Progress of Cost Management Programs at RAO Uni fied E nergy System of Russia

1. Progress of Cost Management Programs at RAO Unified Energy System of Russia

2. Cost Management Programs (CMPs) • The expense growth rate is over the production growth rate • for the following principal reasons: • tariffs lag behind the price growth in industry; • inefficient use of material, labor and financial resources. • Starting from the year 2000, we commenced developing • and implementing cost management programs (CMPs) in • Holding Subsidiary and Dependent Companies, i.e. JSC Energoes and JSC Power Plants: • CMPs received an official status; • Procedures for the development, approval and management of CMPs were worked out.

3. Cost Structure at Holding Subsidiary and Dependent Companies in 2000 JSC Power Plants: Cost Structure JSC Energoes: Cost Structure Fuel 31% Subscribing fee Other expenses Fuel 7% 8% 54% Other expenses Labor 10% 14% Purchased energy 22% Labor 14% Repair and Repair and materials materials 24% 16%

4. Reducible Expenses in 2001 Other expenses Losses 17% 3% ‘Non-profiles’ Labor 1% 18% Fuel Repair and 40% materials 21%

5. In 2001, the Holding saved Rb 12.3 billion as compared with expenses included into tariffs. That amounted to 4.1% of reducible expenses. 57% Fuel Repair and materials Other expenses Energy losses 16% Labor 3% ‘Non-profiles’ 11% 4% 9%

6. Fuel - 2001 In 2001, the Holding saved Rb 6.8 billion, i.e. 5.4% of overall expenses for fuel (Rb 126 billion) Fuel expenses saved (within overall cost reduction) Fuel - due to structuring the balance Fuel - due to cutting unit costs Claims, etc. 4% Due to prices 7% (including tenders) 37% 9% • Fuel accounted for 57% of cost reduction • Large portion of fuel saving (37%) was due to modification of the fuel balance structure

7. Repair and materials - 2001 • The Holding saved Rb 1.96 billion, i.e. 3.2% of expenses for repair (without reducing physical amounts of repair) • Repair accounted for 17.6% of all reducible expenses • Amount of repair carried out on a self-support • basis (57%) was inadmissible

8. Personnel at Holding Subsidiary and Dependent Companies - 2001 • In 2001, Holding subsidiary and dependent companies personnel dropped by 6700 employees while the output rose • Electric energy output per employee increased: • from 950,500 kWh/person in 2000 to 966,500 kWh/person in 2001 107 Variation of output and personnel, % % Number of personeel, % 105 Output per employee, % 103.3 103 101.6 100.5 101 100.0 101.1 100.8 99.8 100.0 98.3 99 98.6 97 1997г. 1998г. 1999г. 2000г. 2001г. 400% Consumer price index, % Rate of average wages growth, %. 358.8% 350% 302.6% 327.3% Rate of wages growth at Holding subsidiary and dependent companies is below the inflation rate 300% 251.7% 250% 184.4% 200% 230.3% 167.4% 150% 100.0% 115.1% 100% 100.0% 50% 0% 1997 1998 1999 2000 2001

9. ‘Non-Profile’ Business - 2001 • In 2001, Holding subsidiary and dependent companies spent Rb 3310 million supporting ‘non-profile’ facilities. • Elimination of ‘non-profile’ activities saved Rb 370 million (in particular, 916,000 sq.m of housing premises were handed over to municipal authorities) • Elimination of ‘non-profile’ activities proceeds at a low pace

10. With due regard to experience gained in cost reduction in 2001, the Holding developed Cost Reduction Programs for 2002

11. In the first half-year of 2002, the Holding cut down reducible expenses by Rb 6.3 billion, or by 3.7 % Fuel First half-year of 2002 2001 4% Repair and materials 5% 44% 9% 14% 24% Energy loss Other ‘Non-profiles’ Labor costs

12. Fuel - First Half-Year of 2002 We saved Rb 2.8 billion, or 3,9% of expenses for fuel in the first half-year of 2002 (Rb 71.8 billion) Saving fuel expenses in the overall expenditure 2001 First half-year of 2002 Fuel - balance structure 6% 7% 12% 19% 4% 6% Fuel - claims, etc. 7% 7% Fuel - unit cost 9% 19% 12% 37% Due to prices (including tenders) Despite reduction of the saving share due to its balance structure (from 37% to 19%), it is still high

13. Repair and Materials - First Half-Year of 2002 • Rb 1.5 billion saved, i.e. 5.4% of expenses for repair and materials • The share of repair and materials within the overall cost reduction increased from 16% in 2001 to 23% in the first half-year of 2002 • Tenders gave 16% of the overall cost reduction for repair and materials Total tenders carried out: 653 tenders to pick up contractors for repair jobs 858 tenders to pick up suppliers of materials and equipment • Number of repair personnel at subsidiaries and dependent companies remains high • The ratio of so-called ‘self-support’ jobs is still high (57%)

14. Number of Personnel and Labor Expenses - First Half-Year of 2002 • Number of personnel in Holding subsidiary and dependent companies was cut down by 17,800 employees • Labor expenses saved in the first half-year of 2002 • amounted to Rb 200 million. Principal saving is expected in the second half-year of 2002 and in 2003 • The rate of personnel reduction is insufficient

15. Non-Profile Activities - First Half-Year of 2002 • In the first half-year of 2002, Holding subsidiary and dependent companies spent Rb 1001 million supporting ‘non-profile’ facilities instead of Rb 1317 million accounted for in tariffs, i.e. respective cost reduction reached Rb 316 million • Elimination of ‘non-profile’ facilities was boosted up, including the following: • - 531,000 sq.m of housing premises were handed over to municipal authorities; • - participation in 230 ‘non-profile’ companies was stopped

16. Cost Analysis for 2001 - First Half-Year of 2002 revealed the following: Positive experience: Negative experience: • engineering and technical measures in saving fuel, cutting down losses, reduction of environmental payments, etc. • non-cost-efficient heat-generating equipment made to stand by as reserve • recycling of materials • acquisition of equipment by leasing • review of personnel number standards • saving upon fuel balance structure (self-illusion) • personnel reduction programs have not reached the target • elimination of ‘self-support’ jobs in repair proceeds at a very slow pace • poor control of electric energy loss • mechanisms encouraging cost reduction at specific worksites have not been used

17. Assessment of Potential Cost Reduction in Holding Subsidiaries and Dependent Companies in 2003 Overall production: Rb 490-500 billion Approximately 35% of expenses can be regarded as irreducible Reducible expenses: Rb 325 billion Experience gained in CMP implementation by the best companies cutting down costs by 4-5% per annum in an open, sustainable and purposeful way Assessment of limits for cost reduction: Rb 14 - 15 billion per annum