Conference “RAO “UES of Russia” is an Open Company. On the Threshold of the Reform” 11 December, Moscow RAO “UES of Russia” CEO Anatoly Chubais Three Years of Problems and Effective Decisions: from Stagnation to Growth

2 668,000 employees 623bn kWh of electricity generated - 72% of Russia’s total generation 2.7mln km of power transmission lines - 96 % of Russia’s total length 407 thermal and hydropower plants with installed capacity of 156,000 MW RAO «UES of Russia» in the country’s energy sector

3  Cash share in payments to UES was 20 %  Up to 6 months wage arrears  21 AO-energos and federal power plants on the edge of bankruptcy, including Dalenergo, Kuzbassenergo, Ryasanenergo, Pskov CHPP, …  Strikes and protests of the Holding personnel Major characteristics of RAO «UES of Russia» in 1998 In 1998 the new team of managers elaborated the Plan of Actions to raise the effectiveness of UES operation and restructuring in the power sector

4 Second stage: Development and investments in the Russian power sector through restructuring First stage: Introduction of proper order in production, finance and management RAO «UES of Russia»: from Stagnation to Growth

5 From the Plan of Actions to raise the effectiveness of UES operation and further restructuring in the Russian Power sector (adopted by the UES Board of Directors on 28 August 1998.) : “… Stage 1 ( ): Recreation of organisation and management mechanisms within the Holding company, improvement of financial operation and raising the economic effectiveness and manageability of the Holding”. «Stage 2 ( ): Setting up of an All-Russian grid company on the basis of the Holding, guaranteeing the secure functioning and economic operation of RAO “UES of Russia”. Creation of a self-regulated market environment. Development of competition in the spheres of production and sales of electric power. Formation of generating companies…” Stages of restructuring outlined in 1998 Introduction of proper order in production, finance and management Development and investments in the power sector through restructuring

6 Increasing the profitability of daughter companies, transparency of activity, investment attractiveness Balance of incomes and expenditures, payment deals only in cash  Gives the opportunity to play on international capital markets (UES has been listed at N EWEX stock exchange)  Allows to compare the UES results with the results of other world energy companies International audit Business planning Budgeting, treasury execution of the budget, separate accountancy Contemporary management is contemporary business procedures First stage: Introduction of proper order in production, finance and management  The UES Charter has been amended to broaden the competence of UES Board of Directors  By the Decision of UES Board of Directors as of November 9, 2001 the Corporate Governance Code was adopted Corporate governance

7 Kazakhstan and Middle Asia In the USSR the parallel operation was carried out with 11 Republics As a result of UES decisions the synchronised operation with 14 countries from 15 that used to be part of the USSR The strategic goal is to set up a parallel operation with the energy systems of European countries R U S S I A N F E D E R A T I O N Transcaucasian Republics Belorussia and Ukraine The Baltic countries Parallel operation is the basis of energy security Rehabilitation of connections within the country:  The parallel operation with Siberia since 15 June 2000  New transmission lines in : Volgodonsk Nuclear Power Station - Shakhty - Budyonnovsk, Balakovo Nuclear Power Station - Trubnoye  The connection with Dagestan was put into effect in May 2000 First stage: Introduction of proper order in production, finance and management

8 Increase in production and consumption of electricity In 1999 the electric power consumption grew by 2.8% or 22.9bn kW per hour, in by 3.7% or 30.6bn kW per hour 2002 (forecast) Billion kW per hour ,8 602,2 628,7 634,2 Production of electric power by RAO «UES of Russia» Holding Consumption of electric power First stage: Introduction of proper order in production, finance and management Billion kW per hour

9 Decrease in the number of technological breaks and death accidents at the energy companies of RAO “UES of Russia” In 2000 the number of technological breaks fell by 25% compared with Technological breaks Death accidents First stage: Introduction of proper order in production, finance and management

10 Increase in electric power quality Frequency, Hertz % calendar time Average frequency of the electric current The duration of UES operation with the normative frequency throughout the year First stage: Introduction of proper order in production, finance and management

11 Solving the problem of non-payments is the basis of stability SOLVING THE PROBLEM OF NON-PAYMENTS Secure and consistent power supply of financially solvent consumers Investments in the construction of new plants and infrastructure Payments of wages on time to the workers in the power and adjacent sectors Recreation of the system of payments to suppliers of fuel and energy Elimination of a possibility of regional energy crises Radical decrease in misusing barter deals First stage: Introduction of proper order in production, finance and management

