The Act "On Electricity" (the "Act") was given its third and final reading and passed by the State Duma (the lower house of the Russian parliament) on 21 February 2003. It was approved by the Federation Council (the upper house) on 12 March 2003 and signed by President Putin on 31 March 2003.
The Act is the most important of a package of five proposed enactments designed to reform and liberalize the electricity industry in Russia by introducing competition and attracting investment. This note relates only to the Act itself, but it should be noted that, in the other parts of the legislative package, there are provisions which stipulate that the new, competitive markets for electricity will not be fully established prior to 1 July 2005 and that, prior to that date, a limited competitive market will be established on a transitional basis. This will mean that, during this interim period, the transitional competitive market will co-exist with the regulated market.
The Act covers:
- future decrees in the electricity sector;
- the role and functions of the Government of the Russian Federation, various federal executive bodies and the Ministry of the Antimonopoly Policy;
- new entities in the competitive wholesale and retail electricity markets; and
- a contractual framework for the successful operation of those markets.
Future decrees in the electricity sector
The Act provides that decrees on prices (tariffs) in the electricity sector must be approved by the Government of the Russian Federation or by a federal executive body.
In addition, the following decrees must be issued by the Government of the Russian Federation as a priority:
- Wholesale Market Rules;
- General Provisions for the operation of the Wholesale and Retail Market;
- Rules for non-discriminatory access to transmission and system control services and to services provided by the Administrator of the Trading System; and
- Rules for curtailing or terminating supplies to defaulting customers.
Neither regional governments nor local authorities will have the right to issue decrees on prices (tariffs) in the electricity sector unless federal law expressly stipulates otherwise.
The role and functions of the Government and federal executive bodies
According to the Act, the Government and a federal executive body (not identified in the Act) are to be responsible for setting minimum and maximum price levels in the competitive electricity markets, except where prices are regulated by regional governments. Prices in the regulated markets will continue to be controlled, as they are at present, until such time as those markets disappear.
New entities in competitive electricity markets
The Act provides for the establishment of new so-called "infrastructure entities", i.e. the Federal Grid Company, the System Operator and the Administrator of the Trading System.
The Federal Grid Company ("FSK") will provide transmission services over the Russian national grid. These services will be rendered on commercial terms in accordance with the terms of a Use of System Agreement to be entered into between the FSK and a generator or power purchaser. The FSK will be obliged to enter into such agreements.
The System Operator ("SO") will function as a special organization, with the sole responsibility of system control, ensuring non-discriminatory access to the grid for all market participants. In order to discharge this responsibility, the SO will be authorized to impose binding obligations on all players within the market. It will provide system control services, on regulated terms, to all market participants.
The SO's liability is to be limited, which means that the right to demand compensation for damages from the SO will be restricted.
The establishment and functioning of the FSK and the SO share several common features:
- the Government of the Russian Federation will hold not less than 52 per cent of the SO's and the FSK's shares during the reorganization period and will increase its holding thereafter to 75 per cent plus 1 voting share;
- the FSK and the SO are prohibited from trading electricity, except that FSK may purchase it in order to cover transmission losses; and
- the FSK and the SO are both deemed to be natural monopolies according to the Law "On Natural Monopolies", because they provide services under monopoly conditions.
The co-operation of the FSK and the SO is to be governed by an agreement entered into between them. An appropriate federal body will also take part in the process of concluding this agreement.
The competitive wholesale market will be administered by a non-profit entity, the Administrator of the Trading System ("ATS"). This is to be established as a non-commercial organization for the purpose of organizing the sale and purchase of electricity in the wholesale market.
The ATS will co-operate with the SO under the terms of an agreement entered into between them. An appropriate federal body will also take part in the process of concluding this agreement.
The wholesale and retail markets will be regulated according to the Law "On Electricity", the Wholesale Market Rules, the General Provisions for the Operation of the Wholesale Market and the General Provisions for the Operation of the Retail Market, etc.
One of the principles of the new retail market is that users will have the right to choose and conclude supply contracts with any Competing Supplier. Such suppliers will enjoy non-discriminatory access to the distribution networks. There will, however, also be so-called "Guaranteeing Suppliers" (suppliers of last resort) whose activities will be overseen by a federal body and who will be obliged to conclude a supply contract with any user.
In addition, the sale of electricity to individuals will be licensed.
Contractual framework for the wholesale and retail market
The contractual framework for the competitive power market proposed under the Act envisages the following agreements: Interaction Agreements between infrastructure entities (the FSK with the SO; the ATS with the SO), Grid Connection Agreements between the FSK and the wholesale market participants, Use of System Agreements between the FSK and the wholesale market participants, Interconnection Agreements between grid companies, Agreements for System Control Services between the SO and the wholesale market participants, Power Purchase Agreements in the wholesale market (between generators and power purchasers) and retail market (between suppliers and end-users), Supply Contracts with Guaranteeing Suppliers, etc.
Also, the Act provides that the contractual framework and the procedure for the conclusion of compulsory contracts for participants in the wholesale market will be established under the General Provisions for the Operation of the Wholesale Market and the Wholesale Market Rules. The retail market contracts will be determined in detail in the General Provisions for the Operation of the Retail Market.
For further information please contact David Griston at david.griston@cms-cmck.com or on 00 7 095 2585000.
