Power Sector Reform in Russia : Results and Steps Forward

1. Power SectorReform in Russia:Results and Steps Forward Y.A. Udalcov, Board Member, Head of the Reform Management Centre JSC “Unified Energy System of Russia” “Utilities Day” London, November 12, 2004

2. The Reform Key Elements Reform • Creating Legal framework for reforms and electricity sector • Unbundling of regional energo • Creating the market infrastructure • Setting up independent market participants • Liberalization of electricity market • Restructuring the Holding (RAO UES of Russia)

3. The Main Stages Reform • Stage 1. Design. 2001-2003 Legal foundation. Corporate transformation schemes. Definition of list of new entities… • Stage 2. Formation. 2004-2005 Regional energo’s unbundling. Interregional mergers. Wholesale market infrastructure development. • Stage 3. Liberalization. 2006-2007 Setting up new businesses. Wholesale market launch with vesting contracts scheme. • Stage 4. “Packing up”. 2007 – RAO UES reorgainzation and distribution of shares of new companies among RAO shareholders.

4. Legal and Conceptual Framework of Reform Reform In force • Reform concept - "On Restructuring the Electric Power Industry of the Russian Federation“Decree of the GOR July 2001 • Legal foundation – Electricity reform Laws adopted in March 26, 2003 • Implementation plan – RAO UES strategy paper adopted by RAO UES Board in May 2003 • Liberalization start-up – Wholesale market regulation Decree of the GOR October 2003 To be adopted • Retail market legal framework - Decree of the GOR • Investment guarantee mechanism – Decree of the GOR • Wholesale market rules – Decree of the GOR

5. Restructuring Regional Vertically Integrated Companies: Plan for Complete Unbundling 2004 2005 2006 73 1 2 5 22 38 44 49 50 60 65 Divided companies – total quantity 1 72 1 71 3 68 17 51 16 35 6 29 Divided companies - quantity during the period 5 24 1 23 10 13 5 8 Q3 2004 Q1 2005 Q2 2005 Q3 2005 Q1 2004 Q2 2004 Q4 2005 Q1-Q2 2006 10.11.04 05.01.05 Isolated energy systems Vertically integrated companies – total quantity

6. Creating Electricity Market Infrastructure Distribution Transmission Dispatching Configuration of the 4 Inter-Regional Distribution Companies (IDC) was approved by the Board of Directors of RAO UES 7 Inter-Regional Transmission Companies (ITC) were established The transfer of the operational and dispatch control functions to System operator began in 2002 Past IDC’s will be established by the end of the year All but isolated energy system passed dispatch functions to System operator. Present Valuation of assets transfering to ITC’s close to completion IDC’s are expected to be completely formed in the middle of 2005 Transmission grids will be passed to ITC’s in 2005 In 2005 System operator will buy out dispatch infrastructure Future

7. Restructuring Generation: Wholesale-Market Generation Companies (WGC) December 2004 WGC 1 December 2004 WGC 2 01.10.04 WGC 3 26.11.04 WGC 4 03.09.04 WGC 5 December 2004 WGC 6 December-January WGC 7 Schedule is forming 3Q 4Q 1Q 2Q 3Q 4Q 1Q 2Q 3Q 4Q 1Q 2Q 2004 2005 2006 2007 WGC № WGC established/under establishment WGC establishment approved by RAO UES Board of Directors State registration of WGC Transition to a single share completed Subsidiaries joined to WGC

8. Restructuring Generation: Territorial Generation Companies (TGC) leasing TGC 1 Merge TGC2 Merge holding TGC3 will be formed as a result of the restructuring of Моsenergo holding TGC4 Merge TGC5 Merge Merge TGC6 Operation since April1, 2005 holding TGC7 Merge leasing TGC8 Merge leasing TGC9 Merge TGC10 leasing Merge TGC13 leasing Merge TGC14 leasing Merge TGC 11, 12 The set-up schedule will be determined after the approval of the reorganization plan of Kuzbassenergo 2004 2005 2006 2007 TGC № TGC which creation had started

9. Development of electricity market:“5-15%” model Free Trade Sector (FTS) has beginning work since November 1, 2003 in accordance with “Wholesale Electric Power (Capacity) Market Rules of the Transitional Period” (approved by the Decree of the Federal Government №643, Dated October 24, 2003) FTS weighted average buying price 500 400 300 Regulated sector tariff (including capacity since January 2004) weighted average price rub/MWH 200 100 mar. apr. may june jule aug. sept. oct. nov. dec. jan. feb. 0 • The year volume of electricity traded through FTS (since November 2003 till October 2004) was about 41 TWh • FTS share equal to about 9% generation of European Russia and Urals • In October2004free market prices were 4,2% lower than regulated prices • 106 entities signed joining agreements to the Market System, 1/3 of them are independent of RAO UES of Russia

10. Development of electricity market:Proposed Changes to the Wholesale Market Model

11. Completing regional companies reorganization – “corporate unbundling” Creating market infrastructure (IDCs, ITCs) Restructuring of generation - creating WGCs and TGCs Set up businesses of new market participants – “management unbundling” Development of wholesale market rules Development of vesting contracts scheme (legal and commercial) Groundwork for wholesale market launch on Jan 1,2006 Main Tasks for 2005Implementing the Decisions Made

12. Thank you for your attention