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Press-release

RAO UES Board of Directors Holds its Regular Meeting

Moscow. 18 January 2008. At its meeting held today, the Board of Directors of RAO "UES of Russia" decided to create the Strategy Committee of the Board of Directors of OAO "UES SO-CDA".

This decision was taken by the Board of Directors in the course of discussion of the energy market participants' involvement in controlling the compliance by the System Operator with the wholesale electricity market rules and regulations.

Currently, such control is exercised by NP "ATS" under an agreement made with the System Operator pursuant to the provisions of the Federal Law On the Electricity Industry. Under the agreement, the System Operator is required to periodically provide detailed reports to ATS on the functioning of the Unified Energy System of Russia, and to give argumented comments if ATS has issues with the data submitted.

The report on the control of the System Operator's activities is submitted on a quarterly basis for review by the Supervisory Board of NP "ATS", which consists of representatives of generation companies, energy retail companies, and electricity consumers. A summary of such report is subsequently published. Another important element of the control system is the participation of the ATS head in the System Operator's Board of Directors.

Also, work is currently underway to finalize the Wholesale Electricity and Capacity Market's rules designed to further formalize the load of power units by the criterion of minimizing the electricity price for consumers.

The RAO UES Board of Directors noted that it is necessary to preserve the existing mechanisms of control over the System Operator's activities by the market participants after the RAO UES reorganization is completed.

Under the applicable Russian laws, the state is to secure a 100 percent stake in the System Operator's capital after the electricity sector restructuring is completed. This means that the System Operator's Board of Directors will be elected by the country's energy-related ministries and agencies.

In this connection, the Board of Directors gave the RAO UES Management Board a task to explore whether it would be possible for a representative of Non-profit Partnership "Market Council" to take part in the System Operator's Board. NP "Market Council" will be created on the basis of NP "ATS" to represent the electricity industry's new participants.

Also, it is planned that a Strategy Committee will be created in the System Operator's Board, which will comprise representatives of the state authorities, NP "ATS" (NP "Market Council"), generation and grid companies, major power consumers, System Operator management, experts and representatives of other organizations, if a resolution to that effect is taken by the System Operator's Board of Directors.

The Strategy Committee will be responsible for providing recommendations for the System Operator's Board of Directors and Management Board on a broad range of issues, including those related to measures needed to develop the Unified Energy System of Russia (electricity consumption growth forecasts, control of implementation of investment projects in the sector, the launch of a system services market, etc.), as well as those designed to improve the System Operator's activities (implementing innovations in the System Operator's activities, information disclosure, analysis of proposals relating to streamlining the internal workflows).

The Board of Directors instructed the Management Board of RAO "UES of Russia" to initiate the corporate acts needed to create the Strategy Committee at the System Operator, including the drafting of the Committee's rules and regulations and nominating candidates for the Committee.

The Management Board of RAO "UES of Russia" was also given the task to submit to the Company's Board of Directors, not later than April 2008, its proposals on the establishment of a similar committee of the FGC's Board of Directors.

The Board of Directors postponed until its next meeting the review of the proposal on the repurchase by the System Operator of its shares from RAO "UES of Russia" and their subsequent cancellation.

***

The RAO UES Board resolved not to limit the number of additional shares to be issued by OAO "TGC-2"* to the amount of funds needed to finance its investment programme (RUB9 billion).

In September 2007, the Board approved the programme for the issuance of new shares by OAO "TGC-2". Under the programme, the company was to raise RUB9 billion in funds by selling up to 440,550,372,372,763 ordinary shares, RUB0.01 par value each (which makes 39.60 percent of the company's capital before the offering and 28.37 percent of its capital after the offering).

The Board also approved simultaneous sale of 372,338,967,050 shares attributable to the "government stake" (which makes 33.47 percent of the company's capital before the offering). The price at which the "government stake" shares will be sold must not be lower than the price of the new shares.

In the course of preparation for the issuance and sale of new TGC-2 shares, it became clear that the strategic investors are interested in the proposed transactions. This makes it possible to expect serious competition among the potential buyers willing to acquire a majority stake in TGC-2. As a consequence, the offering price will be much higher than the price used to calculate the parameters of the new share issue.

However, the high placement price accompanied with the limitation of the number of additional shares to be issued to RUB9 billion will significantly reduce the number of shares to be issued and, as a result, reduce the stake of a potential investor in the company's capital. As a result of the strategic investors' interest in the "government stake" in TGC-2 may decrease.

In order to maximize the price of the offering and share sale while preserving competition among the strategic investors, the RAO UES Board today resolved not to limit the number of additional shares to be issued by OAO "TGC-2" to the amount of funds needed to finance its investment programme (RUB9 billion). This will significantly boost competition in the course of the share issuance and maximize the price not only new shares, but also of "the government stake" to be sold.

