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Conference “RAO “UES of Russia” is an Open Company. On the Threshold of the Reform”

Conference “RAO “UES of Russia” is an Open Company. On the Threshold of the Reform”. Three Years of Problems and Effective Decisions: from Stagnation to Growth. Anatoly Chubais. RAO “UES of Russia” CEO. 11 December, Moscow. RAO «UES of Russia» in the country’s energy sector.

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Conference “RAO “UES of Russia” is an Open Company. On the Threshold of the Reform”

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  1. Conference “RAO “UES of Russia” is an Open Company. On the Threshold of the Reform” Three Years of Problems and Effective Decisions: from Stagnation to Growth Anatoly Chubais RAO “UES of Russia” CEO 11 December, Moscow

  2. RAO «UES of Russia» in the country’s energy sector 407 thermal and hydropower plants with installed capacity of 156,000 MW 2.7mln km of power transmission lines - 96 % of Russia’s total length 623bn kWh of electricity generated - 72% of Russia’s total generation 668,000 employees

  3. Major characteristics of RAO «UES of Russia» in 1998 • Cash share in payments to UES was 20 % • Up to 6 months wage arrears • 21 AO-energos and federal power plants on the edge of bankruptcy, including Dalenergo, Kuzbassenergo, Ryasanenergo, Pskov CHPP, … • Strikes and protests of the Holding personnel In 1998 the new team of managers elaborated the Plan of Actions to raise the effectiveness of UES operation and restructuring in the power sector

  4. RAO «UES of Russia»: from Stagnation to Growth First stage: Introduction of proper order in production, finance and management Second stage: Development and investments in the Russian power sector through restructuring

  5. Stages of restructuring outlined in 1998 From the Plan of Actions to raise the effectiveness of UES operation and further restructuring in the Russian Power sector (adopted by the UES Board of Directors on 28 August 1998.): “… Stage 1 (1998-2000): Recreation of organisation and management mechanisms within the Holding company, improvement of financial operation and raising the economic effectiveness and manageability of the Holding”. «Stage 2 (2000-2003): Setting up of an All-Russian grid company on the basis of the Holding, guaranteeing the secure functioning and economic operation of RAO “UES of Russia”. Creation of a self-regulated market environment. Development of competition in the spheres of production and sales of electric power. Formation of generating companies…” Introduction of proper order in production, finance and management Development and investments in the power sector through restructuring

  6. First stage: Introduction of proper order in production, finance and management Contemporary management is contemporary business procedures Budgeting, treasury execution of the budget, separate accountancy Business planning Increasing the profitability of daughter companies, transparency of activity, investment attractiveness Balance of incomes and expenditures, payment deals only in cash International audit • Gives the opportunity to play on international capital markets (UES has been listed at NEWEX stock exchange) • Allows to compare the UES results with the results of other world energy companies Corporate governance • The UES Charter has been amended to broaden the competence of UES Board of Directors • By the Decision of UES Board of Directors as of November 9, 2001 the Corporate Governance Code was adopted

  7. First stage: Introduction of proper order in production, finance and management Parallel operation is the basis of energy security • Rehabilitation of connections within the country: • The parallel operation with Siberia since 15 June 2000 • New transmission lines in 2000-2001: Volgodonsk Nuclear Power Station - Shakhty - Budyonnovsk, Balakovo Nuclear Power Station - Trubnoye • The connection with Dagestan was put into effect in May 2000 The Baltic countries In the USSR the parallel operation was carried out with 11 Republics Belorussia and Ukraine R U S S I A N F E D E R A T I O N As a result of UES decisions the synchronised operation with 14 countries from 15 that used to be part of the USSR The strategic goal is to set up a parallel operation with the energy systems of European countries Kazakhstan and Middle Asia Transcaucasian Republics

  8. First stage:Introduction of proper order in production, finance and management Increase in production and consumption of electricity Consumption of electric power Billion kW per hour In 1999 the electric power consumption grew by 2.8% or 22.9bn kW per hour, in 2000 - by 3.7% or 30.6bn kW per hour 1074 1062 1100 1002 1050 1000 945 950 863 856 900 832 840 828 813 809 850 800 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 634,2 628,7 Billion kW per hour 700 622,8 602,2 600 Production of electric power by RAO «UES of Russia» Holding 1999 2000 2001 2002 (forecast)

