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On Major Legislative Changes in the Electric Power Industry

Nikolay Pavlovich Roshchenko, Member of the Board — Head of the Legal Department of Market Council Non-Profit Partnership

In this article, the author examines new legislative provisions in the electric power industry, their relevance to regulation of public relations in the electric power industry, features of the legal status of Market Council Non-Profit Partnership, basic provisions of electric power laws reviewed in the State Duma, defines issues of Legal Regulation of the electric power industry.

Statutory regulation of Russia’s electric power industry is attributable to a close combination of technical features of operation of certain electric power facilities, and sometimes even the entire territories within the country, with legal and economic aspects of circulation of electric power, capacity and related services.

In addressing emerging tasks of the branch, such a combination makes it necessary to establish new legal and economic institutions at the level of federal legislation.

A notable example of such a combination in late 2014 was Federal Law dd. December 29, 2014 No. 466-ФЗ “On Amending Federal Law “On Features of Operation of the Electric Power Industry in Transition and on Amending Certain Legislative Acts of the Russian Federation and Invalidation of Certain Legislative Acts of the Russian Federation following the Adoption of Federal Law “On the Electric Power Industry” and Certain Legislative Acts of the Russian Federation”[1] (hereinafter referred to as Law 466-ФЗ), which came into effect since January 1, 2015.

This Federal law is meant to solve the following tasks in the electric power industry:

- to ensure reliable energy supply to consumers of the Crimean Federal District and Kaliningrad Region under possible deficit of electric power, to create incentives for construction of generating facilities in these territories and payback mechanisms for investments made in construction of the said facilities;

- to ensure a stage-by-stage transition to free prices for electric power and capacity for wholesale market purchasers operating in the territories of constituent entities of the Russian Federation, for which features of operation of the wholesale and retail markets are established (the North Caucasus Republics, the Republic of Tuva)[2].

The said Federal Law amended Federal Law dd. March 26, 2003 No. 36-ФЗ “On Features of Operation of the Electric Power Industry in Transition and on Amending Certain Legislative Acts of the Russian Federation and Invalidation of Certain Legislative Acts of the Russian Federation Following the Adoption of Federal Law “On the Electric Power Industry”[3], Federal Law dd. March 26, 2003 No. 35-ФЗ “On the Electric Power Industry”[4] and Federal Law dd. November 23, 2009 No. 261-ФЗ “On Energy Saving and Enhancement of Energy Efficiency and on Amending Certain Acts of the Russian Federation”[5].

Law 466-ФЗ determines a funding source for construction and operation of new generating facilities in the territories of the Crimean Federal District and Kaliningrad Region in the form of capacity price increment to partially compensate capital and operating costs to producers of electric power (capacity) associated with such generating facilities. Meanwhile, it is possible to establish regulated increments as a formula or procedure for their determination, which extended the current list of ways for regulating prices (tariffs) stipulated by the first paragraph of Art. 23 of Federal Law “On the Electric Power Industry”. Besides, to this effect the functionality of organizations of the wholesale market’s commercial infrastructure was expanded: nowadays, as and when prescribed by the Government of the Russian Federation, regulated prices (tariffs) and increments established by the Government of the Russian Federation or a federal executive body responsible for regulation of tariffs in the form of formulas or procedures for determination of such prices (tariffs) and increments, or components of such regulated prices (tariffs) and increments and (or) values, on a basis of which such regulated prices (tariffs) and increments are determined, shall be determined and used by organizations of the wholesale market’s commercial infrastructure.

Federal Law dd. March 26, 2003 No. 36-ФЗ “On Features of Operation of the Electric Power Industry in Transition and on Amending Certain Legislative Acts of the Russian Federation and Invalidation of Certain Legislative Acts of the Russian Federation following the Adoption of Federal Law “On the Electric Power Industry” as in force till January 1, 2015 terminated, since January 1, 2015, the procedure of purchases of electric power in the wholesale market under regulated contracts for wholesale market entities – purchasers of electric power (capacity) operating in certain parts of price zones of the wholesale market, for which the Government of the Russian Federation established features of operation of the wholesale and retail markets. Preservation of such a procedure would lead to a one-time transition from regulated prices to market prices not only for guarantee suppliers, sales companies and large and medium consumers, but also for small consumers, which under essential grid and technological restrictions in the said territories could, in turn, lead to a one-time significant escalation in prices for electric power in the said territories.

