OREANDA-NEWS. On 29 January 2009 was announced, that IDGC of Centre, JSC, as well as other IDGC of Russia, pursues the centralized policy of JSC "IDGC Holding" on conclusion of direct contracts with consumers of electric power grid services. A transition to direct relations is of interest first of all for the consumer of electric power grid services. The interview with the Deputy General Director of IDGC of Centre for Development and Realization of Electric Power Grid Services of IDGC of Centre Vadim Fedorov will throw a light upon this issue.

Legislative base. The main documents regulating the relations in electric power industry are:

-Federal Law of the Russian Federation No.35-FZ "On Electric Power Industry " as amended in 2007;

-ѓnGovernmental Order of the Russian Federation No.109 as of 26 February 2004 "On Pricing of Electric and Thermal Energy";

-ѓnOrder of the Federal Tariff Service No.20-e/2 as of 6 June 2004 "Methodical Instructions on Calculation of Regulated Tariffs and Prices for Electric (Thermal) Energy in the Retail Market";

-ѓnThe tariff decisions taken by regulatory bodies of the constituent entities of the Russian Federation in the responsibility zone of IDGC of Centre, JSC";

-Governmental Order of the Russian Federation No.530 as of 31 August 2006ѓn "Rules of Functioning of the Retail Markets of Electric Energy in a Transition Period of the Electric Power Industry Reform".

On the basis of these documents, any consumer of electric energy (e/e) in the Russian Federation can conclude:

1.   Two separate contracts:

-ѓnWith a grid organization - a direct contract (DC) on granting of electric power grid services;

-ѓnWith a guaranteeing supplier (a power selling organization, a retail manufacturer) - a contract of selling and purchasing of the electric power.

2.   One contract of power supplies:

-ѓnIn this case a guaranteeing supplier (a power selling organization, a retail manufacturer) should turn to the grid organization on behalf of, and in interests of the consumers, as an agent for a conclusion of the contract on rendering of services on electric energy transmission.

"First of all, I would like to tell you about three base preconditions of a necessity to conclude direct contracts," Vadim Nikolaevich says.

1.   The obligation of execution of the federal legislation by virtue of publicity of the contract on transmission of the electric power. We have no right to say "no" to anybody; therefore, we are obliged to provide the conclusion of the contract by the customer's request.

2.   The economic precondition. It is connected with insufficient financial stability of the power selling companies concerning execution of contracts of deliveries and transmission of the electric power.

3.   Simplification of, and increase in efficiency of technological relations with the consumer by means of liquidation of the intermediary in this chain between the consumer and the selling company. The intermediary in these relations leads to dragging out a dialogue; frequently a part of questions vanishes during its way to IDGC of Centre. And direct contracts are considered by the network organizations as an opportunity of better forming of relations with the consumer."

"Vadim Nikolaevich, why do power selling companies resist to the initiative of the grid companies?"

"In a situation of a transition of consumers to two separate contracts, the power selling companies run several risks today:

1.   The risk of a competition for the power selling companies is the main risk. In the system of direct contracts, they run the risk of a flow-out of the client base as the consumer, after a separation of one contract into two contracts, has a real opportunity to move to another power selling company's services with more favourable tariffs and terms. Naturally, the existing structure of the cumulative contract for "power sellers" is a certain hedge. And, certainly, such rough negative reaction on their part becomes clear.

2.   On the other hand, the DC system is now being formed and provokes a lot of questions which should be solved. The main question is how the cross subsidizing issue will be settled in the tariff base decisions. As to one part of our regions, this issue has been solved; as to the others, the issue is being settled now. In our opinion, the scheme of direct contracts leads to making the tariff regulation transparent.

If earlier we had a lot of unanswered questions in the selling grid companies, then we came to a conclusion to divide the tariff, that is by according to the way prescribed by the federal laws (the final tariff should be presented as a set of component parts), the consumer obtained an opportunity to see why it goes like this, rather than differently. This is a more civilized way of life regarding making the monopolists and power selling companies' activities transparent."

