Corporate governance system

BOARD OF DIRECTORS

The Board of Directors of RAO "UES of Russia" is engaged in overall management of the Company and acts within the scope of authority provided by Federal Law On Joint Stock Companies, the Company Charter and the Regulation on the Board of Directors of RAO "UES of Russia".

The Board of Directors has 15 members elected by a General Meeting of shareholders.

The Board of Directors elected by the shareholders at the Annual General Meeting held on 26 June 2007 includes ten Government representatives and five representatives of minority shareholders, which are listed in the Appendix.

During the year under review, the Board of Directors held 31 meetings and considered over 250 items of business.

The most important matters considered by the Board of Directors of RAO "UES of Russia" in 2007 were as follows: approval of the plan for the additional share issues by WGCs/TGCs as part of the investment programme; implementation of the SDCs' investment projects; divestiture of interests in R&M, services and non-core companies; approval of model contracts with ATS, WGCs and TGCs for the supply of capacity to wholesale market and connection of generation facilities to power grids; implementation of investment projects; approval of the roadmap for additional share offerings of WGCs/TGCs within the framework of the investment programme; change of the IDC configuration and increase of the number of IDCs; approval of the target structure for OAO "HydroWGC"; approval of the schedule for auctions to sell energy retail companies' shares for 2008, and so on.

Moreover, the Board of Directors of the Company approved the model for the final phase of reorganization of RAO "UES of Russia", recommended the Separation Balance Sheet of the Company for approval by the General Meeting of shareholders, including the Rules for the distribution of property, rights and obligations in the course of reorganization of RAO "UES of Russia".

In 2007, the Board of Directors of RAO "UES of Russia" approved several interested party transactions. As required by Russian laws, information on such transactions and the results of the Board meetings of RAO "UES of Russia" were disclosed in a timely manner in the securities issuer's quarterly filings and posted on the corporate website.

In 2007, RAO "UES of Russia" did not enter into any major transactions, i.e. transactions involving property worth 25 percent or more of the book value of the Company's assets as of the most recent reporting date.

Board members of RAO "UES of Russia" receive remuneration, which is paid in accordance with the Regulation on Payment of Remuneration to Members of the Board of Directors for the Performance of their Duties and Reimbursement of Expenses Incurred in the Performance of their Functions as Board Members, as approved by the General Meeting of shareholders on 28 June 2002. In 2007, the remuneration paid to the Board members totalled RUB70,107,360 (except for government representatives, as provided by Article 17 of Federal Law On State Civil Service in the Russian Federation).

In 2007, the Board of Directors of RAO "UES of Russia" had five Committees and one Commission: Strategy and Reform Committee, Audit Committee, Appraisal Committee, HR and Remunerations Committee, and Investments and Fuel Supply Commission.

The current members of the Committees and Commission under the Board of Directors of RAO "UES of Russia" are listed in the Appendix.

Emphasis should be made on the importance of the Committees' activities in preparing for meetings of the Board of Directors of RAO "UES of Russia" and ensuring proper review and recommendations on their items of business.

Strategy and Reform Committee was created pursuant to the Board resolution on 31 August 2001.

The Committee comprises 20 members and 5 experts and is an advisory and consultative body under the Board of Directors of RAO "UES of Russia". The Committee's decisions are taken collectively by a simple majority of votes and are of a recommendatory nature.

In 2007, the Committee conducted preliminary reviews of all matters relating to corporate restructuring and gave the Board of Directors recommendations regarding key strategic decisions. The Strategy and Reform Committee under the Board of Directors of RAO "UES of Russia" approved: the system for selling the non-core assets, R&M, services and installation companies; the model for the final reorganization of RAO "UES of Russia"; the mechanism for controlling effective use of the proceeds from the issuance of shares by WGCs and TGCs to finance investment projects; the system for controlling efficient disposal of shares in the R&D; the mechanism designed to ensure that the number of additional shares issued by the thermal WGCs and TGCs is sufficient to finance their investment programmes; distribution of assets, including the number and structure of shares to be transferred to "State Holding Company" and "HydroWGC State Holding Company"; proposals to the General Meeting of shareholders on the reorganization of RAO "UES of Russia"; redistribution of shares among special holding companies within the separation balance sheet of OAO RAO "UES of Russia"; model contract for the supply of capacity on the wholesale market; entry into contracts on the supply of capacity on the wholesale market among the generation companies, ZAO "Center for Financial Settlements", and NP "ATS".

The Appraisal Committee was established on 26 April 2002 pursuant to the resolution of the Board of Directors of RAO "UES of Russia".

The Committee comprises 16 members and 5 experts participating without the right to vote.

The Appraisal Committee is primarily responsible for the valuation of the Holding Company's core assets in the course of restructuring.

In 2007, within the framework of the second phase of reorganization of RAO "UES of Russia", the Committee approved the appraisal results for the calculation of conversion/exchange ratios in the course of reorganization of RAO "UES of Russia"; results of the appraisal of shares in grid companies and energy retail companies owned by RAO "UES of Russia" for the purpose of their sale; and approved the results of appraisal of non-core assets in order to determine the start price for their sale.

The Audit Committee was created by the Board of Directors on 29 August 2003.

The Committee's activities are governed by the Regulations on the Audit Committee and the Rules of Procedure of the Audit Committee approved by the Board of Directors of RAO "UES of Russia" on 29 August 2003.

The Committee comprises four full members and ten experts participating without the right to vote.

The Audit Committee assists the Board of Directors of RAO "UES of Russia" in overseeing the preparation by the Company's managers of its financial statements, and monitoring the internal control system of the Company in the area of financial activities. Ongoing review of the internal control systems at the SDCs of RAO "UES of Russia" makes it possible for the Audit Committee to bring the attention of the Company's executives to any deficiencies discovered and suggest reasonable measures to rectify them.

In 2007, the Audit Committee under the Board of Directors of RAO "UES of Russia" approved the principles for preparation of the Company's separation balance sheet; the key parameters of the separation balance sheet (such as distribution of the property, rights and obligations; rights of succession); the strategy for managing idle cash generated by the sale of the "government stake" shares in thermal WGCs and TGCs in order to ensure that such funds are used in a most efficient manner; and reviewed the RAO UES consolidated interim financial statements for H1 2007 in accordance with the IFRS.

The Personnel and Remunerations Committee was organized by the Board of Directors of RAO "UES of Russia" on 25 March 2005 in accordance with the requirements of the Federal Service for Financial Markets of Russia.

The Committee comprises three members and is responsible for reviewing key matters relating to providing the Holding Company's top managers with incentives designed to ensure that the Company and SDCs' key objectives are achieved.

In 2007, the Personnel and Remunerations Committee of the Board of Directors of RAO "UES of Russia" approved the Compensation and Motivation Programmes for the executive staff of RAO "UES of Russia"; the principal provisions of the stock option plan of OAO "HydroWGC"; the programme for incentivizing employees and members of the Board of Directors of ZAO "INTER RAO UES"; individual Key Performance Indicators for the top managers of RAO "UES of Russia" for 2007.

Investments and Fuel Supply Commission was created by the Board of Directors on 24 November 2006.

The Commission is responsible for the preliminary review of all investment projects and monitoring their scopes and adherence to the project schedules.

In 2007, the Commission reviewed a number of investment projects to be implemented by WGC-1, WGC-2, WGC-4, WGC-6, TGC-2, TGC-4, TGC-6, TGC-7, TGC-8, TGC-10, TGC-12, and TGC-13.