Law 466-ФЗ established the procedure for stage-by-stage (gradual) reduction of electric power purchase volumes under regulated contracts for wholesale market entities – purchasers of electric power (capacity) operating in certain parts of price zones of the wholesale market, for which the Government of the Russian Federation established features of operation of the wholesale and retail markets and created incentives for relevant electric power entities to encourage timely discharge of obligations on payment for electric power (capacity), reduction of actual losses of electric power emerging at power grid facilities in the territories of the relevant regions and gradual adjustment of regulated prices (tariffs) for electric power in the said territories to the level established by the Government of the Russian Federation. For purchasers operating in certain parts of price zones, for which the Government of the Russian Federation established features of operation of the wholesale and retail markets, there is an established schedule for reduction of electric power (capacity) purchase volumes under regulated contracts to be supplied to consumers that do not belong to the population and (or) equivalent categories of consumers, which will enable relevant wholesale market entities to switch, by January 1, 2023, to conditions of operation of electric power markets common to all purchasers in price zones of the wholesale market without any negative social and economic effects.

Besides, as to regulation of electric power relations, Law 466-ФЗ also excludes any indication of Market Council as a self-regulatory organization from Art. 33 of Federal Law “On the Electric Power Industry” and refers the issues of electing bodies responsible for supervision of Market Council’s financial and economic activities and appointing an audit organization or an individual auditor of Market Council to the competence of the Supervisory Board of Market Council.

In this respect, activities of Market Council retain the fundamental principle of self-regulation (cl. 2, Art. 31 of Federal Law “On the Electric Power Industry”) implying participation of Market Council’s members – wholesale market entities in development and regulation of trade rules in the wholesale market. However, it should be noted that Market Council has never been a self-regulatory organization in the meaning of Federal Law “On Self-Regulating Organizations”, because features of its legal status specified in the special law – Federal Law “On the Electric Power Industry” are incompatible with the requirements to self-regulatory organizations reflected in Federal Law “On Self-Regulating Organizations”[6] regarding powers of Market Council’s management bodies and Market Council’s corporate structure and organizations of the wholesale market’s commercial infrastructure.

Commitment to payment discipline by consumers of electric power and electric power transmission services is the cornerstone of the modern market electric power industry and the task requiring an urgent solution. And the same issue is particularly urgent in related branches – gas supply, heat supply, water supply and water disposal, housing and public utilities.

According to the data for 2014 and January-February 2015, the status of settlements for energy sources in retail markets is extremely unsatisfactory with a further increase in non-payments. Summarily, consumers’ debts for all sources (as of February 2015) amount to appr. RUB 744.4 bln.

Total debts for electric power to guarantee suppliers in retail electric power markets for 2014 amounted to RUB 150.8 bln (according to the data of Market Council Non-Profit Partnership as of March 5, 2015). The debts grew in 2014 by RUB 15.8 bln. Meanwhile, in early 2015 the debts continue to grow, and according to the live data of March 5, 2015 debts for electric power in retail markets for February, 2015 amount to RUB 202.1 bln.

The major reasons for emergence and growth of the debts include:

1) impossibility to affect consumers, which restricted supplies of energy sources can lead to economic, environmental and social consequences (hereinafter referred to as the “non-disconnectable” consumers), because such consumers, even if they fail to discharge their payment obligations, cannot be restricted in consumption of sources. The “non-disconnectable” consumers failing to discharge their payment obligations continue to consume energy sources and increase their debts. It is ineffective and futile to hold the said consumers civilly liable for non-payment of energy sources.

