1. 1 RAO UES Anatoly Chubais, CEO Davos, January 25, 2008 Power Sector Liberalization: The Russian Way

2. 2 1998-2008: RAO UES and Russian Power Sector  Russia is the 4 th largest electricity market in the world  ~5-6% of world generating capacities One of the world’s largest markets… … is being served by the world’s largest utility  Electricity output  Heat output  Employees 19982008 ~ 30-33% of Russia’s total > 70% of Russia’s total ~ 670 000~ 470 000

3. 3 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, production and social crisis… …yet sustainable development of the electric power industry necessitated a 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 since 2001-2002 100% of calendar time since 2001 2001 + + RAO UES

4. 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 PolicySupply Policy Business Planning

5. 5 Basics of the Reform: Separation of Monopolistic and Competitive Sectors Monopolistic sectors Dispatching Transmission and Distribution grids Competitive sectors Supply Generation Private property and market Government property and Government regulation

6. 6 Reform Opponents Political 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 VIPs in the Government and Kremlin Majority of senators in the Federation Council Influential oligarch groups 2000 - 2007 Majority of minority shareholders

7. 7 Reform Opponents Concerns 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. 8 Power sector pre-reform: Double vertically integrated and overregulated… Generation Low voltage & High voltage Grids Supply 73 AO-Energos High Voltage Grids + Grid Services Centralised Dispatch 32 Federal Power Plants Minority Shareholders Russian Government 52%48% RAO UES

9. 9 Competitive market Government ownershipPrivate ownership System Operator Monopolistic sectorsCompetitive sectors Federal Grid Company 1 Interregional Distribution Companies (IDCs) Hydro OGK Supply 6 Wholesale GenCos (OGKs) Rosenergoatom (nuclear) Independent GenCos 14 Territorial GenCos (TGKs) …Post-reform model provides competition

10. 10 Functional unbundlingLegal unbundlingOwnership 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. 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 123456789101112131415161718192021222324 200 300 400 500 600 700 01.10.0708.10.0715.10.0722.10.0729.10.07 200 400 600 800 Sep.06Oct.06Nov.06Dec.06Jan.07Feb.07Mar.07Apr.07May.07Jun.07Jul.07Aug.07Sen.07Oct.07Nov.07Dec.07Jan.08 Week and month Year (January 1-20)

12. 12 Power Market Development Pace 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, 2007Jul 1, 2007Jan 1, 2008Jul 1, 2008Jan 1, 2009Jul 1, 2009Jan 1, 2010Jul 1, 2010Jan 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. 13 Electricity demand growth outlook: Mid-term and long-term view Mid-termLong-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 20062007200820092010 Average annual increase in 2006-10: 5% (basic scenario) 5% 5,6% 3,7% 5,3% 3,9% 5%5% 0 2 4 6 2006-20102010-20152015-2020 Basic scenarioOptimistic scenario

14. 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 programs of energy companies from 2008 2006201020202030

15. 15 CAPEX 2006-2010 – over 92 bn Euro Sources of financing Private investments State budget financing Credits and loans Companies’ funds Other Euro, bn 4.8 (5%) 15 (16%) 22.8 (25%) 22.9 (25%) 26.8 (29%) 010203040 Total: ~92.3 bn Euro (private investments ~26.8 bn Euro)

16. 16 Funds raised so far and yet to be raised From competitive share placements and sales to strategic investors 0,3 0,7 0,04 0,3 0,4 0,5 0,8 0,6 0,2 0,4 1,5 0,7 2,0 3,1 1,2 0,4 2,4 0,3 1,7 1,1 0,7 4,2 2,0 0,7 0 10 20 30 Nov 06 Mar 06 May 07 May 07 Jun 07 Sep 07 Sep 07 Sep 07 Oct 07 Oct 07 Dec 07 Dec 07 Dec 07 Jan 08 Jan 08 Feb 08 Feb 08 Feb 08 Feb 08 Mar 08 Mar 08 Apr 08 Apr 08 May 08 May 08 26,8 0,40,4 OGK-5 OGK-3 TGK-5TGK-3 OGK-5 OGK-4 TGK-1 OGK-2 TGK-8 OGK-3 TGK-9 TGK-12 OGK-6 TGK-3 TGK-4 TGK-9 TGK-7 TGK-11 TGK-6 TGK-10 OGK-1 TGK-13 TGK-14 TGK-7 TGK-12 Euro in billions Total: ~ 26.8 bn Euro Fact: 17.5 bn Euro UES estimates: + 9.3 bn Euro

17. 17 2006-2010 RAO UES Capacity Commissioning Program MW 20062007200820092010 2006-2010 Thermal generation OGKs, TGKs, RAO UES 1 1861 5452 0505 78814 36424 934 Hydro OGK 676904201 2241 6124 013 Total commissioning 1 2532 2352 4707 08915 91928 947 0 5,000 10,000 15,000 20,000 MW 20062007200820092010

18. 18 RAO UES Investment Program for 2006-2010: Higher Demand for Suppliers’ Products and Services * Power Sector Development 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 million tonnes of coal 40% Gas: ~ 848 billion cub.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

19. 19 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. 20 Our journey is about to end New heights are to be conquered 1998 2008