Russian power sector reform

Presentation by Anatoly Chubais, Chief Executive Officer, RAO UES of Russia

19 June 2001 Moscow

2

Inter-system gridsalmost 100 %

Inter-system gridsalmost 100 %

Generation85 %

Generation85 %

440 thermal and hydro power stations (28 federal power plants, including 11 hydro stations, belong to RAO “UES of Russia”) 342 power stations (including thermal and co-generation power stations - 304, hydro stations - 38, in general small generating plants with common structure and reporting) belong to 72 Regional energos

RAO «UES of Russia» in the electric power sector

Technological structure

• 2,7 million km of networks

• 21 million consumers

Share of RAO “UES of Russia”Share of RAO

“UES of Russia”

3

SHARE OF CASH PAYMENTS - 20%

WAGE ARREARS - up to 6,0 MONTHS (AO-ENERGO)

NUMBER OF UNPROFITABLE AND LOSS-MAKING AO-ENERGOs - 29

ACTS OF PROTEST BY HOLDING’S EMPLOYEES

Most significant indicators of «RAO UES» financial position in 1998

ACTION PLAN TO IMPROVE EFFICIENCY AND FURTHER REFORM RUSSIAN POWER SECTOR (1998)

4

Power consumption growth

1074 1062

1002

945

856840 828 813

809

832863

1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000800

850

900

950

1000

1050

1100

kWh bln In 1999, for the first time since the beginning

of the crisis power consumption began to grow, surging by 2.8% or 22.9 bln KWh in 1999 and rising by further 3.7% or 30.6 bln KWh in 2000, consumption in Q1 2001 -261,5 bln KWh

5

Supply management: solving the non-payments problem

Significant improvement in cash collection

98 98 98 98 99 99 99 99 00 00 00 00 01

0

20

40

60

80

100

120

Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4

% of cash payments

Q1 Q201

106

6

Normalisation of settlements with fuel suppliers

27 38

92

0

50

100

1998 1999 2000

• increasing the share of cash in settlements with Gazprom by the factor of 3.4 (from 27% to 92%).

1630

70

020406080

1998 1999 2000

• increasing the share of cash in settlements with coal companies by the factor of 4.4 (from 16% to 70%).

1330

70

020406080

1998 1999 2000

• increasing the share of cash in settlements with oil companies by the factor of 5.3 (from 13% to 70%)

During 1998 - 2000 RAO «UES» succeeded in:

7

Settlement of tax payments to the budget in cash

3351,4

1340,6

3410,8

18104,9

14320,9

5391,0

0

2000

4000

6000

8000

10000

12000

14000

16000

18000

20000

Federal budget Regional budgets

1998 1999 2000

Million Roubles

Increase by 3,4 times

Increase by 4,2 times

62% growth 39% growth

8

Bln Roubles

“RAO UES of Russia” Holding’s Sales

0

100

200

300

400

500

1998 1999 2000 2001 (F)

100 %126 %

146 %

137 %

9

Dynamics of key indicators

0

1998 1999 2000 2001 (F)

Revenue on cash basis (bln $)

Dividends (mln $)

Bln $ Mln $

348%

270%

252%

0

2

1998 1999 2000

0

40196%

1

0.5

1.5

10

20

30

13,6

22,22

35,7

34,3

0,82

11,18

1,61

10

Payables and Receivables’ dynamics (Holding “RAO UES of Russia”)

150160170180190200210220230240250

1998 1999 2000 2001 (F)

Payables

ReceivablesBln Roubles

100%

93%

100%

80%

11

Main contents of the draft of Corporate Governance Code of RAO «UES of Russia» ...

On the matters:

increasing of transparency and extension of corporate events, which are the subject to disclosure to auditor

increasing of the role of Board Of Directors of RAO “UES of Russia” with respect to corporate events in affiliated and dependant companies

extension of corporate deals, which require the approval by auditors and Board of Directors

12

… became the part of the Charter (adopted on the annual convention of shareholders of RAO “UES of

Russia” in 2001)

quarterly consideration of plans and reports on the results of the activity of Members of Board by Board of Directors (including fulfilment of deals by RAO “UES of Russia’)

preliminary approval by the Board of directors of the transactions, which alienate from 10 to 25 % of perpetuate assets of RAO “UES of Russia” determination of the position of RAO “UES of Russia” on the main corporate events and transactions in affiliate and dependant companies (increasing of share capital, fulfilment of transactions, taking part in other organisations etc.)