  9. First stage:Introduction of proper order in production, finance and management Decrease in the number of technological breaks and death accidents at the energy companies of RAO “UES of Russia” Technological breaks Death accidents 14233 13022 11761 10738 111 99 98 75 1997 1998 1999 2000 In 2000 the number of technological breaks fell by 25% compared with 1997

  10. First stage:Introduction of proper order in production, finance and management Increase in electric power quality % calendar Frequency, Hertz time 99.94 50 100 49.98 95 94.6 49.96 90 49.94 85 49.99 78.6 49.92 80 49.9 49.88 75 49.92 49.88 70 49.86 Average frequency of the electric current 65 The duration of UES operation with the normative frequency throughout the year 49.84 49.82 60 1996 1998 2000

  11. First stage:Introduction of proper order in production, finance and management Solving the problem of non-payments is the basis of stability Elimination of a possibility of regional energy crises Radical decrease in misusing barter deals Payments of wages on time to the workers in the power and adjacent sectors Recreation of the system of payments to suppliers of fuel and energy Secure and consistent power supply of financially solvent consumers Investments in the construction of new plants and infrastructure SOLVING THE PROBLEM OF NON-PAYMENTS

  12. First stage:Introduction of proper order in production, finance and management Sales management: solving the problem of non-payments Solving the barter problem Payment in cash, % 112 120 101 100 Shadowy and half- criminal annual turnover was up to USD8bn 92 80 48 60 17 22 40 20 0 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 98 98 98 98 99 99 99 99 00 00 00 00 01 01 01

  13. First stage:Introduction of proper order in production, finance and management Coal industry: the effect of solving the non-payments problem by RAO «UES of Russia» % of cash payments for power % of cash payments for coal 112 120 104 92 100 100 101 96 91 80 80 60 60 48 24 40 40 45 17 20 20 22 12 0 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 98 98 98 98 99 99 99 99 00 00 00 00 01 01 01

  14. First stage:Introduction of proper order in production, finance and management Oil industry: the effect of solving the non-payments problem by RAO «UES of Russia» % of cash payments for power % of cash payments for mazut (black oil) 112 120 101 92 100 100 105 101 80 80 60 60 48 54 40 40 22 17 33 20 20 16 11 0 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 98 98 98 98 99 99 99 99 00 00 00 00 01 01 01

  15. First stage:Introduction of proper order in production, finance and management “Gazprom” (Russian Gas Monopoly): the effect of solving the non-payments problem by RAO «UES of Russia» % of cash payments for power % of cash payments for gas 128 114 120 100 103 112 100 100 101 92 80 80 60 60 48 40 40 22 17 41 20 20 17 19 0 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 98 98 98 98 99 99 99 99 00 00 00 00 01 01 01

  16. First stage:Introduction of proper order in production, finance and management Minatom (Russian Nuclear Ministry): the effect of solving the non-payments problem by RAO «UES of Russia» % of cash payments for power % of cash payments for power generated by Minatom 112 120 101 107 100 100 92 80 80 79,5 60 60 48 40 40 22 17 25 20 20 4,6 11,7 0 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 98 98 98 98 99 99 99 99 00 00 00 00 01 01 01

  17. 120 100 80 60 40 20 0 First stage:Introduction of proper order in production, finance and management Solving the non-payments problem by RAO «UES of Russia»is the basis of wage arrears elimination % of cash payments for power Number of energy systems that have wage arrears 101 112 82 72 92 62 60 44 40 17 23 48 20 22 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 98 98 98 98 99 99 99 99 00 00 00 00 01 01 01

  18. RURbillion 41,0 40 by 2.3 times 30 18,1 20 by 3.4 times 10 5,4 3,4 by 59% 0 1998 1999 2000 2001 (forecast) First stage:Introduction of proper order in production, finance and management Cash tax payments to the Russian federal budget and Pension Fund RURbillion 15 13,5 by 22% 11,1 10 by 52% 7,3 4,1 by 78% 0 1998 1999 2000 2001 (forecast) Payments to the federal budget Payments to the Russian Pension Fund

