TRANSITION STEPS IN THE ENERGY SECTOR ION LUNGU PRESIDENT OF ANRE

gradual introduction of competition in generation and supply; KEY PRINCIPLES OF THE ROMANIAN ENERGY POLICY creating an electricity market based on transparency, fairness and non-discrimination; establishing a regulator to regulate monopolies (where they remain), and to foster competition; unbundling the activities of generation, transmission, distribution and supply; gradual introduction of competition in generation and supply; licensing the new market participants; non-discriminatory, regulated access for third parties to the electricity network

GENERAL RULES FOR THE ORGANIZATION OF THE ELECTRICITY SECTOR Electricity Law 318/2003 Government Decisions regarding the restructuring of electricity sector

CONSUMERS - 8537476 INSTALLED POWER GENERATION 17.9GW RESERVE MARGIN 2003 = 46,9 % (Available capacity – Peak demand/Available capacity) GENERATORS PARTICIPATION TO ELECTRICITY GENERATION IN 2003 TYPE OF FUELS USED FOR ELECTRICITY GENERATION IN 2003 Total overhead transmission lines – 8 800 km Substations – 76; Power transformers - 207 CONSUMERS - 8537476 Total distribution lines – 310127 km Substations – 1296

EVOLUTION OF ELECTRICITY GENERATION

CONEL RENEL RENEL Government Decision no. 365/1998 FROM AN INTEGRATED MONOPOLY TO A COMPETITIVE ELECTRICITY MARKET (1) Government Decision no. 365/1998 RENEL RENEL Nuclearelectrica Govora Romag CONEL Electrica Hidroelectrica Termoelectrica

CONEL Government Decision no. 627/2000 FROM AN INTEGRATED MONOPOLY TO A COMPETITIVE ELECTRICITY MARKET (2) Government Decision no. 627/2000 Nuclearelectrica Govora Romag CONEL Electrica Hidroelectrica Termoelectrica Nuclearelectrica Govora Romag Electrica Hidroelectrica Termoelectrica Transelectrica OPCOM

FROM AN INTEGRATED MONOPOLY TO A COMPETITIVE ELECTRICITY MARKET (3) 7 Thermal producers T1 T2 T3 T4 T5 T6 T7 Hidroelectrica Hydro Producer Nuclearelectrica Nuclear producer Almost 20 municipal CoGen producers and IPP’s, other producers RENEL Transelectrica Transmission and system operator Market operator D_S1 D_S2 D_S3 D_S8 8 Distribution and supply companies (two of them will be privatized in the second quarter of 2004) S53 S9 S10 S11 45 Suppliers

ACCESS TO THE NETWORK - REGULATED The restructuring process and the development of the regulatory framework followed the European Directive provisions: GENERATION - the construction of new capacities for electricity generation, cogeneration, transmission and distribution and the refurbishment of the existing ones are subject to authorisation TRANSMISSION SYSTEM OPERATOR function fulfilled by CN Transelectrica SA, member of UCTE from May 2003 MARKET OPERATOR function fulfilled by CN Transelectrica SA’ subsidiary SC OPCOM SA DISTRIBUTION SYSTEM OPERATOR function fulfilled by the 8 distribution and supply companies created following the restructuring of SC Electrica SA MARKET OPENING – 40% ACCESS TO THE NETWORK - REGULATED

TRANSMISSION SYSTEM OPERATOR May 8, 2003 – UCTE membership Fully unbundling - independent TSO company ( legal, management, ownership) Neutral toward electricity market arrangements (not allowed to be involved in electricity business) Technical Grid Code in line with UCTE Operation Handbook - full responsibility for the Power System security of Supply - no major incidents since unbundling (2000); facing very tough operational conditions in 2003 (severe drawn, NPP outage) Cross border capacity over 15 % - complying with Barcelona target

PRIVATIZATION OF THE ENERGY SECTOR - the most important target of the Romanian Government ELECTRICITY DISTRIBUTION Electrica Dobrogea and Electrica Banat Finalization of the negotiation and signature of the contract: end of June 2004 Electrica Moldova and Oltenia Receiving letters of interest from investors: 31 May 2004 Short listing of the investors: 30 June 2004 Continuation of the privatization for 4 distribution companies N.B. Transparency of the process based on the by the public tender procedures Basic principles, the investors have to comply: Full compliance with EU Directives Non discriminatory access to the grid based on regulated tariffs Investors will operate based on clear regulatory framework published by A.N.R.E. Opening of the market is mandatory Legal unbundling of the supply from distribution by 2007

