Moscow. 29 October 2004. The Board of Directors of RAO "UES of Russia" noted the information on the progress of the reform in Russia's electricity industry and the steps to be taken to implement the laws on the electricity reform.

The entities of the Holding Company of RAO "UES of Russia" are implementing reforms in accordance with the laws of the Russian Federation (including the legislative package on the electricity reform), Resolutions of the Government of the Russian Federation and the Board of Directors of OAO RAO "UES of Russia", and the Concept of Strategy of OAO RAO "UES of Russia" for 2003-2008 ("5+5") unanimously approved by the Board of Directors in May 2003.

The electricity reform is being carried out in the following principal areas:

Creation of the regulatory and legal framework for the reform

In connection with the reorganization of the Government of the Russian Federation at the beginning of the year, amendments were made to the plan of measures to reform the electric power industry. The revised plan was approved pursuant to Government resolution No. 966-? of 17 July 2004. Changes were made to the list of responsible parties (primarily due to the changes in the Government structure), and the deadlines for preparation of documents.

Besides, an Interdepartmental Commission for Electricity Reform was created pursuant to the Order of the Minister of Industry and Energy of Russia Victor Khristenko dated 30 August 2004 instead of the Electricity Reform Commission of the Government of the Russian Federation, which was abolished in the course of reorganization of the federal executive branch. The main goals of the new Commission are to coordinate and analyse the results of activities of the federal executive bodies in the implementation of the electricity reform. The Commission consists of representatives of the Ministry of Industry and Energy of the Russian Federation, Ministry of Economic Development and Trade of the Russian Federation, the Federal Antimonopoly Service, the Federal Tariffs Services, the Ministry of Justice of the Russian Federation, and the Federal Nuclear Power Agency.

Reform of the wholesale electricity market

One of the main results of the sector reform is the stable functioning of the free trade segment of the wholesale electricity market launched on 1 November 2003. According to NP "ATS", which performs the functions of the commercial operator of the wholesale market, since the launch of trading until October 2004, 36.2 billion kWh of electricity were sold through the competitive segment. The agreements to join the trading system have been signed by 104 customers, 35 of which are not subsidiaries or dependent companies of OAO RAO "UES of Russia". In September, there were 84 entities taking part in the electricity trading in the competitive market segment. Today, the free market segment accounts for about 9% of the total electricity generation in the European part of Russia and the Urals. Prices in this segment are usually lower than the electricity prices in the regulated segment. In September, the price in the competitive market segment was 3.2% lower than that of the regulated market. As a result, each megawatt-hour of electricity purchased in the competitive segment on average was RUB16 cheaper than in the regulated segment.

Formation of the electricity market infrastructure

In accordance with the order of the Russian Government of 23 December 2003, RAO "UES of Russia" is taking steps to consolidate the assets relating to the Unified National Power Grid (UNPG). Pursuant to this document, the Russian Federal Property Fund and OAO "UES FGC" have established 7 interregional transmission companies (ITCs). The RFPF holds an 85% stake, and OAO "UES FGC" holds a 15% stake in the ITCs.

The regional energos' transmission grids that are part of the UNPG will be consolidated within the ITCs in exchange for additional shares in these companies. Board meetings have been held in 52 regional energos, which considered the launch of the reform of power grid facilities. Work is currently underway to determine the market value of the property to be transferred to the ITCs. As at 1 October 2004, 48 regional energos approved their lists of such assets.

As part of the effort to streamline the vertical structure of the operational dispatch system, work has been completed to transfer the functions of the regional dispatch administrations (RDA) to OAO "UES SO-CDA". As at 1 October 2004, 56 RDAs (responsible for 62-energos) were established out of the total of 70 RDAs (branches of OAO "UES SO-CDA") planned for establishment.

Restructuring of regional energy systems

The key transformations in the sector include restructuring of the regional energos involving their separation by lines of business. As at 1 October 2004, restructuring was started at 52 regional energos.

By October 2004, some new companies established as a result of regional energos' restructuring had been registered with the authorities. Some regional energos—OAO "Kalugaenergo", OAO "Voronezhenergo", OAO "Belgorodenergo", OAO "Bryanskenergo"—have largely completed the separation by lines of business.

