OREANDA-NEWS. February 18, 2011. During a Government Presidium meeting, Vladimir Putin said that the regional and federal authorities should not allow electricity and gas tariffs to exceed the planned 15% increase. The prime minister also instructed the Federal Antimonopoly Service to continue monitoring fuel price cuts. Another major topic on the agenda was the implementation of the second stage of the demographic development programme. Putin said that 876 billion roubles of budget funds would be earmarked for this purpose through 2013.

Transcript of the beginning of the meeting:

Vladimir Putin: Ladies and gentlemen, let’s start with the questions at hand. As you remember, during the meeting on the energy sector’s performance last year we spoke about the growth of petroleum prices, which the Federal Antimonopoly Service said was unjustified. We discussed the problem on February 9, when we took decisions and reached agreements with the largest oil companies. I think that today we should discuss what is happening on that market.

According to the data that I have seen, prices have started falling: the price of diesel fuel has decreased by 2 roubles on average. People are taking an active part in this project, sending us information in a number of ways, including through the internet. I have asked the Antimonopoly Service and the Energy Ministry to monitor the situation. I wonder what the head of the Antimonopoly Service can tell us today. Mr Artemyev, you have the floor.

Igor Artemyev: Mr Putin, ladies and gentlemen. Information comes in from each Russian region every day. Here is the latest data, which we received from the Far East and Siberia today, and information about central Russia we received yesterday evening.

Unfortunately, the decrease of both wholesale and retail prices is smaller than expected. As for retail prices, large vertically integrated companies have reduced them at their filling stations by 1 rouble rather than 2 roubles, as they promised and as we expected them to do. In other words, prices have not been cut by 10% to 12%, as we expected, but by 4%, or by 5% in a few regions and by less than 5% on average.

As for wholesale prices, we also expected them to be cut by 10% to 12%, which would be consistent with the global market premiums of the oil companies on the basis of netback. Wholesale prices have been cut by about 2,000 roubles, but we think the cuts should be twice as large.

But still, this is a positive trend even though the companies’ actions have been insufficient so far.

An important event happened the day before yesterday: the Presidium of the Supreme Arbitration Court passed a ruling on the lawsuit filed by the Antimonopoly Service to fine Gazprom Neft 4.7 billion roubles.

Both the first and the second phase of antimonopoly investigations are over; the total amount of fines collected has exceeded 15 billion roubles, and this money has been transferred to the federal budget. We believe that the latest Supreme Arbitration Court decision, which has set a precedent, should accelerate the process.

On the other hand, we had to initiate an antimonopoly investigation because prices were not cut sufficiently in dozens of regions. The decision concerns quite a few regions where prices were monopolistically high before the February 9 meeting and were not cut enough after it.

Oil companies must decide within a week, and we could wait for one more week because we do not expect a dramatic reduction as it would affect independent retail prices, especially at the filling stations of vertically integrated companies.

Vladimir Putin: I presume that you are talking not only about diesel fuel but also about petrol?

Igor Artemyev: No, I was talking primarily about diesel fuel, as it is an unprecedented situation when diesel fuel costs more than premium petrol A-95. This inadmissible price equality has not changed in many regions. The reason for it was the artificial shortage (of diesel fuel) created by the oil companies, which are now taking measures to increase sales. We expect prices to be cut back to the level of October or November 2010, when diesel fuel cost less than premium petrol. This is a very important indicator.

I would like to say once again that there has been a positive trend, but it is inadequate to the goals and tasks the oil companies have accepted, or compared to the global pricing formula and common business practices. The situation is still not as we would like it to be.

Vladimir Putin: You should continue with this work. I would like to stress that it is, of course, not our intention to put our oil companies at a disadvantage and hinder their economic activities. This is not the aim of the government, but market prices should be economically justified. That is obvious.

In addition, we have agreed on a whole package of measures to make pricing in the fuel market more transparent and predictable. You spoke about this, and Igor Sechin and the energy minister spoke about it: we need to have mechanisms to protect the consumer. One way is developing exchange trading to exclude unnecessary intermediaries. While on this subject, if exchange trading is to develop we have to introduce some changes in the rules by which exchanges work, your deputy was present at the last Presidium meeting and he formulated these proposals.

