1. Power Industry Reform: expansion of investment opportunities
Vasily Zubakin, Board Member,
OAO RAO «UES of Russia»
Power Industry Reform:
expansion of investment opportunities
Russia: going global
Russian Trade and Investment Conference
London,October 12-13, 2005

2. Table of Contents Share of OAO RAO “UES of Russia” price dynamics
UES is undervalued
Structure of Russian Power Sector in 2008: Target sector model
Power Market Development
New Value Challenges: bringing new companies to the stock market
Investment opportunities

3. Share of OAO RAO “UES of Russia” price dynamics2
Share of OAO RAO “UES of Russia” price dynamics
US cents
37.8%
18.7%
21.40%
(1)
(1) Приведен к цене акций РАО «ЕЭС» на начало периода

4. EV/Installed capacity, $/kW
UES is undervalued
Reasons:
EV/Installed capacity, $/kW
1 942
1 631
1 287
1 003
478
410
134
200
400
600
800
1 000
1 200
1 400
1 600
1 800
2 000
Enel
Endesa
Cemig
RAO UES
$/kW
E.On
CEZ
Electrobras 
Complicated reform model
Uncertainty regarding terms and rules for liberalization and operation of wholesale power market
Uncertainty regarding government’s intentions to reduce control over generating assets
Long period of anticipation of the launch of target companies on stock market   

5. Target Power Sector Model
Monopolies
Competitive Power Generation
Private shareholders
Government
<25%
<25%
Territorial GenCos (14)
51-60%
<48%
75-85%
System
operator
FGC
(Transmission)
Wholesale GenCos (6)
Hydro GenCo (1)
Competitive market
>75%
>75%
49-40%
>52%
25-15%
<48%
> 49% Supply companies
Other generating companies
IDC
(Distribution) (4)
Independent Regional Energos
>52%
Nuclear power generating company
FGC – Federal Grid Company
IDC – Interregional Distribution Company

6. Будущая стоимость энергетических активов
ОГК-1, 2, 4
ОГК-3
ОГК-5
ОГК-6
ОГК-7
ОГК
ТГК
МРСК
ТГК-14
ТГК-1,13
ТГК-4,6
ТГК-2,
5,8
ТГК-7,10
ТГК-3
ТГК-9
МРСК 1,2,3,4
2005
2006
2007
RTS
STOCK EXCHANGE
Factors of growth:
Gradual liberalization of power market
Effective management, cost- cutting, key performance indicators, motivation
Boost of liquidity: listing on market, listing of ADRs and other derivatives on international markets. Effective IR.
High standards of corporate governance
Overall value of target companies will grow

7. Investment opportunities
Required vs. Available Capacity in Russia 50
100
150
200
250
300
2000
2005
2010
2015 3 2 1
(1) Required Capacity – Optimistic Scenario
(2) Required Capacity – Pessimistic Scenario
(3) Available Capacity
TPP
NPP
HPP gW
Most of the sector's industrial potential was created in 1960s-1970s. During the economy slowdown of the 1990s the commissioning of power plants and electric grids, as well as the regular maintenance volume dramatically decreased, which resulted in rapid capacity wear.
By 2004, the heat power plants wear & tear reached 70%, and that of hydroelectric power plants – 80%. The standard no-failure operation capacity has run out by 41% for heat power plants and by 50% for hydroelectric power plants.
The stable growth of the country's power demand within the next 10 years calls for an specifically careful estimation of the existing power industry capacity, its ability to satisfy the growing demand for power and heat, and, therefore, for outlining the real scope of the necessary modernization and development.
Forecasted trends (RAO "UES of Russia" estimates):
·        The optimistic scenario suggests that the GDP will continue to grow at the existing high rate of about % up to 2010, and at % between 2011 and 2015.
·        The conservative scenario suggests that the GDP growth rate will gradually decrease to % by 2010, and to 4.0% by 2015.
Before 2015 investments necessary for new construction, modernization and maintenance of existing assets amount to 48 – 65 billion US dollars:
up to 20 billion dollars to modernize and increase the operating life of the existing assets
28 – 44 billion US dollars to commission new capacities
Investments needs of electric power industry

8. Ministries and agencies (investments repayment)
Investment guarantee mechanism
The goal is to attract investments into new capacities construction to cover the forecasted power deficit before the competitive power market starts functioning
Government identifies the area of the deficit
Investor selection is competitive
Requirements
Exclusively new modern equipment
Standards for efficiency, flexibility, environmental safety
Ministries and agencies
Federal
Tariff Service
Investor’s compensation for technology reserve included in to the tariffs of System Operator – Central Dispatch Administration
Consumer starts paying only after the object is commissioned
Protection mechanism is effective for 10 years.
Two-stage mechanism of investment repayment:
Construction investment repayment through payment for capacity reserve formation services
Payment for power generated at a price not higher than the set tariff
The investor it is obliged to give after the conclusion of the contract financial guarantees for the period of construction and operation
Investor’s obligations upon the agreement conclusion:
Financial guarantees for the period of construction and operation
Availability of all the power in the market
Participation of the investor in the market
Adjustable contracts -only payment for electric power
do not participate in free bilateral contracts
do not participate on the market of capacity
participate in the market of system services in accordance with general practice
Bidding
procedure
Power tariffs •
The organization of competitions
System Operator
Investors
Механизм гарантирования инвестиций работает следующим образом:
·  инвесторам гарантируется возврат инвестиций, зафиксированный в контракте с Системным оператором (ОАО «СО-ЦДУ ЕЭС»), с необходимой нормой прибыли на инвестированный капитал посредством платы за услуги по формированию технологического резерва генерирующих мощностей (аналога платы за мощность). Вся произведенная по команде системного оператора электроэнергия будет оплачена по тарифу на электроэнергию, покрывающему переменные издержки генерации электроэнергии;
·  инвесторы выбираются на принципах конкурсного отбора с использованием критерия минимальности платежей рыночного сообщества за предоставляемые инвестором услуги по формированию технологического резерва генерирующих мощностей и на приобретение электроэнергии, произведенной на указанных мощностях. При этом в отборе должны рассматриваться кандидаты, соответствующие установленным квалификационным требованиям; Конкурсы будут организовываться Системным оператором (ОАО «СО-ЦДУ ЕЭС») и проводиться под контролем Государства.
·  инвесторы получают гарантии снабжения топливом;
·  за счет механизма гарантирования инвестиций обеспечивается страхование валютных рисков для инвесторов;
- применение механизма гарантирования инвестиций в настоящий момент позволит ликвидировать будущие издержки рыночного сообщества, возникающие в результате возникновения дефицита генерирующих мощностей и предпринимаемых впоследствии мероприятий по его устранению.
Guaranteed payments
(investments repayment)
Trade System
Administrator
Payment for electric power
Investments
Payment for
electric power
Capacity
Payments
Generation
Customers

9. Thank you for your attention
                                                                                                                                                                   
Thank you for your attention