RAO UES Reform:Investments, Market,

Structural Transformation

UBS Conference

Moscow

September 13, 2006

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This document is being presented to you solely for your information and may not be reproduced, further distributed to any other person, or published, in whole or in part, for any purpose.

This document has been prepared by RAO UES (the Company) and comprises the written materials/slides that have been prepared solely for use at a presentation concerning the Company.

The securities of the [Company and the] Company's subsidiaries have not been and will not be registered under the Securities Act of 1933 and may not be offered or sold in the United States except in reliance on an exemption from, or in a transaction not subject to, the registration requirements of the Securities Act of 1933.

This document does not constitute or form part of any offer or invitation to sell or issue, or any solicitation of any offer to purchase or subscribe for, any shares in the Company or the Company's subsidiaries, nor shall it or any part of it nor the fact of its distribution form the basis of, or be relied on in connection with, any contract or commitment whatsoever.

This document is not an invitation nor is it intended to be an inducement to engage in investment activity for the purpose of Section 21 of the Financial Services and Markets Act 2000 of the United Kingdom («FSMA»). To the extent that this document does constitute an inducement to engage in any investment activity, it is directed only at (i) persons outside the United Kingdom; or (ii) persons who are investment professionals within the meaning of Article 19(5) of the Financial Services and Markets Act 2000 (Financial Promotion) Order 2005 (as amended) of the United Kingdom (the «Financial Promotion Order»); or (iii) persons who fall within Articles 49(2)(a) to (d) («high net worth companies etc.») of the Financial Promotion Order; and (iv) any other persons to whom this document for the purposes of Section 21 of FSMA can otherwise lawfully be made (all such persons together being referred to as «relevant persons»), and must not be acted on or relied upon by persons other than relevant persons. Any invitation or inducement to engage in any investment activity included within this document is available only to relevant persons and will be engaged in only with relevant persons. Anyone other than a relevant person must not rely on this document.

DISCLAIMER

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Generation

Transmission &

Distribution Grids

Sales

73 Regional Energos High VoltageGrids

+Grid

Service

Central Dispatch

32 FederalPower Plants

RussianFederation

MinorityShareholders

of the Parent Company

52% 48%

RAO UES

RAO UES: Pre-reform Structure

4

MonopoliesMonopolies Competitive Power GenerationCompetitive Power Generation

Private shareholders

GovernmentFGC

(Transmission)Wholesale GenCos (6)

Territorial GenCos (14)

Hydro GenCo (1)

System

operator

IDC Holding

(Distribution)

Competitivemarket

Central North-West

Ural and

Volga

Siberiasales

services

FGC – Federal Grid CompanyATS – Administrator of Trading SystemIDC – Inter-regional Distribution Company

RAO UES Target Structure

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Source: RAO UES of Russia estimates

Capacity balance 2006-2010:Two options

Commissioning new capacity

Deficit will already develop in 2007 by 2010 deficit will reach:

In the European zone – 18,7 GW In Siberia – 2 GW

In Far East – 0,8 GW

will prevent future deficit

Capacity needs dynamic (GW)

Available capacity (GW)

Capacity deficit (GW)

With current capacity

202,5

202 202,7 203,7 204,1 204,9

226,4221,0

214,9

199,8

204,3

210,5

180

216

2005 2006 2007 2008 2009 2010

GW

227,2

217,3

211,1207,1

202,9

202,7

226,4221,0

214,9

199,8

204,3

210,5

180

216

2005 2006 2007 2008 2009 2010

GW

-21,5

6

=

What should be done?

The only right answer

Is to launch a large-scale long-term investment program

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Investments: Approach and Requirements

Reform Concept

Approach to Investment Sources

Investments from state budget

Privateinvestments

Competitivesectors of the industry(primarily thermal generation)

Monopoly sectors of the industry

Large-scale investments should be attracted during the final phase of the reform! !

Investment

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New Power Construction Plan

In 2006-2010 commissioning capacity will reach 21,500 MW (for reference, in 2001-2005 commissioned capacity amounted to 7,000 MW)

It is planned to commission about 38,000 MW in 2011-2015

Capacity Commissioning Plan Investment Needs

12792059

3288

5062

9796

0

2000

4000

6000

8000

10000

2006 2007 2008 2009 2010

thsdMW

Investment Plan for 2006-2010: $81,5 billion (the largest investment program in Russia)

Investment

6,8

15,5

18,619

21,6

0

5

10

15

20

25

2006 2007 2008 2009 2010

Bn$

9

Investment

Investment in the Monopoly Sectors:

Federal Budget Allocation starting from 2007

0,8

0,09

0,67

$ bnFGC System Operator Hydro GenCo

0,045

1,56

3,483

0

1

2

3

4

2006 2007 2008 2009

$ bn

10

RAB System: Incentive for Investments in Distribution Networks

Cost-plus Regulatory Asset Base (RAB)

Market-based ROI with allowance for industry risk

No mechanisms to regulate the return on investments

Economic incentives and responsibility for reliable provision of services to consumers

5-year setting

Tariff indexation based on factors that are beyond the company control

No mechanisms to regulate the reliability of services

Short-term setting (1 year) Such risks are not acceptable for strategic investors

Tariff is indexed only for inflation

Investment

Transition to the RAB system provides incentives for:

• growth of the debt for the long-term modernization and development projects• growth of capitalization of distribution grids companies

The Regulatory Asset Base (RAB) system operates in more than 20 countries, including UK, Germany, Sweden, Canada, etc.

