1 Speech by Mr. Y. Udaltsov, member of the Management Board of RAO «UES of Russia», at the seminar «Central and Eastern Europe: A source of Future Growth for Utilities?» Reform: the next steps London, June 30, 2004

2 Company

3 RAO “UES of Russia” Today: Operating Highlights Source: RAO “UES of Russia”, IEA The World’s Ten Largest Electricity Companies (2003) >156RussiaRAO UES Capacity (GW)Home-baseCompany 42South AfricaESKOM 43GermanyRWE 45ItalyENEL 49FranceSUEZ 54GermanyE.ON 59JapanTEPCO 121FranceEDF 151ChinaSPCC 42USA AEP Key Facts Except for nuclear capacity and several large independent generators, UES controls the electricity industry in Russia 72% of Russia’s installed generation capacity 69% of Russia’s electricity output 32% of Russia’s heat production 96% of Russia’s power transmission lines

4 52% RAO UES Holding – current ownership structure Minority Shareholders Other Minority Shareholders Russian Federation RAO “UES of Russia” 48% System Operator 44 federal power plants, including 8 plants under construction Federal Grid Company 100% Sales Generation Dispatching Services 72 Regional Power Companies 100% T&D Grids

5 RAO “UES of Russia” Today: Key Financial Data 2003 (Forecast Data): Revenue – around $19,6 bn 2002: Revenue – $15,83 bn US$ m9 months ended 30 Sept months ended 30 Sept months ended 30 Sept 2003 Revenue8,47410,32813,720 Net Profit EBITDA1,0701,4942,720 EBITDA Margin12.6%14.5%19.8% Operational Margin1.2%0.6%8.9% Net Margin10.7%6.5%4% Fixed Assets24,20125,83429,293 Shareholder Equity14,40416,73019,733

6 100% 150% 200% 250% 300% 350% 400% 450% EESR equities Russian Trade System index Growth of the market capitalisation of RAO «UES of Russia» (RTS data) In the recent two years the stocks of RAO «UES of Russia» were largely outperforming the Russian securities market as a whole

7 Reform

8 RAO UES role in the legal base creation of the power sector reform  Fundamental bills governing the electricity industry restructuring process were enacted into law in April 2003 Laws  Directive of the Russian Federation Government No 865-r "Plan of activities aimed at the restructuring of the electricity industry in " was signed on  The "Energy Strategy of Russia for the period up to 2020” (Directive of the Russian Federation Government No r) was adopted on  Directive of the Russian Federation Government No 1254-r "Composition of the generation companies of the wholesale electricity market" was signed  Regulation of the Russian Federation Government No 643 ”Rules of the transitional wholesale electricity market" was signed on  Directive of the Russian Federation Government No 1939-r "On the participation of the state in the establishment of interregional transmission companies" was signed on Governmental acts

9 Operation of the competitive sector of the wholesale electricity market (5-15%). Preparation for the opening of the electricity markets Growth of the weekly trading volumes in the competitive sector of the wholesale market (million kWh)  The first trading session was held on November 1, 2003  The share of the sector has exceeded 7% of the wholesale market of the European Russia and Urals  The price levels of the competitive sector are less then the tariffs of the regulated sector for 4.6%  The number of the market participants continues to grow  158 million kWh  14 market entities  882 million kWh  84 market entities weeks

10 Restructuring of AO-energos  Restructuring of the regional utilities involves their unbundling with spinning off separate lines of business  By June 1, 2004, the Board of Directors of RAO UES approved 51 restructuring project out of 70 restructuring projects of AO-energos requiring approval 43 utilities launched their restructuring projects Implementation schedule of the utilities restructuring process 2Q Q Q20042Q20051Q * 3 3Q2005 Total (cumulative) Current quarter * - JSC “Pskovenergo” is to be restructured not by “basic variant”

11 State owned companies (State owns more than 50% + 1 share): FGCSO Hydro generation- based WGCs Holding of guaranteed suppliers, isolated AO-energos Isolated AO-energos Guarantee suppliers IDC Private companies (State owns less than 50% of shares): Reforming of RAO “UES of Russia” Industry ownership structure by 2008 About 20 TGCs Thermal generation- based WGCs FGC – Federal Grid Company (the Unified National Electricity Grid) IDC – Interregional Distribution Company SO – System Operator WGC – Wholesale Generation Company TGC – Territorial Generation Company Supply Repair business

