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Power Sector Liberalization: The Russian Way. RAO UES Anatoly Chubais, CEO Davos, January 25, 2008. One of the world’s largest markets …. … is being served by the world’s largest utility. Electricity output Heat output E mployees.

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RAO UES Anatoly Chubais, CEO Davos, January 25, 2008

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Rao ues anatoly chubais ceo davos january 25 2008

Power Sector Liberalization:

The Russian Way

RAO UES

Anatoly Chubais, CEO

Davos, January 25, 2008


Rao ues anatoly chubais ceo davos january 25 2008

One of the world’s largest

markets…

… is being served by the world’s largest utility

  • Electricity

    output

  • Heat output

  • Employees

  • Russia is the 4th largest electricity market in the world

  • ~5-6% of world generating capacities

1998

2008

> 70% of Russia’s total

~ 30-33%

of Russia’s total

~ 670 000

~ 470 000

1998-2008: RAO UESand Russian Power Sector


Rao ues anatoly chubais ceo davos january 25 2008

RAO UES

1998

2001

Payments due by customers

Avalanche of bankruptcy claims to RAO’s leading subsidiaries

Arrears of wages and salaries to personnel

Reliability of power supply:

standard current frequency

18%

>20 energy companies

and power plants

3 months in average,personnel strikes, including hunger strikes

94.5% of calendar time

100% since 2001

None since

1999

None since

2001-2002

100% of calendar time

since 2001

+

+

1998-2001: Crisis Management in RAO

Cleaning up for the Reform Launch

In the late 1990s, RAO implemented a crisis management project

to overcome systematic financial, productionand social crisis…

…yet sustainable development of the electric power industry necessitated

a large-scale structural reform


Rao ues anatoly chubais ceo davos january 25 2008

Tools for accomplishing crisis management tasks

HR Policy

Supply Policy

  • A new teamfor the company’s Management Board was mobilized

  • 90% of CEOs of subsidiaries were replaced (average age of CEOs went down from 60to 50years)

  • About 50 000 people were employed

  • andtrained

  • Regulatory framework for the supply system was created

  • General principles for planning supply operations were introduced as well as a motivation system to ensure their abiding

Corporate Governance

Business Planning

budgeting system,

business planning system,

KPI system with divisional structure

- were adopted

  • A modern corporate governance system with all relevant mechanisms was set up


Rao ues anatoly chubais ceo davos january 25 2008

Basics of the Reform:

Separation of Monopolistic and Competitive Sectors

Private property

and

market

Generation

Competitive sectors

Supply

Government property

and

Government regulation

Dispatching

Transmission and Distribution grids

Monopolistic sectors


Rao ues anatoly chubais ceo davos january 25 2008

UES

Reform

Reform Opponents

Political and business elite changed theirstanding on the reform essence

Conservatively-minded

energy specialists

and scientists

VIPs

in the Governmentand Kremlin

Majority of

regional Governors and influential presidents

of republics

Majority of senators

in the Federation Council

UES

Reform

Key

political factions

in the State Duma

Influential oligarch groups

Majority of

minority shareholders

2000-2007


Rao ues anatoly chubais ceo davos january 25 2008

Threat of“pocket privatization” of RAO

Threat ofasset value dilution

Reform Opponents

Concerns of the minority shareholders dispelled

Imaginary and reasonable concerns of the minority shareholders of RAO UES: digest 2000

“Key reform-related decisions will be adopted ignoring the opinions of minority shareholders. The principal assets will go to investors that are friendly to the management of RAO”

“The assets of RAO will be sold too quickly and, consequently, at a price lower than their market value, which will dilutethe value of stakes held by minority shareholders”

Non-profitability ofinvestments in the electric power industry

Unclear position of the state and local authorities

“The state has not formulated its final position with respect to the restructuring plan.

No political guarantees of the irreversibility of reform, no legal framework are in place”

“Electricity tariffs were artificially reduced and do not provide return on investment. This situation is aggravated by the customers’ systematic failure to pay”

The years of reform have answered all of these questions:

  • Active participation ofminority shareholders in the development and conducting of the reform was ensured.

