Corporate governance system

GOVERNANCE SYSTEM

GOVERNANCE STRUCTURE AND METHODS

The underlying principle of the Company's governance structure is to identify responsibility centers and strictly determine their goals, scope of authority, and resources available to those centers.

RAO "UES of Russia" introduced a divisional management system in 2004.

The Corporate Center is responsible for the overall development and reorganization strategy for the Company; setting the KPI targets for the Business Units, Reform Management Center and the SDCs of RAO "UES of Russia"; performing the coordination and control functions; prepare the Company's financial statements, and developing standards and policies for energy companies' operation.

The Reform Management Center's task to formulate and implement a common policy for reforming the electricity industry and determine the policy for RAO "UES of Russia" to liberalize the electricity market.

The Business Units are to improve the efficiency of the subsidiaries the BUs are in charge of while maintaining and improving the reliability and safety of electricity and heat supply to customers, and to ensure implementation of the reform strategy at the subsidiaries and establishment of companies of the intended (post-reform) sector structure. In 2007, the "Energy Systems of Far East" Business Unit was established to complete the task of Far Eastern energy companies restructuring.

The Project Center for Pre-Sale Preparation and Sale of Assets is to improve the efficiency and generate maximum proceeds from the sale of non-core, services, and retail assets owned by RAO "UES of Russia" and its SDCs.

THE COMPANY'S GOVERNANCE STRUCTURE

PROPERTY MANAGEMENT

The property management system at RAO "UES of Russia" is designed to ensure efficient use of the Company's assets and increase shareholder value.

As of 31 December 2007, RAO "UES of Russia" held shares in 5 WGCs, 13 TGCs, OAO "FGC UES", OAO "SO UES", OAO "HydroWGC", 48 energy retail companies, 54 distribution companies, 9 regional energos, 18 AO-power plants, as well as some scientific, construction, services and other companies.

The Company's pool of property consists of shareholdings in 238 joint-stock companies (31 December 2006: 298), ownership interests in three companies, dispatching facilities (to the extent not transferred or sold to OAO "SO UES"), and the property of one power plant.

Property Structure of OAO RAO "UES of Russia"*

Over 2007, the share of property in the asset structure of RAO "UES of Russia" declined due to the following changes in its property holdings:

• acquisition by OAO "FGC UES" of power grid facilities from RAO "UES of Russia";
• transfer of the property of the Novosibirskaya HPP, Nizhegorodskaya HPP, and Saratovskaya HPP as capital contributions to OAO "HydroWGC".

In connection with the sale or transfer to subsidiaries of the immovable properties located on the land plots leased by RAO "UES of Russia", the Company surrendered the lease of those land plots and terminated the lease agreements concerned, and took steps to terminate the lease of the land plots where the immovable properties were written off or dismantled.

2007 saw major changes in the shareholdings in other companies held by RAO "UES of Russia":

• the WGCs and TGCs completed establishment and consolidated their subsidiaries via share exchange; accordingly, RAO "UES of Russia" transferred its shares in the regional generation companies and AO-power plants as capital contributions to WGCs and TGCs;
• implementation of the first phase of the Company's restructuring during which shareholdings in OAO "WGC-5" and OAO "TGC-5" were spun off, with the generation companies subsequently separating from the RAO UES Group;
• the "government stake" shares in the WGCs and TGCs owned by the Company were sold;
• the regional energos in the Russian Far East completed the functional unbundling, followed by a spin-off of companies by lines of business, which resulted in RAO "UES of Russia" receiving shares in the newly established (spin-off) companies;
• the Company continued its strategy to sell off its services businesses and non-core assets.

The Company implemented its strategy in respect of the shareholding in OAO "Power Machines - ZTL, LMZ, Electrosila, Energomashexport". RAO "UES of Russia" built up a 25 percent plus one share stake, took part in the additional share issue (which helped it maintain its interest in Power Machines' capital) and sold the entire shareholding to a strategic investor.

Within the framework of the strategy for the disposal of its non-core assets, RAO "UES of Russia" sold the shares in the following companies in 2007: OAO "ATP Yarenergo-Holding", ZAO "Energodental", OAO "Dalenergostroyindustriya", OAO "Norilsk-Taymyr Energy Company", OAO "ASEN", OAO "Gazenergo", OAO "Eurocitibank", "Stavropolpromstroybank" (OAO), OAO "Interbank Association - Unified Electricity Industry Complex", OAO "SAK "Energogarant", OAO "Corporate Service Systems", OAO "Engineering Center", OAO "Mosenergosetstroy", OAO "Mosteplosetenergoremont", OAO "NIIPT", OAO "Energostroysnabkomplekt of UES" held by OAO RAO "UES of Russia", and disposed of its interest in the JV "Neva".