12 Solving the barter problem Sales management: solving the problem of non-payments Payment in cash, % Q1 98 Q2 98 Q3 98 Q4 98 Q1 99 Q2 99 Q3 99 Q4 99 Q1 00 Q2 00 Q3 00 Q4 00 Q1 01 Q2 01 Q Shadowy and half- criminal annual turnover was up to USD8bn First stage: Introduction of proper order in production, finance and management

13 Coal industry: the effect of solving the non-payments problem by RAO «UES of Russia» % of cash payments for power % of cash payments for coal Q1 98 Q2 98 Q3 98 Q4 98 Q1 99 Q2 99 Q3 99 Q4 99 Q1 00 Q2 00 Q3 00 Q4 00 Q1 01 Q2 01 Q3 01 First stage: Introduction of proper order in production, finance and management

Oil industry: the effect of solving the non-payments problem by RAO «UES of Russia» 0 % of cash payments for power % of cash payments for mazut (black oil) Q1 98 Q2 98 Q3 98 Q4 98 Q1 99 Q2 99 Q3 99 Q4 99 Q1 00 Q2 00 Q3 00 Q4 00 Q1 01 Q2 01 Q3 01 First stage: Introduction of proper order in production, finance and management

“Gazprom” (Russian Gas Monopoly): the effect of solving the non-payments problem by RAO «UES of Russia» 0 % of cash payments for power % of cash payments for gas Q1 98 Q2 98 Q3 98 Q4 98 Q1 99 Q2 99 Q3 99 Q4 99 Q1 00 Q2 00 Q3 00 Q4 00 Q1 01 Q2 01 Q3 01 First stage: Introduction of proper order in production, finance and management

,611, , Minatom (Russian Nuclear Ministry): the effect of solving the non-payments problem by RAO «UES of Russia» 0 % of cash payments for power % of cash payments for power generated by Minatom Q1 98 Q2 98 Q3 98 Q4 98 Q1 99 Q2 99 Q3 99 Q4 99 Q1 00 Q2 00 Q3 00 Q4 00 Q1 01 Q2 01 Q3 01 First stage: Introduction of proper order in production, finance and management

Number of energy systems that have wage arrears is the basis Solving the non-payments problem by RAO «UES of Russia» is the basis of wage arrears elimination % of cash payments for power Q1 98 Q2 98 Q3 98 Q4 98 Q1 99 Q2 99 Q3 99 Q4 99 Q1 00 Q2 00 Q3 00 Q4 00 Q1 01 Q2 01 Q3 01 First stage: Introduction of proper order in production, finance and management

18 Cash tax payments to the Russian federal budget and Pension Fund Payments to the federal budgetPayments to the Russian Pension Fund RURbillion 3,4 18,1 5,4 by 3.4 times by 59% (forecast) by 2.3 times 41, RURbillion 4,1 11,1 7,3 by 52% by 78% (forecast) by 22% 13,5 First stage: Introduction of proper order in production, finance and management

19 Three years of international audit done by Pricewaterhouse Coopers: profit based on 2000 year results *) All 1998 and 1999 figures are adjusted for the Rouble purchasing power as of 12/31/ Operating profit of the Group, RUR bn * 1998 reports reflected the loss from economic ageing which affected the Group’s performance In 2000 the Group for the first time posted an operating profit of RUR 7.9 bn and net profit of RUR 0.5 bn. Net profit of the Group, RUR bn First stage: Introduction of proper order in production, finance and management

20 Investments increased *) All 1999 figures are adjusted for the Rouble purchasing power as of 12/31/2000 Compared with 1999, cash investments in 2000 grew by from RUR 2.0bn to RUR 9.2bn, in 2001 investments are estimated to reach RUR 11bn* RURbn First stage: Introduction of proper order in production, finance and management Towards the end of the year 2001 RAO «UES of Russia plans - to complete the construction of Petrovsk-Zabaykalsky-Chita 500kV Transmission Line (117.5Km) - to put into operation the following transformer capacities: 501 MWA at the 500 kV Budyonnovsk substation on the 500 kV Transmission Line Rostov Nuclear plant - Budyonnovsk 125 MWA at the 330 kV Okulovskaya substation 801 MWA at the 500 kV Krasnoyarsk substation