  • Theprinciple ofassets pro rata allocation among the shareholders was implemented.

  • The reform of RAO lasted longer than originally planned: quality is more important than pace.

  • The aggregatecapitalization of new companies will be considerably higher than the value of RAO UES.

  • The reform gained absolute support from the state and legislative guarantees.

  • Tariffs were replaced by competitive market: full liberalization is envisaged by 2011.


Rao ues anatoly chubais ceo davos january 25 2008

RussianGovernment

52%

48%

Power sector pre-reform:Double vertically integrated and overregulated…

Minority

Shareholders

RAO UES

73 AO-Energos

Centralised

Dispatch

High

Voltage

Grids

+

Grid

Services

32

FederalPower

Plants

Generation

Low voltage

& High

voltage

Grids

Supply


Rao ues anatoly chubais ceo davos january 25 2008

…Post-reform model provides competition

Monopolistic sectors

Competitive sectors

6

Wholesale GenCos (OGKs)

14

TerritorialGenCos (TGKs)

SystemOperator

Federal Grid

Company

Competitive market

Rosenergoatom (nuclear)

Hydro OGK

Independent GenCos

11

Interregional Distribution Companies(IDCs)

Supply

Private ownership

Government ownership


Rao ues anatoly chubais ceo davos january 25 2008

Power Sector:

Functional, Legal and Ownership Unbundling

The issue is not settled yet for the majority of EU countries:

Ownership unbundling of VICs and spin-off of distribution grids

??

EU countries

Functional unbundling

Legal unbundling

Ownership unbundling

July 1,

2008

Russia

Deadline forownership unbundlingof RAO UES (Federal Law No. 250, November 4, 2007)


Rao ues anatoly chubais ceo davos january 25 2008

600

700

500

600

400

500

300

400

300

200

200

Competitive wholesale market:

Supply/Demand Equation Prices

Average prices (Europe+Urals and Siberia), Rb/MWh

Week and month

Day (Apr 07)

01.10.07

08.10.07

15.10.07

22.10.07

29.10.07

1

2

3

4

5

6

7

8

9

10

11

12

13

14

15

16

17

18

19

20

21

22

23

24

800

Year

600

400

(January

1-20)

200

Sep.06

Oct.06

Nov.06

Dec.06

Jan.07

Feb.07

Mar.07

Apr.07

May.07

Jun.07

Jul.07

Aug.07

Sen.07

Oct.07

Nov.07

Dec.07

Jan.08

Source: Administrator of Trade System (ATS)


Rao ues anatoly chubais ceo davos january 25 2008

Sept 1, 2006

Jan 1, 2007

Jul 1, 2007

Jan 1, 2008

Jul 1, 2008

Jan 1, 2009

Jul 1, 2009

Jan 1, 2010

Jul 1, 2010

Jan 1, 2011

Power Market DevelopmentPace of liberalization: government’s plan and actual progress

100%

100%

~90%

actual pace of liberalization (facts and estimates)

mandatory increase of the liberalized market share

100%

80%

80%

~70%

Excluding

householdconsumption

~60%

60%

60%

50%

~40%

~35%

40%

~ 25%

30%

~18%

(Sept 06)

~20%

(Jan 08)

25%

20%

15%

10%

5%

0%

0%

All new capacity and consumption commissioned after 2007 go to the free market


Rao ues anatoly chubais ceo davos january 25 2008

1,300

Average annual increase in 2006-10: 5% (basic scenario)

1,197

1,200

1,133

kWh, bln

1,100

1,082

1,030

1,000

981

900

2006

2007

2008

2009

2010

Basic scenario

Optimistic scenario

Electricity demand growth outlook:

Mid-term and long-term view

Mid-term

Long-term

5,6%

6

5,3%

5%

5%

3,9%

3,7%

4

2

0

2006-2010

2010-2015

2015-2020

Source: Ministry of Industry and Energy (Minpromenergo); UES estimates


Rao ues anatoly chubais ceo davos january 25 2008

Prospects until 2030:

Target Concept, General Scheme, Investment Programs

2030

Target Concept for Development of the Russian Electricity Power Sector until 2030