RAO "UES of Russia" transferred its shareholdings in the following companies in exchange for additional shares in OAO "FGC UES": OAO "NTC Electroenergetiki", AO IES "GruzRosenergo", as well as cash and shares in 8 transmission (trunk grid) companies.

Also, RAO "UES of Russia" acquired additional shares in OAO "HydroWGC" in exchange for its shares in the following companies: OAO "Viluyskaya HPP-3", OAO "Krasnoyarskaya HPP", OAO "Zaramagskie HPPs", as well as cash.

Over 2007, RAO "UES of Russia" built up its stake in OAO "Tsentr Energetiki" to 98.564% from 75.03%.

The contributions made by RAO "UES of Russia" were charged to the Company's financial results in connection with the liquidation of the following companies: OAO "Severovostokstroyindustriya", OAO "Sevkavgidroenergostroy", OAO "DIGES", OAO "Pontoel", OAO "Buryat Management Company", and OAO "Management Energy Company ", which were spun off from regional energos in the course of their restructuring.

Information on the stakes and voting shares held by OAO RAO "UES of Russia in each of its subsidiaries or dependent companies is given in the Appendix.

MANAGEMENT OF CORE ASSETS

Core assets are the property, plants, and equipment owned by the Company and its SDCs and used in their core operations (generation, transmission, dispatching, distribution, and retailing (sales) of electricity and heat), as well as the shares OAO RAO "UES of Russia" and its subsidiaries hold in the entities engaged in such activities.

In September 2007, state registration was granted to two interim companies spun off from OAO RAO "UES of Russia"—OAO "WGC-5 Holding" and OAO "TGC-5 Holding"—which simultaneously merged with and into OAO "WGC-5" and OAO "TGC-5", respectively. Thus the first phase of the reorganization of RAO "UES of Russia" was completed.

In June 2007, RAO "UES of Russia" held an auction to sell its 25.03 percent stake in OAO "WGC-5". The shareholding was sold to Enel Investment Holding B.V., which made the best bid of RUB39.2 billion. The auction price was nearly 60 percent higher than the reserve price.

This was the first sale of such large shareholding in an electricity company to a private investor.

In order to implement the investment programmes of OAO "FGC UES" and OAO "HydroWGC", the Board of Directors of RAO "UES of Russia" resolved to use the proceeds from the sale of the "government stake" shares in generation companies owned by RAO "UES of Russia" to finance the FGC's and HydroWGC's investment programme.

Pursuant to the resolutions of the Board of Directors of RAO "UES of Russia", the Company entered into transactions to sell the "government stake" shares in generation companies for a total amount of RUB249.93 billion, breaking down as follows:

• OAO "TGC-9" – RUB15.49 billion;
• OAO "TGC-8" – RUB17.25 billion;
• OAO "WGC-3" – RUB23.85 billion;
• OAO "TGC-1" – RUB38.67 billion;
• OAO "Mosenergo" – RUB54.67 billion;
• OAO "WGC-4" – RUB100 billion.

During 2007, RAO "UES of Russia" sold its shares in OAO "Zapadno-Sibirskaya CHPP" and OAO "Yuzhno-Kuzbasskaya TPP" for more than RUB12.8 billion.

Pursuant to the resolution of the Board of Directors of 31 August 2007, the Company sold the "government stake" shares in OAO "Moscow Heat Distribution Company" owned by RAO "UES of Russia" for RUB13.6 billion.

In accordance with the strategy for disposal of shares in energy retail companies approved by the Board of Directors of RAO "UES of Russia" on 8 December 2006, the following shareholdings were sold through public auctions in 2007 with the involvement of the Project Center at a price not lower than the fair market value determined by an independent appraiser: OAO "Kuban Energy Retail Company", OAO "Sverdlovskenergosbyt", OAO "Nizhny Novgorod Retail Company", OAO "Orenburgenergosbyt", OAO "Kuzbass Energy Retail Company", OAO "Belgorod Retail Company", OAO "Vologda Energy Retail Company", OAO "Voronezh Energy Retail Company", OAO "Karelia Energy Retail Company", OAO "Perm Energy Retail Company", OAO "Kurgan Energy Retail Company", OAO "Tver Energy Retail Company", OAO "Lipetsk Energy Retail Company", OAO "Omsk Energy Retail Company", OAO "Buryatenergosbyt", OAO "Vladimir Energy Retail Company", OAO "Marienergosbyt", OAO "Tomsk Energy Retail Company", OAO "Tula Energy Retail Company", OAO "Udmurt Energy Retail Company", OAO "Khakasenergosbyt", and OAO "Kirov Energy Retail Company". The total proceeds from the sale of the shares were in excess of RUB13.2 billion.

