Corporate governance system

BUSINESS PLANNING AND COST CONTROL

Business planning, costs control and a system of Key Performance Indicators (KPI) are the principal instruments for achieving the targets set by the managers for the SDCs. The Holding Company's entities have adopted their own internal standards and regulations based on the uniform Business Planning Standard of RAO "UES of Russia".

Over the past few years the Company has been constantly working to improve the business planning methodology within the RAO UES Holding Company based on the following fundamental principles:

• business plans are an essential tool for achieving target KPIs and are implemented in all subsidiaries;
• subsidiaries' managers are independent in business planning and are responsible for the development and implementation of their companies' business plans;
• business plans are subject to approval by the subsidiaries' Boards of Directors;
• business planning formats and rules remain unchanged during the year.

The current business plan format takes into account the peculiarities of the energy companies engaged in different operations while ensuring comparability and uniform treatment of the companies' KPIs and other important metrics. Another requirement is that a business plan should be flexible enough to accommodate any changes in the environment in which the SDCs of RAO "UES of Russia" operate. Due to the evolution of the wholesale electricity (capacity) market, the Company made adjustments to the indicators and adopted new market rules governing the relationships between suppliers and customers. Grid companies' business plans place a strong emphasis on the key indicators relating to customers' connection to the power grid.

Business plans remain geared towards facilitating investments. Adjustments have been made to the instruments for planning investment projects and controlling delivery of project milestones. Stronger controls have been put in place to ensure that all of the funds raised by the companies, including the proceeds from additional share offerings, are used for their designated purpose.

A business plan gives quite a long time horizon for evaluating a company's performance, both for the previous years, and for the future. In order that potential investors are able to see the prospects of the Company's subsidiary or dependent company, the business plan formats now include forecast indicators for a five-year period (including the year for which the plan is made) The SDCs' five-year business plans are developed based on the scenario conditions for the electricity sector development determined in accordance with the Forecast Balance for the Electricity Industry of the Russian Federation, and the Holding Company's Investment Company for the medium term, and other documents setting out the development strategy for the Company, and are instruments for their implementation.

As before, one of the essential regular management tools used by RAO "UES of Russia" in running the energy subsidiaries is cost control. For that purpose, RAO "UES of Russia" uses the KPI "Limit for fixed costs per MW of installed capacity as of the beginning of the year", which ensures control over fixed costs at generation companies and regional energos. Furthermore, business plans include a section "List of Measures Designed to Achieve KPIs". The biggest savings are achieved by implementing measures aimed at cutting fuel costs, such as measures to boost efficiency; replacement of fuel oil with natural gas purchased at unregulated prices; selection of alternative fuel suppliers; reduction of fuel stockpiles; handling fuel quality claims, etc. Also, considerable cost savings are generated through energy costs reduction measures-such as reduction of electricity purchase costs by accessing the competitive segment of the wholesale electricity market; reduction of technological and commercial losses of energy; reduction of energy consumption for internal and production consumption-and optimizing repair costs, including by using competitive and other regulated procedures, review of the incentive system for their staff, disposal of non-core assets, etc.

One of the key areas for cost reduction at RAO UES entities is the development of competitive and non-competitive regulated procurement of products. RAO "UES of Russia" has created and is further developing a comprehensive system for procurement regulation and management. The Company's system of Procurement Standards contains uniform rules for procurement and competitive tenders held by RAO UES entities. The fundamental principle of the Procurement Standards is that the key method used in procurement activities should be public tendering; non-competitive procurements are allowed only in strictly prescribed situations subject to approval of the Board of Directors or the Company's Central Procurement Body.

The efforts undertaken by OAO RAO "UES of Russia" during the final phase of its reorganization are designed to share with the SDC managers the experience and practices in creating and implementing regular management instruments, methods of business planning and costs control, as well as any organizational, technological and programming know-how in that area.