Information on the Electricity Market Structure

The primary market for sales of products generated by the Company’s branches is the Wholesale Electricity and Capacity Market. In addition to this, the Company supplies electric power, heat and water to local consumers and enterprises on the retail market, including housing and public utility organizations. Electricity retail markets are a sector for distributing electricity outside the wholesale market with the participation of electricity consumers.

The Wholesale Electricity and Capacity Market (hereinafter referred to as the Wholesale Market or OREM) is the sector for distributing electricity and capacity within the Unified Energy System of Russia in the Russian Federation economic area with the participation of major producers and major buyers of electric power which have obtained the status of Wholesale Market entities and operate on the basis of the Wholesale Market regulations.

Areas are unified as prices zones within the wholesale market: The First Price Zone (Europe and the Urals) and the Second Price Zone (Siberia).

Generating capacity (hereinafter referred to as capacity) is traded in order to ensure reliable and uninterrupted supply of electricity on the Wholesale Market. It is a special product, the purchase of which provides market participants with the right to claim availability of generating equipment for power generation of a fixed quality to the amount required to meet the participant’s electricity needs, taking into account the necessary reserve.

The Wholesale Market is a system of contract relations between participants/entities interconnected by a unified technological process of the generation, transmission, distribution and consumption of electricity and capacity in the UES of Russia. Wholesale Energy Market entities are the companies which purchase and sell electricity (capacity) and/or provide infrastructure services on the Wholesale Energy Market (System Operator  “SO UPS”, JSC and the Federal Grid Company “FGC UES” JSC).

The functioning of the Wholesale Market commercial infrastructure is ensured by the Not-for-Profit Partnership Market Council for Arrangement of the Effective System of Electricity and Capacity Retail and Wholesale Trade (hereinafter – NP Market Council) established in accordance with the Federal Act On Electric Power.

Responsibility for arrangement of purchases and sales of electricity on the Wholesale Market (trade system of the Wholesale Market) is borne by the Joint-Stock Company Trade System Administrator of the Wholesale Electricity Market Transactions (JSC "TSA").

The settlement system between the Wholesale Market participants is supported by JSC Center of Financial Settlements, a clearing company.

In 2009, wholesale electricity and capacity trade was carried out in accordance with the Regulations of the Wholesale Electricity and Capacity Market effective as of September 1, 2006 (Russian Federation Government Decree No. 529 dd. August 31, 2006) as well as the Regulations of the Wholesale Electricity and Capacity Market for the Transition Period (Russian Federation Government Decree No. 476 dd. June 28, 2008 On Amendments to Certain Decrees of the Government of the Russian Federation on the Issues of Generating Capacity Competitive Trade on the Wholesale Electricity and Capacity Market).

The Company trades electricity and capacity on the Wholesale Market using the following mechanisms:

1. Regulated Contracts (RC) is the trade of electricity (capacity) at regulated prices (rates) on the basis of regulated electricity and capacity purchase and sale contracts. In accordance with Russian Federation Government Decree No. 205 dd. April 7, 2007, from January 1 to June 30 65% to 70% of electricity and capacity from the volumes established by the 2007 budgeted balance sheet, and 45% to 50% of electricity and capacity from July 1 to the end of 2009 were supplied at regulated prices (rates) on the Wholesale Market.

Starting on January 1, 2011, electricity and capacity will be supplied on the New Wholesale Electricity and Capacity Market at free (non-regulated) prices, with the exception of supplies to public consumers.

 

The schedule for registering contracting parties and delivery schedule for regulated contracts are determined by JSC ATS so that the aggregate cost of base volumes of electricity and capacity established by regulated contracts do not exceed the cost of delivery of base volumes established using indicative prices (rates) of consumers.

The functioning of the RC system is based on the following provisions:

- Two products, namely electricity and capacity, are sold (purchased) according to the regulated contracts entered into.

- The prices for electricity and capacity under each regulated contract are set equal to the contractor’s tariffs for electricity and capacity.

- The contractor supplies the contract volume of electricity and capacity which it produced, or (for electricity only) purchased on the market at the Day-Ahead Market competitive prices or through non-regulated bilateral contracts. The purchaser pays for the contract volume regardless of its own planned consumption.