In 2008, RAO "UES of Russia" plans to complete the sale of its stakes in retail and generation companies pursuant to the decisions taken by the Russian Federation Government and the Board of Directors of RAO "UES of Russia" relating to the electricity industry reform and the final phase of the Company's reorganization.

The resolutions of the Board of Directors of RAO "UES of Russia" on this matter may be viewed on the Company's website.

MANAGEMENT SERVICES ASSETS

The services-related assets of RAO "UES of Russia" are the R&M and services companies, i.e. businesses primarily engaged in providing research and development services, repairs and maintenance of property, plant and equipment used in the generation, transmission, dispatching, distribution, and retailing of electricity and heat.

As of 31 December 2007, RAO "UES of Russia" completed divestiture through auction of the shareholdings in OAO "Sverdlovsk Energy Service Company", OAO "Permenergoremont", OAO "Permenergospetsremont", OAO "Mosteplosetenergoremont", and OAO "Mosenergosetstroy" for RUB689 million.

As part of the strategy undertaken by RAO "UES of Russia" to phase out of its repair and services businesses pursuant the resolutions of the Company's Board of Directors, the SDCs of RAO "UES of Russia" divested shares in the following companies: OAO "Krasnodarenergoremont", OAO "PRP" (Chita), OAO "Rostovenergonaladka", OAO "Kamchatskenergoremservis", OAO "Khakasskaya SRK", OAO "Novgorodenergoservis", OAO "Ryazanenergoremont", OAO "PermGRESstroyremont", OAO "SMU", OAO "Tulenergosetremont", OAO "Voronezhenergoproekt", OAO "Kurskenergosetremont", OAO "Tambovenergosetremont", OAO "Bryanskenergoremont", OAO "Vologdasetremont", OAO "Ivanovosetremont", OAO "IPC Lipetskenergo", OAO "Kalugaenergosetremont", OAO "Karelenergoremont", OAO "Kostromasetremont", OAO "Nizhnovelektrosetremont", OAO "Oryolenergoremont", OAO "Seti Energoremont", OAO "Tverelectrosetremont", OAO "Yarelektrosetremont", OAO "Energoremont Pskovskaya TPP", OAO "Arkhangelsksetremont", OAO "Kolenergosetservis", OAO "Novgorodelektrosetremont", OAO "Chuvashenergospetsremont", OAO "Electrosetservis" (Syktyvkar), OAO "Rostov Energy Repair and Construction Enterprise", OAO "Chelyabenergosetstroy", OAO "Mordovenergoremont", OAO "Lipetskenergoremont", OAO "Kirovelektrosetservis", OAO "Chelyabenergospetsremont", OAO "Krasnoyarsk Power Grids Repair Enterprise", OAO "Belgorodenergoservis", OAO "Smolenskelectrosetremont", OAO "Voronezhelektrosetremont", OAO "Energoavtotrans" (Omsk), OAO "Energospetsremont" (Nizhny Novgorod), OAO "Rostov Energy Repair Enterprise", OAO "Transenergoservis", OAO "Chuvashenergosetremont", OAO "Vladimirelektrosetremont", OAO "Chelyabenergosetremont", and OAO "Marielectrosetservis". The total proceeds from the share sales amounted to more than RUB3.49 billion.

MANAGEMENT OF NON-CORE ASSETS

The non-core assets of the RAO UES Group are the non-current assets owned by the Company comprising property, plant and equipment, as well as construction in progress not used in the companies' core businesses (generation, transmission, dispatching, distribution and sales of electricity and heat) or related businesses (repairs, system management, metering and accounting services), as well as the shares, units, and ownership interests held by the Company in the entities not engaged in the core or related operations.

In accordance with the reform strategy, RAO "UES of Russia" continued in 2007 the work to appraise and dispose of its non-core assets. Decisions on the non-core divestitures are taken by the Board of Directors of the Company if the asset's fair market value is over RUB30 million.

The key methods used to sell the non-core assets are as follows:

• ascending price auction;
• descending price auction;
• sale without announcing the price (negotiated sale).

The key non-core asset sale effected in 2007 was the sale of the shares in OAO "Power Machines" through a competitive process for RUB11.8 billion.