Industry risks

Energy transmission and connection are state-regulated services. Approval of the Company’s tariffs by regulators has a direct influence on revenues and produces the following risks:

  • tariffs prescribed below economically feasible levels;
  • reduced revenues due to changed actual structure of energy transmission (in terms of voltage levels) in comparison to the structure approved during tariffapproval procedure;
  • reduced revenues due to decreased actual transmission volumes compared to previously approved volumes approved as a result of dropped energy consumption.
  • additional expenses caused by cross-subsidization that impedes to set economically feasible tariffs for various voltage levels;
  • risks related to changed legislation on pricing for electric and thermal energy on retail markets.

The usage of RAB methodology causes additional risks when regulators do not approve iRAB evaluated by independent appraisers and affirm rate of return below fair levels, as a consequence, complicating fund-raising to finance the investments. To keep tariffs for end-users down the government limits the growth of a regulated part of a tariff making it an unfavorable factor for the Company. Tariff increase for subsequent years should not exceed federal forecasts of social and economical development for 2014-2016. Permenergo is one of the pilot branches to shift to RAB regulation in 2009 (other branches use RAB since 2011). After 2012 RAB reboot adjusted long-term regulation parameters were approved. Also, it is entirely possible that under a limited upturn of end and network tariffs the regional regulator may affirm a considerable revenue growth for stand-alone grid companies by cutting (or making permanent) revenues of IDGC of Urals in favor of other grid companies.

Poor equipment status caused by its physical and moral depreciation may generate such operating risks as deterioration of exploitation and economic indicators of equipment, unfavorable ecological aftermath, incident threat accompanied by partial or full energy short-delivery and corresponding adverse social consequences, industrial injuries of the personnel and complicated incident threats. Occurrence of the risks may lead to equipment failures and demolition of facilities. Complicated incidents may lead to separation of energy system, rolling blackouts, critical operating modes of equipment. A possibility of equipment failures is average. To prevent the risks the Company takes measures to ensure reliability of equipment and facilities up to the mark – 100%-completed repair programs, modern non-stop diagnostic methods, optimization of structure and volume of spare parts, implementation and upgrade of emergency automation, tender selection among servicing and supplying companies.

Risk management related to the observation of industrial security requirements as a part of industrial risk management structure is provided by the observation of federal legislation on industrial security and industrial control system operating under it. Ecological risks include drainage-mixed oil leaks from substations without oil receivers into rivers and lakes causing possible oil pollution. These violations of pollution control regulations may inflict high fines. The Company identified ecological aspects and evaluated the impact on the environment. Crucial ecological aspects are oil spills during exploitation, maintenance, repair of oil-filled equipment and vehicles, storage of equipment and oil products as well as on-and-off loading. To reduce the weight of ecological aspects we prepare and take measures annually included into production programs of the Company. The Company also operates under ISO 9001:2008, State Standard GOST R ISO 9001–2008, ISO 14001:2004, State Standard GOST R ISO 14001–2007, OHSAS 18001:2007, State Standard GOST 12.0.230–2007, including Ecological Management System (EMS). We obtained Document of Compliance #12.0615.026 dd. 27.06.2012 to confirm ISO 14001:2004 compliance.

Risks related to uncertainties of transmission limits lies in the lack of development plans stipulating consumption dynamics for a certain time periods in several regions and municipalities as well as in uncertainties related to recession terminal dates. The circumstances hinder exact forecasting of investments, able to satisfy growing energy demand in the medium and long term. The risk is minimized by unified sales department of the Company via cooperation with federal and local authorities over the preparation of regional mid-&long-term development plans and via advocating transmission tariffs with investment component focused on increased capacity of grid equipment. We have no risks related to the changing of prices for the Company’s services on global markets since the Company does not transmit energy outside Russia. In our opinion, a risk related to possible price changes on domestic market, primarily to the downside is unlikely.

On the whole, the risks may be minimized by increased operating efficiency due to production cost-cutting programs (establishing competitive environment in procurement and service processes, cost-cutting of repair, exploitation and construction procedures, etc.) and well-balanced financial policy. We believe that possible deterioration of sector environment and negative changes in exploitation and evolution of grids may affect the Company’s operations but still they should not have a significant influence on discharge of obligations.