Ten years of the reform: key events, highlights, comments

Ever since RAO "UES of Russia" Holding Company establishment, the energy companies had to operate in an environment of chronic non-payments from electricity and heat users, with the customers' debt exceeding RUR100 billion at the beginning of the year. Cash payments accounted for a mere 17 percent of the total payments made in the sector. The energy companies' accounts receivable were growing rapidly, with more than 20 companies hovering on the verge of bankruptcy. Salary and wages payments were on average three months in arrears.

On 4 April 1998, the extraordinary general meeting of shareholders of RAO "UES of Russia" elected Anatoly Chubais to the Board of Directors of the Company on the nomination of the Russian Government, and on 30 April 1998, he was appointed Chairman of the Management Board of RAO "UES of Russia".

The new management team drafted and approved an Action Plan designed to improve efficiency and promote restructuring in the electricity industry in the Russian Federation. The first phase of the Plan provided for implementation of turnaround activities and sorting out the issues in the sector, while the second phase envisaged a market reform in the country's electricity industry.

The discriminatory restriction prohibiting RAO UES subsidiaries' minority shareholders from purchasing over 1 percent shares in the subsidiaries was removed from the subsidiaries' charters.

Energy Facilities Commissioning

• In 1998 and 2001, two hydropower units of 200 MW each were brought into service at the Irganayskaya HPP.
• The 444.5 km long "Itat–Barnaul" transmission line was put into operation as part of the final phase of the project to built the 1,150 kV cross-system transit line linking Siberia, Kazakhstan and Urals.

1999

As a result of the measures taken by managers of RAO "UES of Russia" and its subsidiaries from mid-1998 to end-1999, the share of cash in energy payments rose to 49 from 17 percent, with the amount of taxes paid by the energy companies growing threefold to RUB625 million. Also, the Company managed to remove nearly USD1 billion from the "shadow" and "nearly shadow" settlements associated with barter transactions. The wage arrears fell by 2.5 times. The number of regions experiencing tremendous problems in terms of fuel supply declined by half.

Budgeting Tools Implemented

RAO "UES of Russia" started to prepare its financial statements in accordance with the IFRS and introduced a budgeting system. The Parent Company's practices began to be applied in its subsidiaries.

Energy Facilities Commissioning

• Mosenergo brought power unit 1 at the GTU-CHPP into operation in the city of Electrostal. This was the first small gas-turbine power plant to be built in Russia.
• The first hydroelectric power unit (80 MW) became operational at the Zelenchukskaya HPP.
• A GTU-25 was put into operation at the Bezymyanskaya CHPP, which is one of the oldest power plants in the Samara Energy System. This was Russia's first GTU unit built on the basis of a converted NK-37 aircraft engine.

2000

The share of cash payments in the total payments exceeded 80 percent, and in Q3 and Q4 it was as high as 101 percent. An order was adopted to eliminate rolling blackouts. For the first time, RAO "UES of Russia" started to pay all of its federal taxes in cash.

On 4 April 2000, during a meeting in the Kremlin, the Board of Directors of RAO "UES of Russia" stated that it was necessary to implement a reform in the electricity sector, and adopted the RAO "UES of Russia" Restructuring Concept. This triggered the start of corporate procedures designed to restructure the Company. Thus, even before adopting any official resolutions, the Russian Government made it clear that it backed the reform in the electricity industry.

The Company succeeded in restoring large-scale parallel operation of the UES of Russia and the energy systems of the CIS countries and the Baltic republics which stopped after the disintegration of the USSR. By year end, as many as 14 FSU countries (i.e. even more than during the Soviet era) were operating in a parallel mode.

RAO "UES of Russia" brought on line the first power unit at the Severo-Zapadnaya CHPP (North-West), Russia's first power plant based on combined cycle technology.

Energy Facilities Commissioning

• A dispatching control center with a projector dispatcher board was installed in the Moscow cable grid. This control center is one of the most advanced ones currently in operation in Russia.
• HydroWGC put into service 200 MW hydropower unit No. 6 at the Zagorskaya PSPP. The plant's installed capacity reached its design capacity of 1,200 MW.

