19th World Energy Congress

Sydney, Australia

08.09.2004

Anatoly Chubais

Chairman of the Management Board

RAO UES of Russia,

President

Electric Power Council of the CIS

Liberalisation of the electricity sector: embarking on a global change

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Electricity sector: New role in global geopolitics

Why the electricity industry had no geopolitical role for a long time?

It is the last ad key element in the energy supply chain: it serves the very end consumer being itself a consumer of primary resources - gas, coal, oil and nuclear

It plays a unique role in any national economy of the modern world, being the only industry serving 100% of both industrial customers and households

While being a backbone of all the life-supporting processes, it ensures quality of life for society and every person

The reason: due to its vertically integrated structure the electricity industry has been for a

long time developing within its regional (national) context

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Electricity sector liberalization: Radical change over the last 15 years

1990s: launch of the liberalisation process in the electricity sector involving complete unbundling of vertically integrated companies confined to their own region (country)

Dramatic increase of competition

Markets redistribution: crowding out the competitors

Takeovers

Greater geopolitical role of the electricity sectoras a result of its liberalisation

Prerequisites for liberalisation:

…and necessity

Spectacular development of advanced technologies

Consumers’ pressure on prices

opportunity…

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E.On controls about 11% of the UK generation assets (by capacity)

PowerGen (2001)*

•Yorkshire Cogen (1998)•East Midland Electricity (1998)

•TXU Europe (2002)•PowerGen Renewable Holdings (2002)•Midland Electricity (2004)

•New England Electric System (2000)•Niagara Mohawk (2001)

E.On NationalGrid

Global electricity sector:Recent major cross-border acquisitions

Sources: Cambridge Energy Research Association (CERA); PwC; companies’ data

*YearActualClosed

National Grid USAis one of the 10 largest electricutilities in the U.S. by number of customers (more than 3,2million)

SingaporePower

•TXU Australia (July 2004)

On 30 July 2004, Singapore Power finalised its acquisition of TXU Australia from TXU Corp, USA

After acquiring TXU Australia, Singapore Power has emerged as a key player in Australian electricity market

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Electricity sector: Globalisation is just beginning

Forecast: Further redistribution of assets in the global electricity industry comparable in scope and effect with similar processes in the oil and gas markets

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Monetisation of the electricity sector:Primary factor in ensuring energy security in Russia over recent years

2001 – 2004 – …Late 1990s

- Consumers’ payments didn’t exceed 17%;

- Non-transparent financial flows, absence of a budgeting system;

- Growth of accounts payable (including debts to fuel suppliers and budgets of all levels);

- Totally inadequate corporate governance, sharp conflicts with minority shareholders

«Monetary» electricity sector

- Consumer payments in excess of 100% (including repayment of previous years' debts);

- Strict financial discipline, accounting and audit practices. No unsettled debts;

- Five years of IAS financial statements audited by PwC and KPMG (last year)

- Well-structured corporate governance system. RAO UES of Russia ranked first in the "Russian Corporate Governance Leaders-2003" league table of the Investors Rights Protection Association

Recurrent electricity crises in the Russian regions. Threat of bankruptcy of about 20 companies of RAO UES holding

Stable operation of the electricity systems. No power crises since 2001. Sound financial position of the companies of RAO UES holding.

Barter electricity sector

RAO UES of Russiacontrols the bulk of Russian electricity sector,

including 72% of generation capacity and 96% of transmission grids

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Electricity sector reform in Russia: Keeping pace with the global trend

Implementation phaseObjective of the reform

Setting up and expanding a competitive electricity market

Establishing the future competitive suppliers

Separation of the monopolistic and competitive segments of the electricity sector

Federal Grid Company and System Operatorare fully operational

RAO UES holding company has configured and is currently setting up the following entities:

- 10 Wholesale Generation Companies (average installed capacity: about 8 GW each);- 14 Territorial Generation Companies (average installed capacity: about 3 GW each)

Trading exchange of the Administrator of the Trading System (ATS) :

- in operation since 01.11.2003;- among the top ten electricity exchanges in the world;- has more than 80 corporate members

Prices set at the exchange are on average 5% below those of theregulated sector. The 2004 annual sales of ATS are expectedat about $850M.

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International acquisitions:A two-way road

Foreign companies in Russia RAO UES of Russia in other countries

- Enel (Italy), in an alliance with ESN Energo, Russia, wona public tender for the operationof North-West CHP;

- Fortum (Finland) intends to bring its stake in RAO UES’ SaintPetersburg regional utilityLenenergo to 30.7%;

- Kazakhstan investors acquired blocking stakes in two regional utilities of RAO UES holding(in Kaluga and Voronezh)

- Acquired or took under management electricity assets in Georgia (some 25% of the operational generation capacity and 35% of the distribution business);

- Acquired or took under management electricity assets in Armenia (some 85% of the generation assets of the country);

- Is negotiating acquisition of assets (completion of power plants) in Kirgizia and Tadjikistan;

- Is close to complete the transaction to acquire a stake in a high-capacity power plant in Kazakhstan;

- Has been short-listed for the purchase of a 66% stake in Slovenske Elektrarne, a company accounting for 85% of power generation in Slovakia

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Electricity border between CIS/Baltic statesand Europe: a hurdle on the way to cooperation

The solution proposed is synchronisation

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Synchronisation of electricity systems of CIS/Baltics and Europe: sequence of steps

Accomplished activities

- CIS Electric Power Council (CIS EPC) and Union for Coordination of Transmission of Electricity (UCTE) agreed to undertake a joint feasibility study on synchronous interconnection of the two electricity systems (July 2003);

- CIS EPC and EURELECTRIC signed a long-term cooperation agreement (November 2003)

Planned activities

- Cooperation agreement on the feasibility study is to be signed shortly between East (7 CIS/Baltics companies) and West (11 European companies);

- Development of the feasibility study of synchronous interconnection (from October 2004 to 2007)

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Liberalisation of the electricity sector launched a process

of transnational competition

Electricity sector acquires radically new features, evolving into

an important geopolitical factor

These trends of global nature manifest themselves very clearly in Russia

and in the post-Soviet area

Global electricity:Apparent trends and emerging new features

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