Creation of new participants of the energy sector

RAO "UES of Russia" has started to create new sector participants—generation companies of the wholesale electricity market (WGCs), territorial generation companies (TGCs), and interregional distribution companies (IDCs).

Pursuant to the Resolution of the Russian Government of 11 July 2001 and the Strategy Concept, the first stage of the reform will see establishment of WGCs as wholly-owned subsidiaries of RAO "UES of Russia" on the basis of the shareholdings in the federal power plants (FPPs) owned by RAO "UES of Russia" and the FPPs' property. Then the heat WGCs will be consolidated through exchange of shares.

In accordance with the basic plan for the creation of WGCs, the Board of Directors of RAO "UES of Russia" took a decision at the meeting held on 3 September 2004 to establish WGC-5 (contributing the stakes in OAO "Nevinnomysskaya TPP", OAO "Konakovskaya TPP", and the property of the Reftinskaya TPP and Sredneuralskaya TPP to the authorized capital of WGC-5), and at the meeting held on 1 October 2004, the Board took a decision to establish WGC-3 (contributing the stakes in OAO "Kostromskaya TPP", OAO "Pechorskaya TPP", OAO "Gusinoozerskaya TPP", OAO "Kharanorskaya TPP", and OAO "Cherepetskaya TPP" to the authorized capital of WGC-3). Work is currently underway to determine the value the power plants' assets to be included in these WGCs.

In Q4 2004, the Board will consider the establishment of WGC-1, WGC-2, WGC-4, and WGC-6. State registration of these companies is scheduled for late 2004—early 2005.

According to the resolution of the Board of Directors of OAO RAO "UES of Russia", until the separation of the WGCs from RAO "UES of Russia", the Board of Directors of each of these companies is to include at least two representatives of minority shareholders of OAO RAO "UES of Russia".

Territorial Generation Companies (TGCs) will be formed in the course of restructuring of regional energos.

The configuration of TGCs and the principal ways of their establishment were considered by the Board in April 2004. In particular, the configuration was approved for 14 TGCs (these TGCs do not include the Far East of Russia).

The Board of Directors has approved the use of "accelerated" basic plan of the TGC establishment using lease arrangements. TGCs may be established as wholly-owned subsidiaries of OAO RAO "UES of Russia" or co-founded by regional energos (or regional generation companies), with the regional energos' generation assets leased out to the TGCs.

In accordance with said decision, on 3 September 2004 the Board resolved to establish OAO "TGC-9" on the basis of the generation assets of OAO "Sverdlovenergo" and OAO "Permenergo", and OAO "TGC-14" on the basis of the generation assets of OAO "Buryatenergo" and OAO "Chitaenergo".

After the restructuring of the respective regional energos, the spin-off RGCs will start the process of merger with the TGCs leasing their assets. The Board recommended that this process should be completed as soon as possible, starting no later than 6 months after the spin-off of the last generation companies taking part in the corresponding TGC.

It is expected that the Board of Directors will be able to consider by the end of 2004 the establishment of four more TGCs using the leasing arrangements: TGC-1, TGC-8, TGC-10, and TGC-13.

The configuration for the Interregional Distribution Companies (IDC, except for the IDC of the Far East, a decision on which is to be taken later) was approved by the Board in April 2004. In Q2-Q3 this year, preparations were made for the establishment of these companies. The Board meeting held on 1 October also approved the participation of the Holding Company in the establishment of 4 interregional distribution companies (IDCs)—Center and North Caucasus IDC, North-West IDC, Urals and Volga IDC, and Siberia IDC. These 4 IDCs will be established as wholly owned subsidiaries of OAO RAO "UES of Russia" with contributions to the authorized capital to be made in cash in the amount RUB10 million.

As the regional energos are reorganized and their assets are evaluated, shares of the distribution companies will be transferred to the IDCs.

