1 rao ues anatoly chubais, ceo davos, january 25, 2008 power sector liberalization: the russian way
TRANSCRIPT
1
RAO UES
Anatoly Chubais, CEO
Davos, January 25, 2008
Power Sector Liberalization:The Russian Way
2
1998-2008: RAO UES and Russian Power Sector
Russia is the 4th largest electricity market in the world
~5-6% of world generating capacities
One of the world’s largest markets…
One of the world’s largest markets…
… is being served by the world’s largest utility
… is being served by the world’s largest utility
Electricity
output
Heat output
Employees
1998 2008
~ 30-33% of Russia’s total
> 70% of Russia’s total
~ 670 000 ~ 470 000
3
1998-2001: Crisis Management in RAOCleaning up for the Reform Launch
In the late 1990s, RAO implemented a crisis management projectto overcome systematic financial, production and social crisis…
…yet sustainable development of the electric power industry necessitateda large-scale structural reform
Payments due by customers
Avalanche of bankruptcy claims to RAO’s leading subsidiaries
Arrears of wages and salaries to personnel
Reliability of power supply:standard current frequency
18%
>20 energy companies and power plants
3 months in average, personnel strikes, including hunger strikes
94.5% of calendar time
1998
100% since 2001
None since 1999
None since2001-2002
100% of calendar time since 2001
2001
++
RAO UES
4
Tools for accomplishing crisis management tasks
• A modern corporate governance system with all relevant mechanisms was set up
budgeting system, business planning system,KPI system with divisional structure
- were adopted
Corporate Governance
• A new team for the company’s Management Board was mobilized
• 90% of CEOs of subsidiaries were replaced (average age of CEOs went down from 60 to 50 years)
• About 50 000 people were employed and trained
• Regulatory framework for the supply system was created
• General principles for planning supply operations were introduced as well as a motivation system to ensure their abiding
HR Policy Supply Policy
Business Planning
5
Basics of the Reform: Separation of Monopolistic and Competitive Sectors
Mo
no
po
list
ic s
ecto
rs
Dispatching
Transmission and Distribution grids
Co
mp
etit
ive
sect
ors
Supply
Generation
Private propertyand
market
Government propertyand
Government regulation
6
Reform OpponentsPolitical and business elite changed their standing on the reform essence
UES
Reform
UES
Reform
Key political factions in the State Duma
Conservatively-minded energy specialists
and scientists
Majority of regional Governors and influential presidents
of republics
VIPsin the Government and
Kremlin
Majority of senators in the Federation Council
Influential oligarch groups
2000 - 2007
Majority ofminority
shareholders
7
Reform OpponentsConcerns of the minority shareholders dispelled
Imaginary and reasonable concerns of the minority shareholders of RAO UES: digest 2000
Threat of asset value dilutionThreat of “pocket privatization” of RAO
“The assets of RAO will be sold too quickly and, consequently, at a price lower than their market value, which will dilute the value of stakes held by minority shareholders”
Non-profitability of investments in the electric power industry
“Key reform-related decisions will be adopted ignoring the opinions of minority shareholders. The principal assets will go to investors that are friendly to the management of RAO”
Unclear position of the state and local authorities
“Electricity tariffs were artificially reduced and do not provide return on investment. This situation is aggravated by the customers’ systematic failure to pay”
“The state has not formulated its final position with respect to the restructuring plan. No political guarantees of the irreversibility of reform, no legal framework are in place”
The years of reform have answered all of these questions:• Active participation of minority shareholders in the development and conducting of the reform was
ensured. • The principle of assets pro rata allocation among the shareholders was implemented.
• The reform of RAO lasted longer than originally planned: quality is more important than pace.• The aggregate capitalization of new companies will be considerably higher than the value of RAO UES.
• The reform gained absolute support from the state and legislative guarantees.• Tariffs were replaced by competitive market: full liberalization is envisaged by 2011.
8
Power sector pre-reform:Double vertically integrated and overregulated…
Generation
Low voltage& High voltageGrids
Supply
73 AO-Energos High VoltageGrids
+Grid
Services
CentralisedDispatch
32 FederalPower Plants
MinorityShareholders
RussianGovernment
52% 48%
RAO UES
9
Competitive market
Government ownershipPrivate ownership
SystemOperator
Monopolistic sectors Competitive sectors
Federal Grid
Company
11
Interregional Distribution Companies
(IDCs)
Hydro OGK
Supply
6
Wholesale GenCos (OGKs)
Rosenergoatom (nuclear)
Independent GenCos
14
TerritorialGenCos (TGKs)
…Post-reform model provides competition
10
Functional unbundling Legal unbundling Ownership unbundling
The issue is not settled yet for the majority of EU countries: Ownership unbundling of VICs and spin-off of distribution grids
EU countries
Deadline for ownership unbundling of RAO UES (Federal Law No. 250, November 4, 2007)
Russia July 1, 2008
??
