Review of the macroeconomic factors influencing economy of the branch

The factors that determine the state of the economy of Russia as a whole and have an impact on the electric power industry:

Dynamics of oil prices

according to forecasts of the Ministry of Economic Development the level of prices for oil in 2013-2014 will be about 110-120 $/ barrel

Manufacturer price index

it is forecasted to grow by 4-5% a year

Interest rates for raising credit funds

in 2013-2014 there is probability of their increase against the negative external background

The dynamics of the industry also depends on a number of specific factors:

Factors descending with their significance

State regulation of rates

Dynamics of power consumption

Adoption of the Federal Law “About energy saving and increase of energy efficiency increase…” (#261-FZ from 23.11.2009)

Current condition of the industry

Description

Electric power transmission and grid connection are types of activity regulated by the state. The approval of levels of rates by regulating bodies for the services of the Company directly influences volumes of the received revenue

Changing the amount of energy consumption directly affects the state of the industry

Adoption of the law about energy efficiency will cause substantial decrease of power consumption in the medium and long term

The industry condition directly influences all aspects of the Company’s activity

Current condition

The Government of the Russian Federation implements containment policy of growth of rates for goods and service of natural monopolies. Establishment of rates at lower than economically reasonable level will lead to underfunding of the current activity and investment program of the Company

The power consumption volume in 2012 across the Russian Federation was 1038,1 billion kW*h that is 1,7% and 2,9% higher than in 2011 and 2010 respectively. The growth of energy consumption in the service area of the Company in 2012 was 1% compared with 2011.

This is due to the improving economic situation in Russia after the global economic crisis and, consequently, an increase in electricity consumption by large consumers (as well as increasing the volume of grid connection to electric networks).

In 2013, according to forecasts of Russia’s Ministry of Economic Development and Trade and the Ministry of Energy, the power consumption growth at 1-2% is expected in the Russian Federation

According to various estimates, reduction of energy consumption across the country is expected up to 10% in the long run

Substantial wear of fixed assets.

Acute shortage of investments for the industry.

Problem of non-payments.

The tariff policy leading both to understating of financial indexes (pricing by the principle “costs plus”), and to real red ink of some companies.

Measures on minimization of consequences

1. Implementation in conjunction with the Federal Service on Tariffs and tariff regulation authorities of RF subjects of measures to amend the current legislation of the Russian Federation in pricing for the services of natural monopolies to take into account the interests of distribution grid companies in setting electricity tariffs in the retail market.

2. Economic justification of costs included in rates, including inclusion of «shortfall in income» of previous periods into rates.

3. Development and coordination of long-term development programs of regions – in the service areas of the branches of the issuer with the regional and local authorities.

4. Cost reduction and optimization of the investment program.

A set of measures to diversify the package of services to compensate for the drop in energy consumption in the medium term.

In particular, in 2011 a subsidiary of the Company was incorporated - JSC "Energy Service Company", whose main task is to provide services in energy conservation and energy efficiency.

1. The integration of regional and local grid assets.

2. Diversification of the business in part of the services provided with access to the services market in energy conservation and energy efficiency.

3. The implementation of the functions of an electricity supplier of last resort in the branches of the issuer in which that status was granted in accordance with the decision of the Ministry of Energy of the Russian Federation.

Implementation of the tariff regulation based on RAB.

The implementation of a cost management system.

Implementation of advanced tools to manage the Company, the automation of key functions to improve management decision-making.

In the conditions of realization of the monopoly activity by the issuer (rendering services on transmission of electric energy), no changes regarding the authority under regulation of tariffs for services on transmission of electric energy in the near future are expected. As for the limiting levels of tariffs for services on delivery of electric energy, the issuer does not predict sharp fluctuations of the given indicator aside increases or reduction in the near future, however, it is possible for the state to restrain growth of ultimate levels of tariffs in relation of previously planned schedule within the framework of anti-crisis measures.

Currently, the Russian economy as a whole has recovered from the global crisis of 2008-2009. In 2012 in Russia (according to the forecast and actual data of MEDT, Rosstat and SO UES), the industrial production growth was 2,6%, and the increase in energy consumption was 1,7%. In 2013, as forecasted by MEDT, the industrial production growth will be 3,7%, and the increase in energy consumption — about 1-2%. Increase of consumer price index in 2012 was 6,6%, which is not critical for the industry.

Significant changes in the legislative base of the industry, except for the abovementioned, are not forecasted in the nearest future. In the medium term some change of the legal basis in terms of a set of measures to solve the problem of cross-subsidies in the electricity industry are expected.

The main macroeconomic risk at present is the probability of sovereign default of peripheral countries of the European Union, which may cause negative consequences for the global economy, and hence for the economy of Russia.