POWER GENERATION Promotion of two green field projects by private equity participation with a total capacity of about 500 MW - Selection of the investors: June 2004 Promotion of the privatization on the lignite based on energy complexes: - Turceni – negotiation with the 5 candidates and selection of the qualified bidder till the end of 2004; - Rovinari and Craiova Isalnita – selection of the consultant till the end of September 2004 Hydro power generation: Equity participation in more than 100 small hydropower generation with a total production of 300 – 400 GWh. Process has started for the first group Privatization will continue based on a monthly fixed schedule till the end of 2004

ANRE - public institution under the co-ordination of the Prime Minister Mission - to create and implement fair and independent regulations to ensure an efficient, transparent and stable functioning of the electricity and heat sector and markets while protecting the interests of consumers Appointment Power - President and Vice President of ANRE are appointed by the Prime Minister for 5 years, upon proposal of the Minister. The Commissioners are appointed for 5 years by the Minister. Financing - sources outside the state budget covered from license and authorization fees and contributions paid by sector companies.

THE MAIN FUNCTIONS OF ANRE AS A REGULATORY BODY Issue and withdraw authorizations and licenses Regulate the access to the T & D grids Draw up the pricing methodology and set the tariffs and prices for the activities with monopoly characteristic Issue technical and commercial regulations, supervise the functioning of market mechanisms Pre-contractual disputes resolution Protect the interests of investors and energy end-users

ORDERS AND DECISIONS ISSUED BETWEEN 1999-2003 Orders and decisions on: Year Total 1999 2000 2001 2002 2003 1 Licenses, permits and authorisations 7 156 262 243 157 825 2 Commercial regulations 19 50 28 23 139 3 Resolution of pre-contractual disputes - 32 83 38 181 4 Prices and tariffs 509 821 567 199 2100 5 Technical regulations 10 11 42 6 Other regulations regarding the electricity and heat sector and the in-house organisation of ANRE 44 121 92 104 113 474 84 879 1284 984 530 3761 -There were cases when several licenses or authorisations were granted, withdrawn or modified through a decision. - The number of orders and decisions diminished in 2002 due to the take over by ANRSC of a part of ANRE activity.

THE MAIN SECTOR REGULATIONS ISSUED BY ANRE Wholesale Electricity Market Commercial Code Network Codes (Grid Code, Distribution Code) Metering Codes Technical and commercial regulations Tariffs methodologies Authorizations and licenses Rules regarding the connection to the networks based on the Romanian legislation and the Aquis Communautaire for the electricity sector provisions

The objectivity and transparency of the regulatory process is ensured by: permanent consultations with the parties involved by means of surveys, public and bilateral discussions as well as through mediation meetings to accommodate divergent viewpoints, the ANRE’s orders and decisions may be appealed in Court within 30 days from the notification of the parties or, if of general interest, from the date of their publication in the Romanian Official Monitor the annual reports regarding ANRE’s activity and budget the regulator’s code of ethics

AUTHORIZATIONS AND LICENSES authorisations: 22 establishment authorizations and 5 operation permits 365 operation authorizations No. Type of license 1999 2000 2001 2002 2003 Electricity Heat 1 Generation 3 - 10 48 4 95 19 37 7 2 Transmission 6 Dispatch& Market operation Ancillary services 5 Distribution 23 33 14 Supply 49 13 91 30 31 18 TOTAL 126 20 220 59 83

WHOLESALE TRADING ARRANGEMENTS Generating Companies Eligible Consumers TRANSELECTRICA Transmission System Operator Electricity Suppliers Captive Consumers Import/Export Import/ Export LEGEND: Power Purchasing Contracts Transmission & System Services Contracts Ancillary Services Purchasing Contracts Power Purchasing over the Spot Market Distribution Contracts ELECTRICA Distribution & Supply The Spot Market (OPCOM)

TRADING ARANGEMENTS ON: CAPTIVE MARKET COMPETITIVE MARKET Portfolio contracts for the sale and purchase of electricity, with set quantities and regulated prices Long term must run/PPA contract for the sale and purchase of electricity, with regulated prices (Nuclearelectrica) Framework contracts for electricity purchase from independent power producers and autoproducers Framework transmission contracts, ancillary service provision contracts and market administration Framework distribution contracts Framework supply contracts. Bilateral contracts for the sale and purchase of electricity between the market participants, with negotiated quantities and prices The day-ahead market to ensure a balance between contracted quantities and actual consumption.