- Purchasers and contractors enter into RCs based on the standard form approved by NP Market Council and constituting an addendum to the agreement on joining the wholesale market trading system.

- The final cost of capacity for RCs is calculated with consideration of the reduction of cost of capacity caused by the incomplete fulfillment of obligations for maintaining generating equipment for electricity production.

2. On the Non-Regulated Electricity Market electricity is traded at free (unregulated) prices. The non-regulated electricity market has several sectors.

Day-Ahead Market (DAM) - Electricity (capacity) trade at free (non-regulated) prices determined through competitive selection of bid prices of purchasers and contractors carried out twenty-four hours before commencement of the corresponding supply. The basis of the Day-Ahead Market is the competitive day-ahead bid selection by JSC "TSA" with determination of hourly equilibrium hub prices and supply (purchase) volumes.

The DAM is structured on the following principles:

- Volumes of electricity which are not part of RCs and are the result of short-term production and consumption planning are sold.

- "Missing" volumes of electricity for RCs and also volumes of electricity used by suppliers in order to fulfill their obligations under RCs with the help of other suppliers are purchased.

- Volumes of electricity are purchased to guarantee supply of electricity under NCECs and retail market supply contracts. In addition to this, electricity which exceeds the volumes for consumption is purchased.

- Special purpose software calculates the optimal hourly equilibrium prices (hub prices), volumes of production and consumption with consideration of input restraints and technological losses.

- Generators submit hourly bids on a daily basis for all of the installed capacity of generation equipment used by the System Operator in order to participate in the DAM. With regard to electricity volumes corresponding to the power plant minimum technical requirements, the participants submit price-driven bids only.

- The system operator plans power modes and operating modes of electricity suppliers and purchasers based on the results of the day-ahead competitive bid selection.

- Purchase and sale contracts and commissions are settled with the unified party – JSC FSC in order to ensure electricity purchase and sale on the DAM.

The Balancing Market (BM) - Electricity trade at free (non-regulated) prices determined through competitive selection of bids of suppliers and participants with regulated consumption carried out at least one hour prior to electricity supply for the purposes of forming a balanced electricity generation and consumption mode.

This is the market on which bids for current generation or consumption are traded one hour before actual generation (consumption). Electricity is traded on the Balancing Market according to the following principles:

- The price bids which participants submitted at the DAM are used in BM trading.

- The differences in actual generation/consumption volumes from those planned as per the results of the DAM trading are tendered.

- Volumes of electricity are offered during trading which are submitted with the help of immediate price-driven bids for the change to planned volumes of production.

- Volumes of electricity on the BM are purchased according to the indicators and/or at upper (lower) balancing prices.

- Purchase and sale contracts and commissions are settled with the unified party – JSC FSC in order to ensure purchase and sale on the BM.

Non-regulated bilateral contracts (NC) - electrical power is traded at free (non-regulated) prices on the basis of electricity purchase and sale contracts (hereinafter referred to as non-regulated bilateral contracts). Concluded non-regulated bilateral electricity purchase and sale contracts have the following specific features:

- Wholesale Market participants independently determine prices and the volume of electricity supply under non-regulated bilateral electricity purchase and sale contracts.

- The suppliers and buyers of electricity which enter into non-regulated bilateral electricity purchase and sale contracts shall pay the difference between the equilibrium prices in the buyer and seller’s electricity delivery point groups for each contract in accordance with the procedure determined by the agreement on joining the trading system of the Wholesale Market.

- A supplier which concludes an NC shall deliver electricity to the buyer according to the volume and the price stated in the contract by including all/part of the volume in hourly planned production and/or buying electricity on the Wholesale Market.

- Every buyer (supplier) is entitled to buy (sell) electricity under non-regulated bilateral electricity purchase and sale contracts exclusively from (to) Wholesale Market participants operating in the relevant price zone.

- Non-regulated bilateral contracts and also any amendments to them are registered by JSC "TSA" in accordance with the procedure determined by the agreement on joining the trading system of the Wholesale Market in order to take them into account when establishing obligations (requirements) for Wholesale Market participants.

- Electricity must be purchased on the DAM in order to provide for electricity supply volumes under NCs.

