Formation of Interregional Distribution Grid Company JSC IDGC of the Center

December 20,2007

2

Strategy of cost evaluation of IDGC/DGC and main proposals

3

Evaluation Strategy

Date of evaluation – June 30, 2007 . Termination of prognostic period – 2015

Main proposals - Switch during 2010-2012 to RAB regulation- - Restriction of transfer tariff growth in 2010-2014 - Payment for connection is taken into account in proceeds, capital ,

investments but is not considered in the capital base,

100%DCF

Calculation is based on the net asset method.Market value = RCN (full replacement cost) t

– Physical depreciation– External depreciation

External depreciation is defined as correlation between the existing capital investmentsand the required ones.

Expense approach was not used because it is impossible to define the amount of external Depreciation during absence of the technical audit and detailed information ( load,

transfer volume, etc) on each center of the distribution grid.

,

.

0%Expense approach

Method of similar companies was not applied because the selected companies that render services on Transfer of electric energy do not possess characteristics necessary for applying the comparative

approach – there is considerable difference in the scale, maturity, level of diversity and organisation models of their business. The transition method was not applied because the data on

Purchase contracts of distribution grid assets is absent due to the business monopoly.

- ,

–

.

0%Comparative

approach

4

Main propositions of DCF evaluation

* Plan of organic growth** On the basis of average historical exceeding of the tariff growth over inflation.

*

Regulation

2H2007 2008 2009 2010 2011 2011 2012 2013 2014 2015

Expenses + Transition period RAB regulation

Macroeconomicindicators Deloitte

Electric energy supply Business plans of DGC Growth rates included (Deloitte)*

Volume of losses Business plans of DGC By 2015 is to enter the target levelг

Payment of losses Business plans of DGC According to day-ahead prices (Deloitte)

Operational expenses Business plans of DGC- Inflation growth rate included

Capitalinvestments Business plans of DGC-

At the amortization level of the previous year

Restriction of Tariff growth Business plans of DGC- At inflation growth rate of + 4%**

Capital base Fixed assets 1H2007 (re-estimated according to Russian

Accounting Standards) + investments (without payment for Connection) + circulating capital

5

Calculation of tariffs according to the method of the investment capital profitability (RAB)

It is supposed that from 2010 to 2012 Expenses+ strategy of tariff regulation on transfer of e/energy through distribution grids will be replaced by the method of profitability of the invested capital ( RAB –return on Regulatory Asset Base).

The essence of RAB strategy is guarantee of full return of the means invested into the assets of the company during the fixed period that corresponds to the terms of validity of the assets and reception of the stable income the level of which is defined by the regulator that must conform to the risk profile of DGC and guarantee attractiveness of the branch for the investors.

Operational expenses include all the field costs of the company except for amortization of the fixed assets, intangible assets.

Return on the capital base must guarantee reproduction of the assets that are effectively used at transfer of electric energy through DGC’s grids.

Profit of the capital base is defined by the norm of profitability (regulatory WACC) fixed by the regulator the stake of which will be fixed for the long-term period of regulation equal to all DGC.

= + +Necessary gross return

by RAB method

Operational expenses

Return on the capital base

Profit of the capital base

Capital base x WACC

(regulatory)

6

Calculation of the capital base for tariff calculation by RAB method

= + +Regulatory

capital base (as of the

beginning of 2010)

Initial capital as of the beginning of

2010

Cost of capital investments for 2H2007-2009.

Circulating capital as of the

beginning of 2010

For the purpose of correct prognosis of indicators of the operational activity of the distribution grid companies after switch to the system of regulation of their tariffs on the basis of RAB method, calculation of the regulator capital base for the moment of the planned introduction of new rules of tariff design (beginning of 2010) was realised.

The initial capital is defined as the cost of the fixed assets that are on the balance of the company as of June 30,2007 and that were re-estimated according to Russian Accounting Standards for the end of 2009.

Capital investments for 2H2007-2009 from business plans of the companies

Circulating capital is defined on the basis of the existing circulation factors and their correspondence to average branch indicators during the accounting period.

In the following years of the regulation period the regulatory capital base is calculated by the following way:

= +-Regulatory capital base

Regulatory capital base of the previous

year

Investments on the level of amortization of the previous year

Change of the

circulating capital

+Amortization

7

• The initial capital used for defining of the regulatory capital base as of the beginning of 2010 is defined as the full cost of asset replacement with regard of their physical depreciation:

The initial capital is defined proceeding from the current legislation concerning estimation of cost of the fixed assets for the purpose of book keeping

Only the industrial assets are included into initial base of the invested capital (OL, substations, transformer substations), non-profile assets are not considered at calculation of the capital base

The investments that were realised at the expense of payment for technical connection are not included into the capital base in order to avoid double calculation.

