1

2005: Stages of the Power Industry Reform

Moscow, March 9, 2005

Member of the RAO UESR Executive BoardV. A. Zubakin

2

Report Contents

• Resolutions of the Russian Federation Government (2004).

• Formation of WGC.

• Formation of TGC.

• Formation of IDGC.

• Performance the Competitive Sector.

• Wholesale Market of Electric Power (Capacity) in the Transition Period.

• New Model for the Regulated Market.

• Balancing Market, System Service Market, and Capacity Market.

• Rules and Specifics of the Retail Market of Electric Power.

3

Resolutions of the Russian Federation Government (2004)

Decree No. 966 of 17.07.2004

On the 2004-2005 Plan of Measures For Reforming the Power Industry

Decree No. 1367-р of 25.10.2004

On The Formation of WGC No. 7 (HydroWGC).

Meeting of the Russian Federation Government of 24.12.2004

On the Course of the Russian Federation Power Industry Reform: approval of the course of the industry reform; summation of the reform progress and development of the reform plans; appraisal of the reform progress (rate and schedule).

Resolution No. 854 of 27.12.2004

Authorization of rules for operating and dispatching.

Resolution No. 861

of 27.12.20 04

Authorization of rules for a non-discriminatory access to:

• power transmission services;

• operating and dispatching services in the power industry;

• wholesale market sales system administrator services;

Authorization of rules for technological attachment of power-receiving devices.

4

Formation of Wholesale Generation Companies (WGC)

WGC 1

WGC 2

WGC 3

WGC 4

WGC 5

WGC 6

WGC 7 HydroWGC

03.09.04

WGC establishment approved by the RAO UESR Board of Directors

Completion of transition to the unified WGC share

2004 2005 2006

26.11.04

01.10.04

24.12.04

1Q 2Q 3Q 4Q4Q 1Q 2Q 3Q 4Q3Q

Schedule under development

24.12.04

24.12.04

24.12.04

State registration of WGC

27.10.04

23.11.04

29.12.04

04.03.05

09.03.05

5

Formation of Territorial Generation Companies (TGC)

State registration of TGC

2004 2005 2006 2007

holding

holding

leasing

leasing

leasing

leasing

leasing

leasing

TGC 1

TGC 3

TGC 5

TGC 7

TGC 8

TGC 9

TGC 10

TGC 13

TGC 14

TGC 11, 12 The set-up model and schedule to be determined after authorization of the project for reorganizing Kuzbassenergo

merge

merge

merge

merge

merge

merge

merge

merge

merge

merge

TGC 2

TGC 4

TGC 6

holdingmerge

01.04.05 to be established on completion of Mosenergo reorganization

09.12.04

07.12.04

25.02.05

25.02.05

25.02.05

24.12.04

24.12.04

03.09.04

03.09.04

29.10.04

26.11.04

26.11.04

TGC establishment approved by the RAO UESR Board of Directors

6

Formation of Interregional Distribution Grid Companies (IDGC)

IDGC configuration authorized by the RAO UESR Board of Directors on 23.04.04:

IDGC 1 (Central and Northern Caucasia Regions) IDGC 2 (Northwestern Region ) IDGC 3 (Ural and Mid-Volga Regions ) IDGC 4 (Siberia)

Establishment of IDGC-5 (Far East Region) may be decided on in the future in the context of restructuring of regional AO-Energo companies.

Introduction of shares into equity capital of

100% subsidiary affiliate of RAO UES of Russia

of relevant IDGC

territorial contingence of RGC included in IDGC;

comparable total balance-sheet value of IDGC; comparable total length of lines on the balance

of RGC that are included in IDGC.

Completion of basic formation of IDGC: late 2005.

Completion of formation of all IDGC: 2006.

