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19 June 2001

Russian power sector reform Presentation by Anatoly Chubais, Chief Executive Officer, RAO UES of Russia. 19 June 2001. Moscow. RAO «UES of Russia» in the electric power sector. Technological structure. 2,7 million km of networks 21 million consumers.

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19 June 2001

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  1. Russian power sector reform Presentation by Anatoly Chubais, Chief Executive Officer, RAO UES of Russia 19 June 2001 Moscow

  2. RAO «UES of Russia» in the electric power sector Technological structure • 2,7 million km of networks • 21 million consumers 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 Share of RAO “UES of Russia” Inter-system grids almost 100 % Generation 85 % Распред.сети

  3. Most significant indicators of «RAO UES» financial position in 1998 • 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 ACTION PLAN TO IMPROVE EFFICIENCY AND FURTHER REFORM RUSSIAN POWER SECTOR (1998)

  4. kWh bln 1100 1050 1000 950 900 850 800 Power consumption growth • 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 1074 1062 1002 945 863 856 832 840 828 813 809 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000

  5. 01 98 98 98 98 99 99 99 99 00 00 00 00 Supply management: solving the non-payments problem Significant improvement in cash collection % of cash payments 120 106 100 80 60 40 20 0 Q1 Q2 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 01

  6. Normalisation of settlements with fuel suppliers During 1998 - 2000 RAO «UES» succeeded in: • increasing the share of cash in settlements with Gazprom by the factor of 3.4 (from 27% to 92%). • increasing the share of cash in settlements with coal companies by the factor of 4.4 (from 16% to 70%). • increasing the share of cash in settlements with oil companies by the factor of 5.3 (from 13% to 70%)

  7. 18000 16000 14000 12000 10000 8000 6000 4000 2000 0 Settlement of tax payments to the budget in cash Million Roubles 20000 1998 18104,9 1999 2000 14320,9 Increase by 3,4 times Increase by 4,2 times 5391,0 3410,8 3351,4 1340,6 62% growth 39% growth Federal budget Regional budgets

  8. “RAO UES of Russia” Holding’s Sales Bln Roubles 137 % 500 146 % 400 300 126 % 100 % 200 100 0 1998 1999 2000 2001 (F)

  9. Dynamics of key indicators Revenue on cash basis (bln $) Dividends (mln $) Mln $ 1,61 Bln $ 270% 196% 2 40 35,7 1.5 30 348% 252% 1 34,3 1,18 1 20 0,82 22,22 0.5 10 13,6 0 0 0 1998 1998 1999 1999 2000 2000 2001 (F)

  10. Payables and Receivables’ dynamics (Holding “RAO UES of Russia”) Payables Receivables Bln Roubles 250 240 230 100% 220 210 93% 200 100% 190 180 170 80% 160 150 1998 1999 2000 2001 (F)

  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 55 54 Average age of general directors of regional power stations and regional energos 53 52 51 50 49 2001 1998 1999 2000

  14. Up-to-date business procedures Introductionof International Accounting Standards International Audit Budgeting Separate Accounting Business Planning

  15. Despite some positive changes in the sector, key problems remain unresolved Lack of investments, first of all, into fixed assets Cost-based pricing mechanism FOREM is not a market Non-economic regulation of tariffs

  16. Reform basis - splitting of monopolistic and competitive sectors in electricity Generation Competitive sectors • Establish free pricing • and market participants Генерация Sales Market rules Regulated tariffs Dispatching Natural Monopoly To ensure free access to grids Reorganise infrastructure for the market functioning Transmission and distribution grids

  17. 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 Finalising the Basic Guidelines with the assistance of international advisor (Arthur Andersen) General approval of the Basic Guidelines at the RF Government meeting Adoption of the regulation on the Basic Guidelines at the RF Government meeting Consideration of the draft Basic Guidelines on Reforming the RF Power Sector at the RF Government meeting June 2001 May 2001 December 2000 January - March 2001 April 2000

  18. «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. Change of the power sector structure (current situation and the first stage) - combined sketch 1st stage (2001-2004) Current situation 2 phases Generating companies Federal 5-7 Power stations March, 31 2004 Regional Energos 27 Generation, sales 50 - 60 Regional enrgos (generation, distribution, sales) Grid subsidiaries RAO «UES of Russia» unbundling 72 of Regional energos RAO «UES of Russia» Central Dispatch Unit (CDU) RAO «UES of Russia» Federal Grid company Unified Dispatch Units (UDU) System operator Inter-system grids (CDU+UDU) Generating companies, based on Minatom Nuclear stations 1 - 2 Minatom Nuclear stations Trading System Administrator Other market participants (independent from RAO «UES») Other market participants (independent from RAO «UES»)

  20. Change of power Sector structure ( second and third stage ) - combined sketch 2 stage 3 stage (2004 - 2006 (2006 - 2008) ) Generating companies Generating companies 5-7 5-7 Managing Structure Regional Energo ( sales , generation ) Regional Energo 40 - 50 ( sales , generation ) less then 40 Grid subsidiries of Regional Energo RAO UES ( Federal Grid Company + Federal Grid Company RAO “UES of Russia» System Operator) System Operator Trading System Trading System Operator Nuclear power stations Nuclear power stations Operator Independent Sales Companies Independent Sales Companies Other market participants Other market participants

  21. 5,000 MW Program - first stage of investment breakthrough • 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 The program is being worked out by the PriceWaterhouseCoopers

  22. THANK YOU FOR YOUR ATTENTION

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