Full cost of replacement is defined as cost of production or construction under the current conditions of the similar new object that by its functional characteristics is as much as possible similar to the estimated object.

• Physical depreciation is price decrease due to depreciation, dilapidation and aging, and also deterioration of properties that cannot be eliminated at the expense of the current service.

Calculation of the capital base for tariff calculation by RAB method

8

Discount rate and regulatory norm of profitability

Cost of the owned capital Risk-free rate (nominal) 5.21%

Market premium 5.50% Beta (unlevered) 0.87

Corrected Beta ratio 0.60 Country risk 0.01

Specific risk for the reformation period 0.00%Final cost of the owned capital of the company 10.95%

Premium for small-cap 2.28% – 6.27%Debt capital cost

Cost of debt funds (before taxation) 10.32%Tax profit rate 24.00%Cost of debt funds (after taxation) 7.84%

Structure of the capitalTarget correspondence of debt to owned capital 61.00%

WACC for discounting 11.18% – 13.67%Regulatory WACC before taxation 9.78%

Regulatory WACC after taxation 12.86%

Calculation of WACC rates

9

Macroeconomic assumptions for model building

The main cost items are predicted on the basis of price indexes in the industry of the RF.

Wage expenses are predicted in accordance with the pay indexes

Prognosis of electric energy losses in physical terms is based on linear variation of the given indicator during the horizon period and achievement of the target indicator by 2015

Prognosis of electric energy losses in percent to net supply for 2015 is provided by JSC UES FGC

Calculation of flat cost is based on the following assumptions:

Macroeconomic assumptions

Indicators6 months of

20072008 2009 2010 2011 2012 2013 2014 2015

Inflation in the RF,CPI 4,50% 8,00% 7,60% 7,10% 6,50% 6,00% 5,50% 4,50% 4,00%

Cumulative inflation index 108,00% 116,20% 124,50% 132,50% 140,50% 148,20% 154,90% 161,10% 167,50%

Price index in the industry of the RF, PPI

4,90% 9,00% 8,00% 7,00% 6,50% 5,50% 5,00% 4,00% 3,50%

Pay index in the RF 10,10% 13,00% 12,00% 11,00% 13,00% 9,00% 8,00% 7,00% 7,00%

Exchange rate ruble/ US dollar (average annual)

26,50 27,20 28,20 29,00 29,10 30,04 30,85 31,39 31,79

Inflation in the USA, CPI 1,80% 2,50% 2,50% 2,50% 2,50% 2,50% 2,50% 2,50% 2,50%

Source: documents adopted by the Evaluation Committee under the Board of Directors of JSC RAO UES of Russia

10

Review of indicators of DGC that are included in the zone of responsibility of JSC IDGC of the Center

11

IDGC of the Center

-

10 000

20 000

30 000

40 000

50 000

60 000 ВН

СН

НН

Length of OL in DGC, kmGeographical position of IDGC

Refusals of connection, МВА

Investment requirements of DGC, billion rublesDepreciation of the fixed assets, %

Data: Business plans of DGC

Summed installed capacity of TCP and Sb, MVA

2 734

743

1 513 1 349 1 313

1 015 792

1 798

939

1 545

904

2 877

2 209

4 281

1 627

3 216

2 364

1 640

2 978

2 399

3 880

2 782

-

1 000

2 000

3 000

4 000

5 000

CTS capacity

Sb capacity

Belgorodenergo, 7.3

Bryanskenergo 1.9

Voronezhenergo, 2.9

Kostromaenergo, 1.4

Kurskenergo, 2.8

Lipetskenergo, 4.7

Orelenergo 1.4

Smolenskenergo, 2.7

Tambovenergo 1.3

Twerenergo, 1.8

Yarenergo, 2.6

40,00%

47,50%

55,00%

62,50%

0 150 300 450

12

10,0% 12,5%17,9% 21,0%

7,2% 6,2%

6,9%8,8%13,7% 12,3%

13,0%10,2%6,8% 8,2%

4,5%6,3%9,1% 9,5%

9,1%7,7%7,0% 7,3%

12,4% 9,6%7,6% 6,4%

3,8% 4,6%10,2% 11,2%5,8% 7,6%

7,8% 7,0% 5,5% 4,7%

13,7% 12,5%8,2% 8,7%

6,9% 6,9%12,8% 10,8%

YarenergoTverenergoTambovenergoSmolenskenergoOrelenergoLipetskenergoKurskenergoKostromaenergoVoronezhenergoBryanskenergoBelgorodenergo

Length 367.7 thous.km.*

Power 1 318,8 thous.

c.u.*

Productive supply 27 958,2 Mio.kWh **

Proceeds15 820,6 mln.rbl. **

* Data as of the end of the 1st half of 2007** for the 1st half of 2007.