For reference: the gas companies have been implementing this scheme for a long time and rigidly. They have a clearly detached price for the supplied gas and a clearly detached price for its transportation. An independent system of contracts, an independent system of contract parties. This system causes no debates in these companies.

"How does the consumer treat the situation when he or she has to draw up new documents instead of those he was accustomed to?"

"It is complicated both for us and for the consumer. Now we have one contract party, therefore we have less paper work. But the consumer is on a stage of transition to market relations in the power industry. Let's recollect the situation of the 90-ies when non-payments were observed in the power sector. The consumer then did not think that he must pay for the electric power; he took the electric power for granted. A decade passed, and the consumer has got used to an opposite situation: it is necessary to pay. It took years to cultivate this idea. The transformation processes in the power sector go on: generating, selling, and grid companies appeared, and it should take a certain time for the consumer to understand the sense of these changes. The process of a transition to direct contracts is new, and it is extremely hard for an uninformed person to understand the depths of the process. But this process is necessary.

Yes, it is more difficult to run two contracts.  But one of them (the contract with the grid company) is a stable and constant contract, and it will be henceforth subjected to greater doubts and inspection. Both the relations and the document with the selling organization may exchange.

If we take the issue of development of market relations, actually there should be a competition between the power selling companies in the target model of the electric power market development. Look at England, and the Europe, where the consumer within 25 days by phone may exchange services of one marketing company for another! And this procedure involves a change of the contract of sale and purchase: the consumer bought energy from one company - now he or she started to buy it from another company. He chose himself the supplier of the electric power under those criteria which are key for him (price, terms, cooperation). But he did not switch to other grids. He continues to pay transportation through the grids he is connected to. Therefore, if we speak about the development of the electric power retail market, the DC system is more universal and more flexible for the consumer. Just imagine that the new selling company has to come to us to settle transmission issues, or to decide other questionsЎK What for? You should't have.

If to look at the future strategically, one step ahead, we shall see this scheme. Yes, it is a market scheme, somehow complicated for understanding at the initial stage. But everything clicks into place. The environment changes, the risks vary. Our task is to give an idea of this to the consumer."

"Will the consumer derive benefit from a transition to such contracts?"

"The consumer will not feel the transition to these contracts at all; otherwise the market sense is lost. This is not by accident that I told you about the equation of tariff decisions which were taken in the regions. They also should provide seamlessness of the transition. On the one hand, this should not cause any incomes losing in both the companies (the grid and the power selling companies). On the other hand, this should not increase the consumer's expense for the electric power at all. In other words, we should come to the arithmetic sum, and nothing more."

"In the zone of our responsibility, 60,000 consumers may conclude direct contracts with the company. Have you already defined a period of time for IDGC-1 to realize this?"

"Sixty thousand consumers are the whole set of legal entities. Naturally, their range is extremely wide. We mean the electric energy consumers - from owners of stalls consuming only 150 kWh a month, up to large enterprises of metallurgical, mining, machine building sectors, etc. Therefore to say that we will realize all 60,000 contracts now is utopia. We have a program and stages of its realization. We understand we cannot realize this task within a year. It is a matter of two or three years, but the success of this program will depend on understanding of this situation by local authorities.

We hope that the administrations of the constituent entities of the Russian Federation will respond and will support the market transformations. It depends on the balanced tariff policy of each region, on how the relations between the grids, selling companies and the consumer will be built. We definitely do not wish to admit a serious confrontation with the power selling companies. I understand that they run high risks regarding struggle for the consumer, but on the other hand, we assume many market risks without having an opportunity to influence on them. For example, a translation of the noncontrollable price. We do not make a tragedy out of this. And I do not think that this subject should become a stumbling point in our relations. The mass media should not make this issue a subject of a game of politics without sorting out the details."

