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Russia: Moscow Ignores Tariff Regime, Despite Needs Of Power Companies

Russia's government has brushed aside its own plan for a unified tariff-setting body to control prices for gas, power, and railways as it seeks to keep inflation in check. The country's electricity monopoly is complaining that most power plants are losing money, but the government seems determined to set the lowest inflation rate since independence this year.

Boston, 1 November 2002 (RFE/RL) -- Russian President Vladimir Putin's plan to create a powerful tariff-setting authority seems to have collapsed with a complaint that the panel has no power at all.

Last week, the country's Federal Energy Commission (FEK) said government officials have overridden its control over rates charged by utilities and natural monopolies, "The Moscow Times" reported.

FEK spokesman Nikolai Zaitsev was quoted as saying, "If the situation remains as it is, there is a risk that courts -- and not the federal body created by the president -- will be approving tariffs in the country." The FEK has reportedly written to the government asking it to clarify what its powers are.

On the surface, the controversy is only a spat between Russian bureaucracies. But the issue is whether the government can end its Soviet-era system of subsidies for essential services by raising prices. The nation's gas, power, and rail networks could collapse without sharp tariff increases. At the same time, the government must curb the inflation that erodes citizens' incomes. The task may be the toughest economic challenge that Putin has faced.

The specific complaint is about rates set for hydroelectric-power plants. Several have sued the commission for keeping tariffs too low to cover new water-use taxes. On Tuesday, the deputy chief executive of the Unified Energy System (EES) monopoly, Yakov Urinson, told reporters in Moscow that water taxes on the plants have jumped 1,400 percent this year.

Urinson said fuel costs have also risen 35 to 40 percent for thermal plants, the Prime-TASS news agency reported. But the government allowed only a 20 percent increase in wholesale electricity tariffs last March for this year. FEK Chairman Georgii Kutovoi said the government should raise the EES monopoly's rates immediately by at least another 10 percent. But the increase is not included in the government's inflation-fighting plans for this or next year.

The FEK's Zaitsev said last week, "There are obvious economic reasons to increase tariffs, but the Economic Development and Trade Ministry has adopted a position of fighting inflation by keeping electricity and heat tariffs low."

The government has already included a tariff increase of just 14 percent for EES in its 2003 budget, barely above its target of 10 to 12 percent inflation for next year. The government believes inflation will finish this year at 14 percent, leaving EES with little real gain, even without higher taxes and costs. Urinson said 16 of 29 power plants will lose money without higher rates.

One problem is that the economic decision was supposed to be the commission's job. In August 2001, Putin and Prime Minister Mikhail Kasyanov called for turning it into a unified rate-setting agency that would authorize tariff hikes for all utilities and calculate the effect to keep inflation from feeding on itself.

At the time, the government was trying to insulate itself from political pressure after it decided to cancel rate increases in the second half of 2001 to keep a surge of inflation in check.

But the plan for a powerful commission was never given a chance to succeed. Because the country's monopolies remain such a large part of the economy, the government continued to set their prices as part of the budget. The commission has repeatedly sought increases for the monopolies that are higher than the government will allow.

In September, Kasyanov effectively answered the demands of both the commission and the monopolies. Kasyanov said: "Russia is highly likely to have a free electricity and gas market within the next five years. So far, during the transition period, the government should keep control over the tariff-setting policy for natural monopolies' services."

But the reason for wanting a strong commission may have been more than political. Last year, the government appeared to have little sense of how to manage tariff increases and inflation at the same time. The calculation of how much higher gas prices add to electricity costs and then to inflation is complex. The government also had little experience with how long the inflationary effects of tariff hikes would take to "wash out" of the economy each year.

But now it seems to have arrived at a formula that it thinks will work. In an economic forecast last month, the government said, for example, that it plans to raise gas prices by no more than 14 to 15 percent above inflation in 2004 to 2005, RBC News reported. Even if the economy improves, electricity tariffs would go up by only 5 to 8 percent over the inflation rate.

The limits mean that utilities will be tightly reined as they try to raise funds for development. But the government is determined to bring inflation back down to single digits for the first time since independence. If the government meets its 2002 target, annual consumer-price inflation would be slightly less than the 1997 low mark of 14.6 percent.

But one problem with the approach for the monopolies may become evident if the government misses its target. Because tariffs have already been set, each point of slippage in inflation would add to their losses at the end of each year.

So far, the government has been unwilling to risk the kind of adjustments that the FEK has recommended, and its complaints seem unlikely to give it any greater role.