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Speech by Mr. Y. Udaltsov,
member of the Management Board of RAO «UES of Russia»,
at the seminar
«Central and Eastern Europe:
A source of Future Growth for Utilities?»
Reform: the next steps
London, June 30, 2004
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Company
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RAO “UES of Russia” Today: Operating Highlights
Source: RAO “UES of Russia”, IEA
The World’s Ten Largest Electricity Companies (2003)
>156RussiaRAO UES
Capacity (GW)Home-baseCompany
42South AfricaESKOM
43GermanyRWE
45ItalyENEL
49FranceSUEZ
54GermanyE.ON
59JapanTEPCO
121FranceEDF
151ChinaSPCC
42USAAEP
Key Facts
Except for nuclear capacity and several large independent generators,
UES controls the electricity industry in Russia
72% of Russia’s installed generation capacity
69% of Russia’s electricity output32% of Russia’s heat production
96% of Russia’s power transmission lines
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52%
RAO UES Holding – current ownership structure
Minority Shareholders
Other Minority Shareholders
Russian Federation
RAO “UES of Russia”
48%
System Operator
44 federal power plants, including
8 plants under construction
Federal Grid Company
100%
Sales
Generation
Dispatching Services
72 Regional Power Companies
100%
T&D Grids
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RAO “UES of Russia” Today: Key Financial Data
2003 (Forecast Data): Revenue – around $19,6 bn
2002:Revenue – $15,83 bn
US$ m 9 months ended 30 Sept 2001
9 months ended 30 Sept 2002
9 months ended 30 Sept 2003
Revenue 8,474 10,328 13,720
Net Profit 909 669 543
EBITDA 1,070 1,494 2,720
EBITDA Margin 12.6% 14.5% 19.8%
Operational Margin 1.2% 0.6% 8.9%
Net Margin 10.7% 6.5% 4%
Fixed Assets 24,201 25,834 29,293
Shareholder Equity 14,404 16,730 19,733
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100%
150%
200%
250%
300%
350%
400%
450%
03.09
.2002
03.11
.2002
03.01
.2003
03.03
.2003
03.05
.2003
03.07
.2003
03.09
.2003
03.11
.2003
03.01
.2004
03.03
.2004
03.05
.2004
EESR equities Russian Trade System index
Growth of the market capitalisation of RAO «UES of Russia» (RTS data)
In the recent two years the stocks of RAO «UES of Russia» were largely outperforming the Russian securities market as a whole
30.06
.2004
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Reform
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RAO UES role in the legal base creation of the power sector reform
Fundamental bills governing the electricity industry restructuring process
were enacted into law in April 2003Laws
Directive of the Russian Federation Government No 865-r "Plan of activities aimed at the restructuring of the electricity industry in 2003-2005" was signed on 27.06.03
The "Energy Strategy of Russia for the period up to 2020” (Directive of the Russian Federation Government No. 1234-r) was adopted on 28.08.03
Directive of the Russian Federation Government No 1254-r "Composition of the generation companies of the wholesale electricity market" was signed 01.09.03
Regulation of the Russian Federation Government No 643 ”Rules of the transitional wholesale electricity market" was signed on 24.10.03
Directive of the Russian Federation Government No 1939-r "On the participation of the state in the establishment of interregional transmission companies" was signed on 29.12.03
Governmental acts
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Operation of the competitive sector of the wholesale electricity market (5-15%). Preparation for the opening of the electricity markets
Growth of the weekly trading volumes in the competitive sector of the wholesale market (million kWh)
03.11.2003 - 30.06.2004
The first trading session was held on November 1, 2003 The share of the sector has exceeded 7% of the wholesale market of the European
Russia and Urals The price levels of the competitive sector are less then the tariffs of the regulated
sector for 4.6% The number of the market participants continues to grow
158 million kWh 14 market entities
882 million kWh 84 market entities
weeks
0
200
400
600
800
1000
1200
1 3 5 7 9 11 13 15 17 19 21 23 25 27 29 31 33
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Restructuring of AO-energos
Restructuring of the regional utilities involves their unbundling with spinning off separate lines of business
By June 1, 2004, the Board of Directors of RAO UES approved 51 restructuring project out of 70 restructuring projects of AO-energos requiring approval
43 utilities launched their restructuring projects
Implementation schedule of the utilities restructuring process
2Q2004
1
3Q2004
1 5
6
11 17
1734
4Q2004 2Q20051Q2005
42*
3
3Q2005
Total (cumulative)
Current quarter
* - JSC “Pskovenergo” is to be restructured not by “basic variant”
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State owned companies (State owns more than 50% + 1 share):
FGC SO
Hydro generation-
based WGCs
Holding of guaranteed suppliers, isolated
AO-energos
Isolated AO-energos
Guarantee suppliers
IDC
Private companies (State owns less than 50% of shares):
Reforming of RAO “UES of Russia”
Industry ownership structure by 2008
About 20 TGCs
Thermal generation-
based WGCs
FGC – Federal Grid Company (the Unified National Electricity Grid)IDC – Interregional Distribution Company SO – System OperatorWGC – Wholesale Generation CompanyTGC – Territorial Generation Company
SupplyRepair
business
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Establishment of new industry players
Consolidation of assets
comprising the Unified National Electricity Grid
(UNEG)
Operational and dispatch control
structure
56 regional dispatching units (RDUs), established as branches of the System Operator, were launched by 01.05.04. The units are responsible for the regional operational control in 62 utilities