Importantly, TGC-2 shares in excess of the amount needed to raise RUB9 billion will be sold to any investor which offers the highest price per share only if such increase in the number of shares is needed for the investor to secure a maximum stake in TGC-2. The maximum number of shares approved for issuance by the RAO UES Board remains 440,550,372,372,763 ordinary shares.

The RAO UES Board of Directors instructed the Management Board hold negotiations with the TGC-2 minority shareholders 2 and the Ministry of Economic Development and Trade in order to determine the maximum amount of new shares and "government shares" in TGC-2 that may be purchased by the potential purchaser.

The additional share issuance and sale of the "government stake" is scheduled to take place March 2008. The proceeds from the additional share issue will be used to implement the company's investment projects: new capacity will be brought on line in all areas were the company operates, primarily in the Vologda, Novgorod, and Yaroslavl energy systems where the energy shortages are especially acute. The proceeds from the sale of the government stake in TGC-2 will be used to finance the deficit of the FGC investment programme.

After the sale of the "government stake and the share offering, RAO UES will hold at least 11.38% of TGC-2.


* OAO "TGC-2" was formed pursuant to the decision of the Board of Directors of 25 February 2005. The company was registered 19 April 2005. TGC-2 has under management 16 TPPs, 8 boiler plants, and 4 district heating network enterprises. The total installed capacity of TGC-2's power plants is 2,423.5 MW of electricity and 12,156 Gcal/h of heat.

***

The Board of Directors approved that the auction to sell the 50.9% stake in OAO "Mosenergosbyt" held by RAO "UES of Russia" be moved from May 2008 to March 2008. In order to achieve better results selling the Mosenergosbyt stake, the shares are to be sold in the 4th, not the 5th (final), series of auctions to sell shares in the energy retail companies, as previously planned.

OAO "Mosenergosbyt" is Russia's largest energy retail company which supplies electricity to more than 5 million customers in Moscow and the Moscow Region. In 2007, the company's productive electricity supply was 78 billion kWh, with sales revenue exceeding RUB100 billion.

Mosenergosbyt has the highest market capitalization among the RAO UES energy retail companies, with the capitalization in excess of RUB17 billion.

According to the Government's sector reform plan, RAO "UES of Russia" will cease to exist on 1 July 2008. By that time, RAO UES is to sell its stakes in 52 energy retail companies. 22 of them worth a total of RUB13 billion were sold in 2007. If any of the stakes are not disposed of before 1 July 2008, they will be transferred to OAO "RAO Energy Systems of the East" under a demerger balance sheet.

***

The Board instructed the Management Board to take steps needed to issue new shares in OAO "TGC-14"* simultaneously with the sale of the government's stake in the company.

By 4 March 2008, the RAO UES Management Board is to ensure that TGC-14 holds an EGM to approve the new share issues, specifically, resolutions regarding the number of additional shares authorized for issuance and on the capital increase.

RAO UES hold negotiations with another major shareholder in TGC-14, OAO "Norilsk Nickel Mining and Metallurgical Company" in order to arrange for the sale of the companies' stakes as a single lot.


* OAO "TGC-14" supplies heat and electricity to consumers in the Chita Region and the Republic of Buryatia. The plants comprising OAO "TGC-14" have an aggregate installed capacity of 633 MW.

Currently, the TGC-14's authorized capital amounts to RUB777,945,609 and comprises 777,945,609,114 ordinary shares, RUB0.001 par value each.

On 18 January 2007, TGC-14 shares were admitted to trading as unlisted securities on the RTS Stock Exchange, and on 26 January 2007, on the MICEX Stock Exchange. Since 8 June 2007, TGC-14 ordinary shares have been traded on the MICEX as List B securities.

***

The RAO "UES of Russia" Board of Directors made the decision to cease the company’s participation in the planning and surveying institute Dalselenergoproekt.

The main activities of Dalselenergoproekt consist of research and development, planning and surveying and design-engineering works in the field of heat and electric power. The decision to sell 100% shares in the company was made as part of the RAO "UES of Russia" strategy to cease participation in entities of the research and development sector.

Thus, RAO "UES of Russia" shall sell 4 560 common and 1 520 privileged shares in Dalselenergoproekt through open auction. The starting price of the auction shall be no less than the market price determined by an independent appraiser and approved by the Appraisal Committee of the RAO "UES of Russia" Board of Directors.

The auction may be conducted only after receiving the corresponding authorization from the RF Government, because shares in the institute were transferred to the authorized capital of RAO "UES of Russia" upon the establishment of the company.

***

The Board of Directors approved the structure of the 2007 annual report to the annual General Meeting of Shareholders of RAO "UES of Russia". It is baseв upon the structure of last-years report, but contains a number of updates.

