1. Georgy TAVADZE Chairman Georgian National Energy Regulatory Commission (GNERC) Budapest, Hungary April 14, 2005 5th Annual Meeting of the Energy Regulators Regional Association Country updates – Georgia

2. © Energy Regulators Regional Association 5th Annual ERRA Meeting Budapest, Hungary, April 14, 2005 Slide 2 Key Events & Activities of GNERC in 2004 and up to April 2005 GNERC (the Commission) from the very day of its establishment and until today is independent. Organizational and financial independence of the Commission is determined by two laws («Law on Independent Regulatory Bodies»; «Law on Electricity and Natural Gas»). Meanwhile, recently the status and functions of the Commission, as well as those of other regulators, became a topic for heated discussions. In the Government proposals on narrowing the sphere of activity of the Commission prevail, they stipulate focusing main attention on tariff regulation. At the same time, there are discussions concerning the possibility to transfer the Commission to funding from the State Budget. On the other hand, a draft law has been submitted to the Parliament, which envisions strengthening of both institutional and financial independence of regulatory bodies.

3. © Energy Regulators Regional Association 5th Annual ERRA Meeting Budapest, Hungary, April 14, 2005 Slide 3 Key Events & Activities of GNERC in 2004 and up to April 2005 The Ministry of Energy of Georgia developed a new draft Law on Energy, which envisions keeping the current status of the Commission. Position of the Commission is the same and is aimed at keeping the current status and corresponding independent system of funding. During the whole period of independence of Georgia the first new hydro power plant was constructed «Khadori HPP» (24 MW) using foreign (China) investments. The HPP was put into operation at the end of 2004 and at the first stage a temporary tariff was set – around 3.5 cent/kWh. In the I quarter of 2005 the second largest (in terms of capacity) HPP was privatized– Vartsikhe HPP (188 MW), in one package with a mining industrial enterprise «Chiaturmanganum».

4. © Energy Regulators Regional Association 5th Annual ERRA Meeting Budapest, Hungary, April 14, 2005 Slide 4 Key Events & Activities of GNERC in 2004 and up to April 2005 Due to significant changes in the national currency exchange rate all tariffs for supply and distribution of natural gas have been revised. 26 small companies were deprived of their electricity distribution licenses, as a result, market structure were finally formed in this sector. Consideration of the tariff application of the distribution company of the city of Tbilisi («Telasi») became an important event. For the first time after privatization the Commission did not sustain the request of the company to increase the tariff.

5. © Energy Regulators Regional Association 5th Annual ERRA Meeting Budapest, Hungary, April 14, 2005 Slide 5 Key Events & Activities of GNERC in 2004 and up to April 2005 From the beginning of this year the new Tax Code envisions the following changes: -reduction of VAT rates from 20 to 18% (from 01.07. 2005), income tax rate from 22 to 12%, social tax - from 31 to 20%; -elimination of benefits set earlier for distribution companies, when these companies paid VAT according to electricity actually paid for by consumers. These changes significantly influence both pricing and financial position of companies. A new structure was established in the Commission – a central certification body, responsible for organization and coordination of work on certification in the energy service sector of Georgia.

6. © Energy Regulators Regional Association 5th Annual ERRA Meeting Budapest, Hungary, April 14, 2005 Slide 6 II. Key anticipated issues for the current year GNERC takes an active part in formation of the strategy of energy reforms, in the work on improvement of the legislation and in implementation of structural and institutional reforms. Among privatization options considered at present, it is necessary to note an offer to privatize most of state owned power plants (in two or three packages) with distribution companies. As of today all small HPPs are privatized, as well as «Vartsikhe HPP»; two HPP («Khrami-I» and «Khrami II») are transferred to long-term management. Since 1999, 75% shares of «Telasi» (Tbilisi) were privatized and one regional distribution company («Kakheti»).

7. © Energy Regulators Regional Association 5th Annual ERRA Meeting Budapest, Hungary, April 14, 2005 Slide 7 III. Key Issues of Tariff Methodologies & Practice In 2005, the new version of the Methodology of development and approval of tariffs would be adopted; and comprehensive revision of the whole system of tariffs would begin on the basis of it (World Bank project);  Normative losses (technical) of electricity and natural gas would be specified in connection with this as well. In the framework of scheduled reforms issues of drastic broadening of the scope of direct contracts in the wholesale electricity market is envisioned, and (provided this issue is resolved positively) that would lead to corresponding institutional reforms, and, therefore, to changes in the structure of tariffs and system of settlements.

8. © Energy Regulators Regional Association 5th Annual ERRA Meeting Budapest, Hungary, April 14, 2005 Slide 8 III. Key Issues of Tariff Methodologies & Practice A program of phased liberalization of pricing is being developed, first of all for generation. In addition, first steps were taken towards deregulation of natural gas supplies, in particular, according to the new gas supply rules every consumer has the right to choose a supplier. In practical terms, this year, special attention of the Commission would be again focused on regulation of tariffs of «Telasi» and «Tbilgas».