2001

With the turnaround phase completed, the Holding Company's entities, for the first time in recent years, were able to operate without regional energy crises during the 2001/2002 autumn and winter period. From the beginning of the year, RAO "UES of Russia" completely eliminates non-cash forms of payment for electricity and heat.

The Russian Government adopted Order No. 526 On Reforming the Electricity Industry in the Russian Federation, which made it possible to launch efforts aimed at reforming the sector. In this document the Government identified the key areas of the electricity reform for the first time.

Not-for-profit Partnership "Administrator of Trading System" (ATS), the operator of the future liberalized energy market, was established pursuant to the Russian Government's resolution. The process was launched in the sector to create infrastructure for wholesale electricity trading.

Energy Facilities Commissioning

• The second power unit was commissioned into operation at the Kharanorskaya TPP.

2002

RAO "UES of Russia" approved the basic plan for restructuring regional energos providing for functional unbundling of these vertically integrated energy companies by line of business.

In the course of the reform, the Company established entities operating in the monopoly segments, Federal Grid Company (FGC), which would be responsible for ensuring reliable operation of the Unified National Electricity Grid (UNEG), and System Operator (SO), an entity that would be perform the dispatching function in the UES of Russia. The creation of these key infrastructure entities supporting reliable operation and development of the UES of Russia was the first practical step towards unbundling the operations into competitive and monopoly businesses.

Energy Facilities Commissioning

• The Aushigerskaya HPP (60 MW), part of the Nizhnechereksky Cascade of HPPs, was brought into service.
• The world's first controlled reactor of 220 kV rated at 100 Mvar was built at the "Chita" 500 kV substation.
• The construction of the "Vyborg – State Border" 400 kV transmission line was completed. The "Pskov – Yuzhnaya" 330 kV substation was put into operation.
• The first and the second power units at the Mutnovskaya GeoPP-1 were connected to the grid. Today, the Mutnovskaya GeoTPP has a capacity of 50 MW and is one of the world's most advanced geothermal power plants.
• The second hydroelectric power unit (80 MW) became operational at the Zelenchukskaya HPP.

2003

In March 2003, Russian President Vladimir Putin signed into law the legislative package on the electricity reform. These laws were to become an instrument in determining the path for the electric power sector development for decades ahead. For the first time, a systematic foundation was laid governing the key economic and technological issues of the sector's operation, the reform phases and mechanisms for the reform implementation.

1 November saw the launch of an electricity market in Russia. Not-for-profit Partnership "Administrator of the Trading System" (ATS) held the first ever electricity trading session in the "5-15%" competitive market segment. The Government adopted Resolution No. 643 approving the rules for the operation of the wholesale electricity (capacity) market during the transitional period.

In May, RAO "UES of Russia" approved its Reform Strategy Concept "5+5", the principal corporate document setting out in great detail all phases and aspects of the energy companies' restructuring.

Energy Facilities Commissioning

• Hydropower units No. 1 and 2 with an aggregate capacity of 370 MW were brought on line at the Bureyskaya HPP.
• The diesel power plant (DPP) in the settlement of Deputatsky and Eldikanskaya DPP with an aggregate capacity of 22.7 MW were put into service. The projects were implemented as part of the program to develop "smaller" energy projects in the Republic of Sakha.
• In the Khabarovsk Territory, a 6.7 km-long high-voltage crossing was built over the Amur River and Amur channel. The crossing with towers of up to 191 metres high and spans of up to 1620 metres is unique not only in Russia, but in the whole world.

2004

In order to strengthen a business-centric approach during the reform period, the Parent Company introduced a divisional management system. Changes were made to the structure of the executive administration, the Company created a Corporate Center, Reform Management Center, and five Business Units in charge of its subsidiaries.

Pursuant to resolutions of the Russian Federation, the process was launched to establish the companies that would comprise the intended (post-reform) structure of the electricity industry. The first WGCs, TGCs and IDCs were registered with the authorities.

On 1 April, the first regional energo, Kalugaenergo, was unbundled by spinning off its core operations. The next year and a half saw a large-scale process to restructure the regional energos.