The “non-disconnectable” consumers, which restricted supplies of sources can lead to adverse economic, environmental and social consequences, include housing and utility organizations, industrial enterprises with hazardous production, social institutions, etc. The actual impossibility to restrict supplies of energy sources to the said consumers and the inefficiency of sanctions for violations of payment discipline stipulated by civil legislation result in significant abuses of their exceptional position by these consumers.

The amount of the “non-disconnectable” consumers’ debts in total debts to a source provider is, as a rule, the largest.

In this respect, all negative effects of non-payments on the part of the “non-disconnectable” consumers are nowadays faced only by source providers, which are entitled to neither terminate a contract for source supply with such consumers nor limit the quantity of supplied sources. Under the said conditions, the only way to combat the “non-disconnectable” consumers’ non-payments is judicial recovery of their debts. At the same time, this measure is inefficient in view of long terms of judicial proceedings (from 1 to 3 years) and complicated real enforcement of court orders due to the debtor’s lack of liquid assets or bankruptcy;

2) transfer of housing and utility facilities (including lend-lease) to mala fide owners, which do not pay for consumed energy sources.

A significant number of defaulting mediators (including tenants) between owners of housing and  utility facilities and suppliers of energy sources consumed by such facilities and non-liability of owners of socially relevant facilities (including municipalities) for the choice of such mediators and their actions lead to accumulation of debts for sources consumed in operation of housing and utility facilities.

As a rule, the said mediators operate housing and utility facilities (boiler rooms, systems of water supply and water disposal) under short-term lease contracts signed with a municipality or municipal unitary enterprise owning the housing and utility facilities based on the right of economic management;

3) complicated imposition of actual restrictions of energy-source supplies to consumers, inter alia, due to prohibitions of antimonopoly authorities and the public prosecutor's office to impose such restrictions and non-liability for violations by consumers of the established procedure for restricting supplies of energy sources.

Restrictions of supplies of energy sources are quite effective in combating non-payments. At the same time, source providers find it extremely difficult to exercise in practice their statutory right to cut off the debtors.

In most cases, antimonopoly authorities and the public prosecutor's office prohibit source providers to promptly restrict source supplies to the debtors for non-payments forcing them to recover debts from consumers only through a judicial procedure and under enforcement proceedings. In this respect, source providers’ actions in restricting supplies of energy sources and even their intention to impose the said restrictions, i.e. sending a warning of possible restrictions to the debtors, are recognized by the said supervisory authorities as a violation of the law. Thus, in fact antimonopoly authorities and prosecution bodies protect mala fide debtor consumers and hold liable not defaulting parties, but suppliers of energy sources, who receive no payment for actually supplied sources, which results in failure to use the only effective method of combating non-payments.

Besides, consumers of energy sources are nowadays not liable for failure to adhere to the legislated procedure of restricting supplies of energy sources (failure to comply with the requirement on self-restriction of energy source consumption by the consumer, violation of the earlier established level of consumption, etc.), which also reduces the effectiveness of the said method of combating non-payments;

4) inadequate procedure of settlements of facility managers, condominiums and housing associations with source providers for energy sources supplied for rendering public utilities to owners of premises in apartment houses.

Pursuant to the current housing legislation, the major way of payment for public utilities by citizens is the need to make such payments to the settlement account of a facility manager providing services to an apartment house, a condominium or housing association, which shall pay source providers for energy sources they supplied to the apartment house.

At the same time, payment discipline of facility managers, condominiums and housing associations being mediators between citizens and suppliers of energy sources is very poor (11.5% in total debts in retail electric power markets). There are cases of abuse, when the said mediators collect payments for public utilities from citizens, misappropriate these funds, then go bankrupt or wind up. In such situations, it is virtually impossible to recover debts for energy sources supplied by source providers.

The Ministry of Energy of the Russian Federation and Market Council together with concerned federal executive bodies are now putting the finishing touches on draft federal law No. 348213-6 “On Amending Certain Legislative Acts of the Russian Federation to Improve Payment Discipline of Consumers of Energy Sources”. This draft law was introduced by the Government of the Russian Federation to the State Duma of the Federal Assembly of the Russian Federation and passed on its first reading on December 18, 2013[7].