The RAO "UES of Russia" annual report of 2007 will as usual take into consideration the priorities of the companies’ activities and major corporate events related to the restructuring of the sector in 2007: entry of the head Company into the final stage of the reorganization, development of the investment process, results of wholesale and retail electric power markets functioning according to new rules; as well as the recommendations of the Association of Investor Rights Protection and Standard&Poor’s rating agency.

In terms of updates, the Key Company Events section shall reflect upon the main events in the Holding Company’s activities over the last 10 years, as this report is to be the last annual report in the history of RAO "UES of Russia".

Taking into consideration increasing world interest in the environmental safety issue and the outstanding amount of works that RAO "UES of Russia" has conducted over this past year in the field protecting the environment, the annual report will include a new Environmental Policy section.

***

The Board of Directors made alterations to the previously approved Agreement of Experimental TPP Shareholders*.

The said document was approved by the Board of Directors on July 22, 2007. RAO "UES of Russia", the Ministry for Economic Development and Trade of the RF (MEDT) and a strategic investor – EnergoAktiv – were to be parties to this agreement.

Subsequently RAO "UES of Russia" and the MEDT drew up a model Shareholder Agreement, where the signatories are RAO "UES of Russia", System Operator and the strategic investor. Thus the Board of Directors made the decision to substitute one of the parties to the Agreement – METD – for System Operator.

Moreover, the Agreement stipulates that signatories must own at least 75% + 1 share in the authorized capital of Experimental TPP in order to provide for a special majority in the Plant’s Board of Directors and for the adoption of decisions necessary to implement the investment program.

In this context, the Board of Directors approved the acquisition by System Operator of 7 shares in the Plant with a face value of 100 rubles from RAO "UES of Russia". The selling price equals the market price determined on the basis of a conclusion of an independent appraiser and totals 179,32 rubles per share. The total value of the transaction shall be 1255,24 rubles.

As a result of this transaction System operator and the strategic investor shall jointly own 75% + 1 share in Experimental TPP.

The Board of Directors approved the decrease of the RAO "UES of Russia" (together with SGC TGC-8) stake in the authorized capital of Experimental TPP from no less than 25% + 1 share to 25% – 1 share.


* OJSC Experimental TPP was established in 2001 г. on the basis of the Nesvetay SDPP in order to create an efficient energy entity that disposes of production capacities for the development of new technologies of burning solid fuel and the subsequent recycling of wastes.

Capital assets for the modernization of Experimental TPP are being attracted through the placement of the additional issue of shares in the Plant by means of a private subscription in favor of the investor? As determined by the RAO "UES of Russia" Board of Directors decision of June 23, 2006. The main characteristics of the placement were approved by a decision of RAO "UES of Russia" Board of Directors on August 30, 2006.

EnergoAktiv, a company that is part of the ESTAR Holding Company, won the competitive procedure aimed at selecting an investor to implement the modernization project of Experimental TPP. The selection procedure was conducted on the basis of a decision of the Board of Directors of the Company of June 23, 2006. EnergoAktiv shall be responsible for providing funding to a full extent of the Experimental TPP modernization program and for the commissioning of the necessary capacities according to an agreed schedule.

***

The Board of Directors approved the decrease in the characteristics of the additional issue of Kaliningrad CHPP-2 shares.

The decision to place additional shares through a private subscription in favor of the Russian Federation to an amount of 41 854 475 shares par value 10 rubles was made by the Extraordinary General Meeting of Kaliningrad CHPP-2 shareholders on July 26, 2007. Its’ goal was to attract funds out of the 2007-2008 federal budget to finance the construction of a CHPP, pursuant to the Federal Target Investment Program.

At present 5 493 004 additional Kaliningrad CHPP-2 shares have been placed in favor of the State to a sum of 55 million rubles, which is provided for by the 2007 federal budget.

Pursuant to the RAO "UES of Russia" reorganization scheme Kaliningrad CHPP-2 shall become part of the structure of one of the target companies – Inter RAO UES – before April 30, 2008. Legislation stipulates that the placement of additional shares must be completed as of this date. As it is not planned to provide federal budget funding for this before April 30, 2008, the Board of Directors made the decision to limit the amount of additionally-issued shares to the volume of shares already placed.

***

The Board of Directors commissioned RAO "UES of Russia" representatives to the HydroWGC Board of Directors to approve the company’s participation in the Non-Profit Partnership "Corporate Education and Science Centre of the Unified Energy System" (NP "CESC UES").

The Partnership’s main form of activity is providing educational services in the field of professional training and development of workers of electric power industry entities and energy companies.

"CESC UES" is a corporate member of the Institute of Professional Accountants and Auditors of Russia, which allows "CESC UES" to conduct accountant training programs and issue certificates of a standard type.

