1 2005: Stages of the Power Industry Reform Moscow, March 9, 2005 Member of the RAO UESR Executive Board V. A. Zubakin

2 Report Contents Resolutions of the Russian Federation Government (2004). Formation of WGC. Formation of TGC. Formation of IDGC. Performance the Competitive Sector. Wholesale Market of Electric Power (Capacity) in the Transition Period. New Model for the Regulated Market. Balancing Market, System Service Market, and Capacity Market. Rules and Specifics of the Retail Market of Electric Power.

3 Resolutions of the Russian Federation Government (2004) Decree No. 966 of On the Plan of Measures For Reforming the Power Industry Decree No р of On The Formation of WGC No. 7 (HydroWGC). Meeting of the Russian Federation Government of On the Course of the Russian Federation Power Industry Reform:  approval of the course of the industry reform;  summation of the reform progress and development of the reform plans;  appraisal of the reform progress (rate and schedule). Resolution No. 854 of Authorization of rules for operating and dispatching. Resolution No. 861 of Authorization of rules for a non-discriminatory access to: power transmission services; operating and dispatching services in the power industry; wholesale market sales system administrator services; Authorization of rules for technological attachment of power-receiving devices.

4 Formation of Wholesale Generation Companies (WGC) WGC 1 WGC 2 WGC 3 WGC 4 WGC 5 WGC 6 WGC 7 HydroWGC WGC establishment approved by the RAO UESR Board of Directors Completion of transition to the unified WGC share Q2Q3Q4Q 1Q2Q3Q4Q 3Q Schedule under development State registration of WGC

5 Formation of Territorial Generation Companies (TGC) State registration of TGC holding leasing TGC 1 TGC 3 TGC 5 TGC 7 TGC 8 TGC 9 TGC 10 TGC 13 TGC 14 TGC 11, 12 The set-up model and schedule to be determined after authorization of the project for reorganizing Kuzbassenergo merge TGC 2 TGC 4 TGC 6 holding merge to be established on completion of Mosenergo reorganization TGC establishment approved by the RAO UESR Board of Directors

6 Formation of Interregional Distribution Grid Companies (IDGC) IDGC configuration authorized by the RAO UESR Board of Directors on : IDGC 1 ( Central and Northern Caucasia Regions ) IDGC 2 ( Northwestern Region ) IDGC 3 ( Ural and Mid-Volga Regions ) IDGC 4 ( Siberia ) Establishment of IDGC-5 (Far East Region) may be decided on in the future in the context of restructuring of regional AO-Energo companies. Introduction of shares into equity capital of 100% subsidiary affiliate of RAO UES of Russia of relevant IDGC  territorial contingence of RGC included in IDGC;  comparable total balance-sheet value of IDGC;  comparable total length of lines on the balance of RGC that are included in IDGC.  Completion of basic formation of IDGC: late  Completion of formation of all IDGC: Schedule Principles of IDGC Configuration IDGC < 49% owned by RAO UES of Russia, > 49%, by minority shareholders additional share issue RGC 1 … RGC 2 IDGC 100% subsidiary affiliate of RAO UES of Russia

7 Performance of the Competitive Sector 5th in Europe As per volume of sales in physical terms. 9 th in the world As per volume of sales in physical terms. purchased in free market sector, MWh weighted average purchase price in free market sector, RUR/MWh price in regulated sector (from January 2004, including capacity), RUR/MWh volume, MWh = 1% of aggregate volume of production Data from Karana company

8 Not earlier than 2007: fully liberalized power market. From January 1, 2006: unified wholesale market for the Ural- European and Siberian price zones. From April 1, 2005: launch of the 5-15 market in Siberia. From September 1, 2005: launch of the balancing market. Wholesale Market of Electric Power (Capacity) in the transition period SPECIFICS OF THE WHOLESALE POWER MARKET MODEL IN SIBERIA  Differentiation of hourly power volume in the free trade market: 5% for thermal power plants; 2% for hydropower plants + 15% during floods; Consumers can purchase 15%. System Operator - Central Dispatch Administration is entitled to introduce idle discharge hazard mode for hydropower plants;  During floods, hydropower plants may increase electric power sales (up to 15 %). Transition Period

9 New Model for the Regulated Market Launch of the model in Europe and Siberia: early Package of contracts between suppliers and buyers; Under “take or pay” terms; For Capacity and electric power; Provision for two prices (tariffs): electric power price and capacity price; Electric power volumes not covered with regulated bilateral contracts to be sold and bought in the competitive sector. TypeBuyer CategoryContract TimePeriodicity of Contracting 1 Individual consumers (homes) Up to 3 yearsOnce 2 Major power-intensive consumers Up to 5 yearsOnce 3 Other1 yearAnnually, with possibility of prolongation Schedule Specifics Content

10 Balancing Market, System Service Market, and Capacity Market BALANCING MARKETSYSTEM SERVICE MARKET CAPACITY MARKET  To replace the existing deviation sector;  Selection of suppliers on the basis of price bids;  Change of load for suppliers;  Minimization of power supply costs;  Balanced nodal prices.  Self-determination of agents;  Mechanism for selecting suppliers; Composition of services;  Absence of strict regulation in the sphere of SS; (!) No increase in ultimate tariffs for consumers.  Mechanism for selling capacity;  Participants: all entities of the Wholesale Market of Electric Power  Capacity-based reliability of power supply;  Smoothening of volatility (of power prices and supplies;  Capacity auction for 3 years. Launch of the market in Europe +Ural+Siberia: August-September Launch of the pilot project: November 2005  Russian Federation Government’s resolution on the rules: 3 quarter of 2005  Launch of the SS market: March Launch of the market: May 2006 Market of the transition period: until December2008 Target market: from SCHEDULE OBJECTIVE, MAIN POINT

11 Rules and Specifics of the Retail Market of Electric Power Basic Provisions procedure for granting guarantee supplier (GS) status and definition of borders: 1) for the first time, GS’s to be appointed; 2) next time, GS’s to be determined on a bidding basis; rules for entering into contracts for power consumers and GS’s; rules for “pickup” of consumers in case of problems with power grid companies; procedure for interaction of entities. 3 quarter of 2005 – authorization of the rules by the Russian Federation Government Throughout 2005 – participants, retail and network tariffs to be determined. Preferential tariff regulation; Applicability of the cross-subsidy system; Inadmissibility of free change of suppliers for consumers; Unpreparedness of the Wholesale Market of Electric Power for a large number of participants. Specifics of the Transition Period Schedule

12 Thank you for your attention