Russian power sector reform Presentation by Anatoly Chubais, Chief Executive Officer, RAO UES of Russia 19 June 2001Moscow

2 Inter-system grids almost 100 % Inter-system grids almost 100 % Generation 85 % Generation 85 % 440 thermal and hydro power stations (28 federal power plants, including 11 hydro stations, belong to RAO “UES of Russia”) 342 power stations (including thermal and co-generation power stations - 304, hydro stations - 38, in general small generating plants with common structure and reporting) belong to 72 Regional energos RAO «UES of Russia» in the electric power sector Распред. сети Technological structure 2,7 million km of networks 21 million consumers Share of RAO “UES of Russia” Share of RAO “UES of Russia”

3  SHARE OF CASH PAYMENTS - 20%  WAGE ARREARS - up to 6,0 MONTHS (AO-ENERGO)  NUMBER OF UNPROFITABLE AND LOSS-MAKING AO-ENERGOs - 29  ACTS OF PROTEST BY HOLDING’S EMPLOYEES Most significant indicators of «RAO UES» financial position in 1998 ACTION PLAN TO IMPROVE EFFICIENCY AND FURTHER REFORM RUSSIAN POWER SECTOR (1998)

4 Power consumption growth kWh bln  In 1999, for the first time since the beginning of the crisis power consumption began to grow, surging by 2.8% or 22.9 bln KWh in 1999 and rising by further 3.7% or 30.6 bln KWh in 2000, consumption in Q ,5 bln KWh

5 Supply management: solving the non-payments problem Significant improvement in cash collection Q1Q2Q3Q4Q1Q2Q3Q4Q4Q1Q2Q3Q4 % of cash payments Q1Q1Q2Q

6 Normalisation of settlements with fuel suppliers increasing the share of cash in settlements with Gazprom by the factor of 3.4 (from 27% to 92%). increasing the share of cash in settlements with coal companies by the factor of 4.4 (from 16% to 70%). increasing the share of cash in settlements with oil companies by the factor of 5.3 (from 13% to 70%) During RAO «UES» succeeded in:

7 Settlement of tax payments to the budget in cash 3351,4 1340,6 3410, , ,9 5391, Federal budget Regional budgets Million Roubles Increase by 3,4 times Increase by 4,2 times 62% growth 39% growth

8 Bln Roubles “RAO UES of Russia” Holding’s Sales (F) 100 % 126 % 146 % 137 %

9 Dynamics of key indicators (F) Revenue on cash basis (bln $) Dividends (mln $) Bln $ Mln $ 348% 270% 252% % ,6 22,22 35,7 34,3 0,82 1 1,18 1,61

10 Payables and Receivables’ dynamics (Holding “RAO UES of Russia”) (F) Payables Receivables Bln Roubles 100% 93% 100% 80%

11 Main contents of the draft of Corporate Governance Code of RAO «UES of Russia»... On the matters:  increasing of transparency and extension of corporate events, which are the subject to disclosure to auditor  increasing of the role of Board Of Directors of RAO “UES of Russia” with respect to corporate events in affiliated and dependant companies  extension of corporate deals, which require the approval by auditors and Board of Directors

12 … became the part of the Charter (adopted on the annual convention of shareholders of RAO “UES of Russia” in 2001)  quarterly consideration of plans and reports on the results of the activity of Members of Board by Board of Directors (including fulfilment of deals by RAO “UES of Russia’)  preliminary approval by the Board of directors of the transactions, which alienate from 10 to 25 % of perpetuate assets of RAO “UES of Russia”  determination of the position of RAO “UES of Russia” on the main corporate events and transactions in affiliate and dependant companies (increasing of share capital, fulfilment of transactions, taking part in other organisations etc.)

13 Dynamics of age structure of heads of regional energos and regional power stations Average age of general directors of regional power stations and regional energos

14 Up-to-date business procedures Introduction of International Accounting Standards Budgeting Separate Accounting Business Planning International Audit

15 Despite some positive changes in the sector, key problems remain unresolved Lack of investments, first of all, into fixed assets Cost-based pricing mechanism Non-economic regulation of tariffs FOREM is not a market

16 Competitive sectors Competitive sectors Natural Monopoly To ensure free access to grids Reorganise infrastructure for the market functioning To ensure free access to grids Reorganise infrastructure for the market functioning Generation Reform basis - splitting of monopolistic and competitive sectors in electricity Генерация Establish free pricing and market participants Market rules Regulated tariffs Dispatching Transmission and distribution grids Sales

17 January - March 2001December 2000 May 2001 Power sector reform - historical background Presentation by the Chairman of the Board of RAO UES of Russia at the meeting of its Board of Directors Consideration of the draft Basic Guidelines on Reforming the RF Power Sector at the RF Government meeting Finalising the Basic Guidelines with the assistance of international advisor (Arthur Andersen) General approval of the Basic Guidelines at the RF Government meeting April 2000 Adoption of the regulation on the Basic Guidelines at the RF Government meeting June 2001

18 «Basic Guidelines of the State Politics in Reforming of the RF Power Sector» - key points  Generating companies: the way of creation is set by the RF Government  Regional energos restructuring (separation of the network component) - fosters competitive environment  Federal Grid Company and System Operator - the technological basis of the market  Trading System Administrator - the basis of the market infrastructure, organizes the trading on the wholesale market  The change of the power sector structure during the reform is made in 3 stages  The regional specifics should be taken into consideration during the reform  Legislation is the basis of the reform

19 RAO «UES of Russia» Federal Power stations 27 Regional enrgos (generation, distribution, sales) 72 Central Dispatch Unit (CDU) Unified Dispatch Units (UDU) Inter-system grids Minatom Nuclear stations Other market participants (independent from RAO «UES») Current situation Generating companies 5-7 Regional Energos Generation, sales System operator (CDU+UDU) RAO «UES of Russia» Generating companies, based on Minatom Nuclear stations Other market participants (independent from RAO «UES») Trading System Administrator Federal Grid company Grid subsidiaries of Regional energos 1st stage ( ) 2 phases March, RAO «UES of Russia» unbundling Change of the power sector structure (current situation and the first stage) - combined sketch

20 second Regional Energo (sales, generation) Federal Grid Company System Operator Generating companies 5-7 Regional Energo (sales,generation) less then 40 RAO UES (Federal Grid Company + System Operator) Generating companies 5-7 Nuclear power stations Trading System Operator Independent Sales Companies Grid subsidiries of Regional Energo 2stage ( ) 3stage ( ) Other market participants Nuclear power stations Trading System Operator Independent Sales Companies Other market participants Change of power Sectorstructure ( and third stage) - combined sketch Managing Structure RAO “UES of Russia»

21 The program is being worked out by the PriceWaterhouseCoopers  5,000 MW Program envisages introduction of capacities securing gas savings of up to 6.6 bn cub. m3 per year  12 projects (combined cycle, steam turbine, hydro plants)  The Program includes projects with a lot of work already done  Investments amount to US$ 1,737.4 million  Preliminary feasibility studies for the Program are completed 5,000 MW Program - first stage of investment breakthrough

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