Corporate Social Responsibility

Corporate Social Responsibility: Underlying Principles and Implementation Framework

RAO "UES of Russia" consistently puts into its business practice the principles of the Social Charter of Russian Business that is predicated on recognition of close ties between the Company's business interests and its economic and social responsibility.

In RAO "UES of Russia", CSR is implemented through a non-financial risk management system, which was completed in 2006. The system incorporates international standards and COSO-II risk management guidelines, AA1000SES stakeholder engagement standards, GRI guidelines for financial reporting (G3 Guidelines), AA1000AS audit standards, and ISAE 3000. The System provides for:

• identification and monitoring of non-financial risks;
• risk optimization project management;
• information support and non-financial reporting;
• personnel training and professional development, including training of employees of subsidiaries and dependent companies of RAO "UES of Russia".

In 2006, RAO "UES of Russia" introduced the Non-Financial Risks Management Concept, Environment Policy Concept, Charity and Sponsorship Corporate Policy Concept. For the purpose of ensuring successful implementation of the Concepts, RAO "UES of Russia" made certain changes to the existing corporate standards, including investment activity standards, approved HSE programs and initiatives on other issues of social concern, established a permanent framework for conflict prevention and resolution involving trade unions, consumer protection agencies, business associations, and other stakeholders.

RAO UES subsidiaries and dependent companies are implementing the Company's environmental and social initiatives and introducing a system for non-financial risk management and non-financial reporting.

Major Activities on Non-Financial Risk Optimization

In 2006, the Company completed an analysis of non-financial risks associated with the investment stage of RAO UES restructuring and produced mid-term estimates that also cover the post-reorganization period. Research and risk forecasting activities engaging leading scientific and advisory centers covered:

• forecasting implications of elimination of cross-subsidies under various scenarios;
• differentiation of power consumption by various categories of households;
• consumer satisfaction with the performance of energy companies.

Non-financial risk management focused on:

• streamlining relationships with consumers and establishing a conflict resolution framework;
• ensuring affordability of electricity and heating supply, including new consumer connection to the distribution grids;
• improving the quality of power and heating supply to health-care facilities as provided for in the Agreement signed by the Ministry of Health Care and Social Development of Russia, Rostekhnadzor, and RAO "UES of Russia", which came into force in 2006;
• enhancing environmental security of power facilities including measures to be considered in the course of investment project development and implementation;
• increasing efficiency of social partnership, including control over performance of the Industry Tariff Agreement; establishing a framework for social and employment conflict resolution (in conjunction with the Power Industry Employers Association and All-Russia Power Industry Trade Union);
• enhancing information transparency of energy companies on environment and other matters of social concern.

Establishment of the Customer Relations Management Headquarters at RAO "UES of Russia" was a systemic solution to management of the entire range of non-financial risks associated with customer relations. The principal goals of the CRM Headquarters are conflict resolution, control over performance of subsidiaries, and ensuring efficient feedback.

In 2006, RAO "UES of Russia", Delovaya Rossiya, and OPORA Rossii business associations entered into an Agreement to cooperate on key issues in the energy industry, whereby a Tripartite Advisory Board was set up. There is also a standing task force dealing with social and employment issues that consists of representatives of RAO "UES of Russia", All-Russia Power Industry Trade Union, and Association of Energy Industry Employees.

Public hearings on social responsibility and corporate sustainability of RAO "UES of Russia" became a landmark event in the area of stakeholder relations in 2006.

In 2006, RAO "UES of Russia" published its 2004-2005 Report on Social Responsibility and Corporate Sustainability, which was audited by Ernst & Young. This was the first report by a Russian company prepared in accordance with the G3 GRI Guidelines.

The performance of RAO "UES of Russia" in the area of non-financial risk management and non-financial reporting was acknowledged in ratings and awards organized by international institutions.

In 2006, three training courses on management of non-financial risks and corporate social reporting were developed and formed the basis for six training events and workshops, which were attended by representatives of over 70 energy companies of RAO UES Holding Company.

Last year, RAO "UES of Russia" held its Social Power Annual Awards for the second time. 44 energy companies submitted over 60 applications in six categories, including "Customer Servicing Quality", "Occupational Safety", "Environmental and Charitable Programmes", etc.

SDCs of RAO "UES of Russia" implemented a range of pilot projects on non-financial risk management. Leveraging on the experience gained by RAO "UES of Russia", seven generation companies published their CSR brochures.