Electricity market opening degree

CONTRACTS ON WHOLESALE ELECTRICITY MARKET – 2003

Transmission network is robust and well developed REGULATED TRANSMISSION TARIFFS (1) Transelectrica responsible for transmission and system operation service (TSO) Transmission network is robust and well developed No congestion due to sufficient transmission capacity and severe reduction of industrial consumption during the last decade

REGULATED TRANSMISSION TARIFFS (2) 14 zonal tariffs with two components: injection component extraction component Transmission charge is USD 5.0/MWh on average and does not depend on the electric paths and distances Nodal pricing REI-DIMO network reduction technique Based on SRMC including losses and congestion to establish efficient price signals

5 different tariffs for the use of: 110 kV network MV network REGULATED DISTRIBUTION TARIFFS 5 different tariffs for the use of: 110 kV network MV network LV network 110 kV/MV transformers MV/LV transformers Distribution charge does not depend on the electric paths and distances Rate of return regulation

ELECTRICITY - AVERAGE PRICES PER ACTIVITIES

STRUCTURE OF ELECTRICITY AVERAGE PRICE TO END-USERS

AVERAGE ELECTRICITY TARIFFS (EXCLUDING TAXES)

Consumer protection Ensured through: License conditions requesting the holder to be responsible to provide dependable services Monitoring of license holders by enforcing a standard content for the Annual Activity Report and Financial Reports submitted by companies to ANRE on a yearly basis Market mechanisms to prohibit deceptive and anti-competitive market practices Solving pre-contractual disputes in the sector and between suppliers and consumers Monitoring compliance of suppliers with the guaranteed performance standards Information and counseling for consumers in order to be able to make appropriate choices.

Imbalance volumes by company EVOLUTIONS ON MEDIUM AND LONG TERM Bilateral contracts market with self-scheduling of generators, supplemented by a voluntary power exchange (day-ahead market) and a balancing market. BILATERAL CONTRACTS DAY AHEAD ON THE DAY SETTLEMENT System Operator Balancing Market MP P Q S G Day Ahead Market Simple Bids Firm Volumes by Company Simple bids by unit Metered Volumes Meter data Imbalance volumes by company Adjustments to Day Ahead schedule BM Volumes Market Operator G- generators S - suppliers Physical Notifications by unit

Principle of the Day Ahead Market Bilateral contracts Principle of the Day Ahead Market all generators and suppliers (consumers) submit bids for the amount of energy they are willing to produce (consume) for a certain price in each hour (trading participants may also submit export and import offers) the market clearing price is set as the intersection between the supply and demand curve bidding on portfolio/company basis generators decide themselves how to allocate total production on individual generation units, physical notifications to System Operator establishment of balance responsible parties

Principle of Balancing Market (BM) TSO contracts reserves before day ahead (on a company basis) the balancing market starts on the day ahead, following the acceptance of physical notifications by the TSO the BM operates on a unit basis, producers have to offer all remaining capacities (price, quantity) all accepted offers establish an obligation for the unit to deliver the corresponding type and amount of balancing energy

Technical interconnection capacity (ATC) established by TSO Allocation of cross-border interconnection capacity Technical interconnection capacity (ATC) established by TSO Commercial allocation through auctions: yearly, monthly, daily Use it or lose it principle. The mechanism should be agreed with neighboring countries.

Physical notifications Participants to the new trading platform Market Operator Auction Participants Balancing BRP Settlement Administrator TSO Trading Scheduling & imbalances Ancillary services DAM Cross-Border capacities Determine & publish ATC Offer Operate Settle splitting Physical notifications (for DAM) Submit physical notifications Pay for imbalances Determine needs Use for system operation Check and approve and procure

Evolutions of transmission and distribution price control Transmission price control Revenue cap regulation in order to improve efficiency and increase incentives Transmission connection service (i.e. connection charges) regulated as excluded service and not part of the caps Transmission caps supplemented by quality monitoring Distribution price control Tariff-basket approach Multi-variant network tariffs with multinomial parameters Regulatory period’s length: 3 years Building blocks approach Real, risk-adjusted pre-tax WACC Price control supplemented by quality regulation