However, I would like to draw your attention to yet another circumstance: major public sector consumers should also work at the exchange.

Igor Sechin, you have the floor.

Igor Sechin:  Colleagues: In the wake of the meeting that was held wholesale prices for the petroleum products of our vertically integrated companies have indeed been cut. The average prices of oil refineries have been cut by 2,075 roubles per tonne. The filling stations of vertically integrated companies have also cut their prices, and prices for some diesel fuels went down by 2 roubles and 31 kopecks (a litre). You have rightly mentioned such indicators. On the whole, prices are going down for the whole product line: by 1 rouble and 8 kopecks for the Ai-95 petrol, by 1 rouble and 10 kopecks for Ai-92 petrol and by 1 rouble and 56 kopecks for winter diesel fuel. We are now receiving data straight from the filling stations, Mr Putin, and we have photographs. I can show you the real-time information on the work of every company after this meeting.

The Antimonopoly Service probably has data on sales by independent distribution networks which, of course, even out that indicator. The results achieved should not be seen as the final goal, we should introduce the release of systemic results, as you have mentioned, Mr Putin. An interagency working group has been formed to monitor and respond to price changes. It comprises representatives of the Energy Ministry, the Federal Antimonopoly Service, the Ministry of Economic Development, the oil companies, commodity exchanges, Transneft and Russian Railways Company. To provide reference price indicators, it has been suggested that the volume of exchange trade in petroleum products be at least 15% of the total volume produced by each refinery in the country, including those outside the system of vertically integrated companies.

A proposal has also been made to consider the issue that you have raised, i.e. making it mandatory for budget financed organisations that are major oil product consumers to procure no less than 50% of the total volume through exchanges.

After the meeting you chaired we instructed the Federal Financial Market Service in coordination with the federal executive bodies to submit proposals regarding the line-up of the exchange committee. Meetings were held that requested that the Ministry of Regional Development, along with the regional heads, consider the issue of developing a network of alternative filling stations to create price benchmarks in the regions and, perhaps, to encourage the development of chains by vertically integrated companies. We propose discussing petroleum market issues on a quarterly basis at the meetings of the government commission on the fuel and energy complex, and based on the results of monitoring in February and March, to report to you on the current situation and the specific measures to stabilise the situation.

Vladimir Putin: Do major public sector consumers work at the exchange?

Igor Sechin: As of yesterday, not a single contract. I have spoken with the head of the St Petersburg commodity exchange. This is the main exchange for oil products: last year their trade under contracts amounted to 7 million tonnes, not a single federal organisation took part in exchange trading.

Vladimir Putin: We have been talking for years about the need to develop exchange trading in various fields, but federal entities do not work at exchanges. The Ministry of Economic Development took part in developing these rules and principles, didn’t it? Did you expect our agencies to be represented there?

Elvira Nabiullina: Of course we did – and not only to reduce the reference price, but to make government procurement more effective and transparent. We assumed that…

Vladimir Putin: What are our major public sector consumers?

Elvira Nabiullina: Beginning from the ministries and agencies, and I think budget-financed institutions should adopt that system, too.

Vladimir Putin: Which are the biggest ones?

Elvira Nabiullina: You mean the biggest buyers of petroleum products?

Vladimir Putin: Oil and petroleum products.

Elvira Nabiullina: The Defence Ministry and the Interior Ministry buy more than the rest.

Vladimir Putin: The defence minister is sitting to your right. Please monitor this, and work on it with the relevant agencies so that they can…so that they can start working at the exchange.

Mr Artemyev (turning to Igor Artemyev, head of the Federal Antimonopoly Service).

Igor Artemyev: I would like to say that after you issued instructions to create exchanges a very short amendment was developed to Law No. 94. Because Law No. 94 makes it binding on all the agencies to trade on five electronic floors, but according to your instructions, oil products should be moved from the five electronic floors to commodity exchanges. But the government bodies – the Defence Ministry, the Interior Ministry – must have a legal basis for doing this. An amendment to the law must be introduced and quickly finalised. It has been on the table for a long time.

