Billionaire Eyes Heating Reform

The government should set long-term prices for heat producers and use money earmarked for new power stations to modernize the country’s inefficient grid system, which would help keep costs down for consumers, billionaire Mikhail Prokhorov said.

As industrial production plummeted over the past year, electricity and heat producers have lobbied the government for leniency with their state-mandated investment programs, which were approved during the sector’s privatization.

But Prokhorov, who controls 25 power stations in the European part of the country, told The Moscow Times that urgent changes in the state’s approach toward the sector were needed.

“The reform of the electricity sector has been held. Now the time has come for changes to the centralized heating system,” Prokhorov said. “The changes are urgent.

“The government should allow the so-called territorial generating companies, or TGKs, to redirect investment planned for the construction of new power stations to build new heat grids and new boiler houses,” he said.

Most of the country’s heat grids are outdated and technologically exhausted, meaning up to 50 percent of heat can be lost between the generator and the consumer.

If generators are allowed to redirect their investments, consumers will pay significantly lower rates and power stations will become far more efficient, Prokhorov said.

“Building a new power station leads to higher tariffs for heat since the investments to build it have to be returned,” he said. “If a new grid is built and the capacity of the working power station is used more efficiently, tariffs will grow insignificantly because much less heat will be lost on the way to the consumer.”

Prokhorov offered his TGK-4 as an example.

“I have 5,000 kilometers of grids, which have been in use for 30 years on average,” he said. “So I have to build at least 290 kilometers of new grids per year. But with the tariffs set by the state I could only afford to replace 120 kilometers last year and will only replace 80 kilometers of the grid in 2009.”

The situation could be changed, for example, if some of the funds intended to build a 240-megawatt power station in Lipetsk, which is part of TGK-4, were redirected to replace grids.  

“If that were done, prices for heat would only rise 13 percent next year, instead of 89 percent,” he said, referring to the local market. “The utilization of the power station will skyrocket to 70 percent from the current 40 percent.”

TGK-4 has sent the suggestions to the Energy Ministry, Prokhorov said, and he presented this approach to President Dmitry Medvedev at a Sept. 30 meeting of a state commission on the modernization and technological development of the economy.

Under the electricity sector privatizations from 2004 to 2008, state-run monopoly Unified Energy System sold off its assets to domestic and foreign investors, who took on obligations to modernize the country’s dilapidated electricity and heating industry by building new power stations.

A market for the electricity sector has been created and prices for half of the power generated in Russia have been liberalized. Heating rates, however, are still set annually by regional energy commissions controlled by the local administrations.

“When the tariff for the heat is changed every year and is mainly dependant on the will of the region’s governor, you can’t plan any long-term energy-efficient measures,” Prokhorov said. “Long-term heat tariff planning is badly needed for the sector.”

Separately, Prokhorov said TGK-4, based in the Tula region, was holding negotiations with a number of foreign investors to attract additional financing and acquire new technology.

“TGK-4 is working with a few potential partners, some of which want to buy a share in the company, while another wants to create a joint venture with us,” Prokhorov said. He declined to identify the companies.

Onexim Group, Prokhorov’s holding company, was involved in one of last year’s biggest corporate governance disputes after it backed out of a deal to buy out minority shareholders in TGK-4.

In May 2008, Onexim bought a 50.4 percent stake for 2.7 kopeks per share, which required the company to make a buyout offer to the minorities at that price.

But the firm’s shares plummeted last fall to as low as 1 kopek, and 40 percent of the firm’s minority shareholders decided to exercise the buyout right, requiring Onexim to pay a total of 21 billion rubles.

Onexim said in October that it did not have to buy the shares because TGK-4 had recently been placed on a list of natural monopolies, which meant that Cyprus-registered Onexim would have to get permission from the state before it could increase its stake.

Onexim has since issued dozens of lawsuits asking the court to call the initial deal invalid. Some of the lawsuits are still pending.