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Participants in the meeting included Deputy Prime Minister Arkady Dvorkovich, Energy Minister Alexander Novak, head of the Federal Tariff Service Sergei Novikov, as well as Federal Grid Company of Unified Energy System and Interregional Distribution Grid Companies Holding executives.

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President of Russia Vladimir Putin: Colleagues,

We have gathered today to discuss the key issue of developing the electric power industry, First and foremost, we will be analysing how to increase efficiency in managing companies of the sector.

I should note straight away that the power industry has been and is a highly important component in Russia’s economy. Russia’s energy security depends greatly on its reliable and stable functioning. “Energy security” is such a vague term, but we all understand that without the electric power industry, without developing power grid facilities, there may be no industrial manufacturing growth.

We also cannot improve the social sector or our export potential without developing the power industry and our power grid facilities. I recall very well – and you probably do, too – the problems that we faced after the so-called “ice rain” when all the weak points of the power grid became absolutely clear, such as lack of capacities, low quality of performance and deterioration at times.

”The power industry has been and is a highly important component in Russia’s economy. Russia’s energy security depends greatly on its reliable and stable functioning.“

In the 2000s, significant structural transformations were made in the sector, private investors got involved, and over the last five years capital investments in the power industry have accounted for over 3.7 trillion rubles [$120 billion]. We have brought over 90,000 kilometres of electric power lines into operation. I will also note that the Federal Grid Company of Unified Energy System (FGC UES) currently owns more than 124,000 kilometres of backbone power lines, while the Interregional Distribution Grid Companies Holding (IDGC Holding) is managing over two million kilometres of distribution grids in 69 regions of Russia. Their main task is to ensure reliability, quality and accessibility to electric power supply services for consumers. The two companies have launched major investment projects and within next three years, FGC UES intends to implement an investment programme worth over 500 billion rubles [$16 billion], while IDGC Holding plans to invest over 300 billion rubles.

At the same time, the logic of economy demands changing and improving the management mechanisms in electric power companies. As you remember, we discussed this issue at the first session of the Commission for Strategic Development of the Fuel and Energy Sector and Environmental Security, I believe, on July 10 of this year. The ministries have already prepared specific suggestions.

However, before we review them, I want to draw your attention to a few key issues.

First, changes in the management should ultimately benefit the consumers of these companies’ services. Our people and organisations should be able to connect to electrical grids without delays and problems, ideally at financially justified prices, at reasonable rates. At the same time, as I said earlier, it is very important how much a consumer will pay for electricity.

Russia’s large energy resources and their relatively low cost remain its economy’s competitive advantages, even though in recent years their cost has increased significantly and continues to grow, in part due to an increase in the grid component cost that, on average, accounts for over one third of the cost of electricity for the end consumer – more than one third. New, better managementmust play an important role in curbing the growth in electricity prices.

”We will have to increase the efficacy of the common technical power supply network and its competitiveness, first and foremost, by reducing the share of capital and operational costs of the companies, introducing an energy efficiency programme, and reducing electrical transmission losses.“

Second, we will have to increase the efficacy of the common technical power supply network and its competitiveness, first and foremost, by reducing the share of capital and operational costs of the companies, introducing an energy efficiency programme, and reducing electrical transmission losses. We will need broader use of innovative approaches to grids exploitation, intellectual energy networks and energy systems.

Synchronising programmes for developing backbone networks and distribution grids is also an important objective, as is conducting a unified technological policy.

Third, I believe that in adjusting the management mechanisms for power grid facilities, it is imperative to take into account the interests of all the companies’ shareholders. The measures taken should be viewed positively by the investment community, including minority shareholders.

As you recall, at the recent VTB Capital RUSSIA CALLING! Investment Forum both Russian and foreign entrepreneurs once again stressed the need to protect the rights of minority shareholders more effectively. Overall, we know perfectly well that the economies where the rights of minority shareholders are securely guaranteed, see more money inflow, and the money feels safer there.

Right now, the state holds controlling stakes in the main energy companies. It holds a 79.55 percent share of the capital stock in FGC UES, while minority shareholders account for 20.45 percent. The corresponding figures for IDGC Holding are 54.52 and 45.48 percent of shares. I think that we all understand that the percentages of minority shareholders are significant and securing their rights is an important condition for attracting new investments, as I already said, both Russian and foreign. For them, it is very important to have a favourable business climate, reliability, and predictability of our steps.

Overall, I would like to note the importance of continuing daily efforts to create an effective institutional environment for attracting investments in energy. The Cabinet must make a series of key regulatory decisions by the end of the year. I am referring to mechanisms for the wholesale and retail market, the gradual elimination of cross-subsidies, and clear and predictable rules that are necessary for attracting long-term investments in the electric power network.

We certainly must remove various barriers for entrepreneurs in getting connected to power grids. Unfortunately, we still have not fully resolved this problem. At the end of last year and the beginning of this one, we took a number of steps that were assessed quite highly by market participants and generally reflected positively on the development of the national electric power complex. But it seems we did not do enough, and this work will need to be continued.

As for possible structural changes, they must be deliberate, thought-out, without any excessively impulsive actions; they must be based on the practical operation of the companies in recent years. I would like to draw your attention to the fact that both market participants and the governors of the Russian Federation’s regions regularly raise questions about improving the management mechanisms. But this does not mean we should act impulsively, without thinking through all the consequences of every step that you will be proposing today in this domain.

Let us begin our work.

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