Former energy minister on the reasons for his replacement and prospects of the industry

Ukraine and Russia could have switched to a parallel power grid mode as early as March 1, believes recently fired Fuel and Energy Minister Serhiy Yermilov. This would have allowed Ukraine to make up for its electricity shortage in 2001, to the tune of 10 billion kWh, with Russian electricity selling at 1.44 cents per kWh (VAT and transport costs included), while the current industrial electricity consumption costs in Ukraine average three cents per kWh. However, the Ukrainian and Russian power grids are still disconnected, and Serhiy Yermilov, who signed the agreement, was dismissed. As a result, the joining of the electric power systems supported by the president could face yet another problem, a personnel one. Moreover, Yermilov’s replacement by Stanislav Stashevsky as new energy minister give rise to a great many questions that are anything but rhetorical. Without calling into question Mr. Stashevsky’s administrative and personal virtues, one expects an unequivocal answer to the question of why such a specific and strategically important sector as the power industry is being placed under the command of a deputy to the Kyiv mayor, a man basically known in construction? Is it a political appointment? If so, which political forces will assume responsibility for what is happening in the industry? Would not another cadre carte blanche given the premier by the president once again have unpredictable consequences (as in the case with Yuliya Tymoshenko)? The more so that Yermilov’s retirement is apparently a sequel to the former vice premier’s policy, as she insisted on his replacement before being arrested and transferred to the Lukyanivka Detention Center. Also, Serhiy Yermilov’s appointment was lobbied by Viktor Yushchenko. The day before the order to oust him was signed, Serhiy Yermilov had already decided to grant an interview to The Day, Biznes, and Interfax Ukraine.

S. Y.: I was lucky to be fired before March 8 when we men greet our women, so this somehow cushioned the blow.

Q: Whose path did you cross as a minister?

S. Y.: Viktor Yushchenko’s, I think, and not as premier but in some other capacity. I will just say that the industry is functioning normally, so I won’t be ashamed when Stashevsky steps into my office. Of course, there is a lot to be done, but the situation is much better than when I was given the post.

Q: How is your removal going to affect the industry?

S. Y.: I have long been in the energy industry, and I have discovered a certain regularity; once there is word about the minister’s being fired, the energy market returns drop by some 20%, although in my case this might not happen, because word about my dismissal has circulated a long time, yet we managed to raise returns by 20%. We did this because we literally unbound the oblenerho district energy distribution companies’ hands a month and a half ago; we allowed them to work the way they should. Regional and district administrations are still meddling, but the companies received the freedom and opportunity to operate the way they are supposed to, and this has substantially improved their performance. Electricity returns are growing without any special outside pressure, without pulling any administrative levers. Additional reserves will be further tapped; railroad payments made using money only. The same will happen in the oil and gas sector next month and in the coal industry in May-June. The latter will be most difficult, yet it is quite realistic. By July, energy market returns will reach a billion hryvnias a month. Otherwise it just won’t work; the generating companies must be paid money, so they can buy equipment, make repairs, and modernize their production capacity. When we learn to make 200 million hryvnias the industry still lacks, it will mean that we have raised the enterprises’ performance to the level of primary costs in terms of filling the rate so it can be at least covered by real money. When the revenue part of the rate starts to be filled, our enterprises, oblenerhos, and generating companies will work to do the rest. That’s what I mean when I say that electricity rates must under no circumstances be raised at this stage. If they are, the entire program to expand monetary payments will be wrecked. Thus I’m worried by the oblenerho privatization process and the investors’ demand that we not only adopt new methods in working out electricity rates but also those aimed at raising them substantially. This is absolutely unjustified. The cost should be raised allowing for inflation and the world fuel market situation, yet at this stage, when we have decided to finally do away with barter deals in the power industry, it’s best to refrain from raising costs that way.

Q: You insist on the “inviolability” of the electricity costs in the interest of the budget?

S. Y.: There are several approaches. First — and I have always stressed this — why raise the price for electricity when we can’t collect enough even at the current rates? If we raise them by another 20%, our debts will increase by precisely this much. No one will benefit from this. Last year, we had a similar debate concerning Enerhoatom rates. The prime cost of nuclear power is five kopiykas and the price was 7.5. What we actually collected was 3 kopiykas, yet the tax was accrued in full measure. In other words, what actually happened was piling up arrears. Naturally, further raising rates will only result in the further growth of debts. As earlier, we won’t have enough money to improve nuclear safety arrangements. The economic indices of any enterprise are budget-fixed, meaning that the budget will receive less revenue, because this item is formed proceeding from planned indices. By raising the rates of Enerhoatom or other generating companies, without providing for monetary resources, we consciously place both these companies and all spending units and people expecting this money in a difficult position. Debts are piling up, so we should first practice a systemic approach and solve the problem of collecting electricity bills without raising rates. After that everything will be simpler.

Q: Did you try to convince the prime minister to adopt this approach?

