Formation of Interregional Distribution Grid Company JSC IDGC of the Center December 20,2007

1 Strategy of cost evaluation of IDGC/DGC and main proposals

2 Evaluation Strategy

3 Main propositions of DCF evaluation * Plan of organic growth ** On the basis of average historical exceeding of the tariff growth over inflation. *

4 Calculation of tariffs according to the method of the investment capital profitability (RAB) It is supposed that from 2010 to 2012 Expenses+ strategy of tariff regulation on transfer of e/energy through distribution grids will be replaced by the method of profitability of the invested capital ( RAB –return on Regulatory Asset Base). The essence of RAB strategy is guarantee of full return of the means invested into the assets of the company during the fixed period that corresponds to the terms of validity of the assets and reception of the stable income the level of which is defined by the regulator that must conform to the risk profile of DGC and guarantee attractiveness of the branch for the investors. Operational expenses include all the field costs of the company except for amortization of the fixed assets, intangible assets. Return on the capital base must guarantee reproduction of the assets that are effectively used at transfer of electric energy through DGC’s grids. Profit of the capital base is defined by the norm of profitability (regulatory WACC) fixed by the regulator the stake of which will be fixed for the long-term period of regulation equal to all DGC. = + + Necessary gross return by RAB method Operational expenses Return on the capital base Profit of the capital base Capital base x WACC (regulatory)

5 Calculation of the capital base for tariff calculation by RAB method = + + Regulatory capital base (as of the beginning of 2010) Initial capital as of the beginning of 2010 Cost of capital investments for 2H Circulating capital as of the beginning of 2010 For the purpose of correct prognosis of indicators of the operational activity of the distribution grid companies after switch to the system of regulation of their tariffs on the basis of RAB method, calculation of the regulator capital base for the moment of the planned introduction of new rules of tariff design (beginning of 2010) was realised. The initial capital is defined as the cost of the fixed assets that are on the balance of the company as of June 30,2007 and that were re-estimated according to Russian Accounting Standards for the end of Capital investments for 2H from business plans of the companies Circulating capital is defined on the basis of the existing circulation factors and their correspondence to average branch indicators during the accounting period. In the following years of the regulation period the regulatory capital base is calculated by the following way: = + - Regulatory capital base Regulatory capital base of the previous year Investments on the level of amortization of the previous year Change of the circulating capital + Amortization

6 The initial capital used for defining of the regulatory capital base as of the beginning of 2010 is defined as the full cost of asset replacement with regard of their physical depreciation: The initial capital is defined proceeding from the current legislation concerning estimation of cost of the fixed assets for the purpose of book keeping Only the industrial assets are included into initial base of the invested capital (OL, substations, transformer substations), non-profile assets are not considered at calculation of the capital base The investments that were realised at the expense of payment for technical connection are not included into the capital base in order to avoid double calculation.  Full cost of replacement is defined as cost of production or construction under the current conditions of the similar new object that by its functional characteristics is as much as possible similar to the estimated object. Physical depreciation is price decrease due to depreciation, dilapidation and aging, and also deterioration of properties that cannot be eliminated at the expense of the current service. Calculation of the capital base for tariff calculation by RAB method

7 Discount rate and regulatory norm of profitability Cost of the owned capital Risk-free rate (nominal)5.21% Market premium5.50% Beta (unlevered)0.87 Corrected Beta ratio0.60 Country risk0.01 Specific risk for the reformation period0.00% Final cost of the owned capital of the company10.95% Premium for small-cap2.28% – 6.27% Debt capital cost Cost of debt funds (before taxation)10.32% Tax profit rate24.00% Cost of debt funds (after taxation)7.84% Structure of the capital Target correspondence of debt to owned capital61.00% WACC for discounting11.18% – 13.67% Regulatory WACC before taxation9.78% Regulatory WACC after taxation12.86% Calculation of WACC rates

8 Macroeconomic assumptions for model building The main cost items are predicted on the basis of price indexes in the industry of the RF. Wage expenses are predicted in accordance with the pay indexes Prognosis of electric energy losses in physical terms is based on linear variation of the given indicator during the horizon period and achievement of the target indicator by 2015 Prognosis of electric energy losses in percent to net supply for 2015 is provided by JSC UES FGC Calculation of flat cost is based on the following assumptions: Macroeconomic assumptions Indicators 6 months of Inflation in the RF,CPI4,50%8,00%7,60%7,10%6,50%6,00%5,50%4,50%4,00% Cumulative inflation index108,00%116,20%124,50%132,50%140,50%148,20%154,90%161,10%167,50% Price index in the industry of the RF, PPI 4,90%9,00%8,00%7,00%6,50%5,50%5,00%4,00%3,50% Pay index in the RF10,10%13,00%12,00%11,00%13,00%9,00%8,00%7,00% Exchange rate ruble/ US dollar (average annual) 26,5027,2028,2029,0029,1030,0430,8531,3931,79 Inflation in the USA, CPI1,80%2,50% Source: documents adopted by the Evaluation Committee under the Board of Directors of JSC RAO UES of Russia