Power Sector:Functional, Legal and Ownership Unbundling
11
Competitive wholesale market:Supply/Demand Equation Prices
Source: Administrator of Trade System (ATS)
Average prices (Europe+Urals and Siberia), Rb/MWh
Day (Apr 07)
200
300
400
500
600
1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24200
300
400
500
600
700
01.10.07 08.10.07 15.10.07 22.10.07 29.10.07
200
400
600
800
Sep.06 Oct.06 Nov.06 Dec.06 Jan.07 Feb.07 Mar.07 Apr.07 May.07 Jun.07 Jul.07 Aug.07 Sen.07 Oct.07 Nov.07 Dec.07 Jan.08
Week and month
Year
(January 1-20)
12
Power Market DevelopmentPace of liberalization: government’s plan and actual progress
All new capacity and consumption commissioned after 2007 go to the free market
0%5%
10%15%
25%30%
50%
60%
80% 100%
0%
20%
40%
60%
80%
100%
Jan 1, 2007 Jul 1, 2007 Jan 1, 2008 Jul 1, 2008 Jan 1, 2009 Jul 1, 2009 Jan 1, 2010 Jul 1, 2010 Jan 1, 2011Sept 1, 2006
~18% (Sept 06)
~20% (Jan 08)
Excluding household consumption
actual pace of liberalization (facts and estimates)
mandatory increase of the liberalized market share
~ 25%
~35%
~40%
~60%
~70%
~90%100%
13
Electricity demand growth outlook: Mid-term and long-term view
Mid-term Long-term
Source: Ministry of Industry and Energy (Minpromenergo); UES estimates
kWh, bln
900
1,000
1,100
1,200
1,300
981
1,030
1,082
1,133
1,197
2006 2007 2008 2009 2010
Average annual increase in 2006-10: 5% (basic scenario) 5%
5,6%
3,7%
5,3%
3,9%
5%
0
2
4
6
2006-2010 2010-2015 2015-2020
Basic scenario Optimistic scenario
14
Prospects until 2030:Target Concept, General Scheme, Investment Programs
2006
2010
2020
2030
General Scheme for locating power capacity until 2020
Target Concept for Development of the Russian Electricity Power Sector until 2030
2006-2010 Investment Program
of UES Holding Company
5-year investment programsof energy companies
from 2008
2006 2010 2020 2030
15
CAPEX 2006-2010 – over 92 bn EuroSources of financing
Private investmentsState budget financing
Credits and loans Companies’ funds
Other
Euro, bn
4.8 (5%)
15 (16%)
22.8 (25%)
22.9 (25%)
26.8 (29%)
0 10 20 30 40
Total: ~92.3 bn Euro (private investments ~26.8 bn Euro)
16
Funds raised so far and yet to be raisedFrom competitive share placements and sales to strategic investors
0,30,70,040,30,4 0,40,50,80,60,20,41,5
0,72,0
3,1
1,20,4
2,4
0,31,7
1,1 0,7
4,2
2,00,7
0
10
20
30
Nov06
Mar06
May07
May07
Jun07
Sep07
Sep07
Sep07
Oct07
Oct07
Dec07
Dec07
Dec07
Jan08
Jan08
Feb08
Feb08
Feb08
Feb08
Mar08
Mar08
Apr08
Apr08
May08
May08
26,8
0,4
OG
K-5
OG
K-3
TG
K-5
TG
K-3
OG
K-5
OG
K-4
TG
K-1
OG
K-2
TG
K-8
OG
K-3
TG
K-9
TG
K-1
2
OG
K-6
TG
K-3
TG
K-4
TG
K-9
TG
K-7
TG
K-1
1
TG
K-6
TG
K-1
0
OG
K-1
TG
K-1
3
TG
K-1
4
TG
K-7
TG
K-1
2
Euro in billions
Total: ~ 26.8 bn Euro
Fact: 17.5 bn Euro
UES estimates:+ 9.3 bn Euro
17
2006-2010 RAO UES Capacity Commissioning Program
MW 2006 2007 2008 2009 2010 2006-2010
Thermal generationOGKs, TGKs, RAO UES
1 186 1 545 2 050 5 788 14 364 24 934
Hydro OGK 67 690 420 1 224 1 612 4 013
Total commissioning 1 253 2 235 2 470 7 089 15 919 28 947
0
5,000
10,000
15,000
20,000
MW
2006 2007 2008 2009 2010
18
RAO UES Investment Program for 2006-2010: Higher Demand for Suppliers’ Products and Services*
Power SectorDevelopment
Program
2010 vs. 2006 Generation equipment(Procurements of solely primary generation equipment for OGKs and TGKs):~ 21.6 bn Euro
8-fold
Electrical equipment(Procurements solely for FGC):~ 7.6 bn Euro
4-fold
Coal:~ 731 milliontonnes of coal
40%
Gas:~ 848 billioncub.m. of gas
30%
Construction materials(Solely cement expenses of TPPs and HPPs): ~ 0.3 bn Euro
R&D(Solely in thermal power sector):~ 2 bn Euro
Construction and installation(Solely in thermal power sector):~ 9 bn Euro
4.5-fold
4-fold
8-fold
* Expert estimates
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Two final chords of the reform
UES Extraordinary General Meeting (October 26, 2007)
RAO UES EGM approved the final reorganization
(more than 95.43% of the attending shareholders voted for)
Federal Law No. 250 to adjust power sector laws
in connection with RAO UES reorganization.
Federal Law No. 250(November 4, 2007)
Corporate and legal actions taken according to the plan
Coordinated
Synchronized
Transitional period of the power sector reform will end by July 1, 2008
(date of completion of the RAO UES reorganization)
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Our journey is about to end
New heights are to be conquered
1998
2008