The draft law stipulates implementation of measures aimed at improving payment discipline of consumers of energy sources, inter alia:

- establishing, for all source supply branches (energy, heat, gas and water supply), a similar mechanism for securing obligations to pay for energy sources. It is proposed to obligate the “non-disconnectable” consumers, which failed to properly discharge their obligations on payment for energy sources, to provide the said security. In this respect, the Government of the Russian Federation is empowered to establish criteria, meeting which consumers will have to secure obligations on payment for energy sources and establish a procedure for granting the said security (the amount and term of granted security, requirements to security, etc.);

- establishing features of conclusion, execution and termination of lease contracts for state-owned and municipally-owned heat and water supply facilities to choose bona fide tenants of the said facilities and prevent their debts to suppliers of energy sources. Lease contracts are proposed to be signed only upon granting bank guarantees by winners of tenders for the right to sign lease contracts for heat and water supply facilities, which secure payment for energy sources consumed by these facilities. There is also a streamlined extrajudicial procedure for termination of lease contracts upon breach by the tenants of their obligations to suppliers of energy sources;

- establishing the “non-disconnectable” consumers’ duty to implement activities enabling full restriction of consumption of electric power, if it is not paid. In this respect, the said activities shall prevent hazardous effects of such restrictions;

- establishing a penalty for improper payment for energy sources at the rate of 1/90 of the refinancing rate of the Central Bank of the Russian Federation and for bodies acquiring energy sources for further provision of public utilities – at the rate of 1/130 of the refinancing rate within first 60 days of delay and 1/90 of the refinancing rate for the subsequent period of delay;

- introducing administrative liability of consumers and suppliers of all types of energy sources (electric power, heat energy, water, gas) for violation of the procedure of restricting consumption of the said energy sources;

- establishing criminal liability for numerous (more than twice a year) unauthorized connections to power grids and heat networks.

Draft amendments were generally approved during discussions in special-purpose committees of the State Duma of the Federal Assembly of the Russian Federation and at the meeting of the working group on the electric power industry of the Commission for Strategic Development of the Fuel and Energy Complex and Environmental Safety under the President of the Russian Federation dd. February 14, 2014 No. 1 (cl. 3, Section III).

Along with the reviewed draft law, the Ministry of Construction, Housing and Utilities of the Russian Federation is developing draft federal law No. 500410-6 “On Amending the Housing Code of the Russian Federation and Certain Legislative Acts of the Russian Federation (on the Procedure of Rendering Public Utilities and Relations in Management of Housing Facilities)”[8].

This draft law stipulates amendments to a number of legislative acts aimed at improving payment discipline on the part of both utility providers and receivers, raising mutual liability of all parties to relations, actually enabling owners to manage their housing and make decisions in housing management and creating necessary conditions for effective work of the housing and utility sector.

Adoption of these draft amendments during the spring session of 2015 by the State Duma of the Federal Assembly of the Russian Federation will enable prompt implementation of immediate measures to improve the status of settlements in retail markets of energy sources.

As for other projects under current development meant for regulation of legal relations in the electric power industry, we can mention the following projects as the most interesting ones.

The draft federal law “On Amending the Federal Law on the Electric Power Industry” meant to specify the notion of dominant position of wholesale market entities. Pursuant to the current legislation, the dominant position in the wholesale electric power (capacity) market is determined in geographical boundaries of price zones and free power transfer zones by two special commodities – electric power and capacity. When affected by systemic restrictions in the price zone and free power transfer zones, there appear to be territories with a local commodity market having limited outside access. The borders of such a market are determined by systemic restrictions and current performance situation (repair of generating and grid equipment, etc.) and may change over time. In this respect, the local commodity market may have limited competition irrespective of the state of competition within the price zone. To this end, the market’s legislated geographical boundaries used for determination of the dominant position of wholesale market entities may be inconsistent with the actual boundaries of local markets established under systemic restrictions.

