Internal Control and Risk Management System > Main Risk Factors > Regulatory Risks (Industrial Risks)

The Company's main activities: provision of services of electric energy transmission and technological connection to electric grids are regulated by the state.

The tariff regulation policy is aimed at limitation of the growth of tariffs for electric energy which may result in limitation of tariff sources for performance of investment and operational activities of the Company.

In order to minimize the above risk factors the Company implements a balanced policy for increase of the efficiency of investment and operational activities aimed at reducing expenses and optimal planning of the structure of financing sources for the Company's activities.

One of the regulatory risk factors is an inadequacy of the mechanisms of the electric energy retail market functioning resulting in the controversies between electric grid companies and energy selling companies with respect to electric energy consumption volumes and capacity used in tariff calculations. This, in turn, results in disputed and overdue accounts receivable for electric energy transmission services provided to the Company which leads to a lower liquidity and financial stability. The Company takes actions on elimination of causes of conflicts with consumers, decreasing the amount of disputed and overdue accounts receivable for services provided, interaction with federal governmental authorities in drafting amendments to the rules of functioning of the retail market, creation of court practice and positive precedents. Besides, the Company implements programs for perspective development of electric energy accounting systems in the electric energy retail market in distribution grids approved by the Board of Directors.

Another key risk factor is the mechanism of cross-subsidization by large industrial consumers of other categories of consumers, including the population. Many large industrial consumers connected directly to the UNEG networks pay for the Company's electric energy transmission services in the cases where the relevant objects are leased out to the Company under "last mile" agreements made between JSC IDGC of the North-West and JSC FGC UES. In 2010-2013, due to the absence of legislation regulating "last mile" agreements, certain large industrial consumers switched to direct agreements with JSC FGC UES on the basis of court decisions. According to the Company's estimates, termination of "last mile" agreements resulted in the reduction in the Company's revenues in 2012 and may lead to a shortfall in income in 2013.

In accordance with clause 5 of Article 8 of Federal Law No.35-FZ on Electric Energy Industry of March 26, 2003 an organization for management of the unified national (all-Russian) electric grid may, until January 01 2014, lease out electric grid facilities to territorial grid organizations with the consent of authorized federal executive bodies. Resolution No. 1173 of the Russian Federation Government on Procedure for Approval of Leasing out Electric Grid Facilities Included in the Unified National (All-Russian) Electric Grid to Territorial Grid Organizations of December 27, 2010 approves the Rules of Approval by the Ministry of Energy of Russia of Leasing out Facilities Included in the UNEG to TGOs. The composition of the UNEG facilities leased out to TGOs from the beginning of 2011 is approved with regard to an opinion (consent) of authorized federal executive bodies of constituent entities of the Russian Federation.

However, pursuant to the above Resolution the leasing out of the UNEG facilities to TGOs shall be approved on the condition of termination of "direct" agreements for electric energy transmission made between JSC FGC UES and electric energy consumers and on the basis of a written request from the head of the relevant constituent entity of the Russian Federation. In 2012 the Ministry of Energy of Russia approved Decree No. 403 of August 24, 2012 on the basis of which lease agreements for the UNEG facilities ("last mile" agreements) for 2013 were made between JSC IDGC of the North-West and JSC FGC UES. The transmission of electric energy using certain UNEG facilities leased by IDGC under "last mile" agreements is accounted by federal and regional governing authorities in the planned volumes of electric energy transmission services for 2013. In 2012 the President and the Government of the Russian Federation outlined the importance of resolving the cross-subsidization problem in the electric energy sector. The Ministry of Energy of the Russian Federation was requested to develop cross-subsidization liquidation mechanisms.

The Company's transition to the regulation using the return on investment capital method (RAB) is associated with a range of risks. Among them are:

  • contesting by regulators of assessment results of the initial base of investment capital obtained by independent assessors;
  • loss relating to incorrect forecast of the structure of electric energy transmission by voltage levels and overstated volumes of declared capacity against actual capacity regarded in making tariff and balance decisions;
  • non-receipt of income deferred as a result of application of the smoothing mechanisms in determination of planned values of tariff calculation parameters using the RAB method.

One of the Company's regulatory risks is the risk of reduction in the demand for technological connection services and electric energy transmission services compared to the target volumes regarded in making tariff and balance decisions by regional authorities. In order to reduce this risk the Company continue to monitor requests and to create on the basis of such requests forecasts of net supply of electricity, demand for technological connection services for the next year and increasing the number of applications submitted to regulating authorities for establishment of a fee for technological connection under individual projects. At the same time, due to the large number of requests for technological connection the Company is not always capable of satisfying them in full which may affect revenues due to loss of potential customers and violation of antimonopoly laws as regards to the provision of technological connection and electric energy transmission services. In order to solve his problem the Company improves the business process of handling customers' requests for technological connection while explaining the process of provision of technological connection services to customers, including public placement of information on provision of services and creation of customer service centers.

Due to the adoption at the end of 2012 of a range of regulations simplifying the procedure for withdrawal of a guaranteeing supplier status from energy selling companies the Company faced the risks relating to the necessity to assume powers and responsibilities of guaranteeing suppliers from energy selling companies, including:

  • risks associated with increase of accounts receivable of end consumers of electric energy and write-off of accrued accounts receivable under energy transmission service agreements made between energy selling companies and distribution network companies;
  • risks associated with performance of functions of a guaranteeing supplier in the wholesale electric energy and capacity market;
  • - risks resulting from increase of the Company's expenses relating to the performance of functions of a guaranteeing supplier, exceeding required gross revenue provided in establishment of sales mark-ups;
  • organizational risks associated with loss of competence and databases containing information on consumers and incorrect transfers of payments for consumed electric energy.

In order to minimize the above risks the Company takes actions for interaction with federal and regional government authorities, mass media, infrastructural entities of the electricity wholesale market, law enforcement agencies and entities whose status of a guaranteeing supplier was withdrawn with respect to performance of functions of a guaranteeing supplier and debt settlement. In addition, legislative initiatives for optimization of the procedure for replacement of a guaranteeing supplier are being formed.