Experts say that the new policy of issuing guarantees to power market companies can solve debt issues, but not the main problems associated with non-payment by end users.

Non-payments and arrearages have always been considered significant issues for the Russian electric power industry. Even while a considerable share of debts falls on the retail electricity market, debts on the wholesale market also present great concerns. Nowhere are those concerns as high as in Northern Causasus, where fiscal discipline has historically been weak.  

At present, the government electric power market regulating agency is contemplating the introduction of commercial bonds for the wholesale market that would help the generating companies receive timely payments. While certainly appealing, the new arrangement is viewed with suspicion by analysts, who believe that the proposed changes will not address the chief cause of the problems and would bring profit only to electric power producers.    

The information provided by the non-profit partnership Market Council that serves as the regulator of Russia’s retail and wholesale power markets, the wholesale power debts have been increasing gradually up to March 2010. At that point in time, the value of the debt was RUR 35 billion. A steady decrease in the level of debt has been observed since that time. At the end of 2010, the debt volume was RUR 22.3 billion. Still, as of the end of July 2011, the volume of debt was RUR 27.6 billion. The debt of individual consumers on the retail market currently exceeds RUR 100 billion. Of 220 companies making regular purchases of electric power only 40 do not currently have debts.

Still, a number of specialists are convinced that the wholesale debt burden in the Northern Caucuses has not become critical yet. According to senior analyst for the electric power sector of Alfa-Bank Alexander Kornilov, the level of indebtedness on the market today is by no means “serious.” The level of debt during the economic downturn was substantially higher, and the situation has largely stabilized. At the same time, the present situation is compounded by the transfer of debt from the retail to the wholesale market.   

According to Yekaterina Tripoten, who works as analyst at BrokerCreditService, no power companies are yet voicing discontentment over the issue of indebtedness. During the times of economic difficulty, power companies actually had to sue their wholesale customers to get them to pay their bills.  

The analysts acknowledged that the situation with the non-payment of power debts varies from region to region, and that the North Caucuses presents the greatest trouble. In particular, Alexander Kornilov indicated that the debt burden in the region is very high and that it accounts for a substantial percentage of the overall debts. Regrettably, nearly all wholesale customers in the region are equally to blame for contributing to the problem. Part of the problem lies in the general business culture of the population, much of which has a low per capita income. The problem is exacerbated by the presence of various middlemen in the flow of electric power from the generating companies to the end users. Of particular concern is the prevalence of “wholesale resellers.”     

The regions where the consumer payments for electric power are unintermittent are the city of Moscow, the Moscow region, St. Petersburg, as well as the oil- and gas-rich regions in Siberia, such as Tyumen. 

Among the worst consumers of power that are “infamous” for being habitually in arrears Mr. Kornilov listed public organization that are paid from the state budget, as well as housing utilities.  

According to Yekaterina Tripoten of BrokerCreditService, the debt problem has been created as a result of the use of deceptive tactics by marketing and distributing power companies and the lackadaisical attitude on the part of state-funded organizations.  

There is consensus among the analysts that it was the power sales companies that suffered the most as a consequence of non-payments. It is evident that these commercial entities must acquire the payments from the end users and provide the collected funds to electricity generators and distributors. Both the former and the latter are not in the slightest disturbed by the fact that the sales companies might not have received full payment from individual consumers. Since the grace period given by grid companies to sellers is short, imbalances and monetary gaps in the Russian electricity market model are frequent. When a sales company does not have sufficient resources to pay the generator, it must finance the difference with short-term loans. Naturally, the interest rates for such loans have become quite high.

In relation to the methods that can be used to counter power sector indebtedness, Mr. Kornilov noted that a unified solution would not be easy. For one, it would be imperative to make improvements to the electricity meters system, so as to minimize the losses in power delivery.   

As a method of countering chronic non-payments, Market Council suggested implementing a mechanism of providing commercial bonds for the wholesale market. The mechanism entails the issuance of an irrevocable bank guarantee or a warranty from the power generators that are engaged in supplying the power to the wholesale market. The second method could be used to alleviate the debt problem for power sales companies that work in association with the generating companies. Most of the biggest power generators, such as Inter RAO UES, Gazprom, RusHydro, IES Holding, and Irkutskenergo, own power sales assets. Market Council regulators believe that the system of financial guarantees can be launched effective January 1, 2010.  

Commercial bonds and guarantees will certainly be beneficial for large electricity producers. At the same time, the risk of bearing the responsibility for debts would be shifted to banks. However, instituting such safety measures is not likely going to resolve the most fundamental issues with payment discipline and ineffective meters. It would not be easy for small companies in the wholesale market to recieve bank guarantees for the simple reason that banks are reluctant to lend money to small enterprises. 

Yekaterina Tripoten of BrokerCreditService explained that financial guarantees on the wholesale electricity market would eliminate situations when a sales company does not make payment to a generating company. The generators would receive the money under any scenario, since the payments would be made by banks. The analyst also thinks that it would not be difficult for power sales companies to get bank guarantees. Still, risks do exist, and banks are calculating these risks and passing them on in the form of interest rates.