1

RAO UES

Anatoly Chubais, CEO

Davos, January 25, 2008

Power Sector Liberalization:The Russian Way

2

1998-2008: RAO UES and Russian Power Sector

Russia is the 4th largest electricity market in the world

~5-6% of world generating capacities

One of the world’s largest markets…

One of the world’s largest markets…

… is being served by the world’s largest utility

… is being served by the world’s largest utility

Electricity

output

Heat output

Employees

1998 2008

~ 30-33% of Russia’s total

> 70% of Russia’s total

~ 670 000 ~ 470 000

3

1998-2001: Crisis Management in RAOCleaning up for the Reform Launch

In the late 1990s, RAO implemented a crisis management projectto overcome systematic financial, production and social crisis…

…yet sustainable development of the electric power industry necessitateda large-scale structural reform

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

1998

100% since 2001

None since 1999

None since2001-2002

100% of calendar time since 2001

2001

++

RAO UES

4

Tools for accomplishing crisis management tasks

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

budgeting system, business planning system,KPI system with divisional structure

- were adopted

Corporate Governance

• A new team for the company’s Management Board was mobilized

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

• About 50 000 people were employed and trained

• 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

HR Policy Supply Policy

Business Planning

5

Basics of the Reform: Separation of Monopolistic and Competitive Sectors

Mo

no

po

list

ic s

ecto

rs

Dispatching

Transmission and Distribution grids

Co

mp

etit

ive

sect

ors

Supply

Generation

Private propertyand

market

Government propertyand

Government regulation

6

Reform OpponentsPolitical and business elite changed their standing on the reform essence

UES

Reform

UES

Reform

Key political factions in the State Duma

Conservatively-minded energy specialists

and scientists

Majority of regional Governors and influential presidents

of republics

VIPsin the Government and

Kremlin

Majority of senators in the Federation Council

Influential oligarch groups

2000 - 2007

Majority ofminority

shareholders

7

Reform OpponentsConcerns of the minority shareholders dispelled

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

Threat of asset value dilutionThreat of “pocket privatization” of RAO

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

Non-profitability of investments in the electric power industry

“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”

Unclear position of the state and local authorities

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

“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”

The years of reform have answered all of these questions:• Active participation of minority shareholders in the development and conducting of the reform was

ensured. • The principle of assets pro rata allocation among the shareholders was implemented.

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

8

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

Generation

Low voltage& High voltageGrids

Supply

73 AO-Energos High VoltageGrids

+Grid

Services

CentralisedDispatch

32 FederalPower Plants

MinorityShareholders

RussianGovernment

52% 48%

RAO UES

9

Competitive market

Government ownershipPrivate ownership

SystemOperator

Monopolistic sectors Competitive sectors

Federal Grid

Company

11

Interregional Distribution Companies

(IDCs)

Hydro OGK

Supply

6

Wholesale GenCos (OGKs)

Rosenergoatom (nuclear)

Independent GenCos

14

TerritorialGenCos (TGKs)

…Post-reform model provides competition

10

Functional unbundling Legal unbundling 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

Deadline for ownership unbundling of RAO UES (Federal Law No. 250, November 4, 2007)

Russia July 1, 2008

??

Power Sector:Functional, Legal and Ownership Unbundling

11

Competitive wholesale market:Supply/Demand Equation Prices

Source: Administrator of Trade System (ATS)

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

Day (Apr 07)

200

300

400

500

600

1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24200

300

400

500

600

700

01.10.07 08.10.07 15.10.07 22.10.07 29.10.07

200

400

600

800

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

Week and month

Year

(January 1-20)

12

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

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

0%5%

10%15%

25%30%

50%

60%

80% 100%

0%

20%

40%

60%

80%

100%

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, 2011Sept 1, 2006

~18% (Sept 06)

~20% (Jan 08)

