Conference “RAO “UES of Russia” is an Open Company. On the Threshold of the Reform” 11 December, Moscow RAO “UES of Russia” CEO Anatoly Chubais Three Years

Conference “RAO “UES of Russia” is an Open Company.

On the Threshold of the Reform”

11 December, Moscow

RAO “UES of Russia” CEO

Anatoly Chubais

Three Years of Problems and Effective Decisions:

from Stagnation to Growth

2

668,000 employees

623bn kWh of electricity generated - 72% of

Russia’s total generation

2.7mln km of power transmission lines - 96 %

of Russia’s total length

407 thermal and hydropower plants with installed capacity

of 156,000 MW

RAO «UES of Russia» in the country’s energy sector

3

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

Major characteristics of RAO «UES of Russia» in 1998

In 1998 the new team of managers elaborated the Plan of Actions to raisethe effectiveness of UES operation and restructuring in the power sector

4

Second stage: Development and investments

in the Russian power sector through restructuring

First stage: Introduction of proper order

in production, finance and management

RAO «UES of Russia»: from Stagnation to Growth

5

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…”

Stages of restructuring outlined in 1998

Introduction of proper order in production, finance and management

Development and investments in the power sector through restructuring

6

Increasing the

profitability of

daughter companies, transparency

of activity, investment attractivenessBalance of incomes and expenditures,payment deals only in cash

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

International audit

Businessplanning

Budgeting, treasury execution of the budget, separate accountancy

Contemporary management is contemporary business procedures

First stage: Introduction of proper order in production, finance and management

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

Corporate governance

7

Kazakhstan

and

Middle Asia

In the USSR the parallel operation was carried out with 11 Republics

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

R U S S I A N

F E D E R A T I O N

Transcaucasian

Republics

Belorussia

and

Ukraine

The Baltic countries

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


8

Increase in production and consumption of electricity

1074 1062

1002

945

856 840 828 813 809832

863

800

850

900

950

1000

1050

1100

1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000

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

2002(forecast)

Billion kW per hour

1999 2000 2001

600

700 622,8 602,2

628,7 634,2

Production of electric power by RAO «UES of Russia» Holding

Consumption of electric power


Billion kW per hour

9

Decrease in the number of technological breaks and death accidents at the energy companies of RAO “UES of Russia”

In 2000 the number of technological breaks fell by 25% compared with 1997

11761 10738

13022 14233

75

98 99

111

1997 1998 1999 2000

Technological breaks

Death accidents


10

Increase in electric power quality

49.88 49.92

49.9978.6

94.6

99.94

49.82

49.84

49.86

49.88

49.9

49.92

49.94

49.96

49.98

50

1996 1998 2000

Frequency, Hertz

60

65

70

75

80

85

90

95

100

% calendar

time

Average frequency of the electric currentThe duration of UES operation with the normative frequency throughout the year


11

Solving the problem of non-payments is the basis of stability

SOLVING THE PROBLEM OF NON-PAYMENTS

Secure and consistent power supply of financially solvent consumers

Investments in the construction of new plants and infrastructure

Payments of wages on time to the workers

in the power and adjacent sectors

Recreation of the system ofpayments to suppliers

of fuel and energy

Elimination of a possibility of regional energy crises

Radical decrease in misusing barter deals


12

Solving the barter problem

Sales management: solving the problem of non-payments

Payment in cash, %

0

20

40

60

80

100

120

Q198

Q298

Q398

Q498

Q199

Q299

Q399

Q499

Q100

Q200

Q300

Q400

Q101

Q201

Q301

112

17 22

48

92

101

Shadowy and half-criminal annual

turnover was up to USD8bn


13

Coal industry: the effect of solving the non-payments problem by RAO «UES of Russia»

0

20

40

60

80

100

120112

17

22

48

92100

% of cash payments for power% of cash payments for coal

12

2445

9196

104

101

80

60

40

20

Q198

Q298

Q398

Q498

Q199

Q299

Q399

Q499

Q100

Q200

Q300

Q400

Q101

Q201

Q301


14

20

40

60

80

100

120112

17 22

48

92

100

11 16

33

54

105101

101

80

60

40

20

Oil industry: the effect of solving the non-payments problem by RAO «UES of Russia»

0

% of cash payments for power% of cash payments for mazut (black oil)

Q198

Q298

Q398

Q498

Q199

Q299

Q399

Q499

Q100

Q200

Q300

Q400

Q101

Q201

Q301


15

20

40

60

80

100

120

112

17

48

92100

17 19

41

100

114

103

10180

60

40

20

22

128

“Gazprom” (Russian Gas Monopoly): the effect of solving the non-payments problem by RAO «UES of Russia»

