Costs Reduction

In 2002, implementation of cost management programs in the Holding Company's enterprises resulted in cost savings of RUB 14.5 billion, which makes 2.8% of the annual production volume of the Holding Company's SDCs.

In the year under review, the savings resulting from cost reduction increased over RUB 2 billion compared to 2001. The amount of cost savings exceeded the target fixed in the cost management program by 30%. The structure of cost reduction changed over 2002. Whereas in 2001 the fuel cost reduction occurred as a result of changes in the fuel mix, in 2002 the fuel cost reduction (36% of total costs) was achieved primarily through implementation of technological measures, holding tenders, and replacing self-generated electricity with energy purchased from FOREM.

The second largest item in terms of cost reduction after "Fuel Expenses" is the "Reduction of Energy Losses" (15%). However, it should be noted that some of the Holding Company's enterprises were not able to reduce their commercial and technological losses in networks due to insufficient funding of the costly measures to purchase and install metering equipment. "Repairs and Materials" (24%) and "Labour Costs" (6%) account for a bigger part of cost reduction.

To date, all regional energos and AO-power plants have developed and approved for use their cost management programs for 2003, whereunder the target for overall cost reduction amounts to RUB 17.6 billion, or 4.4% of the annual turnover of the Holding Company's SDCs in 2003.

In 2002, RAO "UES of Russia" launched the first phase of its Cost Reduction project. A pilot project was implemented by OAO "Konakovskaya TPP". The ultimate goals of the project are to increase the long-term competitiveness of power plants, to raise their capacity utilization in a market environment, to train professional staff and to develop cost-cutting technologies.