Schemes to consolidate the Russian power grid complex and privatize power assets remain unclear, with the government still failing to develop a single scenario and discussions now being focused on the viability of Rosneftegaz' participation. Analysts, however, note that Rosneftegaz' involvement is a secondary matter and call for all outstanding issues to be promptly clarified, saying that the current uncertainties only reduce investors' interest in the sector. They also note that many investors equate Rosneftegaz’ participation with the government's intention to strengthen its role in the power sector and would prefer a scenario where the government has direct participation.

Igor Sechin, former deputy prime minister in charge of the fuel and energy complex, earlier proposed using funds of state-owned Rosneftegaz to boost the capitalization of power assets prior to their long-discussed privatization. He has suggested uniting the Federal Grid Company of Unified Energy Systems (FGC UES) and IDGC Holding around Rosneftegaz and creating the National Grid Company, which would be controlled by Rosneftegaz. Moreover, under his plan, Rosneftegaz would also buy additional share issues of power majors RusHydro and Inter RAO UES.

State-controlled IDGC Holding manages distribution grids with a tension of up to 220 kilovolt (kV), while FGC UES manages Russia's trunk grids with a tension of at least 220 kV. The government announced plans to unite the companies in May and IDGC Holding's shareholders have already approved the transfer of the holding into the management of FGC UES. However, the final scheme of the grid companies' merger, which was supported by Energy Minister Alexander Novak, remains unclear.

On August 24, business media released a letter from Deputy Prime Minister Arkady Dvorkovich, Sechin's successor, to President Vladimir Putin, where he strongly criticized the schemes proposed by Sechin, claiming that they are overly costly and require legislation changes. As an alternative, Dvorkovich suggested excluding Rosneftegaz from the processes.

The model of the merger proposed by Sechin requires up to 400 billion rubles to buy out shares from the minority shareholders of IDGC Holding and FGC UES. Rosneftegaz does not have the necessary funds to do so, Dvorkovich wrote in the letter.

Moreover, “the merger around the National Grid Company by Rosneftegaz is in fact a privatization of state companies, which will require changes to the current legislation, … will lead to the government losing the management of the grid complex and controlling functions over ensuring reliable and uninterrupted power supplies to final consumers," Dvorkovich said.

He concluded that the merger around Rosneftegaz is unviable option and has proposed alternative ways to unite the grid companies. Under the first scenario, FGC UES and IDGC Holding, excluding its subsidiaries, should switch to a single share. The second option envisages contributing the government's 55.9% stake in IDGC Holding into FGC UES' charter capital. In both cases, the shares of IDGC Holding and FGC UES will remain with the government. Dvorkovich believes that these proposals are advantageous as they do not require a revision of existing legislation, while retaining the government's ability to regulate the industry in order to ensure the reliability of power supplies.

Dvorkovich also opposes Rosneftegaz' participation in additional share offerings of RusHydro and Inter RAO UES and the sale of 40% in Irkutskenergo to Rosneftegaz. He proposed selling Irkutskenergo’s shares to RusHydro, which would allow for a consolidation of Siberian hydropower assets around RusHydro, and suggested boosting RusHydro's charter capital using government funds and selling Inter RAO UES’ shares held by RusHydro to Rosneftegaz.

Surveyed analysts have called for the government’s plans to be fully clarified, saying that the uncertainties weaken investors' interest in the industry. The analysts also said that they saw no major differences between schemes that either include or exclude Rosneftegaz' participation.

"We do not see a big difference between the government's direct participation and the previous plan that encompassed the attraction of Rosneftegaz," UralSib Capital utilities analysts said.

"It seems to me that the question whether Rosneftegaz is participating or not is of secondary significance, because the government in either case becomes the owner of the united company. The only question being whether or not this happens directly or through some additional structure," Konstantin Reyli, a senior utilities analyst at investment company Metropol, said. Reyli believes that from an investors' point of view the government's direct participation in additional share offerings in the merged company would be more preferable, "as many investors equate Rosneftegaz with the government's intention to strengthen its role in the sector instead of privatizing assets, while carrying out this deal with the government's participation gives the company a better chance that it will be eventually privatized," Reyli said.

Alexander Kornilov, a senior analyst covering the electric power sector at Alfa-Bank, said that it was from the very beginning quite unclear for investors for what purposes Rosneftegaz is necessary. The analyst reminded that Sechin promoted an idea that Rosneftegaz will be an interim structure, responsible for preparing power assets for privatization after 2015. He noted, however, that it is unclear as to whether Rosneftegaz would make it efficiently.

Proposals made by Dvorkovich limit Rosneftegaz’ role in the power sector, Kornilov said. "On the one hand, this is probably good, as the prospect of Rosneftegaz' active participation and a de facto increase of the government’s control over the sector frightens many investors," the analyst said. "But on the other hand, proposals, alternative to those with Rosneftegaz’ participation, require certain details, which we now lack," he said.

Reyli from Metropol believes that the schemes proposed by Rosneftegaz are connected with strengthening its influence without bringing any additional economic benefits. He said that in the same way some other company could be created and become an interim storage of assets. RusHydro and Inter RAO UES could make a direct asset swap, as they initially planned, without Rosneftegaz’ participation, and receive the required funds through additional share offerings in favor of the government.

Commenting on the proposed merger of FGC UES and IDGC Holding, Kornilov from Alfa-Bank said that there are several unanswered questions that the government is not ready to clarify. "A full merger of IDGC Holding and FGC UES is accompanied with significant expenditures, namely on buying back shares from minority shareholders of both FGC UES and IDGC Holding," the analyst said. However, when FGC UES in essence holds a controlling stake in IDGC Holding it is also quite unclear, as the question concerning what IDGC Holding is arises, he said. The analyst did not say whether he was supporting the position of Sechin or Dvorkovich and only provided that he was interested in a weighted policy towards the power sector, which suffered a lot over a couple of last years, which led to a great reduction of investors' interest in the industry. "For me, a maximally weighted balanced policy towards the power sector, without the excessive active participation of the government, is important. But I would also like the promised privatization plans to take place someday," he said.

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