IDGC of the Center

13

4 109,6

1 920,4

2 202,5

1 216,2

2 585,8

4 427,0

1 253,3

2 696,8

1 273,4

1 750,2

2 359,6

3 209,7

730,0

14,0

228,7

187,2

316,3

170,0

5,5

0,0

0,0

285,9

0 2 000 4 000 6 000 8 000

Inv estment program, thous.rbl.

Belgorodenergo

Bry anskenergo

Voronezhenergo

Kostromaenergo

Kurskenergo

Lipetskenergo

Orelenergo

Smolenskenergo

Tambov energo

Tw erenergo

Инвестпрограмма без тех присоед. Тех присоединение

0,26

0,14

0,14

0,10

0,15

0,27

0,08

0,09

0,11

0,09

0,22

0,0 0,1 0,2 0,3

Belgorodenergo

Bryanskenergo

Voronezhenergo

Kostromaenergo

Kurskenergo

Lipetskenergo

Orelenergo

Smolenskenergo

Tambovenergo

Twerenergo

Yarenergo

7,7%

5,2%

10,7%

16,9%

10,1%

8,7%

13,7%

18,1%

7,7%

15,3%

7,6%

0% 5% 10% 15% 20%

Belgorodenergo

Bry anskenergo

Voronezhenergo

Kostromaenergo

Kurskenergo

Lipetskenergo

Orelenergo

Smolenskenergo

Tambov energo

Tw erenergo

Yarenergo

Investment program of DGC for 2Н2007-2010, mln rbl. Amount of losses at transfer of e/e in 2006, %

Correlation – transfer of e/e (mln kW*hour)/ length of OL (km) in 2006.

IDGC of the Center

9 580,4

3 767,5

7 289,1

2 485,0

5 152,0

6 973,6

2 248,8

3 265,5

3 038,1

4 500,7

5 743,4

795,4

871,4

812,8

206,8

508,6

580,0

661,5

357,4

719,7

253,8

470,8

1 000 2 500 4 000 5 500 7 000 8 500 10 000 11 500

Belgorodenergo

Bryanskenergo

Voronezhenergo

Kostromaenergo

Kurskenergo

Lipetskenergo

Orelenergo

Smolenskenergo

Tambovenergo

Twerenergo

Yarenergo

Передача э/э

Потери э/э

Productive supply and losses of e/e in DGC in 2006, mln. kWhour

Data: DGC Business plans

14

Results of evaluation

15

JSC Bryanskenergo7,0%

JSC Kostromaenergo5,3%

JSC Kurskenergo8,9%

JSC Lipetskenergo8,5%

JSC Orelenergo3,9%

JSC Smolenskenergo6,5%

JSC Tambovenergo3,8%

JSC Belgorodenergo25,4%

JSC Voronezhenergo16,6%

JSC Twerenergo5,1%

JSC Yarenergo9,0%

* On the basis of the assumption that all DGC will take resolutions on reorganisation of the companies in the form of connection to the corresponding IDGC, without consideration of the stake of the existing IDGC.

Stake of RAO UES – 50.23%

Stake of DGC at technical connection to IDGC of the Center*

16

Calculated ratios of conversion/exchange

ORS/PRSJSC IDGC of the CenterJSC Belgorodenergo 78 000 / 738 687 280JSC Bryanskenergo 78 000 / 18 572 663JSC Voronezhenergo 78 000 / 7 453 771JSC Kostromaenergo 78 000 / 327 431 JSC Kurskenergo 78 000 / 212 429JSC Lipetskenergo 78 000 / 1 798 460JSC Orelenergo 78 000 / 542 455JSC Smolenskenergo 78 000 / 918 754JSC Tambovenergo 78 000 / 73 076JSC Twerenergo 78 000 / 371 625

Ratios of conversion/exchageCompany

17

Appendices

18

IDGC of the Center

OL 110-150 kV, km OL 35 kV, km OL 1-20 kV, km OL 0,4 kV, kmRate of OL110-150

kV, %Rate of OL 35 kV,

%Rate of OL 1-20

kV, %Rate of OL 0,4 kV,

%

JSC Belgorodenergo 1 645 2 450 17 454 15 333 8% 8% 10% 11%JSC Bryanskenergo 1 751 1 755 12 333 10 481 8% 6% 7% 7%

JSC Voronezhenergo 3 105 3 685 20 452 23 059 15% 12% 12% 16%

JSC Kostromaenergo 1 770 2 549 11 497 9 014 8% 8% 7% 6%

JSC Kurskenergo 1 909 2 824 15 007 13 735 9% 9% 9% 9%JSC Lipetskenergo 1 517 2 311 11 706 10 339 7% 8% 7% 7%JSC Orelenergo 1 361 1 864 12 877 11 712 6% 6% 8% 8%JSC Smolenskenergo 2 561 3 770 19 120 12 118 12% 12% 11% 8%

JSC Tambovenergo 1 876 3 155 11 896 11 803 9% 10% 7% 8%JSC Twerenergo 2 720 3 988 26 317 17 321 13% 13% 15% 12%JSC Yarenergo 1 030 2 084 12 024 10 396 5% 7% 7% 7%

Total 21 245 30 435 170 683 145 311 100% 100% 100% 100%

Productive supply of e/e (with regard of

losses) in 2006, mln kW*hour

Productive supply of e/e (with regard of

losses) for the 1st half of 2007, mln kW*hour

Losses in 2006, mln kW*hour

Amount of losses in 2006, %

Proceeds in 2006, thous.rbl.

