Effectively Regulated Competitive Markets Lead to Energy Affordability Sergey G. Novikov Head of FTS Russia World Forum on Energy Regulation IV Athens, Greece October , 2009

Global Energy Agenda Lying at the core of energy security, Competitiveness and Affordability affect the issues of its agenda : meeting the growing energy demand (by various estimations it will rise by 45% (IEA) to 60% (Toshiba Group) by 2030) increasing efficiency of energy production and consumption and ecological responsibility diversification of energy supply and demand transparency and predictability of energy market including regulatory framework new balance between “invisible hand of market” and regulation (PWС’s Utilities global survey 2009 – regulation plays a far more significant role in the next 10 years) Sergey G. Novikov - World Forum on Energy Regulation IV - Athens, Greece - October 18-21,

“The World's Energy System is at a Crossroads.” (IEA WEO 2008) Based on IEA World Energy Outlook 2008, Centre for Strategic Research North-West` (St-Petersburg) foresights Challenges Current generation capacities are not able to meet the increasing energy demand Depletion of easy to extract oil and gas is going up Restriction of carbon massive usage for energy generation Climate change Call for energy industry investments until 2030 are estimated up to $13,6 trillion. Efforts «Nuclear renaissance» ( Massachusetts Institute of Technology` estimates that nuclear capacities worldwide will increase from 360GWt to 1000GWt by 2050 ) Implementation of energy efficiency programs ( Russian energy strategy up to 2030 foresees significant energy saving potential) Development of renewables and clean energy CCS technologies Smart grids & smart meters Development of distributed power generation 3

Price zones: 1 – European part of the UPS of Russia and the Urals; 2 – Siberian part of the UPS of Russia. Competitive trading is conducted separately in each price zone. Non-price zones include the Far East, Republic of Komi, Arkhangelsk Region, Kaliningrad Region, the power systems of which have limited connection to the UPS of Russia. The tariffs in non-price zones are fully regulated Installed capacity 152,8 GW Consumption 100,3 GWh Installed capacity 48,0 GW Consumption 27,7 GWh Installed capacity 4,7 GW Consumption 2,9 GWh Installed capacity 13,9 GW Consumption 7,2 GWh The Case of Russia Energy market’s regulation authorities Federal levelRegional levelSelf-governing Body Ministry of Energy – determining energy policy and developing market rules for the Government 83 Independent Regional Regulatory Authorities (RRA) – tariffs for distribution companies, retail tariffs (after 2011 – for households use and vulnerable consumers only) Non-for-profit Partnership “Market Council” – organizing efficient system of trading of wholesale and retail electricity and capacity market. Activities of NP “MC” are generally governed by the Supervisory Board - a collegial management body consisting of 4 chambers. Federal Antimonopoly Service – antimonopoly market control Federal Tariff Service - methodology, tariffs, supervision over RRA and market players’ activities, pre-trial settlement, consideration of disagreements 4

Self-governing Body and Decision-making Procedures Activities of NP “Market Council” are generally governed by the Supervisory Board – a collegial management body The composition of which is determined by The Federal Law of № 250-FZ The decision of the Supervisory Board is considered to be approved if: the majority of members voted affirmatively none of the Chambers of the Supervisory Board unanimously voted negative Preliminary discussions in MC committees and commissions The only representative member of the State Chamber has the right to veto the Supervisory Board decisions An issue, on which the decision was not made as a result of Supervisory Board Members exercising their right of veto, may be reviewed again at an “in presentio” meeting. NP “Market Council” Supervisory Board Chamber of Producers 4 Infrastructure Chamber (MC, TSA, FGC, SO)* State Chamber 8 Chamber of Consumers 4 5 * MC - Non-for-profit Partnership “Market Council”, TSA - JSC “Trade System Administrator”, FGC - JSC “Federal Grid Company”, SO – JSC “System operator UPS”

Regulatory Input To Energy Affordability (retail market) Special terms of payment such as interest-free installment for a three years term are envisaged for technological connections of small and average businesses with the maximum capacity of 15 kW to 100 kW and with 5% advance payment. The payment for technological connection of power receivers with maximum capacity not exceeding 15 kW for all consumers is fixed at a price of about $ The corresponding expenses of the network of organizations are included into transmission tariffs in the next regulatory period. The shortage of the network organizations income are included by Regulatory Authorities into transmission tariffs. 6 Sergey G. Novikov - World Forum on Energy Regulation IV - Athens, Greece - October 18-21, 2009