Energy Facilities Commissioning

• A 220 MW CCGT unit was brought on line at the Tyumenskaya CHPP-1.
• Two CCGT units with an aggregate capacity of 78 MW were put into operation at the Sochinskaya TPP.
• The "Primorskaya TPP – Khabarovskaya" 500 kV transmission line and the "Khekhtsir" 500 kV substation became operational.
• The "Pskov – Yuzhnaya" 330 kV substation was put into service.

2005

RAO "UES of Russia" started the construction of the Sangtuda HPP-1 in the Republic of Tajikistan. The project to complete the power plant's construction is Russia's largest investment project with the participation of Russian companies to be implemented in the territory of the CIS.

Regional energos' reorganization and registration of interregional companies was nearly completed. By year end, all 7 WGCs, 13 out of 14 TGCs, and 4 IDCs completed their registration with the authorities. In late 2005, WGC-5, the first wholesale generation company established in Russia, started to float on the stock market. Reorganization was completed in 47 regional energos.

RAO "UES of Russia" adopted a Programme of Actions to Improve Reliability of the UES of Russia. The long-term energy use forecasts prepared for the Programme were to play a major role in setting investment priorities for energy companies and formulating the paths for the development of the UES of Russia.

Energy Facilities Commissioning

• The first 450 MW CCGT unit was brought on line at the Kaliningradskaya CHPP-2.
• As part of the modernization of the Ivanovskaya TPP, a project was launched to build a new power plant, OAO "Ivanovskie PGU". The project provided for the installation of two Russian-made combined-cycle power units PGU-325 with an aggregate capacity of 701.7 MW.

2006

The Management Board of RAO "UES of Russia" adopted a five-year investment programme for RAO UES energy companies for the period from 2006 to 2010, which launched the investment phase of the Russian electricity reform. In half a year, the Investment Programme was revised upwards.

On 1 September, the Russian Government introduced new rules for the operation of the wholesale and retail electricity markets. Under the new model for the wholesale market, a transition was made to regulated bilateral contracts. All amounts of electricity not subject to quotas under such regulated contracts started trading at unregulated prices.

Generation Companies Launch IPO Process

WGC-5 completed the additional share offering on the stock market. As a result of the IPO, the company raised USD459 million in funds to finance its investment programme, and started the construction of new power units. Apart from WGC-5, the list of "pilot" projects to issue additional shares included WGC-3, WGC-4, Mosenergo, and TGC-9.

RAO "UES of Russia" completed the first sale of its shareholding in a regional energy retail company. The shares in Yaroslavl Energy Retail Company was sold through a public auction for RUB425.3 million.

At the EGM of RAO "UES of Russia", the shareholders approved the implementation of the first phase of the Parent Company's reorganization by spinning-off two generation companies, WGC-5 and TGC-5.

Energy Facilities Commissioning

• The construction of Boguchanskaya HPP was resumed after an 11-year halt. The power plant's design capacity is 3,000 MW.
• The unique hydraulic unit was floated at the experimental Malaya Mezenskaya Tidal Power Plant (TiPP). The float-on module unit of the TiPP is equipped with a unique experimental 1,500 kW orthogonal hydraulic unit.
• The Grozny 330 kV substation went on line in the Republic of Chechnya. This substation is equipped with cutting-edge equipment and is one of the largest substations in the Northern Caucasia.
• The Gunibskaya HPP of 15 MW was commissioned into operation in the Republic of Dagestan.
• The first power unit with a capacity of 180 MW of electricity and 260 Gcal/h of heat was brought on line at the Pravoberezhnaya CHPP in Saint Petersburg.
• The third hydropower plant of the Chiryurtsky hydropower center, the Gelbakhskaya HPP, was brought into operation.
• A modern "Sosva" 220 kV switching station was brought on line in the Serovo-Bogoslovsky node of the Sverdlovsk Energy System.
• The Zvezda 500 kV substation became operational in the Kostroma Region, with 500 kV and 110 kV feeder lines.
• The Bely Rast substation of 750 kV was put into operation, the largest substation in the so-called "Moscow Energy Ring".
• The second power unit (180 MW of electricity and 260 Gcal/h of heat) was put into pilot operation at the Chelyabisnakaya CHPP-3.
• The Agulskaya Malaya HPP was brought on line in the Republic of Dagestan. The power plant was built using a patented technology for the construction of small hydropower plants, Prometeus, which uses uniform hydropower equipment that can be operated automatically and does not need any operators.
• The fourth power unit of 180 MW was brought on line at the Khabarovskaya CHPP-3.
• The "Amurskaya – Blagoveshchenskaya" 220 kV transmission line and a 220 kV outdoor switchgear at the Blagoveshchenskaya Substation were built and put into service in the Russian territory. This project significantly improved the reliability of power supply to customers in the city of Blagoveshchensk and made possible additional electricity deliveries to the border areas of China.

