Energy And Utilities

Electric Energy

Various institutional and structural changes that impacted the industry during recent year as a result led to prevailing of centripetal tendencies over those of efferent nature.  Supply and energy generating assets are once again being consolidated under control of a rather narrow group of investors for the most part affiliated with the state.

The major result of the reform in electric energy sector is that a new institutionalized playing field was established based on a separation of the types of business models to competition oriented (generation, supplies, service and maintenance) and natural monopoly kind (transmission of electric energy, operative-dispatcher control) and prohibition to have them combined, as well as development of a legal framework for the electric energy markets: wholesale and retail.

Officially the transition period for the energy industry is over: new rules for the wholesale and retail energy markets that have entered into force are no longer of a transitory nature.  However, the course of events has shown that these rules are not less contradictory compared to those previously in effect.  As a result, we now see a steady growth of serious conflicts in the industry. In this manner, the wholesale market of electric energy and power supply is regulated by various rules and typical contracts to be approved by the Nonprofit Partnership Market Council, subject to frequent changes and as a result full of contradictions.

Furthermore, anticipated as a result of the reform full liberalization of the market of the electric energy and creation of a competition-based market of electric power have not been fully achieved. Accordingly, a portion of investors lost the opportunity to count on a recoupment of projects in the electric energy industry they had initially hoped for.  In this situation, a priority task for the companies in the industry and first of all energy supplying and private energy generating companies would be identification of additional ways to protect their property interests in their relations with counter agents, regulating agencies and infrastructure-maintaining organizations.

At the same time, despite prolonged reform, we can see stable growth of the number of foreign investors, which gives grounds to expect that investors’ activity will pick up and, as a result, the number of transactions for acquisition of assets will also increase.

Heat Energy Supply and Municipal Services

Legal regulations with respect to relations concerning production, transmission and supplies of heat energy and capacity have their own unique specific. On the one hand, a large portion of heat energy in Russia is produced in a combined production regime and the role of fuel-burning power plants is regulated by the laws on electric energy. On the other hand, heat energy and hot water are treated under the law as municipal resource which supplies are to be regulated by the laws on municipal complex and utilities organizations and, for a large part, laws on residential communities. Numerous legal collisions between the norms that exist for these industries and the problems in legal regulations continue to cause conflicts between the participants of the heat energy market and result in complaints from the regulatory agencies including antimonopoly authorities.

As of January 1, 2013, the Federal Law On Water Supply and Sewerage entered into force, which once again changed requirements concerning hot water supplies. The new norms also resulted in numerous discrepancies and conflicts arising on such basis.

Key problem for heat supplying organizations is the irregularities of the mechanisms of tariff regulations in the industry, which do not allow compensating for the entire volume of economically reasonable expenses with respect to the regulated activities. Application of tariff caps, maximum allowable quotas for utilities fees increases, often arbitrary valuation of production costs and costs of transmission of the heat energy on part of tariff organizations, irregularities in the methods of obtaining records and calculating invoiced amounts - these are just the most obvious reasons causing losses for the heat supplying organizations. At the same time, existing court precedents allow finding effective mechanisms, based on specific situational details, in order to minimize or compensate for such losses.

Corporate Consulting, Support for Transactions and Investment Projects:

  • Support for Transactions on sale/purchase/lease of assets in the area of energy and utilities, bringing in financial investors (M&A);
  • Support for investment projects to build new ones or re-equip existing power-producing facilities including elaboration of contractual structures, draft investment agreements, partnership initiatives agreements, contractors agreements and other agreements;
  • Legal and tax due diligence of business standing of electricity and heat generating, sales and service companies (groups of companies) for a potential buyer/investor or current business owners, including in order to enter the public capital market;
  • Preparing documents regulating corporate management aspects in the company/group of companies;
  • Search for the most effective task specific ownership, management and operations structures for the groups of electric and heat energy generating companies, supply and service companies in order to reduce risks and increase asset protection effectiveness.

Industry-Specific Consulting:

  • Legal support for the consumers and suppliers in obtaining the status of a participant of a wholesale electricity and capacity market, registration of new or modified supply points, obtaining balance decisions, access to the trading system for the wholesale market;
  • Consultation on the issues of building effective contractual relations in the energy supply field;
  • Consultations on the issues related to implementation of investment programs by the electric energy market participants;
  • Consultations on the issues of specific industry-based regulatory legal framework including applicable to planning and implementation of investment projects, both in greenfield and brownfield formats;
  • Consultations in the field of tariff regulations including legal support on the stages of compilation and defense of tariff applications;
  • Consultations on antimonopoly regulations in electric energy industry including complex legal analysis of typical agreements and company’s internal regulations;
  • Analysis of and preparing draft agreements with respect to design, construction or reconstruction of energy related facilities as well as other agreements related to implementation of investment projects in the energy field (supply agreements, subcontractors agreements, agreements for design and survey work etc.);
  • Analysis and preparation of electric and heat energy supply agreements, transmission of electric and heat energy, technological connection to electric and heat energy grids;
  • Analysis of supply system for the electric and heat energy and capacity producing organizations and organizations of municipal services complex, search for reasons leading to unprofitability of supply activities and recommendations to eliminate such factors;
  • Complex analysis of outstanding accounts receivable of energy supplying organizations and other organizations of the municipal services complex;
  • Consultations on legal issues related to energy savings and maintaining records with respect to energy resources;
  • Complex analysis of business standing for a company operating in the field of energy or utilities, with recommendations to minimize identified risks.

Tax Consulting and Support During Tax Disputes:

  • Trial and pre-trial challenge of decisions, other acts of non-regulatory nature and actions/omissions on part of tax authorities, including with respect to the issues specific for the industry: tax reporting for heat and electric energy losses, reporting for the purposes of taxation of industry reserves etc.;
  • Analysis of potential tax risks, extent of application of all existing tax credits (including application of shorter amortization periods on fixed assets used in hazardous environment) and steps to minimize tax losses.

Support during Litigation Disputes:

  • Industry-specific commercial disputes in Russian courts, reference tribunals and commercial arbitration courts;
  • Disputes arising due to specific issues of wholesale and retail markets of electric energy;
  • Issues arising between the market participants through application of the tariffs for electric and heat energy and municipal resources;
  • Disputes with authorized regulatory agencies on the issues of tariff or balance decisions, approval of quotas or compensations for damages caused through unlawful decisions, actions or omissions by the federal, regional or municipal agencies;
  • Disputes with antimonopoly agencies on the issues of compliance with the laws on protection of competition and natural monopolies;
  • Disputes with resource suppliers and utility consumers.
Ilya Ischuk
Ph.D in Law