sakhalin Region. The authorities there must take all necessary measures to prevent damage and, above all, protect people’s lives, because we know that large tsunamis have already struck and in part have reached our shores too, and so we all must be as prepared and united as possible now.

I instruct the Emergencies Minister to file for my approval the disaster relief assistance proposals.

Thank you for your work. Goodbye.