A top official of the Russian energy giant has confirmed the plans to buy the Armenian power grid. Andrey Rappoport, chairman of the board of directors of Inter-RAO UES, brushed aside allegations of breaching the Armenian legislation while taking over the power grid from a British company. The deal is legally not over yet and the provisions of the Armenian law on privatization will be fulfilled, Rappoport said in an interview with the Russian news agency Regnum. Rappoport also said that the state commission regulating the public service has the powers to set tariffs, issue licences and endorse contracts, making the creation of a "vertically- integrated monster" impossible in Armenia.

The following is the text of report by Russian news agency Regnum; subheadings have been inserted editorially:

Vertically-integrated "monster" impossible in Armenia

[Correspondent] Mr Rappoport, following the explanations of [Britain's] Midland Resources Holding Ltd company, the discussions around the Electricity Networks of Armenia closed-type joint-stock company have slightly subsided. Statements are being made that RAO UES plans to create "a vertically integrated monster" in Armenia. It is alleged that the Russian side intends to establish a monopolistic system of generating and distributing electricity in Armenia which would have a negative impact on the development and energy security of Armenia. Do you agree with this assessment? Please explain your answer.

[Rappoport] I absolutely disagree. First of all, I would like to note that RAO UES Russia owns only 10 per cent of electricity generation in Armenia - the Sevan-Razdan Cascade hydroelectric power plant, which belongs to a subsidiary, the International Energy Corporation [IEC] closed-type joint-stock company.

Inter-RAO UES used to manage the Razdan thermal power plant when the property complex of the Razdan thermal power plant was being handed over from Armenia to the Russian Federation at the expense of the interstate debt. The reason was the need for the stable work of the station while the legal registration took place. Inter-RAO UES dealt with ensuring the uninterrupted and reliable generation of electric power in the Razdan thermal power plant, supplying the reserve fuel to the station and guaranteeing the energy balance in the winter. The company tackled the task successfully.

We withdrew from the management after the station was handed over to Russia and a new legal entity was created. However, Inter-RAO UES is the managing company of Armenia-owned 100 per cent of shares of the Armenian Nuclear Power Station. The management was established in 2003 at the request of the Armenian government with the aim to overcome a crisis at the plant. As a result of our work, the plant generated an all-time record electricity output already in 2004 and its net profit rose to 19m dollars.

At the last session of the board of directors of the Armenian Nuclear Power Station, a report on the work conducted has been heard and the participants in the session agreed that the station is ready to operate on its own. We are ready to stop managing the station even though all these years we have been the financial guarantor of its nuclear fuel supply. Fuel supplies will be done in 2005 in the same way as before.

Concerning the creation of a vertically integrated company or, to borrow your expression, of a "monster", this is impossible in Armenia. The fact is that the most important member in this market is the commission on regulating public services. It regulates the state policy on setting tariffs for each actor of the market, on issuing licenses on their activity, confirming and coordinating contracts. The state dictates the tariff policy, rules of work and fields. Therefore such accusations are groundless.

No influence on tariffs

[Correspondent] Sometimes the Armenian media carries reports warning that as the owner of the main generating capacities of Armenia, RAO UES will have the opportunity to have an unhindered influence on the domestic tariffs in Armenia after having bought its power grid. Does RAO UES have such a task?

[Rappoport] The state is regulating the tariffs via the commission regulating the public services. RAO UES is not the owner of the main generating capacities but owns only the Sevan-Razdan Cascade, which, incidentally, we bought at the request of the Armenian side when the payment for the delivery of nuclear fuel and the repayments of debts accumulated since 1995 were under discussion. At that time the Armenian power industry had no money to settle the accounts with us and we took the cascade as a payment. We cannot influence tariffs. The commission is independent. Its members are elected for a term of five years.

Even the Armenian government cannot influence it.

Ownership of power grid and regional plans

[Correspondent] According to the information given by Britain's Midland Resources Holding LTD, 100 per cent of shares of the Armenian Electricity Networks were handed over to the Russian Interenergo BV company for trust management for the duration of 99 years. By what is behind such a long-term interest of the Russian side in the Armenian Electricity Networks? The top management of RAO UES has repeatedly announced that they intend to synchronize the work of the electricity systems of the South Caucasus countries, as well as of Turkey and Iran. Is it possible to consider the interest of RAO UES to the Armenian Electricity Networks in this context?

[Rappoport] Concerning the period of 99 years, first of all, the Anglo-Saxon law allows to operate with such terms and we used this opportunity. Second, we are not going to be just a manager for 99 years, but we intend to be the owner of the grid in the near future. All the necessary documents for owning the grids or giving the ownership to Interenergo BV, a subsidiary company that is a member of the RAO UES group of companies, will be sent in the near future.

Now about the synchronization of the energy systems of South Caucasus, Turkey and Iran. We have signed a memorandum with Iran, which in particular, talked about the organization of the network construction and ensuring simultaneous work via Azerbaijan by 2007. We also put forward an initiative to organize a corridor for the parallel work via Armenia and Georgia, and have reached a preliminary agreement to this respect with Iran. A corresponding proposal was made to the Armenian power engineers and I think that the work in this direction in Armenia and Georgia will become significantly more intensive in the nearest future.

It must also be taken into consideration that Armenia's energy system is already working in the parallel regime with Iran.

Western criticism

[Correspondent] When the Russian side and the British company made a deal on the Armenian Electricity Networks, USAID took an unexpected and harsh stance. What worries the Americans in your view?

[Rappoport] Some Western organizations voiced an opinion that the deal is not transparent. They are concerned that the owner has changed in the violation of certain legal provisions. We carried out a number of consultations with the representatives of the World Bank and of other Western organizations and made it clear that the ownership has not changed at present and that there was has not been any violation of the legislation.

We are already a participant in Armenia's electricity market, we know the country's laws very well and follow them rigidly. I want to emphasize that the procedure of taking over the shares will also be implemented in accordance with the law. The statements of the Western organizations were prompted, apparently, by the fact that although the procedure has yet to even start, representatives of these organizations assumed that the deal was over. They assumed that it was not only completed but also that it was done "non- transparently". It is possible that they did not fully understand the legal side of the deal, but it is also possible that they fell under the influence of the excessively emotional publications in the local press.

At this point we have already received the declaration on trust, that is we became the beneficiary in terms of rights but we did not become the owner. This means that legally speaking, the operation is not over and it will be completed once the government has endorsed it, and when the provisions of the law on privatization in Armenia are fulfilled.

[Correspondent] RAO UES and Gazprom have suggested the Armenian government that they complete the construction of the fifth unit of the Razdan thermal power station which will take part in the "electricity for gas" scheme involving the gas coming through the Armenia-Iran pipeline. Has Armenia responded to the offer, and if not, what is the reason for the delay?

[Rappoport] Inter-RAO UES and Gazprom did indeed jointly apply with an appropriate commercial proposal in accordance with the decision of the intergovernment commission on economic cooperation between Russia and Armenia. We hoped to receive a response within a month but, regrettably, we have still to receive any information. A possible explanation for the delay is that there is a certain rivalry on this issue and it is likely that some alternative proposals are being formed.