Excluding household consumption

actual pace of liberalization (facts and estimates)

mandatory increase of the liberalized market share

~ 25%

~35%

~40%

~60%

~70%

~90%100%

13

Electricity demand growth outlook: Mid-term and long-term view

Mid-term Long-term

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

kWh, bln

900

1,000

1,100

1,200

1,300

981

1,030

1,082

1,133

1,197

2006 2007 2008 2009 2010

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

5,6%

3,7%

5,3%

3,9%

5%

0

2

4

6

2006-2010 2010-2015 2015-2020

Basic scenario Optimistic scenario

14

Prospects until 2030:Target Concept, General Scheme, Investment Programs

2006

2010

2020

2030

General Scheme for locating power capacity until 2020

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

2006-2010 Investment Program

of UES Holding Company

5-year investment programsof energy companies

from 2008

2006 2010 2020 2030

15

CAPEX 2006-2010 – over 92 bn EuroSources of financing

Private investmentsState budget financing

Credits and loans Companies’ funds

Other

Euro, bn

4.8 (5%)

15 (16%)

22.8 (25%)

22.9 (25%)

26.8 (29%)

0 10 20 30 40

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

16

Funds raised so far and yet to be raisedFrom competitive share placements and sales to strategic investors

0,30,70,040,30,4 0,40,50,80,60,20,41,5

0,72,0

3,1

1,20,4

2,4

0,31,7

1,1 0,7

4,2

2,00,7

0

10

20

30

Nov06

Mar06

May07

May07

Jun07

Sep07

Sep07

Sep07

Oct07

Oct07

Dec07

Dec07

Dec07

Jan08

Jan08

Feb08

Feb08

Feb08

Feb08

Mar08

Mar08

Apr08

Apr08

May08

May08

26,8

0,4

OG

K-5

OG

K-3

TG

K-5

TG

K-3

OG

K-5

OG

K-4

TG

K-1

OG

K-2

TG

K-8

OG

K-3

TG

K-9

TG

K-1

2

OG

K-6

TG

K-3

TG

K-4

TG

K-9

TG

K-7

TG

K-1

1

TG

K-6

TG

K-1

0

OG

K-1

TG

K-1

3

TG

K-1

4

TG

K-7

TG

K-1

2

Euro in billions

Total: ~ 26.8 bn Euro

Fact: 17.5 bn Euro

UES estimates:+ 9.3 bn Euro

17

2006-2010 RAO UES Capacity Commissioning Program

MW 2006 2007 2008 2009 2010 2006-2010

Thermal generationOGKs, TGKs, RAO UES

1 186 1 545 2 050 5 788 14 364 24 934

Hydro OGK 67 690 420 1 224 1 612 4 013

Total commissioning 1 253 2 235 2 470 7 089 15 919 28 947

0

5,000

10,000

15,000

20,000

MW

2006 2007 2008 2009 2010

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

Power SectorDevelopment

Program

2010 vs. 2006 Generation equipment(Procurements of solely primary generation equipment for OGKs and TGKs):~ 21.6 bn Euro

8-fold

Electrical equipment(Procurements solely for FGC):~ 7.6 bn Euro

4-fold

Coal:~ 731 milliontonnes of coal

40%

Gas:~ 848 billioncub.m. of gas

30%

Construction materials(Solely cement expenses of TPPs and HPPs): ~ 0.3 bn Euro

R&D(Solely in thermal power sector):~ 2 bn Euro

Construction and installation(Solely in thermal power sector):~ 9 bn Euro

4.5-fold

4-fold

8-fold

* Expert estimates

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Two final chords of the reform

UES Extraordinary General Meeting (October 26, 2007)

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.

Federal Law No. 250(November 4, 2007)

Corporate and legal actions taken according to the plan

Coordinated

Synchronized

Transitional period of the power sector reform will end by July 1, 2008

(date of completion of the RAO UES reorganization)

20

Our journey is about to end

New heights are to be conquered

1998

2008