Power sales: from monopoly to competition and back

Types of sales
In the initial stages of reform, when just passed unpacking of the regional SC-energo, in the sales business were two types of players: first, the marketing company, evolved from the SC-energo, and received the status of Gs, and, secondly, structures who , Supplied electricity to large industrial enterprises. Over time, the market structure became more complex. According to Chief of analytic department of Investment and Finance Corporation (IFC) "Alemar" Basil Konuzin, today there are four basic business models on the market:
•    independent sales companies;
•    vertically integrated holdings;
•    horizontally integrated holding companies;
•    energy and utility companies of the particular city
And among all the four “models” we can find both Gs and independent sales. It is also curious that we can find  GS, who emerged from the SC-energy, among the independent sales (Petersburg Sales Company), and in the vertical holdings (Sverdlovenergosbyt included in the IES-Holding ").
Vertically integrated structures can be divided into two types: a bunch of "generation-sales" and a bunch of "sales-consumer". First type is represented by companies such as IES-Holding, "RusHydro" and Enel. The latter controls the generating company OGK-5 and is  a co-owner of Rusenergosbyta. Among the structures of the second type ("sales-to-consumer) we can mention a bunch of" Lipetsk sales company "with" “ Novolipetsk Iron and Steel works “and a bunch of" Kuzbasenergosbyt "with" Mechel " . Vertically integrated holdings over time, will occupy the major share of the market in sales of electricity, and possibly become local monopolists. Speaking about the third business model - horizontal holdings, the Vasily Konuzin relates to her commercial companies, each of which runs its business in several regions and is not just for electricity but also with other products (for example, "Transneftservis-C). A representative of sales companies, in fact, an expert working "inside" supply business offers a vision of the market structure. Experts clearly divides the market into guaranteeing suppliers and independent sales and allocates among independent three groups. The first group - «energy workshops», is created to supply the enterprises of finance product group. The second group - the "reformers", the company created by former top managers of RAO or approximate individuals who now have the opportunity to negotiate the delivery to the individual, not always on transparent conditions. The third group - the smallest - is independent companies that are trying to do business in the sales of energy. They are interested in reducing costs, competition, and market development.
(in) dependent sales
Real market today exists primarily in the wholesale electricity market. Here the price is being affected by the balance of supply and demand. A colorful example – decline of prices during the time of crisis, when consumption in some units fell almost double. Companies that buy energy on the wholesale market, can save, with the help of wholesale prices, and secondly, by fixing the price for an extended period in a free two-way contract , and third, adjusting its power consumption so as to maximize the power of periods when its price is minimal (eg at night). Gradually, more and more consumers go on the wholesale market. Even there is a special niche of services - sales companies register for the enterprise group of supply points and begin to buy on the wholesale market certain amounts of energy and power for them. Theoretically, an enterprise can itself purchase the required amounts, but today it is rather difficult to organize it because of the severe shortage of specialists on energy trading - selling-buying energy. There are lots of consumers for whom entry on the wholesale market is impossible by political or technical reasons, or economically disadvantageous. Such retail consumers buy electricity on terms which have little in common with market economy. In the retail segment is virtually no competition. In each region there are guaranteeing supplier (GS), who controls 60-90% of electricity supply in the area of their presence. Only the largest retail consumers can get out from under the «tuition» of GS. As noted the Director of the electric energy and power energy trading Alex Tyukin (he works at group ARSTEM (an independent Energy Company)), imperfect legislation significantly inhibits the development of price competition. In such circumstances, the main trump cards of independent sales companies are sale of electricity by free (contractual) prices and the high level of customer service. Free prices do not depend on the results of trading on the wholesale market, they are known, prescribed in the contract and remain unchanged throughout the year. All risks and deflections in such contracts, the independent sales companies take upon themselves.
Monopoly as a curse
Representatives of the GS believe that a monopoly status gives more headaches than benefits to the sales company. Status of guaranteed provider requires a sales company to provide electricity at regulated tariffs to her customers, located in the area of GS‘s responsibility (almost invariably an area of GS‘s responsibility - area of Federation’s subject) That is, GS could not deny anyone. Even the customer potentially insolvent or unwilling to pay for. These are happy to use the so-called "nondisconnectable" consumers - housing and communal enterprises, some state and municipal institutions. Yuri Zisman (director of work with consumers, First Deputy Managing Director of OJSC «Sverdlovenergosbyt) observed that 70% of the municipal utilities at the time of signing the agreement with GS already know that they will not pay for electricity. General supplier  knows it too. But he is obliged to conclude a contract, and is not entitled in the event of nonpayment to disconnect a client. Consumers do not pay to the supplier of energy not only to save on costs, but also from the "ideological" reasons. Here is the speech of CEO Co Ltd «KRES-Alliance, chairman of the OJSC« Kolenergosbyt and Co Ltd «KRES Alexei Presnov about this situation:« Consumers  paying from their pocket "the entire banquet”, do not see any benefit from market reforms in the industry, and still do not have an ability to choose a provider of electricity, also, they are completely excluded from the forming of "market" price of electricity, which also increases. As compensation for such relation to them, they are not very willingly and accurately pay, and in general they find support for their actions in society, including political support.» As a result non-payments for electricity reached cosmic scales. According to rbcdaily, after two months the new year the total debt at the retail electricity market has grown on 89% and reached 140 billion rubles.