21 RAO «UES of Russia» diresct its targeted investment resources to build power plants –The second unit of the Kharanorskaya CHPP (Chita region) with a capacity of 215 MW was put into operation on 10 October –The second unit of Irganaiskaya hydroelectric plant (The Northern Caucasus, Dagestan) with a capacity of 107 MW was commissioned on 10 December –Mutnovskaya Geothermal electric plant (Kamchatka) is to be commissioned on December 20, 2001 (the capacity of the first block is 25 MW). –An additional 900 MW generation capacity is scheduled to be built at the North- Western CHPP (Saint Petersburg) as part of “5000 MW” Programme. In March 2002 the UES Board of Directors is planning to discuss the attraction of external investments into this project. –The construction of Bureyskaya hydroelectric plant (Amur region) with an installed capacity of 2320 MW has been renewed. The commissioning of this plant ( ) will solve the problem of electricity supply in the Far East. The annual investments in the construction of this plant have increased since 1998 by six times and reached RUR2.4bn. The total amount of commissioned capacities in 2001 almost by 1.5 times exceeded the total amount of commissioned capacities in First stage: Introduction of proper order in production, finance and management

22 Bureyskaya Hydroelectric Plant: dynamics of construction volumes Thousand cu m 2001 (forecast) Volumes of concrete poured Volume of earth-moving works First stage: Introduction of proper order in production, finance and management

23 The stocks of coal and mazut (black oil), accumulated at UES Holding companies are the biggest over the past five years The coal stocks exceed the last year level by 65% or by 9.5mln tons Coal stocks at the UES power plants UES coal stocks as of 1 December, 2001 amount for 24.2mln tons, which exceeds the task set by the Russian Government by 40.6% На ,0 13,8 14,6 Million tons ,2 First stage: Introduction of proper order in production, finance and management

24 UES mazut (black oil) stocks as of 1 December, 2001 amount for 3.5mln tons, which exceeds the task set by the Russian Government by 12% Mazut (black oil) stocks exceed the level of the last year by 38% or by almost 1mln tons 1 1,5 2,0 2,5 На ,6 2,2 2, ,5 3,0 4,0 First stage: Introduction of proper order in production, finance and management Million tons Mazut (oil stocks) stocks at the UES power plants

25 The coal stocks in the UES of the East as of 1 December, 2001 exceed the level of the last year by 114% (1.6mln tons) Coal stocks in the energy systems of the Far East “critical” regions Dalenergo coal stocks as of 1 December, 2001 amount for 590 thousand tons, which exceeds the task set by the Russian Government by 23% На На Coal stocks in the Unified Energy Systems of the East* (UES of the East) by 1 Dec 2001 (thousand tons) Dalenergo’s coal stocks as of 1 December, 2001 (thousand tons) * UES of the East: Dalenergo, LuTEK, Sakhalinenergo, Khabarovskenergo, Amurenergo, Magadanenergo, Chukotskenergo, Yakutskenergo, Kamchatskenergo First stage: Introduction of proper order in production, finance and management

26 Mazut stocks in the Unified Energy Systems of the East as of 1 December, 2001 exceed the plan amount set by the Russian Government by 15% Mazut stocks in the energy systems of the Far East “critical” regions In 2001 Kamchatskenergo have reached the level of 113% of the plan- for the first time over the recent years На ,0 13,0 1, ,0 Kamchatskenergo’s mazut stocks by 1 Dec 2001 (thousand tons) На ,0 78,0 54, ,0 Mazut stocks in the Unified Energy Systems of the East by 1 Dec 2001 (thousand tons) First stage: Introduction of proper order in production, finance and management

27 Low portion of cash in payments of consumers Shortage of investments Cross subsidising Solved in a non-market condition Ageing of basic funds Partly solved in a non-market condition Cannot be solved in a non-market condition Prerequisites of the Russian Power Sector Reform * the tariff for population divided by the industrial tariff (1.6 is the norm) Lack of competitiveness is the lack of motivation to cut the costs Pricing on the basis of incurred costs 17% 0.6 * RUR 5.2 bn. 112% 0.9 * RUR 9.2 bn. up to 50% Second stage: Development and investments in the power sector through restructuring Problems: up to 60%

28 In accordance with economic growth forecasts by 2010 power consumption level shall grow by 20-35% Long-term investment capabilities: generating companies Deregulation State regulation Competitive market Capacity requirements Capacity adjusted for resource exhaustion bn kWh Free market share in power generation Necessary investments - over US$ 35 bn Second stage: Development and investments in the power sector through restructuring

29 Reforming is the Strategy of the Corporation THE LAW REGULATION OF THE POWER SECTOR INCLUDES:  Amendments to the Civil Code of the Russian Federation  Amendments to the Federal Law «On Regulating Tariffs»  Federal Law «On the Power Sector»  Amendments to the Federal Law «On Natural Monopolies  Amendments to the Federal Law «On Competition…» BASICS OF THE REFORM  The Russian Government Decree as of 11 July, 2001 # 526 «On Reforming the Power Sector of the Russian Federation»  Plan of The First Stage of The Reform (the Russian Government Decision as of 3 August 2001 # 1040) Second stage: Development and investments in the power sector through restructuring

