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31.01.2012

PRIME: FOCUS: Russian power prices frozen till March in midst of upcoming election

The Russian government is tightening regulation in the electric power sector in light of the upcoming presidential elections, having announced that it reached an agreement for power prices to remain unchanged in January–February. Analysts say the move is not very significant for the industry, as power prices were not expected to grow on the free market in early 2012 due to stable gas prices. The financial results of power producers are unlikely to be affected much as a result of the government’s decision, but investor attitude could be worsened towards the sector, analysts said. It is also unclear as of yet whether this enhanced regulation will be applied only during the pre-election period or if the policy will be gradually implemented in hopes of sorting out the current chaos in the power industry.

The Russian Energy Ministry has agreed with power producers that electric power prices, including those on the free market, would stay at the December 2011 level through January and February of this year, Energy Minister Sergei Shmatko said on January 20. «We assume that prices for housing and utilities services, including those for electric power, should remain the same,» Shmatko said, adding that a pertaining agreement was reached with guaranteed suppliers and power generating companies. The minister also called on regional governments to notify the ministry in case of a growth of power prices for consumers in January–February.

The majority of surveyed analysts believe that this decision can be attributed to impending presidential elections on March 4. «This step is obviously being taken as part of the pre-election campaign aimed at keeping prices under control until March,» Alfa-Bank utilities analysts Alexander Kornilov and Elina Kuliyeva said. They also said it was not clear for them how the government planned to interfere in the very difficult mechanism of price formation on the spot market.

Utilities analysts at UralSib Capital said they believed «the measure is in line with the government’s policy aimed at strengthening power sector pressure that has been recorded over the previous year amid preparations for both parliamentary and presidential elections.»

Meanwhile, Konstantin Reyli, a senior analyst covering power utilities at investment company Metropol, said Shmatko’s statement did not contain any news and was delivered in the context of earlier government decisions. The Russian government recently approved moving of the annual tariff indexation from January 1 to July 1. The analyst also noted that strengthening of regulation in the power sector was outlined already in early 2011.

Reyli also said he believed prices on the free market would not be rising at the 2011 level, as gas prices currently remain at the 2011 level. «Divergence in power prices for final consumers, namely businesses, as prices for retail consumers are wholly regulated, could occur only because of decisions by regional power commissions and because of growing coal prices,» the analyst also said.

Irina Filatova and Yekaterina Tripoten, utilities analysts at investment company BCS, also said they did not expect changes in free power prices in January–March as gas prices were kept unchanged.

The analysts surveyed were at odds on whether keeping power prices unchanged in January–February would affect the business of power generating companies. While Kornilov and Kuliyeva from Alfa-Bank believe this step can negatively impact power producers, including hydropower company RusHydro and all thermal generating companies, some other analysts say that power producers are unlikely to be significantly affected.

«As gas prices are not growing, the decision to freeze free market power prices at the December 2011 level for two months should not lead to a gas thermal power plants margin decrease in comparison with December 2011 margins,» said Alexander Kotikov, an analyst covering power utilities at investment company Troika Dialog. The investment company, however, could lower its forecasts for the financial results of power generating companies in January–June, Kotikov said, adding that he hoped power producers would have the opportunity of compensation for their lost profits by the end of 2012.

The impact of the price freeze on the financial results of power generating companies in the first quarter of 2012 is minimal on the whole, Filatova and Tripoten from BCS agreed.

Utilities analysts at UralSib Capital do not expect the government’s move to significantly worsen the financial results of generating companies, but said the power price freeze could lead to an insignificant growth of power producers’ payables or receivables. The analysts also said they expected a sector recovery in the second half of 2012.

Shmatko’s statement is not expected to influence the business of power generating companies, as no additional measures over regulation in the power sector have been taken, said Reyli from Metropol. While Reyli believes Shmatko’s statement will not affect investors’ attitude in regards to the power sector, other analysts said that this artificial limitation in the sector could worsen investors’ mood. «The government’s interference gives a negative pattern to the sector perception, taking into account the fact that the government’s regulatory pressure was already quite significant in 2011,» Alfa-Bank utilities analysts said.

On January 20, Shmatko said that the sector would gradually return to its usual operations in March–June. Analysts hope power producers will be able to receive compensation for their growing expenditures after the presidential elections, when pressure on prices is expected to weaken, but how the measure will be implemented is not exactly clear as of yet.

Reyli from Metropol said there were two points-of-view over the current situation in the sector and outlook for the post-election period. The first perspective implies that industry regulation is occurring only in the pre-election period and that the sector will return to its usual operations after the poll. The other side provides that this move is part of a gradual tightening of regulation that will continue after the elections, the analyst explained, adding he is sticking to the second point of view.

In 2012, free power prices will increase by 6.4%–8.6%, while tariffs are expected to increase by 5.8%–7.5%, Mikhail Lyamin, a utilities analyst at NOMOS-Bank, estimates.

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