Further actions of RAO "UES of Russia" to reform the electricity industry

In 2004 – early 2005, OAO RAO "UES of Russia", OAO "UES FGC", OAO "UES SO-CDA" intend to implement the decisions taken earlier, including the following:

The Board of Directors of RAO "UES of Russia" will consider regional energos' reform plans, matters relating to the establishment of WGCs, TGCs, and the consolidation of WGCs;

state registration of companies formed pursuant to decisions of the Board of Directors (WGCs, TGCs, IDCs);

completion of reorganization of the regional energos:

completion of the formation of WGCs, TGCs, and IDCs by transferring to them the assets spun off from regional energos;

contribution of the backbone grid assets as consideration for the additional shares in the Interregional Transmission Companies;

repurchase of regional energos' assets operated by the RDAs that are branches of OAO "UES SO-CDA".

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The Board of Directors performing the functions of the Extraordinary Meeting of shareholders of OAO "UES SO-CDA" considered the proposal to carry out an additional share issue of OAO "UES SO-CDA", which is a wholly-owned subsidiary of RAO "UES of Russia".

Currently, RAO "UES of Russia" owns property used in operational dispatching. As it is planned to liquidate the Integrated Dispatching Administrations (which are branches of RAO "UES of Russia") and Holding Company's Representative Offices, and the property in question is necessary for the work of the System Operator, it is planned to issue additional shares of OAO "UES SO-CDA" to be placed to RAO "UES of Russia".

The Board of Directors of RAO "UES of Russia" resolved to increase the authorized capital of OAO "UES SO-CDA" through issuance of 349,000,844 (three hundred and forty-nine million eight hundred and forty-four) additional registered ordinary shares, par value RUB1 per share, for a total value of RUB349,000,844 (three hundred and forty-nine million eight hundred and forty-four Rubles). The additional shares are to be placed through closed subscription to RAO "UES of Russia" at a price to be determined to the Board of Directors of OAO "UES SO-CDA". The consideration for the shares will be paid in money, property, including property rights. The shares are to be paid in full at the time of placement.

The Board of Directors approved the purchase by RAO "UES of Russia" of at least 329,000,844 (three hundred and twenty-nine million eight hundred and forty-four) registered ordinary shares of OAO "UES SO-CDA", par value RUB1 per share, for a total value of RUB349,000,844 (three hundred and forty-nine million eight hundred and forty-four Rubles). The price of the shares will be set by the Board of Directors of OAO "UES SO-CDA". Such price may not be higher than the market value determined by an independent appraiser (RUB1.50 per share).

The Board of Directors determined the value of property being conveyed by OAO RAO "UES of Russia" in consideration of the additional shares being placed by OAO "UES SO-CDA" at RUB493,501,266 (four hundred and ninety-three million five hundred and one thousand two hundred and sixty-six Rubles).

The Board also approved the Contract of Purchase/Sale of shares in OAO "UES SO-CDA", which constitutes an interested party transaction.

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The Board of Directors of RAO "UES of Russia" approved the establishment of OAO "TGC-10" as a wholly owned subsidiary, with regional energos' shareholders subsequently becoming shareholders in OAO "TGC-10".

The Board approved the lease of the generation and heating facilities to OAO "TGC-10", except for the assets to be transferred to the generation companies of the wholesale electricity market (WGCs). The assets of the following companies are to be transferred to OAO "TGC-10": OAO "Tyumenenergo" (after the reorganization of OAO "Tyumenenergo", the generation and heating network assets of OAO "Tyumen Regional Generation Company"), OAO "Chelyabenergo" (after the reorganization of OAO "Chelyabenergo", the generation and heating network assets of OAO "Chelyabinsk Generation Company"), OAO "Kurganenergo" (after the reorganization of OAO "Kurganenergo", the generation and heating network assets of OAO "Kurgan Generation Company").

The generation assets will be leased to OAO "TGC-10" on the following conditions:

The authorized capital of OAO "TGC-10" will be RUB10,000,000 (ten million Rubles) divided into 1,000,000,000 (one billion) registered ordinary shares, par value RUB0.01 (one kopeck) per share.

The shares are to be paid for within one month after the state registration of OAO "TGC-10";

Payment for the shares is to be made in cash.