By the end of 2004, restructuring of operational control function in 7 more AO-energos is expected to be completed, including the utilities independent from RAO UES
On 29.12.03 the RF Government approved Directive No 1939-r "On the participation of the state in the establishment of interregional transmission companies" (stake of the Russian Federation in their capital is set at 85%, the stake of the Federal Grid Company is set at 15%)
By 01.05.04, 49 branches (out of 53) were set up, based on the assets of transmission networks belonging to the Unified National Electricity Grid
RAO UES signed an order directing commencement of the handover of the UNEG assets owned by AO-energos to interregional transmission companies (ITCs)
IDCs
Interregional distribution companies (IDCs) are scheduled to be set up as wholly-owned subsidiaries of RAO UES. Contributions into their share capital will be made by shares of the distribution companies spun off in the course of reorganisation of AO-energos owned by RAO UES
On April 23, 2004 the Board of Directors of RAO UES approved the configuration of the IDCs and principles of their management during the transitional restructuring period
IDCs are scheduled to be incorporated in 3Q04
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Raising the efficiency of the current operations through cost-cutting and tariff-limiting measures
Cost management programs of RAO UES for the period of 2001-2003: the savings exceeded RUR45 billion
Setting tariff growth caps for 2004-2006
by each electricity system and for
RAO “UES of Russia” as a whole
Cost management
programs
RAO UES tariff policy initiatives
Government Directive
No 1754-r dated 01.12.03
New approach to cost management implemented
at the utilities level
20%
11%
8%8.5%
7.5%6%
9.5%
7.5%5%
10%
15%
20%
2005 2006 2007
gas
Inflation rate
electricity
Decisions adopted at a meeting of the Russian Federation Government on 27.05.04 which discussed the 3-year natural monopolies tariffs revision program
represented a quantum leap in the tariff-setting system
Tariff growth caps:
Instead of cutting costs based on projected costs (“cost plus” basis) – avoiding growth of costs above the inflation and tariff levels (“inflation minus” basis)
Tighter control measures of the utilities' costs have been implemented
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Investments guarantee mechanism
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Project objectives
To engage investors in construction of new generating capacities to cover pending capacity deficiency, their commissioning being planned for 2006
In the immediate 5 years the energy market will be in a formative stage and won’t provide for engagement of investors without applying special mechanisms!
The task is to offer a special mechanism of attracting guaranteed investments during transition period (5 years)
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What do we expect from the use of the mechanism
Expectations – electrical energy generation during certain time intervals to cover energy deficiencies
Minimum cost of the mechanism’s implementation for market community Cost signals for investor and market providing economic efficiency
Effective Effective peak capacitpeak capacities ies are neededare needed
Objects for attraction of investments:
increase of rated capacity through construction of new electric power plants or new auxiliary blocs on operating electric power plants
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Investor’s interests
We take into consideration the interests of foreign and Russian investors
Investors want guarantees as to the reimbursement of committed facilities and rate of return:
Long-term agreement with reliable and credit-worthy counterparty, ensuring backing of committed
facilities and rate of return
Legislative consolidation of legitimacy of such agreement
Escaping the risk, connected with a rate of foreign exchange (contract value should be in Euro)
Guaranteed fuel supplies with due account for the investor’s generating capacities utilisation
Integration into a future model of electric energy market (power)
State guarantees for all cases of default of a treaty: changes of legislation, non-fulfillment of
obligations by the counterparty, etc.
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Ways to secure investor’s interests and correct cost signals
Two-stage mechanism of payment for investor’s services:
Reimbursement of committed facilities and rate of return – through payment of services related to provision of technological reserve of generating capacities (demand charge analogue) – through tariff of SO
Payment for produced electric energy – through payment for electric energy cost (energy tariff analogue)
Why such mechanism of payment?It is the most effective because:
Provides correct cost signals to investors and market
Maintains capacity in a state of readiness at any time specified by SO at minimum prices
Provides for generation of electric energy only when it is profitable for investor and market
Allows escaping guarantees to the investor in terms of annual load of generating capacities
It smoothly incorporates into competitive market of power and electric energy
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Financial consequences of the mechanism implementation
Attraction of investments into construction of 4 100 МW, with guarantee period (pay-off period) being 10 years
Cost of construction of 1 МW of power
($/МW)
Rate of return
Cost of mechanism
New tariff of SO
(today 0.88 copecs/КWh)
Increase of average tariff for end users
1 000 000
30% 5.72 copecs/КWh 6.6 copecs/КWh 9.1%
900 000
15% 3.22 copecs/КWh 4.1 copecs/КWh 5.1%
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Thank you for your attention