General Scheme for locating power capacity until 2020

2020

5-year investment programs

of energy companies

from 2008

2006-2010 Investment Program

of UES Holding Company

2010

2006

2010

2020

2030

2006


Rao ues anatoly chubais ceo davos january 25 2008

Private investments

Credits and loans

Other

State budget financing

Companies’ funds

CAPEX 2006-2010 – over 92 bn Euro

Sources of financing

Euro, bn

26.8 (29%)

22.9 (25%)

22.8 (25%)

15 (16%)

4.8 (5%)

0

10

20

30

40

Total: ~92.3 bn Euro (private investments ~26.8bn Euro)


Rao ues anatoly chubais ceo davos january 25 2008

30

20

10

0

Nov

Mar

May

May

Jun

Sep

Sep

Sep

Oct

Oct

Dec

Dec

Dec

Jan

Jan

Feb

Feb

Feb

Feb

Mar

Mar

Apr

Apr

May

May

06

06

07

07

07

07

07

07

07

07

07

07

07

08

08

08

08

08

08

08

08

08

08

08

08

TGK-9

TGK-7

TGK-8

TGK-7

TGK-6

TGK-5

TGK-3

OGK-3

TGK-3

TGK-4

OGK-3

OGK-2

OGK-5

OGK-1

OGK-5

OGK-6

OGK-4

TGK-9

TGK-1

TGK-11

TGK-10

TGK-13

TGK-12

TGK-14

TGK-12

Funds raised so far and yet to be raised

From competitiveshare placements and sales to strategic investors

26,8

Euro in billions

Fact:

17.5 bn Euro

UES estimates:

+ 9.3 bn Euro

4,2

0,4

3,1

2,0

2,0

2,4

1,7

1,5

1,2

1,1

0,7

0,8

0,7

0,7

0,7

0,6

0,5

0,4

0,4

0,4

0,4

0,3

0,3

0,3

0,04

0,2

Total: ~ 26.8 bn Euro


Rao ues anatoly chubais ceo davos january 25 2008

2006-2010 RAO UES Capacity Commissioning Program

MW

2006-2010

2006

2007

2008

2009

2010

1 186

1 545

2 050

5 788

14 364

24 934

Thermal generation

OGKs, TGKs, RAO UES

67

690

420

1 224

1 612

4 013

Hydro OGK

Totalcommissioning

1 253

2 235

2 470

7 089

15 919

28 947

20,000

15,000

MW

10,000

5,000

0

2006

2007

2008

2009

2010


Rao ues anatoly chubais ceo davos january 25 2008

RAO UES Investment Program for 2006-2010: Higher Demand for Suppliers’ Products and Services

*

Construction materials(Solely cement expenses of TPPs and HPPs):

~ 0.3 bn Euro

2010 vs. 2006

Generation equipment(Procurements of solely primary generation equipment for OGKs and TGKs):~21.6 bn Euro

4.5-fold

8-fold

Electrical equipment

(Procurements solely

for FGC):

~ 7.6 bn Euro

R&D(Solely in thermal power sector):

~ 2 bn Euro

Power Sector

DevelopmentProgram

4-fold

4-fold

Coal:

~ 731 milliontonnes of coal

40%

Construction and installation(Solely in thermal power sector):

~ 9 bn Euro

Gas:

~ 848 billioncub.m. of gas

8-fold

30%

*

Expert estimates


Rao ues anatoly chubais ceo davos january 25 2008

UES Extraordinary General Meeting(October 26, 2007)

Federal Law No. 250

(November 4, 2007)

Two final chords of the reform

Coordinated

Synchronized

RAO UES EGM approved

the final reorganization

(more than 95.43% of the attending shareholders voted for)

Federal Law No. 250

to adjust power sector laws

in connection with

RAO UES reorganization.

Corporate and legal actions taken according to the plan

Transitional period of the power sector reform

will end by July 1, 2008

(date of completion of the RAO UES reorganization)


Rao ues anatoly chubais ceo davos january 25 2008

Our journey is about to end

2008

1998

Newheights are to be conquered


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