30 Reforms are based on the division of monopoly and competitive sectors Generation Competitive sectors Natural monopolies Liberalisation of pricing mechanisms and stimulation of market participation Market rules Production control Backbone and dis- tribution networks Sales Regulated tariffs Ensuring equal access to networks. Reorganisation of market support infrastructure. Second stage: Development and investments in the power sector through restructuring

31 Power sector liberalisation: goal and restrictions Restrictions of free pricing schemes at first stage of market transformation (15 % of all transactions) Creation of protection mechanisms for low-income strata of the population Creation of social rehabilitation mechanisms for the power sector’s released employees State control over functioning of certain power sector entities within competitive sectors (guaranteeing suppliers, generating companies) Way to a market with manageable risk Second stage: Development and investments in the power sector through restructuring

32 Changing the power sector structure with transition to the market Generation LV Grid Supply RAO «UES of Russia» holding CDU Regional energos HV Grid Power plants Independent generating company HV Grid LV Grid Consumers Independent generating company Second stage: Development and investments in the power sector through restructuring

33 … reliable functioning of the power sector: - Hydraulic power plants of one cascade, functioning under the conditions of technological dependence, must be included in one genco. …elimination of the possibilities to manipulate prices: - The summarised volume of installed capacity of power plants to be included in every genco must be limited - Inclusion of all price forming power plants located in one price zone of electricity wholesale market into one genco is prohibited Criteria of setting up generation companies secure......equal start conditions: - Equalisation of summarised installed capacity and expected year profit of gencos. Small, not competitive gencos are not to be created. - The age and wear and tear of production capacities of different gencos must be taken into consideration. Second stage: Development and investments in the power sector through restructuring

34 Pskov CHPP; Stavropol CHPP; Troitsk CHPP; Surgut CHPP-1; Serov CHPP Kostroma CHPP, Cherepetskaya CHPP; Pechorskaya CHPP, Uzhno- Uralskaya CHPP, Kharanorskaya CHPP; Gusinoozyorskaya CHPP CHPP-5 (Shaturskaya); Smolensk CHPP; Yayvinskaya CHPP-16; Surgut CHPP-2; Berezovskaya CHPP-1 Nevinnomysskaya CHPP; Reftinskaya CHPP; Sredne-Uralskaya CHPP; Konakovskaya CHPP Ryazan CHPP, CHPP-24 (Ryazan MGDES), Novocherkasskaya CHPP-1; Kirishskaya CHPP; Krasnoyarsk CHPP-2, Cherepovets CHPP The List of Generating Companies that has been submitted to the Russian Government Verkhne-Tagilsk CHPP; Nizhnevartovsk CHPP; Urengoy CHPP, Iroklinskaya CHPP & hydro- electric plant ; Perm CHPP, CHPP-4 (Kashirskaya) Second stage: Development and investments in the power sector through restructuring

gas Baltic states gas Europe gas investment, US$ mn fuel type capacity to be installed, MW export capabilities Kaliningrad co-gen plant-2 Surgut thermal plant Krasnodar co-gen plant Upper Volga hydroplant cascade Ivanovo thermal plant Dzerzhinsk co-gen plant Schekino co-gen plant North-Western co-gen plant Pskov thermal plant hydro 273.6gas gas gas gas Turkey gas Berezov thermal plant coal Scandinavia Japan gas Sakhalin thermal plant «5,000 MW» programme offers great investment opportunities Second stage: Development and investments in the power sector through restructuring

36 Principles of making deals with the capital of the Holding Independent evaluation of assets to be redistributed Shareholders have the right to suggest candidates of evaluation specialists Competitive principle of selling assets Public openness of information Equal conditions for every shareholder when buying out securities Avoiding the decrease in credit debt security Using market prices of assets on the basis of the independent evaluation The opportunity for shareholders to take part in founding daughter companies Second stage: Development and investments in the power sector through restructuring

37 Effective interaction with the interested parties is the pledge of success in restructuring Regional authorities Managers of RAO «UES of Russia» Big consumers Suppliers Minority shareholders Big business Managers of AO-energos and federal power plants Restructuring of RAO «UES of Russia» and AO-energos Russian State Duma and Federation Council Second stage: Development and investments in the power sector through restructuring