Power Sector Reform in Russia: Results and Steps Forward Y.A. Udalcov, Board Member, Head of the Reform Management Centre JSC “Unified Energy System of Russia” London, November 12, 2004 “Utilities Day”

2 Reform The Reform Key Elements  Creating Legal framework for reforms and electricity sector  Unbundling of regional energo  Creating the market infrastructure  Setting up independent market participants  Liberalization of electricity market  Restructuring the Holding (RAO UES of Russia)

3 Reform The Main Stages  Stage 1. Design Legal foundation. Corporate transformation schemes. Definition of list of new entities…  Stage 2. Formation Regional energo’s unbundling. Interregional mergers. Wholesale market infrastructure development.  Stage 3. Liberalization Setting up new businesses. Wholesale market launch with vesting contracts scheme.  Stage 4. “Packing up” – RAO UES reorgainzation and distribution of shares of new companies among RAO shareholders.

4 Reform Legal and Conceptual Framework of Reform In force  Reform concept - "On Restructuring the Electric Power Industry of the Russian Federation“ Decree of the GOR July 2001  Legal foundation – Electricity reform Laws adopted in March 26, 2003  Implementation plan – RAO UES strategy paper adopted by RAO UES Board in May 2003  Liberalization start-up – Wholesale market regulation Decree of the GOR October 2003 To be adopted  Retail market legal framework - Decree of the GOR  Investment guarantee mechanism – Decree of the GOR  Wholesale market rules – Decree of the GOR

Restructuring Regional Vertically Integrated Companies: Plan for Complete Unbundling Vertically integrated companies – total quantity 22 Q Q Q Q Q1-Q Isolated energy systems Divided companies – total quantity Divided companies - quantity during the period Q Q Q

6 Creating Electricity Market Infrastructure TransmissionDispatching 7 Inter-Regional Transmission Companies (ITC) were established Valuation of assets transfering to ITC’s close to completion Distribution Configuration of the 4 Inter-Regional Distribution Companies (IDC) was approved by the Board of Directors of RAO UES All but isolated energy system passed dispatch functions to System operator. The transfer of the operational and dispatch control functions to System operator began in 2002 Transmission grids will be passed to ITC’s in 2005 IDC’s will be established by the end of the year IDC’s are expected to be completely formed in the middle of 2005 In 2005 System operator will buy out dispatch infrastructure Past Present Future

7 December 2004 Restructuring Generation: Wholesale-Market Generation Companies (WGC) WGC 1 WGC 2 WGC 3 WGC 4 WGC 5 WGC WGC 7 WGC № WGC established/under establishment December 2004 December- January Schedule is forming WGC establishment approved by RAO UES Board of Directors State registration of WGC Transition to a single share completed Subsidiaries joined to WGC 1Q2Q3Q4Q 1Q2Q3Q4Q1Q2Q3Q

8 Restructuring Generation: Territorial Generation Companies (TGC) Operation since April 1, holding leasing TGC 1 TGC 2 TGC 3 TGC 4 TGC 5 TGC 6 TGC 7 TGC 8 TGC 9 TGC 10 TGC 13 TGC 14 TGC 11, 12 The set-up schedule will be determined after the approval of the reorganization plan of Kuzbassenergo will be formed as a result of the restructuring of Моsenergo Merge TGC which creation had started TGC №

9 Development of electricity market: “5-15%” model Free Trade Sector (FTS) has beginning work since November 1, 2003 in accordance with “Wholesale Electric Power (Capacity) Market Rules of the Transitional Period” (approved by the Decree of the Federal Government №643, Dated October 24, 2003)  The year volume of electricity traded through FTS (since November 2003 till October 2004) was about 41 T Wh  FTS share equal to about 9% generation of European Russia and Urals  In October 2004 free market prices were 4,2% lower than regulated prices  106 entities signed joining agreements to the Market System, 1/3 of them are independent of RAO UES of Russia weighted average price rub/ MWH FTS weighted average buying price Regulated sector tariff (including capacity since January 2004) nov.dec.jan.feb. mar.apr.mayjunejuleaug.sept.oct.

10 Development of electricity market: Proposed Changes to the Wholesale Market Model Actual modelProposed model A regulated segment based on regulated tariffs System of vesting contracts + bilateral financial contracts A competitive segment with voluntary participation of the buyers Day ahead LMP based market A balancing sector based on regulated tariffs and on rise/reduce factors Competitive balancing market Ancillary services are not paid.Market incentives for participants to provide ancillary services – competitive “market of system services”

11 Main Tasks for 2005 Implementing the Decisions Made  Completing regional companies reorganization – “corporate unbundling”  Creating market infrastructure (IDCs, ITCs)  Restructuring of generation - creating WGCs and TGCs  Set up businesses of new market participants – “management unbundling”  Development of wholesale market rules  Development of vesting contracts scheme (legal and commercial)  Groundwork for wholesale market launch on Jan 1,2006

12 Thank you for your attention