EUROASIA: Privatization of Russia's electricity company enters home stretch

Anatoly Chubais
A plan to privatize the world's largest electricity company is entering the home stretch, successfully it seems, in spite of its Rube Goldberg-like complexity and the general hostility toward privatization in Russia today. The plan's architects say they have raised $33.9 billion by creating a simple and obvious investment opportunity - the chance to sell heat and light to one of the world's coldest and darkest countries. The Russians say they have learned how to privatize their electricity market by watching the best example of failure: the Americans and Enron.

The Russian state electricity monopoly, Unified Energy Systems, will be disbanded June 30 after spinning off dozens of subsidiaries and floating a portion of shares in those companies on the Russian stock market, then selling the balance at auctions.

To attract buyers and investors, Russian officials promise they will also liberalize electricity tariffs for industrial consumers by next January.

"From a market point of view, it's very sexy," said James Fenkner, chairman of Red Star Management, a hedge fund based in Russia. "You are going, all of a sudden, from a system of government controlled inputs and outputs to a market based system with more potential for profit."

Red Star Management has invested in hydroelectric plants in Russia.

By Tuesday, Unified Energy had raised 797 billion rubles, or more than $33.9 billion, in spite of glum market conditions, according to the company spokesman, Stas Degtyarev. Though the company sells mainly to other utilities rather than portfolio investors, shares in newly privatized Russian electricity companies are now popping up in portfolios and on the books of hedge funds around the world.

To be sure, enthusiasm has been dampened not only by the complexity of the securities, but by memories of President Vladimir Putin's reversal of some oil industry privatizations, and concerns the same fate could await electricity investors. Also, many Russian power plants co-generate heat for residential buildings - a market whose rates will not be liberalized.

Generally, electricity privatization is fiendishly complex, and it has failed spectacularly before. But the Russians say they have learned from others' misfortune, especially the case of Enron.

"What happened in California, though it was unfortunate, helped us design restructuring," said Sergei Dubinin, the chief financial officer of Unified Energy Systems and a former Russian central banker. "We said, 'We can't do it that way.' "

The case for investing rests on a scarcity of electricity as Russia's economy grows and the belief that prices will explode after liberalization. Russia is the fourth-largest electricity market in the world, behind the United States of America, China and Japan.

The deals are low profile, but high-priced. OGK-1, for example, which owns power plants in western Russia and the Ural Mountain region, is expected to fetch about $7 billion at auction on April 17. On Monday, the Russian billionaire Mikhail Prokhorov bought 32 percent of TGK-4, with plants in smaller cities near Moscow, for $500 million at auction.

The gas-powered electricity plants have become acquisition targets for the European utilities like Enel of Italy and E.On of Germany; both have bought plants with intentions to invest money and expertise in energy savings in order to balance a projected rise in the price of natural gas in Russia.

For their part, portfolio investors have tended to bid up the price of power plants before large sales, then exit the stocks, making these shares more volatile than the average equity in the Russian stock market. Shares in the power and heat company TGK-5, for example, dropped 40 percent since its spin-off from Unified Energy.

Some investors have bought Russian hydroelectric capacity that taps the currents of the wide northern rivers. The cost of production, of course, will not rise with the price of gas. This was the approach taken by Red Star, Fenkner's hedge fund. But the government may increase a water tax for these plants .

Controversially, one outcome of Russian electricity privatization is likely to be a shift from natural gas to the relatively cheaper, but less clean-burning coal as plants seek savings - indeed, a Citigroup investor note has even recommended investors buy coal-fired plants.

One looming risk, however, is that Gazprom, the gas monopoly, will raise domestic prices for natural gas before the electricity market is fully liberalized, squeezing the profits of the electricity companies and their new owners. And, as one investor who did not want to be identified because his company deals with Gazprom, noted, "Gazprom is far more powerful than Enron ever was."

Source: International Herald Tribune| By Andrew E. Kramer

No comments: