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May 13, 2010

Russian Prime Minister Vladimir Putin holds working meeting with IDGC Holding Director General Nikolay Shvets

The meeting was dedicated to IDGC Holding’s performance results in the heat deficit period. In addition, the Prime Minister showed interest in the implementation of the Government resolutions related to simplification of the network connection procedures for small and medium-sized businesses.

Transcript of the beginning of the meeting:

Vladimir Putin: Good afternoon! How do you evaluate the results of the work performed in the heat deficit period and how does this work, including development efforts, affect the tariff policy? And what is the progress with the implementation of the Government resolutions related to simplification of the network connection procedures for small and medium-sized businesses?

Nikolay Shvets: Vladimir Vladimirovich, the IDGC Holding team of 190 thousand employees operating in 69 constituent entities of the Russian Federation achieved positive results in the 2009–2010 heat deficit period. The technological problems were solved promptly. In the past heat deficit period, it took less time to eliminate technological failures. In the previous heat deficit periods, failure response operations took 5.5 hours, while in the past period relevant measures required 4 hours, even though the number of technological failures exceeded the previous periods by nearly a thousand. Intensive organizational measures and training sessions were arranged. In addition, joint operations were conducted together with Emercom units. One of the most important indicators characterizing the activities of the electric distribution grid sector to eliminate technological problems is reduced undersupply of electricity. We reduced this indicator by almost 20%.

Vladimir Putin: Did you cope with the subnormal temperatures that affected some areas?

Nikolay Shvets: Yes, we did. IDGC of Siberia performed especially well throughout the period. They took additional measures, conducted training sessions, replenish their supplies, and obtained mobile diesel electric stations. We successfully overcame the heat deficit period owing to the full implementation in 2009 of the investment program and the maintenance plan, account for 17 billion rubles. The high quality of the maintenance services was evidenced by a zero rate of failures in the repaired equipment.

Vladimir Putin: What do you think were the main investments in the previous period?

Nikolay Shvets: The main investments were those made in the construction of substations and the installation of power transmission lines. Last year’s 76 billion rubles of investment enabled us to put into operation 9 GW of new transformer facilities and 10,448 kilometers of power transmission lines.

As for your second question, IDGC Holding fully coped with the task regarding network connection for small and medium-sized businesses. This resolution was signed in April and is a vital factor for supporting small and medium-sized businesses. In the past three years, IDGC Holding achieved a total of 3 GW of network connections. Of this capacity, 660 MW went for small businesses in 2009. They enjoyed a discounted rate of 550 rubles per 1 kW.

Vladimir Putin: Is this discount substantial as compared with the previous period?

Nikolay Shvets: Yes, this discount gave rise to a higher activity on the part of small businesses and the number of applicants increased considerably. There were minor instances of abuse, though, when small entities started to apply for 15 kW in absolutely all the regions. Therefore, we signed an agreement and established productive relations with the all-Russian non-profit-making organization OPORA and made intensive outreach efforts. At that time, the law on energy conservation was adopted, which also made small businesses consider the issue of energy efficiency more carefully.

As for medium-sized businesses, their connections range from 15 kW to 100 kW and the payment arrangements are as follows: the first contribution accounted for 5%, with the remaining amount to be paid in equal installments within three years. To implement this network connection plan, IDGC Holding resorted to borrowings estimated at 16 billion rubles.

To obtain compensation in accordance with the Government resolution, we submitted all required substantiations to the regulatory authorities in all of the constituent entities of the Russian Federation. At present, unfortunately, only 9 billion rubles have been taken into account. We will continue with the substantiation procedure for the remaining amount, so that all this could be accounted for in the following regulation period.

Vladimir Putin: You told about last year’s investment. What are your plans for this year?

Nikolay Shvets: For 2010, we plan an investment program for 89 billion rubles. At present, an investment program for 85 billion rubles has been approved by the regions.

IDGC Holding is a company supervised by regulators in the constituent entities of the Russian Federation. Therefore, we are highly interested in constructive and close cooperation with senior officials and administrations in every constituent entity. Both the heads of the regions and the regulation authorities can increase tariffs for the implementation of the investment program by territory.

Vladimir Putin: Yes, I know that. Could you tell me again what the total cost of last year’s investment program was?

Nikolay Shvets: 76 billion.

Vladimir Putin: 76. And this year’s program?

Nikolay Shvets: 89. We have already approved for 85. We are getting our investment programs approved because IDGC Holding companies are in transition to the long-term tariff regulation system based on the return on investment method.

And we deeply appreciated that you, and the Government, and the Ministry of Energy supported us after we had evaluated the application of this method in pilot regions. From January 1, 2011, all our affiliates will transfer to the new regulation system.

As a holding company, we are highly interested in making this transition happen, as the new method, firstly, makes it possible to approach the selection of our investment programs more efficiently. Our programs should be synchronized with regional ones to prevent the emergence of facilities that would later generate payback, and return on capital established in accordance with the method.

Secondly, operating cost reduction is very important in the context of the transition to the new regulation system. When a company achieves a cost reduction of more than one percent, these funds remain in the company for the regulation period, which will be a five-year period. A company can use these funds to implement new additional investment projects and maintenance programs.

Vladimir Putin: All right.




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