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Government Approves Plans for Energy Sector Reforms - International Law Office

International Law Office

Projects & Procurement - Russia

Government Approves Plans for Energy Sector Reforms

August 14 2001

Electricity
Coal
Gas


Electricity

After several months of debate, Russian Federation Prime Minister Mikhail Kasyanov finally signed a decision of the Russian Federation government on July 11 2001, to approve the main principles governing the reform of the Russian electricity market as set forth in the restructuring plan proposed by the Ministry of Trade and Economic Development. This plan, in turn, was drafted on the basis of recommendations made by RAO UES, Russia's electric power monopoly, and the consulting firm Arthur Andersen, among others. At present, UES currently owns the high-voltage transmissions grid and central dispatch systems, as well as Russia's 73 regional energy companies and 32 federal generation systems. According to the restructuring plan, a temporary holding company ('Tempco') will be established on the basis of UES's current assets, and will contain several new structures while retaining UES's current shareholders. Tempco would own the grid, a separate holding company uniting the power stations and up to seven guarantor energy suppliers.

During the transition Tempco would own between 51% and 100% of the above structure. In the second phase Tempco would be liquidated and its controlling stakes in the various structures, except for the grid company, would be sold. The government would retain at least a 51% stake in the grid company, which would remain a monopoly. Shareholders in UES would be offered the opportunity to exchange their UES shares for shares in the new companies.

The reform will last eight years and will be carried out in three stages. According to the decision, the action plan for the first stage must be submitted to the government within two weeks. In general, the plan proposed by the ministry was not significantly changed, but the government decision additionally establishes that the federal power grid company and system operator must be founded as separate entities and wholly owned subsidiaries of UES by February 1 2002.

For more information please see Restructuring the Energy Sector and Government Hopes to Boost Energy Investment with UES Restructuring.

Coal

As part of its plan to boost investment in the coal industry, the government has announced that during 2001 it will sell off its entire stakes in certain coal companies. The government has issued a list of coal companies in which its shares will be sold, including:

  • Kuzbassugol (79.73% of the shares);

  • Kuznetskugol (80.67%);

  • Khakasugol (43%);

  • Vostsibugol (17.81%); and

  • Irinovskoye (25.5%).

Privatization plans for the sale of the state's shares have been approved for Kuzbassugol and Kuznetskugol.

For two years following the sales, the government will retain 'golden share' rights, meaning that it may appoint its representatives to the board of directors and auditing commission, as well as exercise a veto right at the general shareholders meeting with respect to certain significant matters. The government proposed to sell its stake in Kuznetskugol at auction, in two blocks of 40.33% and 40.34%. At the initial auction, completed on June 25 2001, all but seven shares of the 40.33% stake were sold at a price of Rb650.23 per share. At the second auction, the results of which were announced in July, only 50.38% of the 40.34% stake was sold.

On August 13 2001 it was announced that an auction to sell the 43% stake in Khakasugol had resulted in the sale of the entire stake. Meanwhile, shares in Kuzbassugol are also to be sold in two auctions, of 40% and 39.73% respectively. The last dates for submission of applications to participate in these auctions are September 14 2001 and August 31 2001.

Gas

While the possibility of restructuring Gazprom, Russia's natural gas monopoly, has been discussed for several years, Prime Minister Kasyanov has recently made certain statements indicating that a restructuring programme will be prepared by the end of this year to encourage investment in the industry. These plans were announced a few weeks after the dismissal of Rem Vyakhirev, Gazprom's former chief executive. Kasyanov stated that Gazprom's production units would be split from the transportation unit as part of a general overhaul of the company. The main purpose of these reforms will be to give all producers access to the pipeline network on an equal footing. A special government working group is still in the process of preparing the restructuring programme.

According to some reports, the first stage of the programme will be to transfer certain gas transportation-related assets to a wholly owned subsidiary of Gazprom. In the future, direct state control over this company will be established. At the same time, the production companies will be reorganized into joint stock companies with the right to sell gas on a more independent basis. As a result of the restructuring, the gas transportation sector could become more transparent and effective, which it is hoped will attract more investment for production-related ventures. Currently, no timetable for fulfilment of any restructuring plan is available, but analysts and investors will continue to monitor this issue closely.


For further information on this topic please contact Laura Brank at Chadbourne & Parke by telephone (+7 095 974 2424) or by fax (+7 095 974 2425) or by e-mail (lbrank@chadbourne.com).


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