9 Review of indicators of DGC that are included in the zone of responsibility of JSC IDGC of the Center

10 IDGC of the Center Length of OL in DGC, km Geographical position of IDGC Refusals of connection, МВА Investment requirements of DGC, billion rubles Depreciation of the fixed assets, % Data: Business plans of DGC Summed installed capacity of TCP and Sb, MVA Belgorodenergo, 7.3 Bryanskenergo 1.9 Voronezhenergo, 2.9 Kostromaenergo, 1.4 Kurskenergo, 2.8 Lipetskenergo, 4.7 Orelenergo 1.4 Smolenskenergo, 2.7 Tambovenergo 1.3 Twerenergo, 1.8 Yarenergo, ,00% 47,50% 55,00% 62,50%

11 Length thous.km.* Power 1 318,8 thous. c.u.* Productive supply ,2 Mio.kWh ** Proceeds ,6 mln.rbl. ** * Data as of the end of the 1 st half of 2007 ** for the 1 st half of IDGC of the Center

12 Investment program of DGC for 2Н , mln rbl. Amount of losses at transfer of e/e in 2006, % Correlation – transfer of e/e (mln kW*hour)/ length of OL (km) in IDGC of the Center Productive supply and losses of e/e in DGC in 2006, mln. kWhour Data: DGC Business plans

13 Results of evaluation

14 *On the basis of the assumption that all DGC will take resolutions on reorganisation of the companies in the form of connection to the corresponding IDGC, without consideration of the stake of the existing IDGC. Stake of RAO UES – 50.23% Stake of DGC at technical connection to IDGC of the Center*

15 Calculated ratios of conversion/exchange

16 Appendices

17 IDGC of the Center OL kV, km OL 35 kV, kmOL 1-20 kV, kmOL 0,4 kV, km Rate of OL kV, % Rate of OL 35 kV, % Rate of OL 1-20 kV, % Rate of OL 0,4 kV, % JSC Belgorodenergo % 10%11% JSC Bryanskenergo %6%7% JSC Voronezhenergo %12% 16% JSC Kostromaenergo % 7%6% JSC Kurskenergo % JSC Lipetskenergo %8%7% JSC Orelenergo % 8% JSC Smolenskenergo % 11%8% JSC Tambovenergo %10%7%8% JSC Twerenergo % 15%12% JSC Yarenergo %7% Total % Productive supply of e/e (with regard of losses) in 2006, mln kW*hour Productive supply of e/e (with regard of losses) for the 1 st half of 2007, mln kW*hour Losses in 2006, mln kW*hour Amount of losses in 2006, % Proceeds in 2006, thous.rbl. Proceeds for the 1 st half of 2007, thous. rbl. Tariffs on transfer of e/e in 2006, rbl/MW*hour JSC Belgorodenergo9 580,45 006,4795,47,7% , ,4480,2 JSC Bryanskenergo3 767,51 920,7206,85,2% , ,9400,0 JSC Voronezhenergo7 289,13 636,3871,410,7% , ,7372,8 JSC Kostromaenergo2 485,01 271,4508,617,0% , ,7640,6 JSC Kurskenergo5 152,02 556,0580,010,1% , ,4460,9 JSC Lipetskenergo6 973,63 475,1661,58,7% , ,2333,5 JSC Orelenergo2 248,81 075,8357,413,7% , ,0473,7 JSC Smolenskenergo3 265,51 623,1719,718,1% , ,6660,2 JSC Tambovenergo3 038,11 527,6253,87,7% , ,0463,9 JSC Twerenergo4 500,72 292,6812,815,3% , ,3514,6 JSC Yarenergo5 743,43 573,2470,87,6% , ,3481,8 Total54 044, ,26 238, , ,5 Length of OL by classes of voltage, km Economic indicators of work of DGC for 2006 and 1 st half of 2007 * *Preliminary data for the 1 st half of 2007 Source: Business plans of DGC

18 Technological connection- refusals in connection for 2006 – 1 st half of Refused connection to DGC, (2006 ), kW Refused connection to DGC (1 st half of 2007 ), kW JSC IDGC of the Center JSC Belgorodenergo00 JSC Bryanskenergo JSC Voronezhenergo1680 JSC Kostromaenergo00 JSC Kurskenergo00 JSC Lipetskenergo JSC Orelenergo JSC Smolenskenergo00 JSC Tambovenergo00 JSC Twerenergo JSC Yarenergo00 Total Source: data of UES FGC

19 System of standard units According to the System of standard units for distribution of the general tariff proceeds by classes of voltage adopted by Decree N 25/3 of the Energy Commission of the RF as of May 12, 2000 as appendix to the Strategy of calculation of the amount of payment for the services on transfer of electric energy:  Amount of the overhead power transmission lines (OPTL) and cable power transmission lines (CPTL) is defined in standard units depending from length, voltage,design and material of the supports *: PTLVoltage, kVAmount of chains on the supportMaterial of the supports Amount of standard units for 100 km of OL right-of-way OPTL wood180 Metal160 ferroconcrete130 2metal270 ferroconcrete wood170 metal140 ferroconcrete120 2metal180 ferroconcrete wood160 Wood on ferroconcrete stubs140 ferroconcrete, metal110 0, CPTL Up to 1 kV270  Amount of substations, transformer substations (TS), complex transformer substations (CTS),etc. *: NameMeasurement unitAmount of standard units for 1 measurement unit kV35 kV1-20 kV SubstationSB Power transformer (one- or three-phase) or reactor or booster transformer Equipment unit7,82,11,0 One-transformer TSB, CTSBTSB, CTSB--2,3 Two-transformer TSB, CTSBTSB, CTSB--3,0 One-transformer substation 34/0,4 kVSB-3,5- * Extracts on certain kinds of equipment are presented