Proceeds for the 1st half of 2007, thous.

rbl.

Tariffs on transfer of e/e in 2006, rbl/MW*hour

JSC Belgorodenergo 9 580,4 5 006,4 795,4 7,7% 4 962 756,7 3 328 613,4 480,2

JSC Bryanskenergo 3 767,5 1 920,7 206,8 5,2% 1 527 536,0 1 389 297,9 400,0JSC Voronezhenergo 7 289,1 3 636,3 871,4 10,7% 2 756 784,1 1 620 382,7 372,8JSC Kostromaenergo 2 485,0 1 271,4 508,6 17,0% 1 664 313,8 995 249,7 640,6JSC Kurskenergo 5 152,0 2 556,0 580,0 10,1% 2 398 718,0 1 216 634,4 460,9JSC Lipetskenergo 6 973,6 3 475,1 661,5 8,7% 2 524 778,5 1 520 684,2 333,5JSC Orelenergo 2 248,8 1 075,8 357,4 13,7% 1 085 440,0 732 802,0 473,7JSC Smolenskenergo 3 265,5 1 623,1 719,7 18,1% 2 316 465,9 1 203 321,6 660,2JSC Tambovenergo 3 038,1 1 527,6 253,8 7,7% 1 423 596,0 737 977,0 463,9JSC Twerenergo 4 500,7 2 292,6 812,8 15,3% 2 378 545,0 1 370 221,3 514,6JSC Yarenergo 5 743,4 3 573,2 470,8 7,6% 2 872 758,8 1 705 374,3 481,8Total 54 044,1 27 958,2 6 238,2 25 911 692,6 15 820 558,5

Length of OL by classes of voltage, km

Economic indicators of work of DGC for 2006 and 1st half of 2007 *

*Preliminary data for the 1st half of 2007 Source: Business plans of DGC

19

Technological connection- refusals in connection for 2006 – 1st half of 2007.

Refused connection to DGC, (2006 ), kW

Refused connection to DGC (1st half of 2007 ), kW

JSC IDGC of the CenterJSC Belgorodenergo 0 0JSC Bryanskenergo 0 1 287JSC Voronezhenergo 168 0JSC Kostromaenergo 0 0JSC Kurskenergo 0 0JSC Lipetskenergo 12 358 16 360JSC Orelenergo 29 000 10 983JSC Smolenskenergo 0 0JSC Tambovenergo 0 0JSC Twerenergo 6 936 2 046JSC Yarenergo 0 0Total 48 463 30 676

Source: data of UES FGC

20

System of standard units

According to the System of standard units for distribution of the general tariff proceeds by classes of voltage adopted by Decree N 25/3 of the Energy Commission of the RF as of May 12, 2000 as appendix to the Strategy of calculation of the amount of payment for the services on transfer of electric energy:

Amount of the overhead power transmission lines (OPTL) and cable power transmission lines (CPTL) is defined in standard units depending from length, voltage,design and material of the supports *:

PTL Voltage, kV Amount of chains on the support Material of the supportsAmount of standard units for 100 km of

OL right-of-way

OPTL 110-150 1 wood 180Metal 160

ferroconcrete 1302 metal 270

ferroconcrete 18035 1 wood 170

metal 140ferroconcrete 120

2 metal 180ferroconcrete 150

1-20 1 wood 160Wood on ferroconcrete stubs 140

ferroconcrete, metal 1100,4 1 260

220150

CPTL 110 230020-35 4703-10 350

Up to 1 kV 270

Amount of substations, transformer substations (TS), complex transformer substations (CTS),etc. *:

Name Measurement unit Amount of standard units for 1 measurement unit110-150 kV 35 kV 1-20 kV

Substation SB 105 75 -

Power transformer (one- or three-phase) or reactor or booster transformer

Equipment unit 7,8 2,1 1,0

One-transformer TSB, CTSB TSB, CTSB - - 2,3

Two-transformer TSB, CTSB TSB, CTSB - - 3,0

One-transformer substation 34/0,4 kV SB - 3,5 -

* Extracts on certain kinds of equipment are presented