Three “Nuts” for monopoly
Today on the agenda is put - and in some cases has already been solved - the question of the status’s deprivation of retail companies’ supplier who have gained very significant receivables (and therefore its own debt to the generation). To this is added the start of the long-planned process of change of suppliers. Even at the start of the energy reform, was stated that the status of Gs sales company is not given in perpetuity, and periodically in each region should be competitions for the status of GS, in which active GS and independent sales will be able to participate. This mechanism haв to start work in full force in 2007, but there were needed different revisions of normative documents, and therefore it was decided to run massive competitions for the status of the GS in the regions in 2010. Now there is discussion of the technical subtleties. And, according to the existing realities, in the procedure of the competition builds in the mechanism that helps GS to rid from the accumulated debts. In particular, the Ministry of Energy and Non-Profit Partnership "Market Council” propose to introduce the condition according to which the winner - a new GS will have to buy (in whole or in part) accounts, accumulated by the prior GS. That is, to pay his own debts, and most deal with debtors of former GS. It is a quite logical design. However, market participants fears that such a rule, being included in the conditions of competition, will thoroughly narrow the range of possible contenders for the status of the GS. Only very large companies will be able to Participate in such competitions because only they will be able to simultaneously pay off the debts predecessor. This will lead to the fact that in the Russian Federation will remain only a few mega-sales companies that will act at the same time in several regions. This means that the real competition in the retail market will be almost less than it is today.
Likewise, on the reduction of potential competition has affected the disappearance of the majority of suppliers of the second level from the market at the beginning of the year (GS-2 - a company with the status of GS working, usually in the same town). GS-2 who did not come up to tenders on the wholesale market, had lost their guarantee status. Most probably, these companies will simply leave the supply business. This means that will disappear players, which could potentially compete with the regional suppliers or other local monopolist.
There is a third phenomenon, potentially reducing competition. It is the creation of departmental sales who  provide electricity to individual industries.

Three target models
Until the end of I quarter 2010 “Market Council” plans to present to the Russian government their vision of the target model of the retail electricity market. Own version of the model suggests Holding ISC (interregional sales company).
In addition, there is a model developed by representatives of the companies - suppliers. All modellers claim that their goal is the development of competition in the retail electricity sector. However, there is reason to believe that the implementation of any of these models can lead to increased monopolization on  the market.  We will attempt to briefly analyze features of the proposed models. That's what about the model proposed by IDC Holding, says the magazine "Energy Market": "On the status of GS now claims power companies - such a scenario provides a proposal of IDC Holding. It is Clear that, in this scheme, the competition between the independent sales and GS (owning networks) will be very limited. Particularly active independent sales companies may face restrictions on access to networks. Concept that is proposed by “Market Council” ("revolutionary" model) involves the elimination of the status of a general supplier and provides an access to points of delivery for all sales companies. However, this scheme does not solve the problem of a rigid (and often unfair) competition from existing independent sales occurring in the vertical holdings. The presence of regular consumers and / or loyal wholesale energy suppliers, allows distribution companies to offer low prices and lure the best solvent, and then all of how any solvent consumers to yourself. And from this far before the emergence of new local monopolies ...
The model proposed by a supplier ("evolutionary" model) offers a seize from GS status of a monopolist. At the same time, the model is frankly aimed at the consolidation of the market. Alex Presnov fears that, as in the previous case, it will give rise to "quasi-monopoly mega-vendors" in the retail market, where competition is possible only in a narrow market segment. Oleg Salamatov decide that after that may set a situation when in the country would compete three- four marketing companies, a kind of analogue of the "Big Three" - Megafon, MTS, Beeline – but in PowerSales. In principle, it’s not a bad option, but only on condition that all three (or how many there will be) the company will compete in each region, each local market. Alas, such a comprehensive competition among a limited number of suppliers occurs only at a very fast-growing regional markets (as mentioned in the cellular market in 1999-2005.) In the case of market of power the risk of monopoly is quite real. Moreover, as notes Alex Tyukin, three or four companies would easier agree with price than if there were three or four dozen of companies. According to experts on the role of members of the "big three" (in our case "five") in the electrical retail claim "Transneftservis-C", "Rusenergosbyt", IES-Holding, RusHydro and Joint Energy Company. However, according to managing director of OAO "Udmurt Energy Retail Company" Denis Detinkin, we should not think that on the market will be only the big players. In his view, we can extrapolate the situation of the energy market on the oil market, where successfully operate giants and very small network of service stations .
