Global Change: Liberalisation of the Electricity Sector

1. Liberalisation of the electricity sector: embarking on a global change Anatoly Chubais Chairman of the Management Board RAO UES of Russia, President Electric Power Council of the CIS 19th World Energy Congress Sydney, Australia 08.09.2004

2. Electricity sector: New role in global geopolitics Why the electricity industry had no geopolitical role for a long time? It is the last ad key element in the energy supply chain: it serves the very end consumer being itself a consumer of primary resources - gas, coal, oil and nuclear It plays a unique role in any national economy of the modern world, being the only industry serving 100% of both industrial customers and households While being a backbone of all the life-supporting processes, it ensures quality of life for society and every person The reason: due to its vertically integrated structure the electricity industry has been for a long time developing within its regional (national) context

3. Prerequisites for liberalisation: opportunity… Spectacular development of advanced technologies …and necessity Consumers’ pressure on prices Electricity sector liberalization: Radical change over the last 15 years 1990s: launch of the liberalisation process in the electricity sector involving complete unbundling of vertically integrated companies confined to their own region (country) Dramatic increase of competition Markets redistribution: crowding out the competitors Takeovers Greater geopolitical role of the electricity sector as a result of its liberalisation

4. After acquiring TXU Australia, Singapore Power has emerged as a key player in Australian electricity market Global electricity sector: Recent major cross-border acquisitions Sources: Cambridge Energy Research Association (CERA);PwC; companies’ data E.On National Grid Singapore Power PowerGen (2001)* • TXU Europe (2002) • PowerGen Renewable • Holdings (2002) • Midland Electricity • (2004) • TXU Australia (July 2004) • New England • Electric System (2000) • Niagara Mohawk (2001) On 30 July 2004, Singapore Power finalised its acquisition of TXUAustralia from TXU Corp, USA • Yorkshire Cogen (1998) • East Midland Electricity (1998) National Grid USA is one of the 10 largest electric utilities in the U.S. by number of customers (more than 3,2 million) E.On controls about 11% of the UK generation assets (by capacity) * YearActualClosed

5. Electricity sector: Globalisation is just beginning Forecast: Further redistribution of assetsin the global electricity industry comparable in scope and effect with similar processes in the oil and gas markets

6. Monetisation of the electricity sector: Primary factor in ensuring energy security in Russia over recent years RAO UES of Russia controls the bulk of Russian electricity sector, including 72% of generation capacity and 96% of transmission grids 2001 – 2004 – … Late 1990s «Monetary» electricity sector Barterelectricity sector - Consumer payments in excess of 100% (including repayment of previous years' debts); - Strict financial discipline, accounting and audit practices. No unsettled debts; - Five years of IAS financial statements audited by PwC and KPMG (last year) - Well-structured corporate governance system. RAO UES of Russia ranked first in the "Russian Corporate Governance Leaders-2003" league table of the Investors Rights Protection Association - Consumers’ payments didn’t exceed 17%; - Non-transparent financial flows, absence of a budgeting system; - Growth of accounts payable (including debts to fuel suppliers and budgets of all levels); - Totally inadequate corporate governance, sharp conflicts with minority shareholders Stable operation of the electricity systems. No power crises since 2001. Sound financial position of the companies of RAO UES holding. Recurrent electricity crises in the Russian regions. Threat of bankruptcy of about 20 companies of RAO UES holding

7. Objective of the reform Federal Grid Company and System Operator are fully operational Separation of the monopolistic and competitive segments of the electricity sector RAO UES holding company has configured and is currently setting up the following entities: - 10 Wholesale Generation Companies (average installed capacity: about 8 GW each); - 14 Territorial Generation Companies (average installed capacity: about 3 GW each) Establishing the future competitive suppliers Trading exchange of the Administrator of the Trading System (ATS) : - in operation since 01.11.2003; - among the top ten electricity exchanges in the world; - has more than 80 corporate members Prices set at the exchange are on average 5% below those of the regulated sector. The 2004 annual sales of ATS are expected at about $850M. Setting up and expanding a competitive electricity market Electricity sector reform in Russia: Keeping pace with the global trend Implementation phase

8. International acquisitions: A two-way road Foreign companies in Russia RAO UES of Russia in other countries - Acquired or took under management electricity assets in Georgia (some 25% of the operational generation capacity and 35% of the distribution business); - Acquired or took under management electricity assets in Armenia (some 85% of the generation assets of the country); - Is negotiating acquisition of assets (completion of power plants) in Kirgizia and Tadjikistan; - Is close to complete the transaction to acquire a stake in a high-capacity power plant in Kazakhstan; - Has been short-listed for the purchase of a 66% stake in Slovenske Elektrarne, a company accounting for 85% of power generation in Slovakia - Enel (Italy), in an alliance with ESN Energo, Russia, won a public tender for the operation of North-West CHP; - Fortum (Finland) intends to bring its stake in RAO UES’ Saint Petersburg regional utility Lenenergo to 30.7%; - Kazakhstan investors acquired blocking stakes in two regional utilities of RAO UES holding (in Kaluga and Voronezh)

9. Electricity border between CIS/Baltic states and Europe: a hurdle on the way to cooperation The solution proposed is synchronisation

10. Synchronisation of electricity systems of CIS/Baltics and Europe: sequence of steps Accomplished activities - CIS Electric Power Council (CIS EPC) and Union for Coordination of Transmission of Electricity (UCTE) agreed to undertake a joint feasibility study on synchronous interconnection of the two electricity systems (July 2003); - CIS EPC and EURELECTRIC signed a long-term cooperation agreement (November 2003) Planned activities - Cooperation agreement on the feasibility study is to be signed shortly between East (7 CIS/Baltics companies) and West (11 European companies); - Development of the feasibility study of synchronous interconnection (from October 2004 to 2007)

11. Global electricity: Apparent trends and emerging new features Electricity sector acquires radically new features, evolving into an important geopolitical factor Liberalisation of the electricity sector launched a process of transnational competition These trends of global nature manifest themselves very clearly in Russia and in the post-Soviet area

12. THANK YOU FOR YOUR ATTENTION