Power Sector Reform in Russia:Results and Steps Forward

Y.A. Udalcov, Board Member,

Head of the Reform Management Centre

JSC “Unified Energy System of Russia”

London, November 12, 2004

“Utilities Day”

2

Reform

The Reform Key Elements

Creating Legal framework for reforms and electricity sector

Unbundling of regional energo

Creating the market infrastructure

Setting up independent market participants

Liberalization of electricity market

Restructuring the Holding (RAO UES of Russia)

3

Reform

The Main Stages

Stage 1. Design. 2001-2003

Legal foundation. Corporate transformation schemes. Definition of list of new entities…

Stage 2. Formation. 2004-2005

Regional energo’s unbundling. Interregional mergers. Wholesale market infrastructure development.

Stage 3. Liberalization. 2006-2007

Setting up new businesses. Wholesale market launch with vesting contracts scheme.

Stage 4. “Packing up”. 2007 –

RAO UES reorgainzation and distribution of shares of new companies among RAO shareholders.

4

Reform

Legal and Conceptual Framework of Reform

In forceReform concept - "On Restructuring the Electric Power Industry of the

Russian Federation“ Decree of the GOR July 2001Legal foundation – Electricity reform Laws adopted in March 26, 2003Implementation plan – RAO UES strategy paper adopted by RAO

UES Board in May 2003Liberalization start-up – Wholesale market regulation Decree of the

GOR October 2003

To be adoptedRetail market legal framework - Decree of the GOR Investment guarantee mechanism – Decree of the GOR Wholesale market rules – Decree of the GOR

5

727371 68

5135 29

24 2313 8

Restructuring Regional Vertically Integrated Companies: Plan for Complete Unbundling

05.01.05

2004 2005

5

Vertically integrated companies – total quantity

22

Q1 2005

Q2 2005

Q32005

Q42005

38 4449 50

2006

60

Q1-Q22006

65

Isolated energy systems

Divided companies

– total quantity

11 2

3

17

166

51

105

Divided companies -

quantity during the

period

Q1 2004

Q2 2004

Q32004

10.11.04

1

6

Creating Electricity Market Infrastructure

Transmission Dispatching

7 Inter-Regional Transmission Companies (ITC) were established

Valuation of assets transfering to ITC’s close to completion

Distribution

Configuration of the 4 Inter-Regional Distribution Companies (IDC) was approved by the Board of Directors of RAO UES

All but isolated energy system passed dispatch functions to System operator.

The transfer of the operational and dispatch control functions to System operator began in 2002

Transmission grids will be passed to ITC’s in 2005

IDC’s will be established by the end of the year

IDC’s are expected to be completely formed in the middle of 2005

In 2005 System operator will buy out dispatch infrastructure

Pa

stP

rese

nt

Fu

ture

7

December 2004

December 2004

Restructuring Generation: Wholesale-Market Generation Companies (WGC)

2004 2005 2006

WGC 1

WGC 2

WGC 3

WGC 4

WGC 5

WGC 6

2007

WGC 7

WGC № WGC established/under establishment

26.11.04

03.09.04

01.10.04

December 2004

December-January Schedule is forming

WGC establishment approved by RAO UES Board of Directors

State registration of WGC

Transition to a single share completed

Subsidiaries joined to WGC

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

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Restructuring Generation: Territorial Generation Companies (TGC)

Operation since

April 1, 2005

2004 2005 2006 2007

holding

holding

holding

leasing

leasing

leasing

leasing

leasing

leasing

TGC 1

TGC 2

TGC 3

TGC 4

TGC 5

TGC 6

TGC 7

TGC 8

TGC 9

TGC 10

TGC 13

TGC 14

TGC 11, 12The set-up schedule will be determined after the approval of the

reorganization plan of Kuzbassenergo

will be formed as a result of the restructuring of Моsenergo

Merge

Merge

Merge

MergeMerge

Merge

Merge

Merge

Merge

Merge

Merge

TGC which creation had startedTGC №

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Development of electricity market:“5-15%” model

Free Trade Sector (FTS) has beginning work since November 1, 2003 in accordance with “Wholesale Electric Power (Capacity) Market Rules of the Transitional Period” (approved by the Decree of the

Federal Government №643, Dated October 24, 2003)

The year volume of electricity traded through FTS (since November 2003 till October 2004) was about 41 TWhFTS share equal to about 9% generation of European Russia and UralsIn October 2004 free market prices were 4,2% lower than regulated prices106 entities signed joining agreements to the Market System, 1/3 of them are independent of RAO UES of Russia

0

100

200

300

400

500

wei

gh

ted

ave

rag

e p

rice

ru

b/

MW

H

FTS weighted average buying price

Regulated sector tariff (including capacity since January 2004)

nov. dec. jan. feb. mar. apr. may june jule aug. sept. oct.

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Development of electricity market: Proposed Changes to the Wholesale Market Model

Actual model Proposed model - 2006

A regulated segment based on regulated tariffs

System of vesting contracts + bilateral financial contracts

A competitive segment with voluntary participation of the buyers

Day ahead LMP based market

A balancing sector based on regulated tariffs and on rise/reduce factors

Competitive balancing market

Ancillary services are not paid. Market incentives for participants to provide ancillary services – competitive “market of system services”

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Main Tasks for 2005 Implementing the Decisions Made

Completing regional companies reorganization – “corporate unbundling”

Creating market infrastructure (IDCs, ITCs)

Restructuring of generation - creating WGCs and TGCs

Set up businesses of new market participants – “management unbundling”

Development of wholesale market rules

Development of vesting contracts scheme (legal and commercial)

Groundwork for wholesale market launch on Jan 1,2006

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Thank you for your attention