Retail market
The rules of operation of retail markets: fundamental issues
The Russian Federation Government Resolution "On adoption of rules of operation of retail energy markets in the transition period of electricity industry restructuring and rules of full and (or) partial reduction in consumer electricity consumption either in case of violation of obligations by consumers or in case of the necessity to take measures for prevention or liquidation of failures" (further – the Rules) has been worked out in accordance with Item 1, Article 21 of the Federal Law "On the Electric Power Industry" and Article 6 of the Federal Law "On the Specifics of Electric Power Industry Functioning during the Transition Period…".
The Rules also imply changes to be made to the whole range of existing statutory acts that are regulating relations in the electricity industry, and orders to federal executive bodies to work out concomitant statutory acts.
Besides, the Rules include regulations concerning the procedure of conclusion and execution of public contracts in the retail market and an example of the contract for electricity supplies to population1. The Rules determine how wholesale and retail market participants (supplier of last resort, sales (retailing) companies, grid companies and electricity consumers) should interact with each other.
Supplier of last resort is the main participant of the retail market. He is obliged to conclude a contract with any consumer who applies to him (if this consumer is located in the region where the supplier is working). All other sellers of electric power may choose whether to conclude a contract with this or that consumer or not. In other words, if buyers and sellers fail to come to an agreement concerning supply conditions, the contract wont be concluded and itll be impossible to oblige these suppliers to conclude it.
If a buyer is not satisfied with his seller of electric power, he may always apply to a supplier of last resort.
The Rules also specify the procedure of assignment to a position of a supplier of last resort and the procedure according to which the consumer may change his supplier of last resort. Since adoption of retail market rules, the following entities were assigned to a position of suppliers of last resort (within the corresponding territories of the Russian Federation):
- AO-Energos that havent yet finished unbundling by activity type and (or) power sales (retailing) companies established in the process of reorganization of AO-Energos;
- Wholesale consumers-resellers and established on the basis of them retailing companies delivering electricity to population and other consumers financed from the consumer budget in the amount of no less than 50 mln KWh per year as of the date of coming into force of the Russian Federation Government Resolution;
- Power sales (retailing) companies providing services to consumers connected to the grids of open JSC Russian Railways;
- Business entities using transmission or generation facilities that are not connected to the Unified Energy System of Russia or isolated energy systems (the so-called "islands" – a typical example – oil production companies owning their own diesel power plants).
In each region areas of operation of a supplier of last resort are defined individually by regional authorities proceeding from servicing areas of those suppliers of last resort that have already been appointed to their position.
The Rules also impose requirements on organizations appointed to a position of a supplier of last resort. The main requirement is to separate retailing and transmission activities. Thus, all wholesale consumers-resellers who gained the right to act as suppliers of last resort should complete unbundling by activity type.
In case the organization which became a supplier of last resort is not a participant of a wholesale market, it should gain the status of a wholesale market participant before January 1, 2008. Otherwise, until January 1, 2008 this organization will have to buy electric power from any other supplier of last resort – wholesale market entity whose area of activity lies within the territory of the corresponding subject of the Russian Federation. In each region these will be power sales (retailing) companies established in the process of reorganization of AO-Energos. After January 1, 2008 all companies that failed to gain the status of a wholesale market participant will be deprived of their right to work as suppliers of last resort.
All suppliers of last resort (wholesale buyers-resellers, winners of the competitive selection or local transmission organizations – if they have the status of a supplier of last resort) must gain the status of wholesale market participants. Besides, there are some peculiarities for these organizations:
- They have a longer (four-year) period for coordinating their financial accounting systems with the requirements imposed by the contract for joining the trading system of the wholesale market (in accordance with wholesale market rules).
- Suppliers of last resort dont have to meet technical (quantitative) requirements that are obligatory for other wholesale market entities.
Thus, the only requirement imposed on suppliers of last resort is to conclude contracts in the wholesale market and to receive the FTS balanced decision, while all technical measures that are usually taking a long period of time may be completed later.
The Rules imply that the first competitive tenders for the status of a supplier of last resort in all regions of the Russian Federation should start before January 1, 2008. These measures are aimed at stimulating the companies to compete for consumers, enhancing quality of services provided to customers, and reducing expenses. The tenders are supposed to be held every three years. The winner of competitive selection is defined mainly proceeding from the amount of gross revenue2 required to act as a supplier of last resort (the amount of gross revenue is voiced by each participant of competitive selection). If a company wins the competition, its gross revenue (with account of indexation) will be adopted when calculating a markup of a supplier of last resort for a three year period. If nobody has won the competitive selection, the working supplier of last resort continues his operations.