S. Y.: I wasn’t able to discuss it with him (later in the interview Mr. Yermilov will state that he met with the president almost every day and that Leonid Kuchma would often call to ask how things were, that he closely followed the situation in the industry — Ed.). I did try to explain my stand, but to no avail. Also, any references to my signing the Marchuk Commission’s findings are totally unfounded. What I did was follow the President’s instructions to the letter; I am a civil servant, and this is what I have to do. Hundreds of people worked on those findings; the document has their signatures. Mine was at the bottom and it meant nothing new. Yet even before the document was signed (October 31), the well-known special assignment appeared, placing all energy sector enterprises under Yuliya Tymoshenko’s direct command. In other words, something must have happened on high. I’ve never before explained this situation. The commission’s report, a two-page document with signatures, is just a summary of the findings, so it cannot, of course, be considered separately from the president’s directive in which every member of the commission was given a detailed assignment. And the same applies to the local documents enclosed with the report and stored in the NSDC files (several boxes of them). So they used several paragraphs [from the report] and my signature, then lashed out at me. My signature under the Marchuk Commission’s Report was just an excuse, because the said special assignment appeared earlier. All figures in the report had been checked by dozens and hundreds of experts, there were signatures and seals. Why shouldn’t I sign it? As one in charge of the industry, I looked through all those documents and all the figures were carefully verified. So I signed under those true figures and specified, “As per data provided by the Ministry of Fuel and Energy.” The Marchuk Commission did a thorough job, so those who didn’t like the formulas [in the report] were simply being emotional.

Q.: You were accused of acting against the government. Did you?

S. Y.: There is the cabinet action plan and I took part in its elaboration as an adviser. The MFE acted in strict observance of that plan. So all accusations are either indiscriminate or fabricated. This has been proved by deeds. I never submitted a single proposal or draft resolution concerning offset settlements.

Q: There are practically no energy experts in government. The vice premier in charge of industrial policy is a metallurgist. The new energy minister specializes in construction. Maybe we should have a volunteer organization to determine energy sector strategy?

S. Y.: In any sector the strategy is determined by experts. There are good experts at the MFE; they can do it, for they have dedicated their lives to the industry. They know what should be done and how. They can still be made to shift in a certain direction. Take that directive No. 449 that caused so much trouble. The struggle for signing or not signing it lasted about two months. Meetings and panel discussions every day and everybody was supposed to sign on. The MFE didn’t endorse it, yet the document was finally signed. Offset and bill arrangements were possible again. I am grateful to Mr. Dubyna. He listened to me and agreed that the directive had to be nullified.

Q: The Marchuk Commission’s findings boiled down to Ukraine being unprepared for the winter, yet we survived it. What was it that saved us? Warm weather?

S. Y.: The commission worked in October, before the heating season, and the situation was difficult indeed, although a lot had been done to improve it. The collection rate in October was the best of the year, yet the power industry’s status in many respects depended on what was happening in the gas sector, so the commission gave its findings proceeding from the circumstances. If we didn’t solve the gas problem (the agreement was signed in Moscow on December 22), if we didn’t work miracles to improve the quality of coal (we are practically burning no fuel oil now), and if we didn’t discard much of highlighting gas we would be in an entirely different situation now. As it is, we keep our balance entirely under control. Suppose we have to accumulate coal. We can. We can also burn an additional amount of gas. In a word, the industry is currently in a balanced state. We managed all this toward the end of the winter, but it doesn’t mean that we have no further problems. The industry is in a very difficult situation. The thermal electricity stations must be immediately re- equipped and modernized. For many years the heating surfaces and rotating machinery have not undergone major repair and renovation. All the ash disposal areas have been practically filled. Another year and we will have nowhere to dispose of the coal ash. Tthis would mean an ecological disaster and heavy capital investment would be required to combat it. In a word, the industry needs big money with which to rebuild. So far we have managed to provide for the fuel component of the price of energy, but it will be truly alive and well only after it starts making profits. Then we will be fully prepared for the next winter. An appropriate directive has been issued by the ministry. But there are still problems. The situation on the coal market is such that all Polish coal has been contracted by Germany at quite high cost. Russia also has practically no coal to spare. Therefore, the next autumn- winter balance being computed in Ukraine should proceed from minimum spending. Coal burning looks the best and most effective option, yet the development program underway in the coal industry provides for no extraction increment this year. The current task is not to lose [what we already have]. We must start accumulating [resources] already in April, so we can have at least 5 million tons of good coal stored. This will make it possible to burn less gas, which is considerably more expensive, and use the money thus saved for renovation.

Q: You say that the power industry needs big money for renovation. Do you expect such money from foreign investors?