The RAB System is planed to be introduced in Russia in 2008

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Investments in Competitive Sectors:Basic Mechanisms

Thermal generation is the most important investment target

2/3 of electricity generation in Russia

Additional issue of sharesin

WGCs and TGCs

InvestmentsGuarantee Mechanism

Direct private investments in local projects

Private placement

Public placement

Investment

Up to 460 billion roubles (>$17,5 billion) *

* - 2006-2010

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0,000

5,000

10,000

15,000

20,000

25,000

30,000

35,000

40,000

11,853

31,715

$bn

Investment RAO UES of RussiaMarket capitalization dynamics

Statement of the Ministry of industry and power on the free access of private

investments into thermal generation

Positive outcome of the meeting with President Putin on the investments in power sector

Approve of the priority generating capacity projects

Decision on the maximum tariff growth in 2007 – 10%.Government approve investment program for 2006-2010

BoD decision on the pilot projects for additional shares issues of WGC/TGC

13

217 239 268 276 277 283 331

590

1095 *

1917 **

0

500

1000

1500

2000

TGC-5 WGC-2 WGC-3 RAO UESof Russia

WGC-4 WGC-5 TGC-6 TGC-3 (Mosenergo)

Companiesinemergingmarkets

Companiesindevelopedmarkets

EV/IC (August 2006)

Undervaluation of Generation Assets:Comparative Analysis

* - Weighted average value for 10 companies from Brazil, the Czech Republic, China, India, Malaysia, and South Korea

** - Weighted average value for 11 companies from Spain, Finland, France, Germany, Italy, the United Kingdom, and the USA

Investment

Source: RAO UES of Russia estimates, company data

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EV/length (August 2006,weighted average)

Undervaluation of Distribution Grid Assets:Comparative Analysis

Investment

Source: RAO UES of Russia estimates, company data

4699 4829

28849

0

5000

10000

15000

20000

25000

30000

Russia Emergingmarkets

Developed markets

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Power Market Liberalization

Markets

Competitive Market Model (launched on Sep. 1, 2006)Competitive Market Model (launched on Sep. 1, 2006)

Spot market (no price cap) Balancing market New rules of the retail markets (wholesale competitive

prices included into retail prices)

Competitive Markets

One year long Long- run (starting from 2007)

Regulated Bilateral (Vesting) Contracts

Projected for 2007

Ancillary Services Market

Capacity Market

• Suppliers selected on a competitive basis

• Bilateral contracts • Auction held by System Operator

+

+

Starting from Sep.1, 2006

Mandatory and voluntary liberalization of power market

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Markets

Mandatory sales under regulated contracts

Voluntary liberalization (less electricity supplied under regulated contracts subject to a purchaser’s decision)

Mandatory liberalization

Ann

ual c

ons

umpt

ion

– 2

007

5%5%

5%

5%

52007+

[5-15%]2008

Ann

ual c

ons

umpt

ion

– 2

006

Ann

ual c

ons

umpt

ion

– 2

007

2006 2007 2008 …

+

around 75%(including

new generation and new

consumption)

95% 90%

Annually from 2008:

Mandatory liberalization –at least 5% of the 2007 annual

consumption

Voluntary liberalization –at least 5% of the 2007 annual

consumption.

All new capacity and consumption commissioned

after 2007go to the free market

Sources to extend liberalization

New generation and consumption

5-9%(next slide)

Liberalised purchase of deltas (see next slide)Retrading (see next slide)

11-16%

X% X%

X%

X%

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De facto liberalization of the market

(based on the results from first 13 days in September):

Purchase at spot prices of delta between day-ahead consumption and annual projections ~ 5% - 9% of total daily consumption

Producers retrade regulated contracts’ energy at competitive spot prices – 11 - 16 % of total daily production

TOTAL: Trading energy volumes at competitive spot market prices: 16 - 25%

Regulated contracts– financial contracts (not physical!)

Demand, supply and competitive price are formed by full production and consumption volumes

Efficient allocation of resourcesp

ric

e

volume

Market price

Efficient plantsPerform RC on their own + sell electric power over RC to “expensive” plants based on the market price

«Expensive» plantsIt is more profitable to buy based on the market price than generate on their own in order to meet RC obligations

Markets

Sources to further extend liberalization

+

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As a result of reorganization,

shareholders of RAO UES will own WGC,TGC, FGC and IDC shares in proportion to the amount of their shares in RAO UES

Structural Transformation

Restructuring of RAO UES of Russia: Two Steps in the Final Phase

First reorganization: pro-rata spin-off

(2006 - 2007)

Second reorganization:pro-rata unbundling

(2007 - mid-2008)

RAO UES Shareholders Meeting(November 30, 2006)

RAO UES Shareholders Meeting (2008)

• Spin-off of two generation companies(WGC-5 and TGC-5) with pro-rata distribution of shares

• Reorganization of RAO UES of Russia throughunbundling• Pro-rata distribution of the company assetsamong shareholders• Transfer of functions to the Government and infrastructural power industry entities

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