0

% of cash payments for power% of cash payments for gas

Q198

Q298

Q398

Q498

Q199

Q299

Q399

Q499

Q100

Q200

Q300

Q400

Q101

Q201

Q301


16

20

40

60

80

100

120112

17

48

92100

4,6 11,725

79,5

107101

80

60

40

20

22

Minatom (Russian Nuclear Ministry): the effect of solving the non-payments problem by RAO «UES of Russia»

0

% of cash payments for power% of cash payments for power generated by Minatom

Q198

Q298

Q398

Q498

Q199

Q299

Q399

Q499

Q100

Q200

Q300

Q400

Q101

Q201

Q301


17

0

20

40

60

80

100

120

112

17

22

48

92

101Number of energy systems that have wage arrears

72

60

40

20

44

62

82

23

Solving the non-payments problem by RAO «UES of Russia» is the basis is the basis of wage arrears elimination

% of cash payments for power

Q198

Q298

Q398

Q498

Q199

Q299

Q399

Q499

Q100

Q200

Q300

Q400

Q101

Q201

Q301


18

Cash tax payments to the Russian federal budget and Pension Fund

Payments to the federal budget Payments to the Russian Pension Fund

0

10

20

30

40

RURbillion

3,4

18,1

5,4

by 3.4 times

by 59%

1998 20001999 2001 (forecast)

by 2.3 times

41,0

0

10

15

RURbillion

4,1

11,1

7,3

by 52%

by 78%

1998 20001999 2001 (forecast)

by 22%

13,5


19

Three years of international audit done by Pricewaterhouse Coopers: profit based on 2000 year results

*) All 1998 and 1999 figures are adjusted for the Rouble purchasing power as of 12/31/2000

-100

20 1998 1999 2000

-80

-60

-40

-20

0

7.9- 28.2

- 91.3

Operating profit of the Group, RUR bn

* 1998 reports reflected the loss from

economic ageing which affected the

Group’s performance

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.

Net profit of the Group, RUR bn

-500

-100

0

100

- 11.9

- 532.3

1998 1999

0.5

2000


20

Investments increased

*) All 1999 figures are adjusted for the Rouble purchasing power as of 12/31/2000

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*

RURbn

2.0

9.2

0

10

1999 2000 2001

11.0


Towards the end of the year 2001 RAO «UES of Russia plans - to complete the construction of Petrovsk-Zabaykalsky-Chita 500kV Transmission 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

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.–Mutnovskaya Geothermal electric 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

Bureyskaya Hydroelectric Plant: dynamics of construction volumes

1998 1999 2000

Thousand cu m

2001(forecast)

Volumes of concrete poured

Volume of earth-moving works

100

200

300

375

310270

16222

60

6689


23

The stocks of coal and mazut (black oil), accumulated at UES Holding companies are the biggest over the past five yearsThe coal stocks exceed the last year level by 65% or by 9.5mln tons

Coal stocks at the UES power plants

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%

10

15

20

25

На 01.12.1998

17,0

13,814,6

Million tons

01.12.2001 01.12. 2000 01.12.1999

24,2


24

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%

Mazut (black oil) stocks exceed the level of the last year by 38% or by almost 1mln tons

1

1,5

2,0

2,5

На 01.12.1998

2,6

2,2

2,5

01.12.2001 01.12.2000 01.12.1999

3,5

3,5

3,0

4,0


Million tons

Mazut (oil stocks) stocks at the UES power plants

25

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)

Coal stocks in the energy systems of the Far East “critical” regions

Dalenergo coal stocks as of 1 December, 2001 amount for 590 thousand tons, which exceeds the task set by the Russian Government by 23%

0

200

400

600

На 01.12.1998

196234

129

01.12.2001 01.12. 200001.12.1999

590

1000

2000

3000

На 01.12.1998

2090 17411437

01.12.200101.12. 200001.12.1999

3083

Coal stocks in the Unified Energy Systems of the East* (UES of the East) by 1 Dec 2001 (thousand tons)

Dalenergo’s coal stocks as of 1 December, 2001 (thousand tons)

* UES of the East: Dalenergo, LuTEK, Sakhalinenergo, Khabarovskenergo, Amurenergo, Magadanenergo, Chukotskenergo, Yakutskenergo, Kamchatskenergo


26

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%

Mazut stocks in the energy systems of the Far East “critical” regions

In 2001 Kamchatskenergo have reached the level of 113% of the plan- for the first time over the recent years