13

Dynamics of age structure of heads of regional energos and regional power stations

49

50

51

52

53

54

55

1998 1999 2000 2001

Average age of general directors of regional power stations and regional energos

14

Up-to-date business procedures

Introductionof

International Accounting Standards

Budgeting SeparateAccountingBusiness

Planning

International Audit

15

Despite some positive changes in the sector, key problems remain unresolved

Lack of investments, first of all, into fixed

assetsCost-based

pricing mechanism

Non-economic regulation of tariffs

FOREM is not a

market

16

Competitivesectors

Competitivesectors

Natural MonopolyNatural Monopoly To ensure free access to grids

Reorganise infrastructure for the market functioning

To ensure free access to grids

Reorganise infrastructure for the market functioning

GenerationGeneration

Reform basis - splitting of monopolistic and competitive sectors in electricity

Генерация

Establish free pricing and market participants

Market rules

Regulated tariffs

Dispatching

Transmission and distribution grids

Sales

17

January - March 2001December 2000 May 2001

Power sector reform - historical background

Presentation by the

Chairman of the Board of RAO UES of Russia at the meeting of its

Board of Directors

Consideration of the draft Basic Guidelines on

Reforming the RF Power Sector at

the RF Government meeting

Finalising the Basic Guidelines

with the assistance of international

advisor (Arthur Andersen)

General approval of the Basic

Guidelines at the RF

Government meeting

April 2000

Adoption of the regulation on the Basic Guidelines at

the RF Government

meeting

June 2001

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«Basic Guidelines of the State Politics in Reforming of the RF Power Sector» - key points

Generating companies: the way of creation is set by the RF Government

Regional energos restructuring (separation of the network component) - fosters competitive environment

Federal Grid Company and System Operator - the technological basis of the market

Trading System Administrator - the basis of the market infrastructure, organizes the trading on the wholesale market

The change of the power sector structure during the reform is made in 3 stages

The regional specifics should be taken into consideration during the reform

Legislation is the basis of the reform

19

RA

O «

UE

S o

f R

uss

ia»

FederalPower stations

27

Regional enrgos(generation,

distribution, sales)72

Central Dispatch Unit (CDU)

Unified Dispatch Units (UDU)

Inter-systemgrids

Minatom Nuclear stations

Other market participants

(independent from RAO «UES»)

Current situation

Generating companies5-7

Regional EnergosGeneration, sales

50 - 60

System operator

(CDU+UDU)

RA

O «

UE

S o

f R

us

sia

»

Generating companies, based on Minatom Nuclear stations 1 - 2

Other market participants (independent from RAO

«UES»)

Trading System

Administrator

Federal Grid company

Grid subsidiaries

of Regional energos

1st stage (2001-2004)2 phases

March, 31 2004

RAO «UES of Russia»

unbundling

Change of the power sector structure (current situation and the first stage) - combined sketch

20

second

Regional Energo( sales, generation)

40 - 50

Federal Grid Company

System Operator

Generating companies 5-7

Regional Energo( sales, generation) less then 40

RAO UES (Federal Grid Company + System Operator)

Generating companies5-7

Nuclear power stations Trading System

Operator

Independent Sales Companies

Grid subsidiries of Regional Energo

2 stage (2004 - 2006 ) 3 stage (2006 - 2008)

Other market participants

Nuclear power stations Trading System Operator

Independent Sales CompaniesOther market participants

Change of power Sector structure ( and third stage) -combined sketchM

anag

ing

Str

uct

ure

RA

O “

UE

S o

f R

uss

ia»

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The program is being worked out by the PriceWaterhouseCoopers

5,000 MW Program envisages introduction of capacities securing gas savings of up to 6.6 bn cub. m3 per year

12 projects (combined cycle, steam turbine, hydro plants)

The Program includes projects with a lot of work already done

Investments amount to US$ 1,737.4 million

Preliminary feasibility studies for the Program are completed

5,000 MW Program - first stage of investment breakthrough

THANK YOU FOR YOUR ATTENTION