OREANDA-NEWS. October 20, 2010. The Ministry of Economic Development and Federal Tariff Service proposed the introduction of price caps for power capacity prices in 3 more zones of the market for existing capacity. The aim of these price caps is to limit the rise of end-consumer electricity tariffs to 13%-16% in 2011. The mechanism for introducing the additional price caps is unclear at this point, and a final decision on this has yet to be made by the state, reported the press-centre of OTKRITIE Financial Corporation.

View: Price caps for existing capacity have already been introduced for the majority of regions, with a level of RUB113/kW/month for the zones in European and Urals part of Russia and RUB120/kW/month for Siberia. In our view, the price caps themselves have a limited negative impact on the power generators. Even if their level is below the current regulated capacity tariffs, the main sources of value for the companies are the liberalized electricity market and new generation capacity construction (which have a different pricing scheme). Fortum and Kuzbassenergo have plants located in the 3 zones mentioned above, hence we view the news as marginally negative for these two companies.

Valuation: Fortum and Kuzbassenergo trade at EV/Installed capacity multiples of USD 140/kW and USD 181/kW respectively, compared with Russian generation average of USD 260/kW.

Action: We view this news as neutral for the generation sector, with a potentially negative impact on Fortum and Kuzbassenergo.