12 Establishment of new industry players Consolidation of assets comprising the Unified National Electricity Grid (UNEG) Operational and dispatch control structure  56 regional dispatching units (RDUs), established as branches of the System Operator, were launched by The units are responsible for the regional operational control in 62 utilities  By the end of 2004, restructuring of operational control function in 7 more AO-energos is expected to be completed, including the utilities independent from RAO UES  On the RF Government approved Directive No 1939-r "On the participation of the state in the establishment of interregional transmission companies" (stake of the Russian Federation in their capital is set at 85%, the stake of the Federal Grid Company is set at 15%)  By , 49 branches (out of 53) were set up, based on the assets of transmission networks belonging to the Unified National Electricity Grid  RAO UES signed an order directing commencement of the handover of the UNEG assets owned by AO-energos to interregional transmission companies (ITCs) IDCs  Interregional distribution companies (IDCs) are scheduled to be set up as wholly- owned subsidiaries of RAO UES. Contributions into their share capital will be made by shares of the distribution companies spun off in the course of reorganisation of AO-energos owned by RAO UES  On April 23, 2004 the Board of Directors of RAO UES approved the configuration of the IDCs and principles of their management during the transitional restructuring period  IDCs are scheduled to be incorporated in 3Q04

13 Raising the efficiency of the current operations through cost-cutting and tariff-limiting measures Cost management programs of RAO UES for the period of : the savings exceeded RUR45 billion Setting tariff growth caps for by each electricity system and for RAO “UES of Russia” as a whole Cost management programs RAO UES tariff policy initiatives Government Directive No 1754-r dated New approach to cost management implemented at the utilities level 20% 11% 8% 8.5% 7.5% 6% 9.5% 7.5% 5% 10% 15% 20% gas Inflation rate electricity Decisions adopted at a meeting of the Russian Federation Government on which discussed the 3-year natural monopolies tariffs revision program represented a quantum leap in the tariff-setting system Tariff growth caps:  Instead of cutting costs based on projected costs (“cost plus” basis) – avoiding growth of costs above the inflation and tariff levels (“inflation minus” basis)  Tighter control measures of the utilities' costs have been implemented

14 Investments guarantee mechanism

15 Project objectives To engage investors in construction of new generating capacities to cover pending capacity deficiency, their commissioning being planned for 2006 In the immediate 5 years the energy market will be in a formative stage and won’t provide for engagement of investors without applying special mechanisms! The task is to offer a special mechanism of attracting guaranteed investments during transition period (5 years)

16 What do we expect from the use of the mechanism  Expectations – electrical energy generation during certain time intervals to cover energy deficiencies  Minimum cost of the mechanism’s implementation for market community  Cost signals for investor and market providing economic efficiency Effective peak capacities are needed  Objects for attraction of investments :  increase of rated capacity through construction of new electric power plants or new auxiliary blocs on operating electric power plants

17 Investor’s interests We take into consideration the interests of foreign and Russian investors Investors want guarantees as to the reimbursement of committed facilities and rate of return:  Long-term agreement with reliable and credit-worthy counterparty, ensuring backing of committed facilities and rate of return  Legislative consolidation of legitimacy of such agreement  Escaping the risk, connected with a rate of foreign exchange (contract value should be in Euro)  Guaranteed fuel supplies with due account for the investor’s generating capacities utilisation  Integration into a future model of electric energy market (power)  State guarantees for all cases of default of a treaty: changes of legislation, non-fulfillment of obligations by the counterparty, etc.

18 Ways to secure investor’s interests and correct cost signals Two-stage mechanism of payment for investor’s services:  Reimbursement of committed facilities and rate of return – through payment of services related to provision of technological reserve of generating capacities (demand charge analogue) – through tariff of SO  Payment for produced electric energy – through payment for electric energy cost (energy tariff analogue) Why such mechanism of payment? It is the most effective because:  Provides correct cost signals to investors and market  Maintains capacity in a state of readiness at any time specified by SO at minimum prices  Provides for generation of electric energy only when it is profitable for investor and market  Allows escaping guarantees to the investor in terms of annual load of generating capacities  It smoothly incorporates into competitive market of power and electric energy

19 Financial consequences of the mechanism implementation Attraction of investments into construction of МW, with guarantee period (pay-off period) being 10 years Cost of construction of 1 МW of power ($/МW) Rate of return Cost of mechanism New tariff of SO (today 0.88 copecs/КWh) Increase of average tariff for end users %5.72 copecs/КWh6.6 copecs/КWh9.1% %3.22 copecs/КWh4.1 copecs/КWh5.1%

20 Thank you for your attention