Russian power companies have always faced the problem of non-payments for their services.

Analysts say the problem with non-payments is not currently as acute as it was during the economic crisis, but note that it is still critical in some Russian regions and admit that the bulk of non-payments falls on the retail market. Meanwhile, some experts warn that the situation may significantly worsen if no measures to solve the problem are taken. Analysts believe cutting off power supplies is the most efficient way developed so far to fight the problem and also say it is necessary to carry out a balanced policy that would encourage consumers to pay power bills on time.

The majority of surveyed analysts believe the situation with non-payments for power services has now on the whole stabilized. “The situation with non-payments for electric power is not as acute as two years ago, at the height of the (economic and financial) crisis,” said Alexander Kornilov, a senior analyst covering the electric power sector at Alfa-Bank. “We can say that the situation on the whole has stabilized,” he said. Power sales companies are not facing such problems as they had in late 2008 and early 2009, he said.

The sector managed to solve this problem in 2010, said Vladimir Sklyar, an analyst at Renaissance Capital.

The surveyed analysts, however, admitted that the problem of non-payments was still critical in some Russian regions. “There are problems in Russia’s southern republics,” said Mikhail Rasstrigin, an analyst covering the electric power sector at VTB Capital, naming the North Caucasus among the regions with a high rate of non-payments for power. Kornilov from Alfa-Bank and Sklyar from Renaissance Capital also named the North Caucasus among the most troubled regions.

The highest volume of debts for power services is registered in regions of Russia’s Central, North Caucasus, and the Urals federal districts, said Dimitrios Somovidis, managing partner of Morgan & Stout credit management service, a company providing collection services in the area of debt purchases and collection of overdue debts for banks and companies, including electric power enterprises.

Unlike analysts from investment banks, Somovidis believes the problem of non-payments for power services is still acute and prompt measures should be taken to eliminate it. “The volume of debts (for power services) was only growing during the last five years. And the emergence of separate players instead of united company UES as a result of reforms, as well as the structural formation of the market in the form of wholesale and retail segments, unfortunately, did not solve the problem,” Somovidis said, adding that there was debt on both the wholesale and the retail market. “If no measures for the timely settlement of the problem of non-payments are taken, the forecast looks unfavorable – the volume of debts on the retail market is to increase by at least 30 percent during one year,” Somovidis said. “Debts on the wholesale market are to have similar dynamics,” he added.

The analysts said payment discipline on the wholesale market was quite good, while the bulk of debts for power services falls on the retail market. According to the data from the non-commercial partnership Sovet Rynka (Market Council), which regulates the country’s wholesale and retail power markets, debts for power on the wholesale market started growing in 2009 and were at above 30 billion roubles during the second half of 2009 and in early 2010; they gradually started to decline in March 2010 to just above 20 billion roubles and were at 20.3 billion roubles as of January 27, 2011. Debts on the retail market varied between 70 billion and 100 billion roubles during 2009 and peaked at 142 billion roubles in March 2010, after which they started to decrease and were at around 100 billion roubles in the remaining part of the year.

Describing the individuals that might have debts for power services, Somovidis from Morgan & Stout said these were people of all social classes and of all age groups. “In our practice we have come across debtors with incomes significantly higher than average and these are not single cases, but a mass phenomenon,” he said. “People do not perceive bills not paid on time as debts. Due to such a frivolous attitude, debts of tens of billions of roubles are accumulated,” he said.

Speaking about sanctions for non-payments for power services, Kornilov from Alfa-Bank said that “tougher sanctions, up to exclusion from (status of) participant of the wholesale market” were being imposed on the wholesale market, while no tough sanctions were being imposed on the retail market.

Providing further comments on the problem of non-payments for power services, Somovidis from Morgan & Stout pointed to the negative impact of non-payments on power suppliers. He estimated that electric power suppliers do not receive up to 40 percent of monthly revenue on time. Meanwhile, power sales companies have to carry out their operations and make payments for purchased capacities. “As a result, power sales companies have to finance a persistent cash gap with banking loans, notably at quite a high rate, as they do not have collateral of a sufficient quality,” Somovidis said.

For sales companies the problem of non-payments is quite critical, as they have to transfer money to the wholesale market, but sometimes are not able to do it as they haven’t yet received money from retail consumers. Sklyar from Renaissance Capital agreed. This cash gap is usually covered by state banks that provide loans at quite high interest rates, which is not profitable for sales companies, he said. He also said non-payments did not have a severe impact on generating companies. They receive payments for power within 50 days, which is quite normal, he said.

Meanwhile, Rasstrigin from VTB Capital said that the problem of non-payments for power services did not have a severe impact on power supply and generating companies. “The situation is improving, prices for power are increasing and the companies’ revenues are thus rising too,” he said, adding that companies were thus getting more funds for the modernization of their power facilities.

Non-payments for power services also have a direct impact on the program of modernization in the power sector, as grid and generating companies are getting involved in the chain of non-payments, when power sales companies delay transferring money to grid companies, Somovidis from Morgan & Stout also said. “Because of this, large-scale investments in modernization are often becoming impossible and are being made on a minimum accepted level,” he said.

Trying to define the most efficient methods of tackling non-payments for power services, the surveyed analysts said it was necessary to encourage consumers to pay for the services on time. “It is necessary to implement a balanced policy for the population that would encourage people to pay power bills on time,” Kornilov from Alfa-Bank said. If consumers do not pay for power for about two-three months, additional fines and higher rates could be introduced for them in an effort to make them pay their power bills on time, he said. Kornilov also said it would not be correct to cut off power immediately for consumers with debts, as it could lead to whole neighborhoods’ being left without power.

Many power companies have developed programs to work with consumers on the problem, Rasstrigin from VTB Capital said. The methods of tackling non-payments are traditional and entail completely ceasing or partially limiting power supplies, he said. This base was already quite well developed during the existence of the former power monopoly UES, he added.

Sklyar from Renaissance Capital agreed that partial or full limitation of power supplies was currently the most efficient method developed. Under the current mechanism operating on the market, power supplies are cut off after court proceedings, which are commenced after a consumer doesn’t pay power bills for three months. “This mechanism is working, but is time-consuming,” Sklyar said.

It is necessary not only to recover debts, but to develop a system to control and encourage payment discipline of consumers, Somovidis from Morgan & Stout said. “This is a huge and laborious task comprising systems of control over incoming payments, reminding users about the need for accurate payments, encouraging prompt payers,” he said, adding that the approach to payments should be changed.