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Presentation by Anatoly Chubais Chief Executive OfficerRAO UES of Russiaat the informal seminar of EU Energy Ministers: 

Presentation by Anatoly Chubais Chief Executive Officer RAO UES of Russia at the informal seminar of EU Energy Ministers Pamplona 28 April 2002

Slide2: 

668,000 employees 627 bln kWh of electricity generated - 72% of the total generation in Russia Total 2001 sales - USD 16,3 bln. 2,7 mn km of power transmission lines - 96 % of the total length in Russia 407 thermal and hydropower plants with installed capacity of 156,000 MW RAO UES of Russia in the country’s energy sector

Slide3: 

1990-s: increase in electric power generation in CIS countries and RAO UES of Russia Total generated electric power in CIS countries 1100 1200 1300 1400 1500 1600 1700 2001 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 Bln.Kw/h 1632 1525 1433 1303 1266 1234 1208 1191 1212 1244 1267 Total generated electric power by RAO UES of Russia 600 615 630 645 660 675 690 2001 1993 1994 1995 1996 1997 1998 1999 2000 692 647 630 615 608 604 602 623 627 Bln.Kw/h

Slide4: 

Solving the non-payment problem in RAO UES of Russia: 1998 - 2001 0 2 3 6 7 9 1 4 5 8 15 33 47 0 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 0 20 40 60 80 100 120 Q2 Q4 1998 Q2 Q4 1999 Q2 Q4 2000 Q2 Q4 2001 112 17 22 48 92 101 % cash payments for electric power supplied 1998 1999 2000 2000 1000 3000 4000 5000 6000 7000 8000 7069 2826 0 Total losses of RAO UES of Russia due to non-payments, mln USD (upon Deutche Bank estimates)

End of 1990s: dynamics of financial performance of RAO UES Russia: 

*) Calculation of indices of 1999 and 1998 is based on rouble purchasing power as of 31 December 2000 -100 20 1998 1999 2000 -80 -60 -40 -20 0 7,9 - 28,2 - 91,3 Profit of the core business of the Holding, bln. roubles * In 1998 losses due to economic depreciation were included, which was reflected in Holding’s performance indices In 2000 for the first time, 7,9 bln. roubles profit gained from the core business of the Holding, net profit - 0,5 bln. roubles Net profit of the Holding, bln. roubles -500 -100 0 100 - 11,9 - 532,3 1998 1999 0,5 2000 FORECAST 2001 FORECAST 2001 End of 1990s: dynamics of financial performance of RAO UES Russia

Slide6: 

Low portion of cash in consumer settlements Lack of investments Cross subsidising Solved in a non- market environment Depreciation of power sector’s key assets Solved in part Cannot be solved in a non-market environment Power sector in a transition economy: recent years’ solutions in Russia * households-to-industry tariff ratio (standard - 1.6) Lack of competition - no cost-сut motivation Price-setting mechanism based on the cost-plus principle 17% 0,6 * RUR 5,2 bln 112% 0,9 * RUR 50 bln up to 50 % up to 60 %

Slide7: 

Competition complete liberalization of electric power sector State monopoly Price liberalization Non-discriminatory access to grid Private investments 1990s: World trends in electric power sector Russia (2001) France (2000) Italy (1999) Ukraine (1997) EU Directive (1996) SAR (2000) Greece (2000) Kazakhstan (1998) Moldova (1999) California (1995)

Reform base: separation of monopoly and competitive sectors: 

Reform base: separation of monopoly and competitive sectors Liberalisation of price-setting mechanisms and stimulation of market participation Market rules GRIDS Regulated tariffs Securing equal access to grids. Establishment of market technical and commercial infrastructure GENERATION SALES DISPATCHING

Slide9: 

Electric power sector liberalization: East and West “free competition in generating sector, allowing alternative procedures for new capacities input (based on permission and tender)” “gradual opening of the energy supply market to end-consumers in accordance with the mutual benefit principle” European Parliament and Council Directive EC - 96/92 Basic principles of liberalization in East Europe are similar to those in West Europe, implementation is 1 to 3 years behind “demonopolization and introduction of competition in generation, sales and customer services” “equal access to market infrastructure of all energy producers and consumers” RF Governmental Decree N 526, 11 July 2001

Slide10: 

