The Economics of the Russian Nuclear Power Industry - Bellona

183. Problems of nuclear power industry regulationState regulation of tariffs. The 2001 reform in the Russian power generation industry divided theactivities performed in the energy generation sector into three separate branches: production,transmission, and retail power sale. Concern Rosenergoatom on the whole operates as a generatingcompany and sells power and heat produced by Russian nuclear power plants in what is called theWholesale Power and Capacity Market. Retail prices are partially regulated by the Federal Tariff Serviceof Russia. 43The very fact that Russia is attempting to copy the Western system of tariff regulation andreproduce it at home indicates that all the problems that are known to have shaped the long history ofthis issue in the West and the Western experience of dealing with them are applicable in Russia as well.An extensive body of literature written on the economics of state regulation is dedicated to the issues ofregulation of tariffs.Before reforms of natural monopoly regulation were launched in the West – and, in a sense, thissituation continues to this day – the so‐called “costs plus” regulation 44 was in place. It has long been inevidence, however, that even without information asymmetry, 45 this model of regulation contributes tooverproduction and increasing costs.Even though the relationship between a regulatory body and a regulated company is supposedto be, and appears to be, that of an authority and an entity it is supervised by, in effect, the regulatedcompanies tend to have quite a considerable ability to defend their own interests.For one reason, state regulatory agencies maintain very close ties with the industry. The onlyavailable labour pool to supply the regulatory authority with qualified personnel who are well enoughversed in the industry’s inner workings to understand its problems is usually that same industry. Ithappens quite often that once they have a regulatory job on their resumes, specialists can count on amuch more lucrative position in one of the companies they used to oversee. In such a situation, peoplestart perceiving themselves as part of the industry – and their work as a way to provide necessaryassistance in solving the industry’s problems. 46Secondly, the structure of information about the economic situation of any given regulatedcompany is asymmetric – that is, the company itself is much better informed about its own costs thanthe official in charge of regulating its operations. This concerns the real level of costs the company43 Rosenergoatom’s operations as a generating company are regulated by the Federal Laws “On state regulation ofelectric power and thermal energy tariffs in the Russian Federation” and “On the electric power industry.” The fulltext of the latter can be found here: http://www.kodeksluks.ru/ciws/site?tid=0&nd=901856089&prevDoc=901889584(in Russian).44 Under cost‐plus regulation (or rate‐of‐return regulation), the tariff is calculated to cover costs reported bycompanies plus a market‐determined rate of return on capital. The regulator ensures a fair price charged by theregulated company. The risks of overwhelming costs are thus reduced to the company, while consumers areprotected against unreasonable pricing. This approach has been criticised, however, for giving monopolycompanies little incentive to cut costs. – Translator.45 In state regulation, information asymmetry is a phenomenon where the regulated company has the advantageof possessing more information about its financials than the regulator it reports to. – Translator.46 Consider, for instance, this fragment from an interview FTS head Sergei Novikov gave to the Russian newsagency Interfax, shedding light on the motivation behind the agency’s work: Q.: The FTS and other agencies havebeen given a task of analysing, by December [2006], the efficiency of Rosenergoatom’s participation in trades onthe wholesale market. Why was this task assigned? What sort of consequences will such an analysis have forRosenergoatom? A.: The thing is that there are certain obvious peculiarities to the operation of nuclear powerplants that have to do with ensuring safety. And there have been certain special decisions made with regard toConcern Rosenergoatom to prevent under‐generation of desired revenue associated with expenses that fall underthe expenditure items linked to safety. (Published on the FTS’s website on October 6, 2006; the full text is availablehere: http://www.fstrf.ru/press/interview/23, in Russian).