Vladimir Putin: (addressing Anatoly Serdyukov, the defence minister) Which deputy is in charge of logistical support?

Anatoly Serdyukov: Bulgakov (deputy defence minister).

Vladimir Putin: Order him to work out all the necessary mechanisms.

Anatoly Serdyukov: I was just going to say that this is necessary, first, to introduce the amendments, and second, that we take out quite a lot from Rosreserv, the national reserve. In other words, we take part of the fuel from there and start to build up the system from there.

Vladimir Putin:  But Rosresesrv is a reserve, as its name suggests. It is intended…

Anatoly Sedyukov: No, we only do this when the time comes.

Vladimir Putin: I see. When the time comes to replenish the reserves, that I can understand. But this is not a permanent situation, but a one-time thing. Freshening up the stocks, as they say. But after they renew the stocks, then it will be necessary to operate normally. 

Mr Nurgaliev (Rashid Nurgaliyev, minister of the interior) is in the North Caucasus today. Who is standing in for him here?

Sergei Gerasimov: Deputy Minister Sergei Gerasimov.

Vladimir Putin: It concerns you too. How do you propose to work there?

Sergei Gerasimov: I think we will work with the Defence Ministry to put in place a legal framework for a final solution of the issue. We also think that transparency in the procurement of fuel and lubricants, if we go to the exchange, will give us a lot more leeway and will give us more control over the process.

Vladimir Putin: Carry on. Rashid Nurgaliyev deals with operational issues personally, including support for the families of Interior Ministry personnel who have died. If you need government support, specify your needs and we will do it.    

Sergei Gerasimov: Yes, sir.

Vladimir Putin: As regards work at the exchange, this applies not only to the defence and security agencies, but to all our ministries and agencies. I need you, Mr Sechin, to look into it more carefully, to work with your colleagues and help organise this work.

Now the second item that has to do with electricity rates and prices: I am very worried about what is happening in this market. Just to remind you: we determined that electricity tariffs for end consumers should not grow by more than 15%. But according to the reports coming in from the regions, the growth is much bigger: by 32.9% in the Tver Region, 33.2% in the Kursk Region, 32% in the Saratov Region, 30% in the Omsk Region, 46.5% in the Astrakhan Region and 37% in the Penza Region.

Meanwhile, there are regions that are working differently and are keeping it below 20%. They are the Vologda Region and Karelia (15%), the Kostroma Region (15.4%), the Tula Region (16.7%), the Nizhny Novgorod Region (16.5%), the Tambov Region (17%), the Voronezh Region (19%), the Samara Region (18%), Kabardino-Balkaria (16%), North Ossetia (15%), the Perm Territory (15.9%), the Republic of Altai and the Altai Territory (15.4%) and the Tomsk Region (17.5%).

Why are there such increases in other regions? Please comment on what is happening, Igor Sechin. We also have representatives from the regions here and I would like to hear from them too.

Igor Sechin: The government predicted that the increase of electricity prices for consumers in 2011 would be under 15%, 14.9% to be more exact.

The government predicted the following average figures for regions and groups of consumers: 12.5% for the European part of Russia and the Urals, 12% for Siberia, for the territories that are not part of the price regulated zones – plus 4.5%, and for the general public – 9.6%. At the same time, I must say…

Vladimir Putin: The growth of electricity prices for the general public should not exceed 9.6%.

Igor Sechin: The parameter for this year was 9.6%, and we believe it is possible and necessary to stay with it.

Vladimir Putin: What is the structure of this price increase? What is the cause of it?

Igor Sechin: Mr Putin, forecasts for higher prices are now emerging in 38 regions and for some groups of consumers, which you mentioned and which allow a substantial price increase of over 15%. You have named these regions.

The Energy Ministry, the Ministry of Economic Development, the Federal Antimonopoly Service (FAS), the Federal Tariff Service (FTS) and experts from the Academy of Sciences conducted an analysis of these price increases, and found that prices are affected both by factors of federal (about 41%) and regional importance (59%-60%).