The Board of Directors approved the establishment of OAO "TGC-8" as a wholly owned subsidiary, with regional energos' shareholders subsequently becoming shareholders in OAO "TGC-8". The authorized capital of OAO "TGC-8" will be RUB10,000,000 (ten million Rubles) divided into 1,000,000,000 (one billion) registered ordinary shares, par value RUB0.01 (one kopeck) per share.

The Board approved the lease of the generation assets of the following companies to OAO "TGC-8": OAO "Astrakhanenergo" (after the reorganization of OAO "Astrakhanenergo", the generation assets of OAO "Astrakhan Regional Generation Company"), OAO "Volgogradenergo" (after the reorganization of OAO "Volgogradenergo", the generation assets of OAO "Volzhskaya Generation Company"), OAO "Kubanenergo" (after the reorganization of OAO "Kubanenergo", the generation assets of OAO "Kuban Generation Company"), OAO "Rostovenergo" (after the reorganization of OAO "Rostovenergo", the generation assets of OAO "Rostov Generation Company"), Kaspiyskaya CHPP and Makhachkalinskaya CHPP of OAO "Dagenergo" (after the reorganization of OAO "Dagenergo", the generation assets of OAO "Dagestan Heat Generation Company"), and Kislovodskaya CHPP of OAO "Stavropolenergo" (after the reorganization of OAO "Stavropolenergo", the generation assets of OAO "Stavropol Heat Generation Company").

The Board of Directors instructed representatives of OAO RAO "UES of Russia" taking part in the Board meetings of the above companies to vote FOR the approval of the following agenda of the general meetings of shareholders of the companies: "Approval of the interested party transactions".

Subject to consent of the minority shareholders, the formation of OAO "WGC-8" will be completed through merger of the regional generation companies (RGCs) spun off from OAO "Astrakhanenergo", OAO "Volgogradenergo", OAO "Dagenergo", OAO "Kubanenergo", OAO "Rostovenergo", and OAO "Stavropolenergo", to which the generation assets are to be transferred in accordance with the separation balance sheets, and which will act as legal successors to the corresponding regional energos under the lease agreements.

Alternatively, the payment for the additional shares in OAO "TGC-8" will be made in form of shares of OAO "Astrakhan Regional Generation Company", OAO "Volzhskaya Generation Company", OAO "Dagestan Heat Generation Company", OAO "Kuban Generation Company", OAO "Rostov Generation Company", OAO "Stavropol Heat Generation Company", including the shares held by OAO RAO "UES of Russia".

The Board of Directors instructed the Management Board of RAO "UES of Russia" to hold additional consultations with the Federal Antimonopoly Service in the process of conclusion of the lease agreements.

On the proposal of the Chairman of the Management Board of OAO RAO "UES of Russia" Anatoly Chubais, the Board resolved to postpone considering the establishment of OAO "TGC-1" until the next Board meeting. The Board took into account the request to that effect made by Fortum, a minority shareholder of OAO "Lenenergo", in order to further examine the plan for the establishment of TGC-1.

Anatoly Chubais said that, according to the Fortum representative, Fortum did not generally object to the establishment of TGC-1 using leasing arrangements, but requested to be given more time to look into the plan in detail.

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The Board of Directors of RAO "UES of Russia" heard and noted the report on the analysis carried out by the Strategy and Reform Committee under the Board of Directors of the method used in the calculation of ROTA without taking into account the target investment funds. This study had been commissioned by the Board of Directors of the Holding Company.

Besides, the Board noted the report on the activities of the Management Board of the Holding Company in Q3 2004 and approved the plan of work of the Management Board of RAO "UES of Russia" for Q4 2004.

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The Board of Directors deemed it advisable for OAO "Bureyskaya HPP" to repurchase its shares held by the Amurskaya Region Administration.

At its meeting held on 16 June 2004, the Board approved the increase in the authorized capital of OAO "Bureyskaya HPP" and the purchase by RAO "UES of Russia" of the additional share issue of the power plant in order to provide the Holding Company's funds for the construction of the Bureyskaya HPP. The EGM of OAO "Bureyskaya HPP" held on 28 July 2004 approved the increase of the power plant's authorized capital and the additional share issue valued at RUB17,559,060,840. The shares will be placed through closed subscription (private placement) to OAO RAO "UES of Russia". As a result of the additional share issue, the stake held by RAO "UES of Russia" in OAO "Bureyskaya HPP" will grow to 94% from 74%.