The ARENA energy exchange provides trading participants with the opportunity to conclude non-regulated bilateral contracts for supply of electricity (NCE).

Exchange traded non-regulated bilateral electricity purchase and sale contracts are entered into by suppliers and buyers when the terms and conditions of two opposite orders submitted by Participants at the exchange are the same.

At the end of trading in the settlement period (month), the exchange trading system draws up electricity purchase and sale contracts where the parties to contracts are disclosed.

3. Non-Regulated Capacity Market

On July 1, 2008 a transitional capacity market was launched in accordance with Russian Federation Government Decree No. 476 dd. June 28, 2008. Its main provisions are as follows:

- The introduction of the procedure for competitive selection of capacity (CSC).

- The guarantee of payment for capacity of suppliers whose bids were chosen by CSC.

- Liberalization of capacity trade.

- The possibility to trade capacity at free (non-regulated) prices.

Competitive selection of capacity (CSC) is capacity traded at free (non-regulated) prices determined through competitive selection of bid prices to sell capacity. The Company submits bids to sell capacity to participate in the competitive selection of capacity with regard to capacity of the generating equipment recorded on the budgeted balance sheet for the corresponding calendar year. The size of the monthly payment for one unit of capacity specified in the price bid to sell capacity which was submitted with regard to the capacity of generating equipment recorded on the budgeted balance sheet in 2007 as of January 1, 2007 cannot exceed the threshold level which is equal to the regulated price (rate) for capacity established in the reviewed year by the Federal Tariff Service of the Russian Federation in relation to the generating equipment.

A price bid to sell capacity which was submitted with regard to the capacity of generating equipment commissioned after 2007 must conform with the requirements for economic feasibility of the size of a monthly payment for one unit of capacity as determined by the agreement on joining the trading system of the Wholesale Market.

The procedure for establishing the compliance (non-compliance) of a price bid to sell capacity with the requirement for economic feasibility of the size of a monthly payment for one unit of capacity and also the procedure for bringing the bid into line with this requirement are specified by the agreement on joining the trading system of the Wholesale Market.

The following parameters are defined based on the competitive selection of capacity:

- the list of the Wholesale Market participants supplying capacity in the corresponding calendar year;

- the list of the generating equipment having passed the CSC with the indication of free flow zones;

- capacity volumes and free (non-regulated) prices determined based on the competitive selection of bid prices to sell capacity.

Purchase and sale contracts and commissions are settled with the unified party – JSC FSC in order to ensure electricity purchase and sale in the CSC.

As a result of CSC, every supplier is required to maintain its generating equipment in a state of permanent electricity generation readiness.

To fulfill its obligations regarding the capacity quality the Company entered into agreements for the transfer of capacity by the Wholesale Market participants – electricity and capacity suppliers with all the suppliers of the Wholesale Energy Market and a unified party JSC FSC.

Non-regulated bilateral contracts on electricity and capacity (NCEC) - electrical power is traded at free (non-regulated) prices on the basis of electricity and capacity purchase and sale contracts.

OTC NCEC- a non-regulated purchase and sale contract for electricity and capacity concluded by a supplier and a buyer - parties to a regulated contract (RC). The capacity volume in the contract shall not exceed the deregulated part of the corresponding RC, i.e. the difference between the RC capacity volume before deregulation (100%) and the RC volume after deregulation. Effecting OTC NCECs makes it possible for suppliers to obtain additional profit from the sale of capacity at non-regulated prices and also to reduce the risk of failure to pay for a part of capacity by non-payers in case of this capacity sale in the CSC.

The ARENA energy exchange provides trading participants with the opportunity to conclude exchange traded non-regulated bilateral contracts for supply of electricity and capacity (NCEC).When settling an exchange-traded NCEC, the price for electricity and capacity depends on the type of the contract settled (peak, shoulder, valley) and free flow zone, and is determined for each “supplier – purchaser” pair separately through comparison of their bids submitted to the commodity exchange.

Exchange traded purchase and sale NCECs are entered into by suppliers and buyers when the terms and conditions of two opposite orders submitted by Participants at the exchange are the same.

At the end of trading in the settlement period (month), the exchange trading system draws up electricity and capacity purchase and sale contracts where the parties to contracts are disclosed.