Some factors in the first group are objective: the growth of fuel prices (the price of gas has risen by 15%) is affecting price formation; prices were underestimated at the initial period of reforming the tariff base of the electric power industry in some regions – when compared with the actual, it results in a huge price increase (we will separately report to you on Khakassia and the Irkutsk Region, where this reason is objective); the investment increment for nuclear and hydro power stations; high tariffs for forced generation; an increase in one’s own sources of funding at the expense of the tariff in the investment programme of the FGC UES and the IDGC holding.

Regional factors include the growth of tariffs of territorial network organisations, including the IDGC holding; the growing share of the network component in the final price in connection with a switch of network facilities to RAB-regulation. The state of affairs in some regions is very alarming. In the Omsk Region the services of regional network facilities have grown by about 108% and in the Tomsk Region by 74.2%. Let me emphasise that these are network services but they largely affect the final price of electricity for consumers. The relevant figure for the Kursk Region is 54.3%, and the figures you’ve mentioned are the final price of electricity for consumers. But network facilities are a major factor in this context.

This is what we suggest on the growth of prices formed on the federal level this year – I’m emphasising this year – without affecting the principles of reforming the electric energy industry: very concise efforts to reduce the influence of subjective factors on the final price for consumers. This year we suggest no adjustment for inflation in energy payments in 2011. We haven’t done it in the past, and we’ve never said that this is our responsibility.  Let me emphasise that these are our decisions for this year.

We recommend changing the procedure for calculating tariffs for forced power generation (that has not been used commercially). We suggest reducing targeted investment for nuclear and hydro power stations – I’m referring to the possibility of redistributing incomes inside these providers – Rosatom and RusHydro. According to the Energy Ministry, Rosatom can get additional funds from operating on the world uranium market.

We also propose smoothing the tariff for the FGC UES without changing the investment programme by extending the source of funding to five instead of three years – they will be reimbursed in perspective. We must also introduce changes in the methods of RAP-regulation for the IDGC – the terms have not been increased. Regrettably, there is no regulation by increasing it from three to five years. We must level out the reduction of the growth of the tariffs of network organisations, which will allow us not to exceed the limit of 15%.

The first measure – adjustment of payment for power – will allow us to save 12 billion roubles. A change in the calculation of tariffs for the forced outage will allow us to save another seven billion roubles; the targeted funding of nuclear and hydro power stations will provide savings of another 15 billion roubles, and the levelling out of the FGC UES tariffs – five billion roubles. A more reasonable approach to the IDGC programme and territorial network facilities will save 25 billion roubles. Thus, we will be able to carry out the decisions you suggested.

The analysis of growth factors at the regional level is a separate story. Regrettably, here the influence of the federal link is minimal. There are no representatives of the FAS or the Market Council (the non-profit partnership The Council of the Market on Organising Effective Wholesale and Retail Trade in Electricity and Power) in the regional energy commissions. And sometimes five year-long investment programmes are carried out much faster – these companies try to implement their programmes in a year, which is then extrapolated to the price for the consumer. It is necessary to enhance coordination in this respect. We suggest that unified monitoring of electricity prices should be carried out by the Market Council and that this issue should be reviewed at sessions of the government commission on the development of the electric power industry every quarter.

Vladimir Putin: Okay. Thank you. Please, let’s start from the Tver Region.

Dmitry Zelenin: Mr Putin, in reality tariffs for the general public are protected – no higher than 9.5% in all regions of Russia, including ours. But the position of other consumers, including commercial ones, is even worse than you said. For instance, the Zapadnodvinsky District’s payment system is above 46%, and it was the Andreapol and neighbouring districts that were hit by freezing rain. I can imagine how small companies react to payment obligations with such figures. Moreover, these payment documents arrived last week.

How do energy supply organisations explain such prices? They say: “Don’t worry. We will recalculate them in February and reduce them.” And these payments and settlement accounts come to welfare institutions, small business and agricultural companies. The FTS made a decision in January not to restrict the permitted hours of use, which was supposed to lower tariffs for these small companies. But this did not happen. Unfortunately, the regions have no payment regulation system. I’d suggest that payments be issued by the Housing Inspection as a monitoring body responsible for housing and utilities as a whole.