There are no Absolutely Safe and Isolated Systems Economic response Russian Federation Government bodies are aimed at prevention of violent prices variations: Governmental Decree: Price monitoring Mechanism for smoothing prices (including automatically triggered) in normal conditions Introduction of price regulation in cases of: – temporary power shortage, – the absence of competition among suppliers due to technological issues, – emergencies in power industry. If the above measures are insufficient - direct price regulation is imposed for a period not exceeding 30 days (setting limiting parameters for price bids’ and calculating equilibrium prices excluding marginal principle). Interstate: Joint work of the system operators in Russia and Kazakhstan has allowed to ensure energy supplies to Russian consumers in the first hours after the accident. Sayano–Shushenskaya hydroelectric power station accident – decommissioning of 6400 MW power at a time 7 Price for day-ahead market $/Mwh Sergey G. Novikov - World Forum on Energy Regulation IV - Athens, Greece - October 18-21, 2009

The Lessons We've Learned 1.It turned out that Market rules, management system, structure, design and regulatory tools for energy market should be universal, wide and flexible enough to be instrumental in any situation. It involves: -proper functioning competitive market -power shortages in the market (mechanisms of monitoring, control and the possibility of smoothing the market volatility) -emergencies (the opportunity of introducing direct price regulation) 2.Interdependence gives an additional weight to cooperation as an effective option to overcome emergency situations (positive role of Kazakhstan); mutual support/solidarity requires commonly shared and compatible tools for effective cross-border regulation 3.Modern, increasingly sophisticated energy markets and their interrelation need common approaches towards efficient comprehensive regulation. The essence of enhanced energy regulators cooperation is to contribute to global energy affordability. 8 Sergey G. Novikov - World Forum on Energy Regulation IV - Athens, Greece - October 18-21, 2009

Current Legal Basis for Global Energy Cooperation No matter how diverse the energy world is, to function efficiently in a sustainable way it needs a universal legal basis which reconciles interests of at least the critical majority of its actors – producing, transiting and consuming countries (if it’s politically possible). The most ambitious attempt to achieve that goal was the Energy Charter and its legally binding instruments launched 18 years ago. However, on July 30, 2009 the Russian Government made a formal decision that Russia does not intend to become a Party to the legal Charter documents. This decision was the result of the mounting frustration over Charter’s failure to prove itself as a universal, comprehensive, balanced, workable and flexible set-up. Inability of the Charter instruments to prevent or resolve severe, although short-lived gas crises with Ukraine has sealed the decision. Actually it means that Russia has joined the team of important world energy players which opted to stay out of the Charter regime. The list includes Algeria, Belarus, Canada, China, Egypt, India, Iran, Kuwait, Nigeria, Norway, Oman, Qatar, Saudi Arabia, the United Arab Emirates, the United States and Venezuela. That is explainable but does not promote the goal of creating an effective legal framework for global energy cooperation. Meanwhile this goal is becoming increasingly complicated and urgent reflecting new interrelated challenges. Climate change and new dimensions of economic interdependence figure prominently in this context. G8 has paid a lot of attention to the global energy security lately. The core of its approach was agreed at St-Petersburg G8 summit and proved its relevance and vitality. Since then Heiligendamm, Toyako and L’Aquila has advanced the G8 energy agenda, stakeholders and instruments to achieve the shared goals. Sergey G. Novikov - World Forum on Energy Regulation IV - Athens, Greece - October 18-21,

10 New World Energy Order? It was the Italian G8 Presidency that innovatively introduced a new dimension in wide discussions of world energy problems. We see new opportunities for increased contribution by Energy Regulators to emerging New World Energy Governance to make it right. In G8+ Energy Regulators’ Roundtable in May 2009 in Rome there was a unanimous decision to move towards more institutionalized cooperation between national energy regulators and their associations. We will appreciate if Canada in its capacity as the next host of G8 arranges the second G8+ ER Roundtable. We believe that depending on the issues and scope other regulatory cooperative formats, e.g. G8, G8+ or G20 might be very effective and contributing to the shared goals. We are also considering the idea of setting-up the International Confederation of Energy Regulators as an important step in the same direction. Being a major long-term initiative, it ought to be approved by Governing Bodies of the prospective ICER members on the basis of their respective statuary procedures. In April 2009 President D. Medvedev introduced a Russian Conceptual Approach towards New Legal Basis of International Energy Cooperation. Its goals and principles are rooted in the experience and lessons of the past and aimed at improving current multilateral arrangements to ensure long-term adequate, sustainable and ecologically responsible energy supplies. Intensive consultations on the initiative are under way both domestically and internationally. Не зависимо от того, каким будет новый энергетиNo matter what a new emerging world energy order will be, fair and efficient cooperation of energy regulators has to be the inherent part of it. Sergey G. Novikov - World Forum on Energy Regulation IV - Athens, Greece - October 18-21, 2009

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