FEC Suspicious of Cabinet Power Play

The government is making a big mistake by shackling what should be an independent regulator of natural monopolies, the deputy chairman of the Federal Energy Commission warned Monday.

Vyacheslav Ovchenkov said the government, by pushing the State Duma to amend a tariff regulation law that would strip the FEC -- Russia's supposedly independent regulator -- of its authority, is making it just another government department, defeating a key purpose of its existence.

"The amendments, which effectively have been approved by the Cabinet ... raze the FEC's independence to the level of a government department," Ovchenkov said at an Organization of Economic Cooperation and Development presentation on efficiency and competition in infrastructure sectors.

"This decision is a mistake," he said.

The amendments are part of the paperwork to transform the FEC, which regulates the country's railways, natural gas and power tariffs, into a unified tariff organ.

"We interpret independence not as absolute independence from all government bodies, but when we come up against what is happening now, when tariffs are in fact set at the government level, this is another picture," Ovchenkov said.

Last week, Prime Minister Mikhail Kasyanov repealed an FEC decision to raise railway tariffs by 14 percent as of Monday and set a 35 percent cap on all natural monopoly tariff hikes this year.

Although formally the Cabinet can only recommend which tariffs to increase and by how much, in practice its word is law, said Kaha Kiknavelidze, analyst at Troika Dialog.

"The FEC's power is widening in terms of industry coverage. However, the government's involvement in these decisions is also increasing," said Kiknavelidze. "The government appears to be quite concerned with its macroeconomic benchmarks."

The ideal role of an independent regulator is to make neutral, transparent decisions on issues such as tariffs, free from short-term political pressures and business interests. Russia lags significantly in shaking loose from government intervention, said Nikolai Malyshev of the OECD's Center for Cooperation with Non-Members.

Independently set tariffs are also an important factor in increasing the investment attractiveness of the sectors, according to the OECD report.

"Prices should be such as to allow a reasonable expectation of an adequate return on prudently incurred investment. If it is not possible to impose this principle as a binding rule on the central government, an alternative is to enhance the independence of the regulatory institutions," the OECD wrote. "For this reason we support strengthening the independence of the FEC."

"Independence is more of an issue on a regional level, where administrations are directly involved in the work of the local energy commission," Kiknavelidze said. "After nonpayments, the tariff issue is the single most important problem in these sectors."

Russia is set to become the first OECD nonmember country to undergo a two-year regulatory review relating to reforms in the country's railways, gas, power and telecommunications sectors, Joe Phillips, head of the OECD's competition law and policy division, said Monday.

"The decision has been made on a political level," and an agreement should be set by spring, said a presidential administration official.

Similar reviews have already been carried out in 16 OECD member countries, including the United States, Japan, the Czech Republic and Hungary. Paris-based OECD is an international organization of 30 countries set up to address economic, social and governance issues.