The second point. When we talk about an increase in the network tariff, that is, the tariff of the network component in the regions, it does not amount to a full tariff, but only to its smaller part and the powers of the regions are not so big here. For instance, last year when we raised the average tariff component for network companies by a mere 3.5% in a bid to restrain the tariff, and by 7.5% for the IDGC, but the decision was reversed and administrative proceedings were brought against the head of the regional energy commission for insufficient tariff increase. I would like to emphasise that the case was filed for not raising the tariff high enough and not the other way around. This was the likely cause for his disqualification for several years.

I believe that our region switched to the RAB method back in 2007-2008. This method involved significant investment by distribution grid companies, which would result in reduced distribution losses as well as lower tariffs. Unfortunately, of the expected 7 billion roubles in investment, the power distribution companies invested 350 million roubles in the IDGC in 2009 and 550 million roubles in 2010.   

These are approximate figures. They can still be adjusted for 2010, but we have  accurate figures for 2009. And when we reduced the tariff for those companies in 2009, we also had to increase the tariff share in the final rate.

If we have the opportunity, I believe we should also reduce the tariff share this year. It has increased on average by 15% for the IDGC across the region, as they failed to meet their tariff obligations.  

Therefore, I agree with the proposals to expand the control zones to oversee the implementation of these investment plans in the course of the year, as opposed to at year’s end, and when setting the tariff for next year.

Besides, I can tell you that… You visited the region to inaugurate the perinatal centre – the powerful transformer station that provides power to the centre and other facilities was built using funds from the regional budget. That is, we include the cost of creating energy distribution facilities in the regional spending, which, to a certain extent, compensates for the lack of investment projects by distribution companies.

In general, however, the distribution companies should be responsible for the development of these energy facilities. I am referring not only to the perinatal centre. We have been investing in low-rise residential developments, which are quite extensive both in Tver and the region. Therefore, I believe we need to intensify the oversight over the investment commitments by the companies, especially those working under the RAB method.  

I would also suggest increasing the oversight powers of the Russian regions.

Vladimir Putin: We will certainly discuss the oversight issue. But with regard to the regional energy commissions, they fall within your area of responsibility, so you need to control them.

Dmitry Zelenin: We do control them, and the decision to cancel the insufficiently high tariff is having a psychological and administrative impact on the decisions the energy commissions are making. If there is an appropriate decision, we can again raise this issue with the federal…

Vladimir Putin: Obviously, they are not feeling enough pressure, considering that the rates have gone up so much. And secondly, you have mentioned the transformer station that was built for the perinatal centre. Quite possibly, it was a right thing to do for lack of an alternative solution, but you need to be very careful with including the cost of the investment projects in the tariff. Otherwise, all you are doing is diverting funds from day-to-day needs. This way you can build in as much cost as to raise the rate to 30, 70, and even 80. That’s the point.

Dmitry Zelenin: Mr Putin, I personally…

Vladimir Putin: Thank you. Please.

Pavel Ipatov (Governor of the Saratov region): Mr Putin, first on fuel and lubricants. We watched the live TV broadcast, and almost immediately after TNK-BP announced the lowering of price by 1 rouble 20 kopeks, we checked in three hours – they reduced the price. So, with regard to the gas prices, the problem has been promptly resolved.    

Vladimir Putin: Good.

Pavel Ipatov: As far as electricity is concerned, the problem does exist. Mr Sechin correctly mentioned here that the price increase you were told about is a potential price increase which was built into the documents. But there is no price increase as of yet, as the new tariffs have yet to be applied for January, and the recount will be done on March 3-4. 

Vladimir Putin: Zelenin has already received the bills.

Pavel Ipatov: That is because in some regions some enterprising fellows were, so to say, too keen on being paid as soon as possible

Vladimir Putin: Everybody wants to be paid as soon as possible.

Pavel Ipatov: But there are some, who have used a small loophole to send their bills ahead of time. But I think the importance of today’s meeting is that we can act to prevent the expected price increase.

