Depreciation rate – Newspaper Kommersant No. 56 (7501) of 04/03/2023

As Kommersant found out, the FAS wants to force electric grid companies to direct tariff funds received as equipment depreciation compensation for investments and repairs from 2025. Regulators will also cease to include in the tariffs the cost of renting other people’s networks. The industry supports “a more rigorous approach to the intended use of depreciation.” However, small network companies expect an increase in the number of abandoned orphan electricity networks. The number of unprofitable players will increase, industry consolidation will slow down, but there will be no noticeable reduction in tariffs, analysts warn.

The FAS proposes to introduce the principle of “target depreciation” in electricity transmission tariffs, follows from a draft government decree developed by the service (“Kommersant saw it”). Now the tariff takes into account depreciation in full, but under the new rules, the power grid company will be obliged to spend these funds on the investment program and repairs. Otherwise, the regulator will exclude depreciation compensation from the tariff. The tariff will also no longer include the cost of renting other people’s network facilities (the rental rate is calculated based on the depreciation of facilities and property tax).

In 2025, the company will be required to invest 50% of the depreciation funds, in 2026 – 60%, and in 2028 – the entire amount.

The measure is necessary because of the “shortage of sources for investments and repairs in the context of limiting tariff growth rates.” The initiative will also force companies to approve investment programs, according to the FAS documents.

The Federal Antimonopoly Service explained to Kommersant that the initiative would “ensure the use of depreciation deductions to maintain power grid facilities in good condition and will help ensure the reliability and quality of power supply.” The new rules “will not lead to an increase in tariffs,” the service claims. The FAS plans to develop similar measures in the housing and utilities sector.

“A more rigorous approach to the targeted use of depreciation is quite logical and justified, especially after the inclusion of the so-called estimated entrepreneurial profit (5% of revenue) in the network tariffs,” they say in the Community of Energy Consumers. “It is advisable to also extend this approach to non-market mechanisms investment in generation.

On average, depreciation costs account for 10-12% of the total revenue of grid companies in the region, and the amount of depreciation deductions of organizations without approved investment programs does not exceed 0.5%, says Sergey Sasim from the Institute for Economics and Regulation of Infrastructure Industries of the National Research University Higher School of Economics. The impact of accounting for depreciation on the final tariff is within the rounding error of tariff rates, he notes.

Premature introduction of the FAS initiative and even its public discussion may negatively affect the process of network consolidation, believes Daniel Dmitriev, a representative of the Association of Independent TSOs. Medium players will stop buying and renting network facilities due to the further futility of returning money in the form of depreciation, which will create many scattered pockets of abandoned orphan objects. However, the launch of the initiative in 2025 after the market is cleared of small players under the pressure of formal criteria may create a stronger negotiating position for large companies with the remaining enlarged players.

An excessive restriction will also have a negative impact on large companies: formally recorded depreciation is not always provided by the actual revenue received, and the company’s business plan may involve the expenditure of these funds for other purposes (for example, to pay loans), says Sergey Sasim. According to his estimates, large companies have consolidated about 50% of power grid equipment under lease agreements, often at a rate exceeding depreciation. The FAS initiative will increase the number of unprofitable players, slow down the consolidation process and lead to limited consumer access to the network infrastructure, the analyst warns. Rosseti did not comment.

Polina Smertina