On August 31, 2004 the Board of the RF Federal Tariff Service (FTS) considered the application of OJSC North-West Telecom for a change in local telephone connection tariffs in all branches of the company. By the decision of the Federal Tariff Service, the new local communications tariffs for the regions on the territory of which OJSC North-West Telecom operates will come into effect on October 1, 2004.

According to the proposal of OJSC North-West Telecom, if the current national telephone connection tariffs for individuals and organizations (in all branches, except Elektrosvyaz of Republic of Karelia) remain unchanged and communications tariffs are introduced with effect from October 1, 2004, on the whole the weighted average increase in the average annual tariffs for local and national telephone services would be 13%.

In accordance with the FTS’s decision the weighted average increase in the local telephone connection tariffs will be 30% for individuals and 29% for organizations.

Taking into account the change in the current national telephone connection tariffs (in the branch Elektrosvyaz of Republic of Karelia) and introduction of communications tariffs with effect from October 1, 2004, on the whole the weighted average increase in the average annual tariffs for local and national telephone services will be 10 %.

The application of OJSC NWT and the FTS’s decision are based on the rules of RF Government Resolution No. 715 of October 11, 2001 in accordance with which the tariffs may be changed on the following grounds:

• Growing tariffs to the economically justified costs adjusted for inflation;
• Necessity to cover investment expenses on the modernization and development of telephone exchange equipment, development of cable line facilities;
• Reducing the cross-subsidizing between local telephone connection tariffs for organizations and individuals.

The funds gained by OJSC NWT as the result of increased tariffs will be invested in the network development and modernization, enabling the company to reduce the waiting list for the telephone installation as well as expand the range and improve the quality of services in the region.

In 2003, as in the preceding years, the local telephone connection was unprofitable for OJSC North-West Telecom on the whole. The expenses on this service were compensated by proceeds from other services, including those not liable to regulations and not intended for social purposes (Internet, data transmission etc.). However, in these conditions OJSC North-West Telecom does not receive incomes in the volume necessary for the network development and modernization. Consequently, the company is unable to meet the existing demand, improve the quality of services and reduce current expenses on the services. Although the service for individuals is unprofitable, OJSC North-West Telecom is engaged in an active work for the development and modernization of the local telephone network. In 2004 the expenses for these purposes will be 31% greater than in 2003.

Yet, the increase in tariffs will not substantially change the share of communications expenses in the average statistical family budget (the share of these expenses will rise from 3.2% to 3.3%). For organizations, the rise in expenses is expected to be even smaller because expenses on communications services do not exceed 1% of all expenses of organizations.

The weighted average index of change in the average annual tariffs for local telephone connections will be 1.21, i.e. lower than the per capita income growth rate which according to the State Statistics Committee of Russia was equal to 22.2% in the first half of 2004 as against the same period of 2003. On the whole, the weighted average index of change in the local and national telephone service tariffs of North-West Telecom will be 1.10, which is almost time and a half lower than the inflation index for the period from the last change in tariffs (August 1, 2003).

The established tariffs will ensure the financial balance of activities of the company and enable it to introduce 317 thousand numbers, of which 77 thousand numbers will be allocated for satisfying telephone installation requests, including more than 10 thousand requests of people entitled to privileges. As of January 1, 2004, telephone installation requests for 211 thousand numbers were not satisfied.

Local telephone connection (subscription fee) for individuals*, rubles per month including VAT:

• Naryan-Mar in “Artelecom of Arkhangelsk Region" - 180
• "Artelecom of Arkhangelsk Region" - 180
• "Murmanelektrosvyaz" - 180
• "Elektrosvyaz of Republic of Karelia" - 160
• "Novgorodtelecom" - 160
• "Elektrosvyaz of Pskov Region" - 160
• "Elektrosvyaz of Kaliningrad Region" - 160
• "Elektrosvyaz of Vologda Region" - 160
• "Petersburg Telephone Network" - 170

*This table contains the local telephone connection charges in case of the subscription system of payment for local telephone services (subscription fee for the use of the subscriber’s device per month) via the subscriber’s wire line from the subscriber’s principal individual set. Special tariffs are set for shared or parallel subscriber’s devices, collective subscriber’s devices, in case of the time-rate system.

Local telephone connection (subscription fee) for organizations*, rubles per month not including VAT:

• Naryan-Mar in "Artelecom of Arkhangelsk Region" - 390
• "Artelecom of Arkhangelsk Region" - 230
• "Murmanelektrosvyaz" - 230
• "Elektrosvyaz of Republic of Karelia" - 230
• "Novgorodtelecom" - 200
• "Elektrosvyaz of Pskov Region" - 200
• "Elektrosvyaz of Kaliningrad Region" - 200
• "Elektrosvyaz of Vologda Region" - 200
• "Petersburg Telephone Network" - 250

* This table contains the local telephone connection charges in case of the subscription system of payment for local telephone services (subscription fee for the use of the subscriber’s device per month) via the subscriber’s wire line from the subscriber’s principal individual set. Special tariffs are set for shared or parallel subscriber’s devices, collective subscriber’s devices, for mini-exchanges connected to the general network, in case of the time-rate system.

National telephone connection

The effective national telephone connection tariffs for individuals and organizations (with account taken of the proposal of NWT concerning the branch Elektrosvyaz of Republic of Karelia) are established as the limit ones and the operator is given the right to reduce the tariffs on its own, depending on the day, hour, and volume of services.