OREANDA-NEWS. The Russian government's decision to freeze certain tariffs for utilities in 2014-2015 shows the country's unpredictable regulatory framework, which is one of the main constraints on utility ratings, Fitch Ratings says.

On 2 June Prime Minister, Dmitry Medvedev, signed a decree abolishing index-linked price increases in the competitive capacity market for 2015. This market deals with sales for existing electricity generating capacity. The authorities also scrapped indexation of regulated tariffs for electricity and capacity sales in 2014 and capacity price indexation for the newly commissioned nuclear and hydro power plants.

The tariff freeze for hydro power generators might be mitigated by the liberalisation of tariffs for about half of Siberian hydro capacity, which started in May. However, the pricing parameters for capacity supply agreements for thermal generators, which in most cases provide the largest share of the companies' EBITDA, have not been changed. The effective tariff increase for the whole 2015 and 2016 may therefore be half of CPI, as previously tariff increases were set in line with inflation, unless the tariffs are frozen again in 2016.

While Fitch expect the impact of tariff freezes on Russian utilities' credit metrics to be limited, they undermine the stability of the regulatory framework and make it more difficult for the utilities to manage their operations. Fitch expect the margin deterioration to be manageable across the rated utilities.

Frequent government intervention in the regulatory regime increases the uncertainty over companies' operations and, as a result, business and financial risks. Therefore, Russian utilities companies are not rated as investment grade category on a standalone basis. However, many of the Russian utilities ratings benefit from state or parental support and relatively low leverage compared with European peers. Fitch, therefore, do not expect these regulatory changes to have an immediate rating impact on the electricity generation companies.