Functions of a supplier of last resort may be temporary (for a period up to 6 months) transferred to a transmission company in the following cases:
- If a working supplier of last resort is deprived of his license to sell electric power to the population;
- If he is deprived of his right to participate in the wholesale market;
- If he makes an announcement concerning his self-liquidation;
- If bankruptcy proceedings are launched with respect to this supplier;
- If he violates his obligations concerning payments for electric power and transmission services in the retail market or financial indicators characterizing his activities do not correspond to control points specified in the annex to the Rules.
In case of bad financial condition of a company acting as a supplier of last resort, non-observance of obligations undertaken by a supplier, or voluntary refusal to perform his functions, an extra competitive selection will be held.
The change of a supplier of last resort will be held publicly. Information on this procedure will be published in regional mass media, in the Internet (including the web-cites of power sales companies, branch departments and their regional subdivisions) and in payment centers, where payments for electric power are received (including departments of Savings Bank of the Russian Federation and the Russian Post).
When the change of a supplier of last resort takes place, consumers – legal entities should enter into contracts with a new supplier, while consumers – natural persons will only have to start paying to a new supplier of last resort.
The Rules also include information concerning pricing in the retail market. According to the pricing system, part of electricity volumes will be supplied at regulated prices (in 2007 this will refer to nearly 95%), and the remaining volumes will be supplied at a price that reflects the wholesale electricity price within the limits of extreme (maximum and minimum) levels of unregulated (free) prices (in 2007 this will refer to nearly 5%). Maximum and minimum levels of unregulated prices will be calculated according to the special formula (specified in the Rules) on the basis of information about the average wholesale price for electricity (as of the last month) monthly published by NP ATS, regulated tariffs for transmission services, services provided by NP ATS and RAO "UES of Russia", and amount of a sales markup.
This will help to liberalize retail and wholesale markets synchronously, stimulate a supplier of last resort to reduce his expenses for the purchase of electric power in the wholesale market and to protect electricity consumers from careless pricing policy.
It is important that during the transition period the whole of actually consumed electricity volumes will be delivered to the population at regulated prices!
Power sales (retailing) organizations that arent delivering electricity to the population have the right to deliver it at agreed prices. Besides, electricity consumers that conclude voluntary contracts with such retailing companies always have an opportunity to appraise the suggested electricity price – they may compare it with the cost of electricity supplies set by a supplier of last resort.
The Rules also specify other peculiarities of retailing companies operations, including the actions to be taken by retailing companies and consumers in order to prevent creation of dishonest retailing companies, which offer electricity to consumers without concluding the necessary contracts that guarantee purchase of this electricity in wholesale or retail markets.
The Rules imply synchronization with the housing legislation of the Russian Federation and determine the procedure according to which organizations should work in the sphere of housing and utilities infrastructure with the purpose of providing public services connected with electricity supplies. Besides, suppliers of last resort, supply and retailing companies may deliver electric power only to those people who live in private houses or according to the housing legislation manage a multifamily building.
The Rules include peculiarities of operation of power producers in retail markets. Since January 1, 2007 those power producers who meet all technical (quantitative) requirements obligatory for wholesale market entities but dont belong to them may deliver electric power only to suppliers of last resort in case of observance of the following requirements: these power producers are located within the area of activities performed by a supplier of last resort and electricity prices dont exceed cost of purchase of electricity by a supplier of last resort in the wholesale market. The reason for this lies in the necessity to stimulate power producers to become participants of the wholesale market, where there are transparent conditions for competition and a whole range of opportunities to control the use of producers generating capacities and equipment.
The Rules also strengthen the requirements for electricity metering, enumerate possible ways of accounting in case of absence of metering devices, impose penalties on consumers for violation of working conditions of metering devices. Consumers are obliged to precisely plan the volumes of electricity consumed – they are responsible for any deviations from their consumption schedules.
The Rules introduce and clarify the rules for partial or full reduction of electricity volumes consumed by a customer with the aim of prevention or liquidation of power failures and in case if consumers violate the procedure of payment for electricity.
1. Note: pursuant to the article 426 of the Russian Civil Code, a public contract is a contract concluded by any commercial organization, which specifies its obligations concerning the sale of goods, execution of functions, provision of services or other activities that this organization should perform with respect to any person who applies to it. As far as these public contracts are concerned, the Russian Federation Government may adopt rules that are obligatory for parties to the contract during conclusion and execution of public contracts (this right is specified in the Law "On the Electric Power Industry").
2. The necessary amount of gross revenue may be defined as economically feasible amount of financial assets necessary for the organization to exercise regulated activities during the accounting period of regulation (article 2, chapter I of the Russian Federation Government Resolution ¹109 of February 26, 2004 "On Pricing Mechanisms Applied to Electric and Thermal Power in the Russian Federation").