I can speak for the Saratov region. When we received the estimates from the federal committee on tariffs, we realised that the rate increase for the final consumer would be in excess of 15%. And the excessive price rise is happening mostly in the federal area of responsibility. I can speak for the regional distribution companies – they increased their rates by 7% (the recommended rate was 10%)

For the inter-regional companies and specifically the IRDC-Volga, we have raised the rate by 13%, whereas the limit was 15%. We have stayed within the limits of the recommended federal rates in our area of responsibility. As for the estimates for the Federal Distribution Company and the price hike in the wholesale market, they were excessive.

I have been dealing with this issue since September last year. I have appealed to the State Duma, to the Duma Committee, to Yuri Lipatov (Chairman of the State Duma Committee on Energy), the committee on tariffs. And they explained to me why tariffs were expected to increase by more than 15%. But Mr Sechin clearly explained today what measures will be taken to prevent the price rise.

I am confident that if these measures are implemented at the federal level, the rate increase for the final consumer will not exceed 15%. With regard to my area of responsibility, I can say that our regional committee on tariffs has strictly complied with the federal government directives, and we have not allowed any excess rate increases in the region. Therefore, we do not have any complaints. 

Vladimir Putin: Good. Please.

Sergei Novikov: Mr Putin, I would just clarify and add to what has been said here. What Mr Sechin explained here with regard to the federal government role is quite clear in terms of the proposed amendments and implementation deadlines.

But I would like to clarify what the governor of the Tver Region was talking about. In reality, the significant rate increase this year is to a large extent a consequence of the small tariff rise last year. When you hold the rates from going up for a long time and then simultaneously start pouring money into large-scale projects, you will get a big increase in the grid tariff. 

This issue was discussed by the government last year, using the Tver Region as an example. On May 31 last year, you signed a government resolution empowering the regions to reduce the grid rate should the grid company fail to meet its investment commitments. Therefore, the issue raised today, has already been resolved by government resolution. 

I would like to draw your attention to the fact that the currently proposed package of measures will set the average (and I emphasise the word average here) rate increase for each region at under 15%. Our current rates are not higher than the country average, taking into consideration all aspects.

The proposed package of measures will set the average rate increase at under 15% for each region of the Russian Federation. But I would like to draw your attention to the fact that in previous years, some regions, in the framework of the remaining regulated sector, provided certain categories of consumers, including state-financed consumers, agricultural producers, and some others with special reduced rates.

Therefore, for these categories of consumers, we will not be able to avoid raising the rates by more than 15% even in the framework of the currently proposed measures. To do that, we will have to develop additional instruments such as using additional budget financing or other solutions. This is an extremely important issue I wanted to emphasise. 

Vladimir Putin: Good then. The issue is closed. It should be no more than 15%. And I urge everybody to comply. We all have our own area of responsibility, whether it is the federal government or the regional authorities. Mr Sechin has proposed a set of measures aimed at resolving the problem. Everyone should start working now on implementing them and in a week or 10 days, I expect you to report on the results.

We certainly need to implement our investment programmes as well as the regional investment projects, but we should do it wisely. The governor of the Kursk Region was not feeling well and could not attend today (I hope he feels better soon), but it appears, and I think it is more than likely true that they wanted to implement the five-year investment plan in one year. No wonder the prices have soared. Why do it, what’s the need to rush? Oh maybe they had to pour in all the money to the contractors in one year? What is making them to rush?      

The investment programmes should be implemented carefully and wisely. Such excess spending should be avoided. And of course, regional energy commissions should include representatives of the Federal Anti-Monopoly Service, the Federal Tariff Service, and market representatives to make decisions in cooperation with colleagues in the regions.  

With regard to Khakassia and the Irkutsk Region, they had a very weak base, therefore you need to work with RusHydro to develop a special programme for them. But please work very carefully. Please report on the progress in two weeks. Mr Zubkov (addressing Viktor Zubkov), please report on the preparation of farmers for the spring sowing season.     

Viktor Zubkov: Mr Putin, colleagues, over the recent years the government has been providing extensive support to farmers, who essentially are the small and medium businesses in agriculture. Today, their share in livestock and crop production is 52% and 62% respectively. There are quite a few interesting ways the government has been supporting them. Just recently, this week, I invited ten farmers from the Samara region and Tartarstan for a meeting…