As the stake held by the Amurskaya Region Administration in this case may decrease from 5.0% to 1.07%, the regional authorities demanded the repurchase of 24,613,185 shares in OAO "Bureyskaya HPP" held by them at RUB11.3 per share for a total value of RUB278,128,990. Due to the lack of funds, the regional authorities do not intend to use their pre-emptive right to purchase the additional shares pro rata to the number of shares held by the region, as provided by Article 40 of the Federal Law On Joint-Stock Companies.

The Board of Directors noted the information on the procedure for share repurchase by the Company established by the applicable laws. Under Article 75 of the Federal Law on Joint-Stock Companies, shareholders of OAO "Bureyskaya HPP" (including the Amurskaya Region authorities) are not entitled to tender shares for repurchase to the Company in this particular situation.

The Board of Directors instructed the Management Board to take steps designed to protect the interests of shareholders of OAO RAO "UES of Russia" and OAO "Bureyskaya HPP" relating to the completion of the construction of the power plant, including the registration of the additional share issue of OAO "Bureyskaya HPP".

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The Board of Directors instructed representatives of OAO RAO "UES of Russia" on the Boards of Directors of subsidiaries and dependent companies of OAO RAO "UES of Russia" (SDCs) to vote FOR the approval of the following items on the agenda of general meetings of SDCs' shareholders:

On payment (declaration) of dividends in respect of first nine months of 2004, and other matters relating to the payment of dividends in respect of the first nine months of 2004.

The Board of Directors instructed the Management Board of RAO "UES of Russia" to approve the list of SDCs of RAO "UES of Russia" in which extraordinary meetings are to be held in order to approve (declare) the dividends in respect of the 9 months of 2004.

According to the schedule of SDC restructuring, in December 2004 – Q1 2005, unbundling is expected to be completed at 32 regional energos*. As a result of the regional energos' restructuring the following entities will be established: a generation company, a trunk grid company, a distribution grid company, an energy retail company, and a management company. The regional energo's "brand" in most cases will be owned by the distribution grid company.

Under the laws in force, in the process of reorganization of a company through spin-off, the net profit is not distributed to the companies established as a result of such reorganization, remaining with the company being reorganized (the brand-owner). Therefore, all 2004 net profit of the existing regional energos, which is a source of dividend payments, will be reflected only in the financial statements of the company being reorganized (as a rule, the distribution grid company). Accordingly, the AGMs of the reorganized regional energos in May-June 2005, when the reorganization is to be completed, the payments may be effected only by the company being reorganized (as a rule, the distribution grid company).

As the reorganized company will be much smaller than the regional energo before the unbundling, the dividend payment in respect of 2004—if the amount of such dividends is quite large—may adversely affect the financial position of the 'brand-owning' company. In order to reduce the financial burden of the company being reorganized, the Board of Directors of RAO "UES of Russia" deemed it advisable for the above regional energos to pay dividends in respect of the first 9 months of 2004.

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* OAO "Kirovenergo", "Orelenergo", "Chuvashenergo", "Marienergo", "Yarenergo", "Volgogradenergo", "Kostromaenergo", "Tambovenergo", "Tverenergo", "Rostovenergo", "Smolenskenergo", "Astrakhanenergo", "Dagenergo", "Lipetskenergo", "Ryazanenergo", "Permenergo", "Kurskenergo", "Udmurdenergo", "Kurskenergo", "Mosenergo", "Buryatenergo", "Chitaenergo", "Karelenergo", "Mordovenergo", "Nizhnovenergo", "Penzaenergo", "Vladimirenergo", "Ivenergo", "Chelyabenergo", "Altayenergo", "Tyumenenergo", "Orenburgenergo", "Khakasenergo".

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The Board of Directors of RAO "UES of Russia" approved the holding by the member of the Management Board of RAO "UES of Russia", Managing Director of Business Unit 1 Mikhail Abyzov of the position of Board member at OAO "WGC-5".