"As judged by press statements, IDGCs of Russia have felt a necessity of these changes for two years; now they hold negotiations with the authorities and specialists in the power industry sphere."

Ў§The position of JSC "IDGC Holding" concerning this question in the interview with IA "Finmarket" ("Interfax" group of companies) was stated by the Deputy Chairperson of the Management Board of FGC and IDGC Holding Alexander Chistyakov. He said in particular that as the power selling companies have mainly other motivation, they are not interested, unlike the grids, in maximum possible careful check of consumption, reduction of both commercial and real technical losses in grids. The reason is that the losses are paid by them under their commercial cost. He has also said that the power selling companies have practically all databases on consumers, and we have not received any voluntary updated database on end users from none of the power selling companies. The grid organizations are poorly provided with registration systems on the retail markets. Two years running, very serious steps are taken in this direction: databases are independently kept, balances are independently struck. It is a question of efficiency for electric grids both regarding decrease in losses and definition of real productive supplies in watt-hours and in the ratio of declared and consumed power. A. Chistyakov has noticed that we shall continue to be engaged in this work, because a relevant resource for a decrease in charges lies in this area for electric grids.

If our client remains in the system of works under one contract, he or she will run one pair of risks. At transition to two contracts - another pair of risks; they concern comprehension of the issue. The consumer should weigh these risks and make a respective decision."

"In August 2008, on The V Professional Power Forum "Development of the Russian electric power industry: generation, grids, and selling" which took place in Moscow, you have stated arguments which are, at first sight, different from what we discuss now ЎK"

"As you remember, my report at the forum was called "The retail market: relations, problems, and ways of solution". In my report I focused on several problems which accompany the retail market. First of all, I have concerned legislative base which for that moment had not been generated yet with regard to this issue. We spoke about multi-apartment houses, about "uniform" tariff scheme, about direct contracts. Many of these questions are interconnected with each other and accompanied by activities of regulatory bodies. And then, in August, we stated that it was necessary to take decisions under direct contracts. And since August 2008 till January 2009, greater work was done including on a regional level, to approach a realization of this scheme."

"Vadim Nikolaevich, as to the legislative base, was it prepared for this work?"

Ў§If you look at the Rules of Functioning of the Electric Energy Retail Markets in a Transition Period of the Electric Power Industry Reform (Governmental Order of the Russian Federation No.530 as of 31 August 2006), these rules say that the consumer is to settle this question both with the grid organization, or with the selling one. They read that the agency scheme with the power selling companies is an additional scheme. Why do we feel such a reaction among people and mass media now? Because we try to change the settled system of relations, to translate it to a different course so that it should correspond to new economic conditions, and such events always make a noise, but we plan to continue to take into account a development of the market and interests of our end user in future."

"What is the situation concerning the conclusion of direct contracts of IDGC of Centre: have you passed from plans to actual realization?"

"As to the branches of IDGC of Centre, as of 20 January 2009 in the regions of the zone of the Company responsibility, 558 direct contracts with the connected consumers were concluded; 1,758 more contracts are on the stage of settlement.

In Kursk region, 233 direct contracts were concluded; Belgorodenergo branch of IDGC of Centre concluded 58 contracts and prepares 75 more contracts for conclusion with the consumers who have the total declared capacity of 103.7 MW and the scheduled volume of the power consumption of 778.3 million kWh. This makes around 6.5% of the total consumption on the territory of the Belgorod region (without the contract concluded earlier with JSC "Lebedinsky Mining and Concentrating Plant" in view of which the share of the scope will equal 12.7%).

If the clients of IDGC of Centre have any questions concerning power industry and, in particular, on the topic of the conversation, we invite you to turn to the grid company for help and consultations. You will receive consultation and information in order to understand a new system of contracts, to weight all pros and contras and to make a decision. You can telephone the direct hotline of power specialists: 8 800 50 50 115 or to write a letter to the Internet Reception on the company website at: /client/. Here you can also read frequently asked questions and answers of clients of the company on this subject.