In 2006, OAO RAO "UES of Russia" joined two leading international associations dealing with social responsibilities issues - International Business Leaders Forum (IBFL) and Transparency Enhancement Association (AccountAbility). Being an e8 member, the Company takes part in the development of an international standard for non-financial reporting in the energy industry, the GRI Electric Utility Sector Supplement.

To keep the public informed about the Company's major activities and performance in 2006, RAO "UES of Russia" participated in the following industry events:

• Russia Power-2006;
• Hanover Trade Fair;
• International Safety in Power Idustry-2006;
• Power Gen Europe-2006;
• 8^th Specialist Exhibition "Fuel". "Power Industry" within the framework of the Great Rivers-2006 Forum;
• 3^rd Specialist Exhibition "Ecology in Power Industry - 2006";
• IT in Power Industry exhibition and conference;
• Energy Asia-2006;
• International Industrial and Economic Forum "Russia United";
• Reliability of UES of Russia exhibition and conference;
• 9^th International Exhibition and Congress "Energy Savings and Energy Efficiency";
• 8^th International Specialist Exhibition "Energy Savings - 2006".

Plans and Priorities

The priorities for RAO "UES of Russia" in corporate social responsibility in 2007 - 2008 are:

• improving the quality of services delivered to customers of grid, distribution and generation companies;
• increasing the efficiency of non-financial risk management, including environment risks in the course investment project development and implementation by RAO "UES of Russia" and its subsidiaries;
• ensuring proper performance under the Power Industry Tariff Agreement and other employer's obligations; reducing the number of incidents resulting in occupational injuries;
• promoting the CSR policy of OAO RAO "UES of Russia" in companies of the post-reform sector structure.

The 2006 - 2007 Report on social responsibility and corporate sustainability of RAO "UES of Russia" will be published in 2008 based on a new non-financial reporting standard for electricity utilities (GRI Electric Utility Sector Supplement). In 2007, RAO "UES of Russia" periodically posts on its web-site information brochures for various stakeholders, including brochures on Non-Financial Risk Management, Consumer Relations, Public Hearings for Assessing Investment Project Implications for Environment, etc.

The major lines of the Company's Environment Policy for 2007 - 2008 were approved by a resolution by the Management Board of RAO "UES of Russia" of 25 September 2006.

The objective of the RAO UES environment policy is ensuring a due level of environmental security, raising RAO UES energy companies' capitalization by ensuring reliable and environment-friendly power generation, transmission, and distribution, and increasing investment attractiveness of the energy companies.

It is very important for the Company to take into account statements made by securities market players and major banks concerning an environmentally responsible approach to corporate lending, the so called Equator Principles approved by major banks (banks account for 80 percent of total project finance loans in emerging markets).

In 2006, RAO "UES of Russia" put considerable efforts into implementation of conceptual documents of the Holding Company, such as the Environment Policy of RAO "UES of Russia" and the Program for Implementation of RAO "UES of Russia" Environment Policy for 2006. The Company's management appointed corporate officers to take charge of environment activities in subsidiaries; there were seven pilot energy companies identified for the purpose of launching an environment management and environment audit system; the Company invested a lot of time and effort into the development of corporate regulations governing environment safety issues.

In 2006, there were meetings held with representatives of WWF, All-Russia Nature Protection Society, EColine, Greenpeace of Russia, Russian Regional Environment Center, and ANO NERA to discuss various issues of environment activities of RAO "UES of Russia".

As part of its environment management and environment audit activities, the Company developed and approved a Framework Program and Framework Regulation governing the procedure for environmental audit at RAO UES energy companies, as well as environment auditor certification systems for conformity with the corporate requirements. The Company also started the implementation of pilot projects to implement environment management and audit systems in WGCs, TGCs, and IDCs.

In 2006, RAO "UES of Russia" and subsidiaries carried out the first series of public hearings for the purpose of assessing environmental implications of investment projects. The objective of the hearings was both to provide the public and environment organizations with objective information on the projects and to obtain recommendations on environment activities.

In response to a proposal presented by environmental organizations, RAO "UES of Russia" supported the Program for Promotion of Energy Efficiency and Efficient Use of Resources in the Public Sector and Utilities, which was implemented by non-for-profit organizations. The Practical Guidelines for Energy Savings posted on the Company's website were one of the deliverables of the above-mentioned program.

"In 2006, people stopped arguing whether the electricity sector reform would be implemented. The reform opponents lost their last hope. Politicians, officials, journalists, and, importantly, ourselves, our staff, not only realized, but also felt that we are on the home straight. Surprisingly, it is getting more and more interesting to work here" Leonid Gozman Member of the Management Board, RAO "UES of Russia"