As part of the interaction of RAO "UES of Russia" with the international association of energy companies e8, "CESC UES" arranges trainee exchanges between foreign energy companies and RAO "UES of Russia" businesses.

HydroWGC becoming a member of NP "CESC UES" will allow it to participate in managing the Partnership and in its’ activities, as well as to use the potential of existing regional centers to train and develop skilled workers for the hydroelectric power industry on commission from HydroWGC.

***

The RAO "UES of Russia" Board of Directors reviewed a number of issues related to the activities of FGC UES.

In particular, during the meeting the Board decided it wise to implement the proposed mechanism of creating a competitive environment in the sector of technical servicing and repair works of trunk power grids, as well as the engineering sector and the construction of electric power grid facilities.

This mechanism was developed upon the commission of the RAO "UES of Russia" Board of Directors of October 26, 2007. It proposes to create a competitive environment by means of expanding the application by the FGC of competitive procedures for the selection of suppliers of such services. For example, in 2008 at least 50% of the total volume of FGC orders to conduct services on the repair and servicing of electric power grid facilities shall be fulfilled through competitive selection procedures. In 2009 this figure shall be at least 70%. Herewith, it is planned to set a minimum amount of services that FGC must buy from external companies. It shall be set at 15% for 2008 and 20% for 2009.

The creation of a competitive environment in the engineering and electric power grid facilities construction sector shall be achieved by means of setting key efficiency indicators for open joint-stock company "Centre for Engineering and Managing Construction of the Unified Energy System" *. These key indicators shall be aimed at expanding the community of contractors and suppliers attracted, as well as at decreasing the level of prices during purchase procedures.


* The decision to establish wholly-owned subsidiaries "Centre for Engineering and Managing Construction of the Unified Energy System" (CEMC UES), "Specialized Electric Power Grid Servicing Company of the UNPG" (Electrosetservice UNPG) and Main Electric Power Grid Servicing Company of the UNPG (Glavsetservice UNPG) was made by the FGC UES Board of Directors on November 14, 2007. Previously – on October 26, 2007 – FGC UES participation in the listed companies was approved by the RAO "UES of Russia" Board of Directors.

***

The RAO "UES of Russia" Board of Directors reviewed proposals submitted by FGC UES on the possibilities of reducing affiliation between Federal Grid Company, Electrosetservice, Glavsetservice and CEMC UES. The Board of Directors commissioned the preparation of these proposals at its meeting on October 26, 2007.

Measures for the registration and formation of the specified companies are planned to be completed in 2008, their positioning on the market is set for 2009. Taking this fact into consideration, as well as the forecasted rates of development of competition in the sector of technical servicing and repairs of trunk power grid facilities, the Board of Directors pointed out the expediency to reduce affiliation of FGC and Glavsetservice starting from 2010.

This in mind, the RAO "UES of Russia" Management Board has been commissioned to ensure that all measures for the improvement of the management structure, increasing the value of Glavsetservice and for the preparation of proposals on the mechanisms and ways of alienating shares in the specified company, scheduled for 2008-2009 are conducted before the completion of the final reorganization of the head company. These proposals must account for the possibility of Glavsetservice downsizing in order to increase the amount of participants of the market for technical servicing and repairs of trunk power grid facilities. It is planned to address this issue in the 1 st quarter of 2009 at an FGC Board of Directors meeting.

The RAO "UES of Russia" Management Board has also been commissioned to ensure (before the completion of the reorganization of the head company) that the issue on the expediency of decreasing affiliation between FGC and Electrosetservice is reviewed at an FGC Board of Directors meeting in the 1st quarter of 2009.

It has been deemed inexpedient to reduce affiliation between FGC and CESC UES, since the latter is being created as an ordering party of construction works for the FGC.

***

The RAO "UES of Russia" Board of Directors has commissioned the RAO "UES of Russia" Management Board to refine upon the existing mechanisms of control over Electrosetservice and Glavsetservice functioning in the 1st quarter of 2008, in particular, by means of reviewing the results of their activities at "in presentia" meetings of the FGC Board of Directors, approving business-plans for these companies, setting key performance indicators and their target values. Moreover, the Management Board has been commissioned to refine upon the mechanism of control over the activities of CEMC UES activities and the implementation of investment programs by the company.

Based on the results of reviewing this issue the RAO "UES of Russia" Board of Directors advised FGC to select 3 representatives of minority RAO "UES of Russia" shareholders each to the Boards of Directors of Electrosetservice, Glavsetservice and CEMC UES and 1 to 3 representatives of minority RAO "UES of Russia" shareholders and FAS representatives – to their audit commissions. These measures are aimed at increasing the control of FGC UES over the listed companies.

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