End of 1990s: liberalization of the CIS power sector Ukraine (1998), Каzakhstan (2002) competitive wholesale market launched industry reform program is adopted Russia (2001), most CIS countries establishment of independent grids Кazakhstan (1998), Ukraine, most CIS countries establishment of generating companies with their further privatization Georgia (1998), Armenia (1999) Moldova (1998) Georgia, Аrmenia, Аzerbaidjan sale of distribution networks to private investors

RAO UES of Russia: reform through 2004: 

RAO UES of Russia: reform through 2004 RAO UES of Russia System Operator Federal Grid Company Trading System Administrator 100% 100% АО-энерго 100% Year 2002 Year 2004 System operator Federal Grid Company Interregional grid companies АО-энерго Interregional generating companies 52/48% 52/48% 52/48% RAO UES of Russia grids generation sales

Short-term investment program «5000 МWt»:projects for 2002: 

Short-term investment program «5000 МWt»: projects for 2002 Pskov CPS, 215 MWt North-West TPS (CCGT), 450 MWt Transaction goal - to attract a strategic investor to complete the 3rd power generating unit Transaction type: tender for 25%+1 share with an option for other 25% Transaction goal - to attract a strategic investor Transaction type: tender for 25%+1 share with gradual increase of investor share in the capital up to 51% Power sector reform: investment opportunities

Slide13: 

UCTE is expanding, Eastern interconnection is restored. This has lead to the inevitable alternative: back-to-back station or global synchronization UCTE 1991 1996 1994 Russia split-up USSR split-up MIR split-up European power systems’ borderlines: 1991 - 2002 IPS/UPS East-West strategy: power system integration Russia intercon’d CIS intercon’d 1999 2001

Slide14: 

Synchronous operation vs. back-to-back station Transmission capacity Systemic impacts: drop in reserves, mutual emergency assistance, decrease in relative disturbance level Synchronous operation 3000 - 7000 MW (11 grids) Back-to-back station 3 х 600 = 1800 MW No Parameters Yes Transmission capacity increase cost Cost of grid const- ruction + B-B station Cost of grid construction Recoupment Over 10 years - - - - + + + + East-West strategy: power system integration Technology aspects Technological unity Technological separation - + Under 5 years (TASIS financed study 1998-1999 by RWE, CEZ, IVO, EDF )

Technical requirements: scale of problem : 

Technical requirements: scale of problem Overall structure and regulation principles in Eastern and Western zones are quite compatible Same frequency (50 Hz) Allowed frequency deviation within UCTE: +/- 0.05 Hz, within IPS/UPS: +/- 0.20 Hz Actual quality of electric power in IPS/UPS is much higher than the existing requirements Positive dynamics of fulfilling technical requirements in IPS/UPS CONCLUSION: TECHNICAL PROBLEMS ARE SOLVABLE. NOT ONLY SYNCHRONISATION IS TECHNICALLY FEASIBLE, IT IS EFFECTIVE AS WELL! NEW POSSIBILITIES FOR ELECTRICITY OVERFLOW East-West strategy: power system integration

Slide16: 

in 2001, 97, 28% of the time IPS/UPS maintained within UCTE standards IPS/UPS operation dynamics East-West strategy: power system integration Average frequency

Slide17: 

The most important strategic goal of the CIS Electric Power Council is to organize a synchronous operation of IPS/UPS with TESIS Resolution of the 21st Meeting of the CIS EPC, 19 March 2002 Protocol of the joint meeting between CIS Electric Power Council and EURELECTRIC To encourage the active development of the dialogue between involved network associations in order to identify the best solutions and necessary measures to promote interconnection development To coordinate actions where possible and appropriate in promoting this dialogue in the political and energy spheres To carry out annual joint meetings to follow-up and assess progress made in the fields of interconnections, market structure and environmental aspects and to identify actions to be taken if necessary CIS power companies’ initiative - reaction from EURELECTRIC East-West strategy: power system integration

Slide18: 

To choose between alternative ways of power system interconnection is vital and inevitable To solve this strategic problem, support of EU national governments and European Commission is needed East-West strategy: power system integration «Interconnection of both parties’ grids is of great mutual interest ... » Russia - EU Summit (Brussels, October 3rd, 2001) Abstract from a joint address on energy dialogue of Russian President Putin and EC President Verhofstadt

THANK YOU FOR ATTENTION: 

THANK YOU FOR ATTENTION