1. Russian power sector reform Presentation to AmCham Russia members by CEO of Unified Energy Systems of Russia, Anatoly B. Chubais March 20, 2001Moscow

2. 2 Increase in power generation  2000 saw a 3.9% increase in Russia’s power consumption level  To achieve this, RAO «UES» has raised its power generation by 19.5 bn kWh as compared to 1999. (586.5 kWh in 1999 versus 606.0 bn kWh in 2000)  This is comparable to annual power consumption level of such highly industrialised regions as Samara and Perm  According to expert estimates, in 2001 power generation level is going to rise by 47.5 bn kWh compared to 1999

3. 3 Improvement of power quality and reduction of the number of technological failures 49.88 49.92 49.99 78.6 94.6 99.94 49.82 49.84 49.86 49.88 49.9 49.92 49.94 49.96 49.98 50 199619982000 Frequency, Hz 60 65 70 75 80 85 90 95 100 % of calendar time Average frequency of electric current RAO UES’s time of standard frequency operation per year Power qualityTechnological failures (number over the last 4 years) Y2000: number of technological failures fell by 25% compared to 1997

4. 4 % Resolution of non-payment problem Significant improvement in cash collection Paid in cash, %

5. 5 Normalisation of settlements with power suppliers increasing the share of cash in settlements with Gazprom by the factor of 3.4 (from 27% to 92%). increasing the share of cash in settlements with coal companies by the factor of 4.4 (from 16% to 70%). increasing the share of cash in settlements with oil companies by the factor of 5.3 (from 13% to 70%) During 1998 - 2000 RAO «UES» succeeded in:

6. 6 North-Western Co-Generation Plant * Late in 2000 the first unit of the North-Western Co-Generation Plant was commissioned - first CCGT plant in Russia * Total design capacity of the plant will be 1,800 MW * Its efficiency rate will amount to 51.5%, while at conventional steam plants this rate does not exceed 40% * Fuel consumption per 1 kW of generated power will fall by 20-25% * Construction of the plant is financed by RAO «UES» В 2000 the amount of RAO «UES» investments in production was 1.4 times as high as it was in 1998 (RUR 34.9 bn against RUR 24.3 bn). RUR 24.3 bn RUR 34.9 bn RUR 28.7 bn 823.9 MW 1,116 MW 836.5 MW In spite of increase in the capex volume...

7. 7 Assets of RAO «UES» have highly deteriorated  Over the last 15 years virtually no large power projects have been commissioned  Annual retirement of capacities is 5 times as high as the introduction of new ones  Annual amount of investments is 5-6 times lower than required Without optimisation of «RAO UES» structure and that of the power generation sector in general, Russia would become energy deficient by 2005 …internal resources are not sufficient to solve the key problem

8. 8 4 «Sellers» do not sell, «buyers» do not buy, FOREM is not a true market 4 Principle of a «core payer» is applied, a buyer is linked to a seller, contractual relations are half fictitious 4 Price (tariff) is set not by the market but by regulators (Federal Energy Commission and Regional Energy Commissions) and is cost-based Current structure and economic mechanism 4 System of «sellers» and «buyers» has been created; FOREM has been founded 4 Need to establish contractual relations between market participants has been recognised 4 Need to set price (tariff) taking into account power specifics (tariffs for power and capacity) has been recognised Federal (wholesale) market Basic accomplishments Key drawbacks Regional (retail) level  No changes 4 Absolute monopoly at the regional level: single seller system, all buyers in the region are obliged to purchase from the single seller

9. 9 Basic directions for the development of power sector structure and economic mechanism Enlargement of AO-energos Market structure; unbundling of monopolistic and competitive sectors Market structure; full liberalisation of economic relations within the sector Current structure Administrative System

10. 10 Most countries have chosen a competitive model Liberalisation Privatisation Private State- owned State regulation Competitive market Russia (2000) France (2000) Hungary (1999) Thailand (1996) Italy (1999) California (1995) Great Britain (1990) Ukraine (1997) Skandinavia (1992) EC Directive for Power sector Argentina (1990) Brazil (1995) South Africa (2000) Greece (2000) Kazakhstan (1998) Moldova (1999)

11. 11 Russian power sector reform implies introduction of competition into generation and supply of power Generation of power Supply of power Segments, where development of competition is possible Natural monopolies Introduce free market pricing Stop cross subsidizing Reorganise commercial/ technological infrastructure for functioning of power market Provide equal access to distribution network Re-organise the regulatory system Rules of the market Regulated tariffs Dispatching High voltage grid Distribution

12. 12 The reform should harmonise Russian power sector with basic principles of EU Electricity directive (1996) Liberalisation of electricity generation and supply through implementation of competition EU Directive’s principles Principles of Russian reform No constraints for third party access Community-wide Unbundling and strict regulation of electricity transmission and distribution systems Gradual opening of electricity markets over a period of 6 years Demonopolisation of generation and supply through restructuring of UES’ subsidiaries Free access to customers Separation and strict regulation of transmission; separation and regulation of distribution, third party access to the grid Development of wholesale and retail electricity markets and conditions for private investments

13. 13 4 2 0,6 2,5 2,2 1 1,3 0,6 0,8 6,5 6,3 4,5 2,9 3,1 2,8 2,7 2,2 Raising investments is a key task of reform Replacement of depreciated capacity is necessary... … 80 GW by 2010... Capital requirements for a replacement of capacity is estimated between $2 bn to $6 bn annually …while investment are down 3 times over last 10 years... Rbls bn. (in 1991 roubles) GW …while new constructions is down 5 times

14. 14 Reform will open new horizons for co-operation between Russia and international investors in power sector Strengthening Russian electricity security is in the interests of international investments in Russian economy New markets for Russian and international power sector technologies Investments opportunities in generation and supply Russian power sector reform Continuing cooperation with multilateral organisations