S.G. Novikov Head of the Federal Tariff Service Budapest, Hungary April 14, th Annual Meeting of the Energy Regulators Regional Association Country Update – Russian Federation

© Energy Regulators Regional Association 5th Annual ERRA Meeting Budapest, Hungary, April 14, 2005 Slide 2 Key Events & Activities from May 2004 – April 2005 Main events: The Government approved the Regulation on the FTS of Russia – a document that defines main functions and authorities of FTS in the sphere of state regulation Conversion to long-term regulation based on cap tariffs continues Implementation of methods for budgetary planning of FTS activity began; these methods are oriented towards achievement of specific goals and tasks A pilot project on the World Bank loan was implemented – introduction of a single information analytical system for tariff regulation

© Energy Regulators Regional Association 5th Annual ERRA Meeting Budapest, Hungary, April 14, 2005 Slide 3 Key Events & Activities from May 2004 – April 2005 ( continued) Main regulatory functions : ▪state regulation of prices and tariffs including development and approval of methodological and other regulatory documents ▪formation and maintenance of registries of regulated organizations ▪law enforcement and supervisory functions ▪participation in development of the legislation (lawmaking activity) in the set area

© Energy Regulators Regional Association 5th Annual ERRA Meeting Budapest, Hungary, April 14, 2005 Slide 4 Key Events & Activities from May 2004 – April 2005 (continued) FTS of Russia regulates tariffs and prices in the following areas (markets, industries ): ▪ power sector ▪ gas industry (internal prices and tariffs) ▪ pipeline transport of oil and oil products ▪ railroad transport ▪ sea, river ports, airports and terminals ▪ publicly available electric and postal communications ▪ socially-significant goods

© Energy Regulators Regional Association 5th Annual ERRA Meeting Budapest, Hungary, April 14, 2005 Slide 5 Main issues (problems) of the current regulatory system Short-term asynchronous regulation mostly aimed at suppression of the current inflation rather than at attraction of investments and long-term development Development of the regulatory system tries to «catch up» with structural reforms «Unbalanced» social burden for infrastructure sectors that prevents economic development, including development of competitive segments of the market Lack of unification, gaps and contradictions in the regulatory legal base Regulatory bodies have limited resources for execution of their controlling functions

© Energy Regulators Regional Association 5th Annual ERRA Meeting Budapest, Hungary, April 14, 2005 Slide 6 Goals and objectives of the Federal Tariff Service GoalsObjectives 1. To ensure balance and long-term stability of regulated markets of goods and services in infrastructure sectors, as it is an important factor of economic growth  Conversion to the long-term period of tariff and price regulation;  Expansion of use of method of economically justified return on invested capital;  gradual elimination of cross subsidies;  unification of principles, methods, procedures and regulations of the state price regulation; 2. To ensure fairness and transparency of decisions made at all levels of state regulation  introduction and development of the institute of comprehensive expertise of prices and tariffs of regulated organizations when preparing tariff decisions;  creation of the system of disclosure standards for information presented by regulated companies in the course of setting tariffs and prices