0

20

60

На 01.12.1998

2,0

13,01,0

01.12.2001 01.12. 200001.12.1999

68,0

Kamchatskenergo’s mazut stocks by 1 Dec 2001 (thousand tons)

50

100

150

На 01.12.1998

58,0 78,054,0

01.12.200101.12. 200001.12.1999

180,0

Mazut stocks in the Unified Energy Systems of the East by 1 Dec 2001 (thousand tons)

200

40


27

Low portion of cash in payments of consumers

Shortage of investments

Cross subsidising

1998 2001

Solved in a non-market condition

Ageing of basic funds

Partly solved in a non-market condition

Cannot be solved in a non-market

condition

Prerequisites of the Russian Power Sector Reform

* the tariff for population divided by the industrial tariff (1.6 is the norm)

Lack of competitiveness is the lack of motivation to cut the costs

Pricing on the basis of incurred costs

17%

0.6 *

RUR

5.2bn.

112%

0.9 *

RUR

9.2bn.

up to 50%

Second stage: Development and investments in the power sector through restructuring

Problems:

up to 60%

28

In accordance with economic growth forecasts by 2010 power consumption level shall grow by 20-35%

Long-term investment capabilities: generating companies

DeregulationState regulation Competitive market

100

150

200

250

2000 2003 2010

Capacity requirements

Capacity adjusted for resource exhaustion

bn kWh

191

246

Free market share in power generation

Necessary investments - over

US$ 35 bn

196

214


29

Reforming is the Strategy of the Corporation

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…»

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)


30

Reforms are based on the division of monopoly and competitive sectors

GenerationGeneration

Competitive sectorsCompetitive sectors

Natural monopoliesNatural monopolies

Liberalisation of pricing mechanisms and stimulation of

market participation

Market rules

Production control

Backbone and dis-tribution networks

Sales

Regulated tariffs

Ensuring equal access to networks.Reorganisation of market support infrastructure.


31

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

Creation of social rehabilitation

mechanisms for the power sector’s

released employees

State control over functioning of certain

power sector entities within competitive

sectors (guaranteeing suppliers,

generating companies)

Way to a market with manageable risk


32

Changing the power sector structure with transition to the market

2001 2006-2008

Generation

LV Grid

Supply

RAO «UES of Russia»

holding

CDU

Regional energos

HV Grid

Power plants

Independent generating company



HV Grid

LV

Grid

LV

Grid

Consumers



33

… 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.

…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

Criteria of setting up generation companies secure...

...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.


34

Pskov CHPP; Stavropol CHPP; Troitsk CHPP; Surgut CHPP-1; Serov CHPP

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

The List of Generating Companies that has been submitted to the Russian Government

Verkhne-Tagilsk CHPP; Nizhnevartovsk CHPP; Urengoy CHPP, Iroklinskaya CHPP & hydro-electric plant; Perm CHPP, CHPP-4 (Kashirskaya)


35

230.0 450gas

Baltic states32.5 215gas

Europe437.0 900gas

investment, US$ mn fuel type capacity to be installed, MW export capabilities

Kaliningrad co-gen plant-2

Surgut thermal plantKrasnodar co-gen plant

Upper Volga hydroplant cascade

Ivanovo thermal plant

Dzerzhinsk co-gen plant

Schekino co-gen plant

North-Western co-gen plant

Pskov thermal plant

31.2 195hydro

273.6 gas

37.6 150gas

275.8 900gas

177.7 345gas

Turkey166.8 474gas

Berezov thermal plant-1

113.5 700coal

Scandinavia

Japan9600 4000gas

Sakhalin thermal plant

«5,000 MW» programme offers great investment opportunities


36

Principles of making deals with the capital of the Holding

Independent evaluation of assets to be redistributed

Shareholders have the right to suggest candidates of evaluation specialists

Competitive principle of selling assets

Public openness of information

Equal conditions for every shareholder when buying out securities

Avoiding the decrease in credit debt security

Using market prices of assets on the basis of the independent evaluation

The opportunity for shareholders to take part in founding daughter companies


37

Effective interaction with the interested parties is the pledge of success in restructuring

Regionalauthorities

Managers ofRAO «UES of Russia»

Big consumers

Suppliers

Minorityshareholders

Big business

Managers of AO-energosand federal

power plants

Restructuring of RAO «UES of Russia»

and AO-energos

Russian State Dumaand Federation Council


Documents

Conference “RAO “UES of Russia” is an Open Company. On the Threshold of the Reform” 11 December, Moscow RAO “UES of Russia” CEO Anatoly Chubais Three Years