Nevertheless, even with all the "mitigating factors, the analysis of the market models, in conjunction with the above-mentioned (at least three) processes occurring at odds with the increased competition, makes quite seriously the risk of growing monopolization of the retail market.
Expert’s Comments of Energyland.info
Alex Presnov, General Director of "KRES-Alliance, Chairman of the Board of Directors of Kolenergosbyt" and "KRES": On the one hand on the market is monopoly of GS, on the other - unfair competition from the "independent" suppliers of companies with large "anchor" consumers, whom they account for up to 90-95% of the sales. In terms of incorrect tariff, based not on criteria of cost at the point of delivery, and depending mainly on the volume of sales, price indices of the GS and PSC does not reflect their actual effectiveness, as measured by such a universal economic yardsticks like productivity. Electricity markets are highly monopolized on the local levels and areas of specific marketing enterprises. To start the competition, you first need to cancel or "devalue" the status of SE in its current sense, and bring it to the standard in the world - the provider of last resort "for expensive and is not for everyone, but only for those who have not yet found a commercial provider. Completely remove the cross-subsidy from sales markup.
Alex Tyukin, director of electricity and power trading of energy group ARSTEM:
Often the decision to change electricity supplier and start work with an independent electricity supplier in the company is being accepted with a lot of difficult and takes a lot of time. Our experience shows that in 60-70% of cases the main reason for this situation is the lack of information about alternative suppliers of electricity and basic ignorance of the regulatory framework. Often, business owners are unaware that there are real mechanisms, such as to change electricity supplier in the middle of the year, for the transition to a more favorable tariff and so on.
Oleg Salamatov, director of market development for JSC Kirovenergosbyt:
When it comes to competition for energy in the classical Western sense, where the user can change supplier daily, such competition will not threaten Russia for a long time. Obstacles are both objective and subjective. Including the "inertia of consciousness" in a significant part of consumers, many of them think that small "JSC. - are fakers' (but the majority of small potential players in a competitive market is likely to choose this particular form, as the most simple and flexible). Another problems - the difficulty and complexity of regulations, administrative resources, the complexity of the technical arrangements required to enter the wholesale electricity market. In the market will never be "Perfect competition", such as described in economic theory , or at least until such time as we learn to get energy out of thin air.
Shelemanov Alexander, Deputy of General Director for marketing activities of OAO Perm Energy Retail "
Competition in the retail electricity market exists, although it is bigger at the level of large consumers. In the Perm region now operate about 10 retail companies. In my opinion pure competitive market cannot be achieved, because of the specificity of the energy sector of in retail.  In the world practice power market is oligopolistichen. To further develop the market we need to raise the statutory responsibility for the defaults and bezdogovornoe consumption, create a retail market infrastructure for the integration of electrical energy, registration of contracts for the implementation of the relationship between wholesale markets and retail.
Yuri Zisman, director of work with consumers, First Deputy Managing Director of Sverdlovenergosbyt:
If we start to levy payable to the consumer marketing company in court, it would take at least six months, and with the appeal on - up to 11 months. For outstanding debt, we can collect pennies by the Central Bank refinancing rate, which now stands at 8.5%.  To close the cash gap we have to borrow credits at an interest rate not lower than 17-18% per annum. The result is that the supplier of last resort has to give to its customers a commodity loan on highly concessional terms. Energetics has repeatedly offered to introduce a rule of direct debiting amounts from the account debtor. Now this issue rises again. But we should remember that the launch of this practice requires a very high level of legislative decisions. If the direct debit will be imposed only government decree, then it will not work. Such examples have already been. To equate the payment of power to the court must amend the Civil Code.
Denis Detinkin Managing Director of OAO Udmurt Energy Retail Company ":
At the moment, the only clearly effective way to address the issues of the receivables - to restrict consumption. Moreover, this method does not always apply. For example, the low occupancy of municipal budgets gives a sharp increase in accounts receivable. Municipal budgets cannot fully pay off supplying the resource supplying organizations (utilities, heat supply organizations and other organizations to HCS), which in turn then with retailing companies. In this case, we cannot impose restrictions in relation to these organizations as well as affecting the rights of the population. Exit I see in the harmonization of antitrust, housing law and the laws of electricity.

Andrey Gubanov, Energyland.info
Translation: Mukhametyanov Timur