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Unified Energy System

February 20, 2008

RAO UES statement regarding Economic Security Department's findings

Moscow, 20 February 2008. RAO "UES of Russia" is very serious about the information released by the Economic Security Department of the Russian Ministry of the Interior (ESD) on the measures being taken to ensure safety and security in the electricity sector.

RAO "UES of Russia" appreciate it that the ESD is raising issues which, despite all efforts taken by the Company's top managers, have not been addressed in the sector for many years.

Specifically, because of the rationing of the so-called "limit" gas supplied at regulated prices, RAO UES generation companies had to switch to more expensive fuels, chiefly fuel oil, or to purchase gas at higher prices from intermediaries in order to ensure reliable power supply to customers. The extra costs associated with the purchase of gas at market prices have been taken into account in the tariffs set for the next year.

RAO UES has on various occasions requested the regulator to provide for the statutory volumes and terms of gas supply at regulated prices. However, this complex issue still remains unresolved.

Over the past few years, RAO UES and Gazprom have taken some joint measures to address the issue. Specifically, last year saw the first steps taken to conclude long-term contracts for the supply of "limit" gas and "extra-limit" gas. With respect to "limit" gas supplies, all generation companies of RAO "UES of Russia" have entered into five-year contracts with Gazprom's retail companies fixing the gas volumes and formulas for the calculation of gas prices. Work is currently underway to make long-term contracts for the supply of gas in excess of the limit.

Besides, Mezhregiongaz operates an electronic trading venue where generation companies can purchase natural gas at market prices if gas transportation to their facilities is available.

In order to safeguard the interests of consumers, both private individuals and legal entities, especially during the transition to a competitive electricity market, Customer Relations Groups have been created in all regions of Russia. Customers are now able to approach these Groups with their questions and complaints.

Moreover, RAO UES together with the energy related ministries and agencies is working proactively to formulate the regulatory framework and enforcement measures intended to strengthen control over the competition compliance in the electricity industry.

In addition, in order to avoid potential conflicts with the grid companies, on the one hand, and electricity consumers and generators, on the other, RAO UES has approved the master terms and conditions for the connection to the grids, as well as the standard form of connection agreement. The Company is also developing a Standard for information disclosure on customers' requests for connection to the power grids, the results of their review, and the timing for connection measures. The Standard is designed to increase transparency of the activities of RAO UES grid companies relating to customer connections, and enable customers to oversee the connection process undertaken by the energy companies. These documents are to ensure that the activities of RAO UES grid companies are as transparent as possible and to prevent violations in the grid sector.

We at RAO "UES of Russia" are confident that the creation of energy companies engaged in the core activities— electricity generation, transmission, dispatching and retailing in accordance with the package of laws and resolutions of the Russian Government* has made their operations much more transparent and controllable.

In this connection, RAO "UES of Russia" would like to emphasize that it does not agree with the allegations made by the ESD as a result of its measures that "the reform of RAO "UES of Russia" may lead to an increased number of economic and tax crimes in this sector".  

* Since 2001, 83 legislative acts have been adopted as part of the process to develop and reform the Russian electricity sector, including 16 Federal Laws, 46 Resolutions and 21 Orders of the Russian Government.




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