2007

The additional share offerings carried out by 10 generation companies and the sale of the "government stake" shares in 6 WGCs and TGCs owned by RAO "UES of Russia" generated more than RUB600 billion in direct private investments for the sector development.

RAO "UES of Russia" was included in the RTS Index Book of Records as the Most Liquid Security over the 12 years of existence of the RTS Index. Also, Standard and Poor's named RAO "UES of Russia" among the top five most Russian companies in terms of transparency.

The consolidation was completed at six thermal WGCs and fourteen TGCs. Shares of all the thermal generation companies were floated on the securities market.

On 3 September 2007, the first phase of reorganization of RAO "UES of Russia" was completed, with two generation companies—WGC-5 and TGC-5—spun off from the Company. At the EGM held on 26 October 2007, the shareholders of OAO RAO "UES of Russia" approved key resolutions relating to the final phase of the Parent Company's reorganization.

A schedule was set for the electricity market liberalization which provides that electricity prices on the wholesale market would be deregulated by 2011. At end-2007, electricity deliveries at unregulated prices reached 20 percent of the total wholesale market deliveries.

Energy Facilities Commissioning

• During the year, 10 mobile gas turbine units with an aggregate capacity of 225 MW were deployed and brought on line in the Moscow Region.
• Mosenergo put into operation a new 450 MW combined-cycle unit at the CHPP-27.
• The Novgorodskaya Substation was put into service. This was the first project to build a new 330 kV facility in the North-West of Russia.
• The Frunzenskaya Substation (330 kV) having a transformer capacity of 195 MVA was brought on line in the Belgorod power center.
• The Knyazhegubskaya Substation, the first substation built by FGC beyond the Arctic Circle, became operational.
• The last, sixth hydropower unit was put into operation at the Bureyskaya HPP in Talakan, the Amurskaya Region. The Bureyskaya HPP became the largest hydropower plant in the Far East of Russia with 1,675 MW of installed capacity.
• A new steam turbine with the capacity of 12 MW of electricity and 43 Gcal/h of heat was brought on line at the Chelyabisnakaya CHPP-3 owned by TGC-10.
• The System Operator inaugurated a unique computing center which does not have any parallels in Russia or Europe. According to the TPC-C test, the server has the best performance among Intel Xeon MP based servers designed for Microsoft SQL Server 2005 Database.
• The project was completed to build a unique transit transmission line "Zarya – Barabinsk – Tavricheskaya". The line is unique in its great length (730 km). This grid facility is used for bulk transfer of electricity at 500 kV from Siberia via Urals to the European part of Russia.
• The GTU-CHPP was put into service on the site of the Belgorodskaya CHPP. The plant has two gas turbine power units 34.5 MW each.
• HydroWGC brought into pilot operation a 1 MW wind power plant in Kalmykia.
• The first phase of the Yemelino Substation (500 kV) went on line in the Sverdlovsk Region. This facility was constructed within a record short period of 9 months.

2008

The Russian Government adopted the Master Plan for Location of Energy Facilities for the Period until 2020. The document was prepared taking into account the forecasts of energy use increase and plans for the location of new production and special facilities provided by the regional governments.

On 21 January, three months ahead of schedule, RAO "UES of Russia" brought on line the first hydropower unit of 167.5 MW at the Sangtuda HPP. Russia agreed to accelerate the construction on the request of the government of Tajikistan in order to help reduce electricity shortages in the republic.

The Extraordinary General Meetings of shareholders held at all companies spun off from RAO "UES of Russia" approved the reorganization. Thus, the companies took all resolutions needed to complete the second (final) phase of RAO UES reorganization by 1 July 2008.