  19. First stage:Introduction of proper order in production, finance and management Three years of international audit done by Pricewaterhouse Coopers: profit based on 2000 year results Operating profit of the Group, RUR bn In 2000 the Group for the first time posted an operating profit of RUR 7.9 bn and net profit of RUR 0.5 bn. 2000 20 1998 1999 0 7.9 -20 - 28.2 Net profit of the Group, RUR bn -40 -60 2000 100 -80 1998 1999 -100 - 91.3 0 0.5 * 1998 reports reflected the loss from economic ageing which affected the Group’s performance - 11.9 -100 -500 - 532.3 *) All 1998 and 1999 figures are adjusted for the Rouble purchasing power as of 12/31/2000

  20. First stage: Introduction of proper order in production, finance and management Investments increased RURbn Compared with 1999, cash investments in 2000 grew by 4.5 - from RUR 2.0bn to RUR 9.2bn, in 2001 investments are estimated to reach RUR 11bn* 10 11.0 9.2 *) All 1999 figures are adjusted for the Rouble purchasing power as of 12/31/2000 2.0 0 2001 2000 1999 Towards the end of the year 2001 RAO «UES of Russia plans - tocompletetheconstruction of Petrovsk-Zabaykalsky-Chita500kVTransmission Line (117.5Km) - to put into operation the following transformer capacities: 501 MWA at the 500 kV Budyonnovsk substation on the 500 kV Transmission Line Rostov Nuclear plant - Budyonnovsk 125 MWA at the 330 kV Okulovskaya substation801 MWA at the 500 kV Krasnoyarsk substation

  21. First stage:Introduction of proper order in production, finance and management RAO «UES of Russia» diresct its targeted investment resources to build power plants • The second unit of the Kharanorskaya CHPP (Chita region) with a capacity of 215 MW was put into operation on 10 October 2001. • The second unit of Irganaiskaya hydroelectric plant (The Northern Caucasus, Dagestan) with a capacity of 107 MW was commissioned on 10 December 2001. • MutnovskayaGeothermalelectric plant (Kamchatka) is to be commissioned on December 20, 2001 (the capacity of the first block is 25 MW). • An additional 900 MW generation capacity is scheduled to be built at the North-Western CHPP (Saint Petersburg) as part of “5000 MW” Programme. In March 2002 the UES Board of Directors is planning to discuss the attraction of external investments into this project. • The construction of Bureyskaya hydroelectric plant (Amur region) with an installed capacity of 2320 MW has been renewed. The commissioning of this plant (2002-2003) will solve the problem of electricity supply in the Far East. The annual investments in the construction of this plant have increased since 1998 by six times and reached RUR2.4bn. • The total amount of commissioned capacities in 2001 almost by 1.5 times exceeded the total amount of commissioned capacities in 1999.

  22. First stage:Introduction of proper order in production, finance and management Bureyskaya Hydroelectric Plant: dynamics of construction volumes Thousand cu m Volume of earth-moving works 375 Volumes of concrete poured 300 310 270 200 22 66 89 162 60 100 1998 1999 2000 2001 (forecast)

  23. First stage:Introduction of proper order in production, finance and management Coal stocks at the UES power plants The stocks of coal and mazut (black oil), accumulated at UES Holding companies are the biggest over the past five years The coal stocks exceed the last year level by 65% or by 9.5mln tons Million tons UES coal stocks as of 1 December, 2001 amount for 24.2mln tons, which exceeds the task set by the Russian Government by 40.6% 24,2 25 17,0 20 14,6 13,8 15 10 На 01.12.1998 01.12.1999 01.12.2001 01.12. 2000

  24. First stage:Introduction of proper order in production, finance and management Mazut (oil stocks) stocks at the UES power plants Mazut (black oil) stocks exceed the level of the last year by 38% or by almost 1mln tons Million tons 4,0 3,5 UES mazut (black oil) stocks as of 1 December, 2001 amount for 3.5mln tons, which exceeds the task set by the Russian Government by 12% 3,5 2,6 3,0 2,5 2,2 2,5 2,0 1,5 1 На 01.12.1998 01.12.1999 01.12.2000 01.12.2001