S. Y.: We need large-scale investment, especially in generating capacity, yet the privatization of six oblenerho enterprises at this stage does not answer the question of where we get that investment. What money inflow can one expect, considering that we propose to sell the six oblenerhos for $200 million, whiles raising the rates by one cent will cost $1.5 billion? Even if we raise them by half a cent the result is $750 million denied the economy, including the budget meant to provide for tax concessions, subsidies, and energy supplies to the spending units. I see no such investment coming, yet the process is underway, a decision was made, and I’m in no position to do anything about it. However, before privatization (and I am all for it), I would do something to improve the industry’s financial status, then the companies would become more profitable and their value would increase substantially. Today, commercial losses in the electrical power systems, including theft of electricity, reach 30%, even 70% in some districts. The profit rate there remains at 5-6%. If we could reduce such losses at least by half, such energy companies would immediately become more investment-attractive. They could be sold at a better price without damaging the entire economy. We carried out a tentative analysis. It shows that such privatization can raise the price index by 18-20%. Do we need this kind of privatization? We need to work hard with our strategic partners and convince them that they should go back a little on their cost-increase requirements, for the rest of what they demand is quite acceptable.

Q: Proposals concerning the so- called energy islands were actively discussed last winter.

S. Y.: I have never supported the idea and I told Mr. Kuchma so after I was instructed to study the issue. I insisted on linking the power systems [i.e., those of Ukraine and Russia — Ed.]. True, three governors thought differently and they were given carte blanche. However, what they actually accomplished shows that such energy islands are impossible. I think the idea has been finally discarded. Nodal transfer could be a source of replenishing our energy resources, so we prepared and signed a memorandum [on cooperation between the MFE of Ukraine and Russia’s Unified Energy Systems Company — Ed. ] It took us almost two years to work out the document. Chubais visited and we had talks right here in my office, when Ivan Plachkov was still Minister [of Energy]. Working on that and other pertinent documents was very hard. But buying Russian electricity is considerably more profitable than gas, for such is the current proportion of costs. It takes a cold-blooded pragmatist, and it has to be done while we still have a chance. Now we daily spend hundreds of thousands of dollars burning additional gas just because we did not hook up to Russia’s power grid. Is this patriotism? Good business is done by making correct calculations. Russia would also benefit from such a deal, because its electricity costs are lower. The Russians burn their gas at the thermal power stations at $15.00. In Ukraine, it is $70.00, delivery costs and taxes included.

Q: Why such political resistance to your memorandum in Ukraine?

S. Y.: I attribute this to the tent town campaign, for it can’t be explained by common sense. Just another opportunity to attract the public eye and say that there is something wrong in the government or with those in it.

Q: How did you confrontation with Yuliya Tymoshenko begin?

S. Y.: Even those working as advisors to the prime minister don’t know everything a minister does. It took us a long time to bring Tymoshenko up to date — I mean myself and other advisors and ministry officials. She could find her bearings already in May; she is a capable woman. Things seemed to be going well. I agreed to the ministerial post, because the tasks on hand coincided with my views, but when I started work I saw that she [i.e., Tymoshenko — Ed.] wanted to use the situation to her own advantage. In fact, it became obvious in a week. My appointment came July 13 and she made her trip to Sumy a week later. Even on that occasion she wanted to carry out her project and institute regional accounting centers, subsequently to be handed over to commercial structures, and then place the entire power industry along such lines. That was the first time our opinions differed, followed by a couple more conflicts. Actually, we did not have many differences, and I think that a lot was accomplished. I headed a task force to prepare the gas talks, on Viktor Yushchenko’s instructions. The team was made up of basically new people: Haiduk, Kopylov, Chaly, Shlapak, Bahirov, Lysovenko, and Trykolych. Those seven experts sorted out the problem, and every high-level meeting brought us closer to the point where that problem could be finally solved. And it was. The first quarter of the year shows results we have never had, and the first quarter has always been the hardest. Well, maybe the unusually warm weather has helped. Anyway, we have not burned a single cubic meter of gas above schedule. And there is some left in storage. Another achievement, in my opinion, is that we managed to balance the coal and power industries. Usually, budget allocations were exhausted in the first three or four months — I mean subsidies intended not as payroll but for re-equipment and so on. This year we did not spend a single kopiyka of state money on wages and salaries. In February, the coal industry received the largest subsidy in its history. And this considering that there were no back wages and prepayments for coal supplied to a number of production complexes. If only we could keep in the same vein for at least another year, but again we have miserable allocations for capital investment: 17 million for the whole MFE. We can’t raise coal prices. We raised coke prices last December, and there is no sense increasing the price of electricity, because this will affect consumption rates, and we will not collect more money anyway.

Q: How would you comment on what is going on at Enerhoatom, considering its dual presidency, with one appointed by the president and the other still in office because not formally relieved of duty by the cabinet?

S. Y.: It just makes no sense. The situation is incredible and Enerhoatom is in a very bad way in terms of management Yuri Nedashkivsky could not put his house in order. We had a talk in October, and he said he would hand in his notice, but then the cabinet did not accept his resignation. Now the place is dominated by commercial structures. The situation is abnormal and bodes no good.

Q: Do you have any plans?

S. Y.: I didn’t build myself a parachute, so I’ll have to think it.