Operational results of electricity and heat markets

In 2007, 48 energy retail subsidiaries of RAO "UES of Russia" were active on the retail electricity markets, including 6 regional energos which have not been restructured, which sold electricity to their own customers.

During the year, the useful supply of electricity to retail customers (without taking into account the electricity supplied to grid companies to compensate for power transportation losses) throughout RAO UES Holding Company amounted to 523.9 billion kWh.

STRUCTURE OF EFFECTIVE SUPPLY OF ELECTRICITY, BY CONSUMER GROUPS OF RAO UES ENERGY RETAIL COMPANIES

In order to implement the programme of RAO "UES of Russia" to divest its retail operations, public and private auctions were held to sell its shares in 22 energy retail companies. Shares in another seven retail companies were put up for sale in the ISTRA Information and Trading System for Sale of RAO UES assets.

The reduction of useful power supply throughout the Holding Company in 2007 compared to 2006 was due to the sale of part of the energy retail companies owned by RAO "UES of Russia".

As of 31 December 2007, the consumers owed RUB13.3 billion in electricity debts to the energy companies of RAO "UES of Russia". Utilities and household consumers accounted for the bulk of the debts owed to the RAO UES energy companies, 26.7 percent and 14 percent, respectively. Industrial customers' debt made 11.4 percent, while pubic sector entities (federal, regional, municipal and local) accounted for 10.1 percent of the total debt owed to energy retail companies.

All retail companies of RAO "UES of Russia" participating in the retail electricity markets were granted the status of guaranteeing electricity suppliers, which means that they are required by law to enter into electricity supply agreements (contracts for the sale of electricity) with any person so requesting.

In H2 2006, a new pricing system was introduced on the retail electricity market. The key peculiarity of this system is that it is synchronized with the price liberalization process on the wholesale market. This means that part of electricity is supplied at regulated prices (tariffs) and while the other part of electricity is sold at prices reflecting the cost of electricity on the competitive wholesale market within the unregulated price cap. During the transitional period, household users are guaranteed supply of all electricity used at regulated prices.

In order to facilitate the creation and development of an efficient competitive retail electricity market in the Russian Federation, protect and represent the interests of the retail electricity market on the federal level, Not-for-profit Partnership of Guaranteeing Suppliers and Energy Retail Companies (NP of GSs and ERCs) was founded on 15 December 2006.

As of 31 December 2007, among the members of NP of GSs and ERCs were RAO "UES of Russia" and 37 energy retail companies. The members of NP of GSs and ERCs account for about 55 percent of the total useful supply of electricity nationwide, which means that NP of GSs and ERCs is an organization serving the interests of the entire energy retail community in Russia.

In order to promote efficient interaction of energy retail companies with retail customers in a post-reform environment, introduce rules and regulations for customer relations, define service level standards, optimize the arrangements for interaction among entities supplying electricity and heat, RAO "UES of Russia" produced a Customer Service Standard and made all RAO UES energy retail companies adopt the Standard in 2007.

Therefore, 2007 saw the completion of the process to achieve the intended model of the retail electricity market as a market of guaranteeing suppliers and energy retail companies which purchase electricity independently on the wholesale market or from the guaranteeing suppliers that are wholesale market participants.