  25. First stage:Introduction of proper order in production, finance and management Coal stocks in the energy systems of the Far East “critical” regions Coal stocks in the Unified Energy Systems of the East* (UES of the East) by 1 Dec 2001 (thousand tons) The coal stocks in the UES of the East as of 1 December, 2001 exceed the level of the last year by 114% (1.6mln tons) 3083 2090 3000 1741 1437 2000 1000 На 01.12.1998 01.12.2001 01.12.1999 01.12. 2000 Dalenergo’s coal stocks as of 1 December, 2001 (thousand tons) Dalenergo coal stocks as of 1 December, 2001 amount for 590 thousand tons, which exceeds the task set by the Russian Government by 23% 590 600 234 400 196 129 * UES of the East: Dalenergo, LuTEK, Sakhalinenergo, Khabarovskenergo, Amurenergo, Magadanenergo, Chukotskenergo, Yakutskenergo, Kamchatskenergo 200 0 01.12.2001 01.12. 2000 На 01.12.1998 01.12.1999

  26. First stage:Introduction of proper order in production, finance and management Mazut stocks in the energy systems of the Far East “critical” regions Mazut stocks in the Unified Energy Systems of the East by 1 Dec 2001 (thousand tons) Mazut stocks in the Unified Energy Systems of the East as of 1 December, 2001 exceed the plan amount set by the Russian Government by 15% 180,0 200 150 78,0 58,0 54,0 100 50 Kamchatskenergo’s mazut stocks by 1 Dec 2001 (thousand tons) На 01.12.1998 01.12.2001 01.12.1999 01.12. 2000 In 2001 Kamchatskenergo have reached the level of 113% of the plan- for the first time over the recent years 60 68,0 40 13,0 1,0 20 2,0 0 01.12.2001 01.12. 2000 На 01.12.1998 01.12.1999

  27. 1998 2001 Second stage: Development and investments in the power sector through restructuring Prerequisites of the Russian Power Sector Reform Problems: 112% Solved in a non-market condition Low portion of cash in payments of consumers 17% Ageing of basic funds up to 50% up to 60% 0.9 * 0.6 * Partly solved in a non-market condition Cross subsidising RUR 5.2bn. RUR 9.2bn. Shortage of investments Pricing on the basis of incurred costs Cannot be solved in a non-market condition Lack of competitiveness is the lack of motivation to cut the costs * the tariff for population divided by the industrial tariff (1.6 is the norm)

  28. Second stage: Development and investments in the power sector through restructuring Long-term investment capabilities: generating companies In accordance with economic growth forecasts by 2010 power consumption level shall grow by 20-35% Free market share in power generation Necessary investments - over US$ 35 bn bn kWh Capacity requirements 250 214 246 200 196 191 Capacity adjusted for resource exhaustion 150 100 2000 2003 2010 Competitive market State regulation Deregulation

  29. Second stage: Development and investments in the power sector through restructuring Reforming is the Strategy of the Corporation BASICS OF THE REFORM • The Russian Government Decree as of 11 July, 2001 # 526 «On Reforming the Power Sector of the Russian Federation» • Plan of The First Stage of The Reform(the Russian Government Decision as of 3 August 2001 # 1040) THE LAW REGULATION OF THE POWER SECTOR INCLUDES: • Amendments to the Civil Code of the Russian Federation • Amendments to the Federal Law «On Regulating Tariffs» • Federal Law «On the Power Sector» • Amendments to the Federal Law «On Natural Monopolies • Amendments to the Federal Law «On Competition…»

  30. Second stage: Development and investments in the power sector through restructuring Reforms are based on the division of monopoly and competitive sectors Market rules Generation Liberalisation of pricing mechanisms and stimulation of market participation Competitive sectors Sales Ensuring equal access to networks. Reorganisation of market support infrastructure. Production control Natural monopolies Backbone and dis-tribution networks Regulated tariffs