Sch

edu

le

Pri

nci

ple

s o

f ID

GC

C

on

fig

ura

tio

n

IDGC< 49% ownedby RAO UES of Russia,

> 49%, by minorityshareholders

additional share issue

RGC1

…

RGC2

IDGC100%

subsidiary affiliate of RAO UES

of Russia

7

Performance of the Competitive Sector

5th in Europe As per volume of sales in physical terms.

9 th in the world As per volume of sales in physical terms.

purchased in free market sector, MWh

weighted average purchase price in free market sector, RUR/MWh

price in regulated sector (from January 2004, including capacity), RUR/MWh

volume, MWh = 1% of aggregate volume of production

Data from Karana company

8

Not earlier than 2007: fully liberalized power market.

From January 1, 2006: unified wholesale market for the Ural-European and Siberian price zones.

From April 1, 2005: launch of the 5-15 market in Siberia.From September 1, 2005: launch of the balancing market.

Wholesale Market of Electric Power (Capacity) in the transition period

2005 2006 2007

SPECIFICS OF THE WHOLESALE POWER MARKET MODEL IN SIBERIA

Differentiation of hourly power volume in the free trade market: 5% for thermal power plants; 2% for hydropower plants + 15% during floods;

• Consumers can purchase 15%.

• System Operator - Central Dispatch Administration is entitled to introduce idle discharge hazard mode for hydropower plants;

During floods, hydropower plants may increase electric power sales (up to 15 %).

Transition Period

9

New Model for the Regulated Market

Launch of the model in Europe and Siberia: early 2006.

• Package of contracts between suppliers and buyers;

• Under “take or pay” terms;

• For Capacity and electric power;

• Provision for two prices (tariffs): electric power price and capacity price;

• Electric power volumes not covered with regulated bilateral contracts to be sold and bought in the competitive sector.

Type Buyer Category Contract Time Periodicity of Contracting

1 Individual consumers (homes)

Up to 3 years Once

2 Majorpower-intensive consumers

Up to 5 years Once

3 Other 1 year Annually, with possibility of prolongation

Schedule

Specifics

Content

10

Balancing Market, System Service Market, and Capacity Market

BALANCING MARKET SYSTEM SERVICE MARKET CAPACITY MARKET

To replace the existing deviation sector;

Selection of suppliers on the basis of price bids;

Change of load for suppliers;

Minimization of power supply costs;

Balanced nodal prices.

Self-determination of agents; Mechanism for selecting

suppliers;• Composition of services; Absence of strict regulation in

the sphere of SS;• (!) No increase in ultimate tariffs

for consumers.

Mechanism for selling

capacity; Participants: all entities of the

Wholesale Market of Electric Power

Capacity-based reliability of power supply;

Smoothening of volatility (of power prices and supplies;

Capacity auction for 3 years.

Launch of the market in Europe +Ural+Siberia: August-September 2005.

• Launch of the pilot project: November 2005 Russian Federation

Government’s resolution on the rules: 3 quarter of 2005

Launch of the SS market: March 2006.

• Launch of the market: May 2006

• Market of the transition period: until December2008

• Target market: from 2008.

S

CH

ED

UL

E

O

BJE

CT

IVE

, MA

IN P

OIN

T

11

Rules and Specifics of the Retail Market of Electric Power

Basic Provisions

• procedure for granting guarantee supplier (GS) status and definition of borders:

1) for the first time, GS’s to be appointed;2) next time, GS’s to be determined on a bidding basis;

• rules for entering into contracts for power consumers and GS’s;

• rules for “pickup” of consumers in case of problems with power grid companies;

• procedure for interaction of entities.

• 3 quarter of 2005 – authorization of the rules by the Russian Federation Government

• Throughout 2005 – participants, retail and network tariffs to be determined.

• Preferential tariff regulation;

• Applicability of the cross-subsidy system;

• Inadmissibility of free change of suppliers for consumers;

• Unpreparedness of the Wholesale Market of Electric Power for a large number of participants.

Specifics of the Transition

Period

Schedule

12

Thank you for your attention