Regulatory risks

The key operations of the Company (transmission and connection services) are regulated by the state. Tariff regulation policy is aimed at the control of tariff growth that may cause the limitation of tariff resources related to investment and operating activities.

To minimize the risk factors the Company pursues a balanced policy related to the increased efficiency of investment and operating activities aimed at cost reduction and optimal planning of financing structure.

One of the risk factors is imperfect retail mechanisms resulting in controversies between grid and supply companies regarding energy and capacity consumption used for tariff calculation. As a result, there appears debatable and overdue debt for the Company’s transmission services ending in the decreased liquidity and financial stability of the Company. The Company takes measures to eliminate causes of conflicts with consumers, to decrease debatable and overdue debt, to cooperate with federal authorities preparing changes into retail market rules, on court practice and creating positive precedents. Besides, the Company implements programs on perspective metering development adopted by the Board of Directors.

Large industrial consumers subsidize othe consumers, including residents, and this is also a significant risk factor. Several large industrial consumers connected to UNES networks pay for the transmission services according to the transmission tariffs in cases when grid facilities are rented by the Company under the last mile contracts between us and FSK. In 2010-2013, due to the lack of last-mile legislation, several large industrial consumers migrated to direct contracts with FSK via judicial decisions. According to item 5, article 8 of Federal Law #35-FZ dd. 26.03.2003 on Energy sector till 01.01.2014 UNES is entitled to rent grid facilities to regional grid companies upon approval of the federal executive authorities. Russian Government Decree #1173 dd. 27.12.2010 on the approval procedure regarding the transfer of grid facilities being part of UNES network into rent by regional grid companies approved the Rules regarding the transfer of UNES grids into rent by regional grid companies. Since the beginning of 2011 the transfer of UNES facilities into rent is approved according to a resolution adopted by regional executive bodies.

Nevertheless, according to the decree the transfer is approved if direct contracts between FSK and consumers are cancelled and if a written letter from the regional head is forwarded. The Ministry of Energy approved Decree #403 dd. 24.08.2012 under which IDGC of Urals and FSK concluded UNES facilities rental contracts (last mile contracts) for 2013. Transmission of energy using UNES facilities rented by the Company under last mile contracts is included by federal and regional regulators in planned transmission volume for 2013. In 2012 the President and Government underlined the importance of solving the problem of cross-subsidization. The Ministry of Energy received instructions to prepare cross-subsidization liquidation mechanisms. The Company plans to actively participate in the debates over the problem with the federal authorities.

The transfer to RAB tariffs is accompanied by a range of risks, namely: contestation of iRAB evaluation results prepared by independent appraisers by the regulators; losses related to incorrect forecast of transmission structure in terms of voltage and overstated capacity volume that were included into tariffs; as well as non-receipt of deferred incomes due to income smoothing mechanisms.

To decrease the risks the Company concludes agreements with the regulators determining the volumes and resources for financing its investment program under long-term regional development programs with a view to exclude subjectivity of tariffs due to the preparation and implementation of cost administration programs, including a program related to the implementation of a President’s instruction on 10% cost decrease. Besides, the Company plans to prepare and implement regulatory contracts facilitating tariff settings in terms of service quality. The contracts should stipulate mutual responsibility of grids in terms of service quality and of regulators in terms of adjustment of tariffs during long-term regulation period.

One of the regulatory risks is a risk of decreased demand for connection and transmission in comparison to planned volumes used by regulators during tariff approval procedures. To reduce the risk the Company continues to monitor applications and form a forecast of productive supply, connection demand based on the applications as well as submit increased number of applications related to individual connection fee to regulators. At the same time due to a large amount of applications for connection the Company is not always able to fully satisfy the demand, this can negatively influence the revenues due to the loss of potential consumers as well as violation of anti-monopoly legislation in terms of transmission and connection. To resolve the problem the Company improves the procedure of connection application processing. We also explain our consumers the peculiarities of connection process, including dissemination of information on the services and creation of client service centers.

Due to regulatory documents adopted at the end of 2012 simplifying the procedure related to the withdrawal of last resort provider status from energy supply companies the Company encountered new risks related to the necessity to assume authorities and liabilities of last resort providers from energy supply companies:

  • risks related to increased receivables of end consumers and write-off of accrued receivables under contracts on transmission between energy supply and grid companies;
  • risks related to the functions of last resort providers on the wholesale markets;
  • risks caused by increased costs related to the functions of a last resort provider exceeding RGR included into supply charges;
  • organizational risks related to the loss of competences and data bases on consumers as well as erroneous payments for consumed energy.

To minimize the risks the Company interacts with federal and regional authorities, mass media, wholesale market infrastructure organizations, law enforcement bodies as well as companies with withdrawn last-resort-provider status on the functions of last-resort provider and debt settlements. Besides, we form legislative initiatives on the optimization of provider change procedure.