  31. Second stage: Development and investments in the power sector through restructuring Power sector liberalisation: goal and restrictions Restrictions of free pricing schemes at first stage of market transformation (15 % of all transactions) Creation of protection mechanisms for low-income strata of the population Way to a market with manageable risk State control over functioning of certain power sector entities within competitive sectors (guaranteeing suppliers, generating companies) Creation of social rehabilitation mechanisms for the power sector’s released employees

  32. LV Grid LV Grid Independent generating company Power plants Second stage: Development and investments in the power sector through restructuring Changing the power sector structure with transition to the market 2006-2008 2001 RAO «UES of Russia» holding Independent generating company HV Grid Independent generating company CDU HV Grid Regional energos Generation LV Grid Supply Independent generating company Consumers

  33. Second stage: Development and investments in the power sector through restructuring Criteria of setting up generation companies secure... …elimination of the possibilities to manipulate prices: - The summarised volume of installed capacity of power plants to be included in every genco must be limited - Inclusion of all price forming power plants located in one price zone of electricity wholesale market into one genco is prohibited ...equal start conditions: - Equalisation of summarised installed capacity and expected year profit of gencos. Small, not competitive gencos are not to be created. - The age and wear and tear of production capacities of different gencos must be taken into consideration. … reliable functioning of the power sector: - Hydraulic power plants of one cascade, functioning under the conditions of technological dependence, must be included in one genco.

  34. Second stage: Development and investments in the power sector through restructuring The List of Generating Companies that has been submitted to the Russian Government Pskov CHPP; Stavropol CHPP; Troitsk CHPP; Surgut CHPP-1; Serov CHPP Verkhne-Tagilsk CHPP; Nizhnevartovsk CHPP; Urengoy CHPP, Iroklinskaya CHPP & hydro-electricplant; PermCHPP,CHPP-4 (Kashirskaya) Kostroma CHPP, Cherepetskaya CHPP; Pechorskaya CHPP, Uzhno-Uralskaya CHPP, Kharanorskaya CHPP; Gusinoozyorskaya CHPP CHPP-5 (Shaturskaya); Smolensk CHPP; Yayvinskaya CHPP-16; Surgut CHPP-2; Berezovskaya CHPP-1 Nevinnomysskaya CHPP; Reftinskaya CHPP; Sredne-Uralskaya CHPP; Konakovskaya CHPP Ryazan CHPP, CHPP-24 (Ryazan MGDES), Novocherkasskaya CHPP-1; Kirishskaya CHPP; Krasnoyarsk CHPP-2, Cherepovets CHPP

  35. 437.0 gas 900 Europe 32.5 gas 215 Baltic states 177.7 gas 345 166.8 gas 474 Turkey 9600 gas 4000 Japan Second stage: Development and investments in the power sector through restructuring «5,000 MW» programme offers great investment opportunities Kaliningrad co-gen plant-2 North-Western co-gen plant Pskov thermal plant 230.0 450 Scandinavia gas Upper Volga hydroplant cascade Ivanovo thermal plant Dzerzhinsk co-gen plant Schekino co-gen plant 31.2 hydro 195 273.6 gas 37.6 150 gas 275.8 gas 900 Surgut thermal plant Krasnodar co-gen plant Sakhalin thermal plant Berezov thermal plant-1 investment, US$ mn fuel type capacity to be installed, MW export capabilities 113.5 coal 700

  36. Second stage: Development and investments in the power sector through restructuring Principles of making deals with the capital of the Holding Shareholders have the right to suggest candidates of evaluation specialists Using market prices of assets on the basis of the independent evaluation Competitive principle of selling assets The opportunity for shareholders to take part in founding daughter companies Equal conditions for every shareholder when buying out securities Avoiding the decrease in credit debt security Public openness of information Independent evaluation of assets to be redistributed

  37. Second stage: Development and investments in the power sector through restructuring Effective interaction with the interested parties is the pledge of success in restructuring Russian State Duma and Federation Council Big business Managers of RAO «UES of Russia» Restructuring of RAO «UES of Russia» and AO-energos • Minority • shareholders Regional authorities Suppliers Big consumers Managers of AO-energos and federal power plants

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