Then, draft Federal Law No. 632833-6 “On Amending and Updating Federal Law “On the Electric Power Industry” as to Price-Setting during Technological Connection to Distributors of the Electric Power Producer”[9] should be considered.

The draft law proposes to establish a possibility of technological connection of consumers to distributors of electric power generating facilities through grid operators obligating the latter to settle relations with owners of electric power generating facilities’ distributors on a basis of the one-stop principle. Besides, it is proposed to entitle regulatory bodies to include in charges for technological connection to power grid facilities (distributors) forming part of electric power generating facilities expenses for construction and (or) reconstruction of these facilities.

And the last of the laws discussed – the draft federal law “On Amending Article 23.2 of Federal Law “On the Electric Power Industry” to Specify the Application of the Investment Component Covering Expenses of Grid Operators Associated with Development of Existing Facilities”.

Provisions of the said draft law propose limiting categories of consumers not subject to provisions stipulating that technological connection charges do not include expenses of grid operators associated with development of existing facilities, inter alia, ties between facilities of territorial grid operators and facilities of the unified national (all-Russian) power grid – consumers belonging to the “preferential” category having power receivers with maximum capacity no more than 15 kW inclusive (taking into account capacities of power receivers previously connected in this connection point) of reliability category III (by one power supply source), consumers of electric power having power receivers with maximum capacity no more than 150 kW and consumers of electric power having power receivers of over 150 up to 5 MW (except when the said consumers express no intention to reimburse expenses of grid consumers belonging to this category).

In turn, expenses of grid operators will be fully included in charges for technological connection of power receivers of over 5 MW and power production facilities (regardless of their installed capacity) and during technological connection of power production facilities to power grid facilities of grid operators.

In addition to the above draft laws being nowadays topical and important, the Ministry of Energy of the Russian Federation, Market Council, other concerned bodies and organizations are permanently drafting proposals on improvement of statutory regulation of the electric power industry aimed at development and support of sustainable development of power supply in Russia, prompt and quality solution of arising technical, economic and legal problems in the branch.



[1] Federal Law dd. December 29, 2014 No. 466-ФЗ “On Amending the Federal Law “On Features of Operation of the Electric Power Industry in Transition and on Amending Certain Legislative Acts of the Russian Federation and Invalidation of Certain Legislative Acts of the Russian Federation following the Adoption of the Federal Law “On the Electric Power Industry” and Certain Legislative Acts of the Russian Federation” // Rossiyskaya Gazeta, December 31, 2014 (in Russian).

[2] The list of territories of the wholesale market’s price zones, for which features of operation of the wholesale and retail markets are established, is defined by Annex No. 3 to the Rules of the Wholesale Electric Power and Capacity Market approved by Resolution of the Government of the Russian Federation dd. December 27, 2010 No. 1172. See: Resolution of the Government of the Russian Federation dd. December 27, 2010 No. 1172 “On Approving the Rules of the Wholesale Electric Power and Capacity Market and on Amending Certain Acts of the Government of the Russian Federation on the Procedure of Operation of the Wholesale Electric Power and Capacity Market” // Collection of Legislative Acts of the Russian Federation, 2011, No. 14, Art. 1916 (in Russian).

[3] Collection of Legislative Acts of the Russian Federation, 2003, No. 13, Art. 1178 (in Russian).

[4] Collection of Legislative Acts of the Russian Federation, 2003, No. 13, Art. 1177 (in Russian).

[5] Collection of Legislative Acts of the Russian Federation, 2009, No. 48, Art. 5711 (in Russian).

[6] Federal Law dd. December 1, 2007 No. 315-ФЗ “On Self-Regulating Organizations” // Collection of Legislative Acts of the Russian Federation, 2007, No. 49, Art. 6076 (in Russian).

[7] URL: http://www.duma.gov.ru/systems/law/?number=348213-6&sort=date

[8] URL: http://www.duma.gov.ru/systems/law/?number=500410-6&sort=date

[9] URL: http://www.duma.gov.ru/systems/law/?number=632833-6&sort=date