Strategic Principles of Development

The mission of the Company is to secure a reliable and efficient electric power supply satisfying the growing demand of the Russian economy and social sector at service prices affordable for customers. To accomplish its mission, the Company carries out a comprehensive program of measures in accordance with its Strategy for Development Until 2015 with Long-Term Plans Until 2020. The program includes the following three areas:

1Enhancing the Quality and Reliability of the Electricity Supply for Ultimate Customers

Enhancing the reliability of the electricity supply for ultimate customers and improving the quality of services provided by the Company subsidiaries are among the priorities defined in the Strategy. For this purpose, the following measures are specified in the Strategy:

• Create a system for the accurate measurement of electricity supply quality and reliability based on world standards and use it while formulating investment and repair programs. The accurate measurement of electricity supply quality and reliability requires that metering equipment and supporting IT systems be put into operation. The accurate measurement system includes sampling audit procedures and the methods for checking measurement results against complaints received from customers. In order to control electricity supply quality and reliability in accordance with world standards, the Company subsidiaries work to introduce into their operations the System Average Interruption Duration Index (SAIDI) and the System Average Interruption Frequency Index (SAIFI) and to ensure that, when applied, the measurement system based on these indices will be reliable. To make the electricity supply more reliable by reducing the interruption duration and frequency, the SAIFI and SAIDI will be included in the criteria for formulating the investment and repair programs of the Company’s subsidiaries.
• Raise the responsibility of the technical, financial and economic, and investment divisions of the Company and all subsidiaries, and (as part of the regulation system) all grid organizations for achieving quality and reliability targets.
• Implement a system for assessing customer satisfaction with respect to services provided by the Company subsidiaries. In order to comprehensively evaluate the quality of services provided by subsidiaries from the customer’s perspective, the assessment system will be based on market research and the analysis of appeals received by subsidiaries from customers.
• Organize and develop subsidiaries’ call centers and face-to-face customer service infrastructure (a network of customer service centers) and online service centers.

2 Maintaining the Tariff-Based Sources of Investment

The measures taken by the Company to maintain the tariff-based sources of investment in the renewal and development of networks include:

• Keeping the RAB system with adjusted parameters and enhancing the transparency of tariff design and investment programs of all grid organizations.
• Forming the government’s position on the necessity of decreasing the number of territorial grid organizations by means of establishing and gradually raising the minimum requirements applicable to them to be followed by their consolidation.

3Improving Operating and Investment Efficiency

In this area, the Company works to improve the efficiency of its operating and investment expenses by raising workforce productivity, prioritizing and cutting the specific costs of work, using technical solutions with higher cost effectiveness, and reducing losses. Measures to improve operating and investment efficiency are as follows:

• Reducing per-customer expenses related to repair, operation, dispatching, and support functions by means of implementing an asset administration program, enhancing the effectiveness of prioritizing work, and raising workforce productivity;
• Introducing the accurate measurement of the volume and cost of commercial and technical electricity losses and implementing programs to reduce electricity losses;
• Achieving a high utilization rate of commissioned facilities by means of improving the quality of demand planning, revising the criteria for closing down main substations, introducing multistage construction practices, and raising the responsibility of various divisions of the Company and its subsidiaries. Raising the responsibility of regional authorities and investors for the utilization of constructed facilities, including by means of switching to a two-rate tariff and the take-or-pay principle for new connections;
• Increasing the effectiveness of investment in the existing grid by means of efficiently ranking and selecting projects and tracking achieved results;
• Reducing the specific costs of construction by means of implementing model solutions and enhancing the transparency of specific costs;
• Improving the quality of project implementation by means of introducing the principles of project management;
• Developing personnel, including training and exchange of knowledge, a stronger orientation toward the achievement of key performance indicators and professional advancement, and the promotion of the best employees and the attrition of weaker employees.

In order to ensure a uniform approach to implementing the technical policy and the principles of managing Russia’s electric grid sector and pursue uniform investment, financial and economic, and personnel policies, pursuant to Directive of the Government of the Russian Federation No. 2111p-P13 of May 8, 2012, and in accordance with Agreement No. 1007 of July 10, 2012, the powers of the Company’s sole executive body were transferred to FGC UES.

PROSPECTS FOR DEVELOPMENT

In order to further the development of the Russian electric grid sector and coordinate work on its management, Russian President Vladimir Putin signed on November 22, 2012, Decree No. 1567 “On Joint Stock Company Russian Grids.” The Decree specifies that the Company will be renamed Joint Stock Company Russian Grids (Russian Grids) and that governmentally owned 79.55% of shares in FGC UES will be used as a contribution to the authorized capital of Russian Grids. In accordance with the Decree, these measures must be complete before June 30, 2013.

Additionally, pursuant to the Decree, it is necessary to prepare the Strategy for Development of Russian Grids within one month after its issuance and develop and approve the Strategy for Development of the Electric Grid Sector of the Russian Federation in the 1st quarter of 2013. The draft of the Strategy for Development of Russian Grids was reviewed by a meeting of the Government Commission on the Development of the Electric Power Industry on December 20, 2012. The Strategy for Development of Russian Grids approved by the direction of the Russian Federation Government dated April 03, 2013 № 511-p.

The goal of the structural transformations aimed at the consolidation of electricity transmission and distribution grids is to create a single center of responsibility to the shareholders for transmission and distribution operations, coordinate work on improving the economic efficiency of investing activities, develop uniform quality standards and indicators, and enhance the operating efficiency of transmission and distribution grid companies.

Russian Grids will be one of Russia’s most significant infrastructural companies controlled by the government and the world’s largest electric grid company in terms of the number of customers and the length of power lines.

INTERNATIONAL COOPERATION

In order to achieve its strategic goals, the Company finds it important to give heightened attention to international cooperation. The Company continued in 2012 to build up effective cooperation with major foreign energy companies, primarily with the aim of applying modern managerial decisions and advanced techniques to its operations.

As part of pursuing the Strategy for Development of the Company until 2015 with Long-Term Plans Until 2020, a logical continuation of the program of strategic cooperation with France-based electric utility ERDF took place. For instance, the Cooperation Agreement specifies that Tomsk Distribution Company (TDC), a subsidiary of the Company, will be managed by the foreign partner until the end of 2019.

On March 1, 2012, under the agreement that had been signed several days earlier for the transfer of the powers of TDC’s sole executive body, ERDF Vostok began to manage the electric grid assets of the Tomsk Region. This allows the practical work of the French utility in Russia to provide a basis for sharing advanced experience in the efficient management of distribution grids, the reliable and high-quality electricity supply and customer service, and the implementation of capex programs.

The Company’s foreign partner engaged French experts to carry out the following six main audits in 2012 in different areas of the managed company’s operations:

• Audit of electricity network losses;
• Audit of equipment;
• Audit of the organization of operating management and customer relations;
• Audit of the network management system;
• General analysis of operating networks rated 110 and 35 kV;
• Audit of occupational safety.

At present, it appears that it is also important to build up mutually beneficial contacts between Russian and French higher education institutions specializing in personnel training for major electric utilities. On June 21, 2012, during the 16th St. Petersburg International Economic Forum, the Company, ERDF, and the Tomsk Polytechnic University (TPU) signed the Cooperation Agreement. As part of participating in the Forum, the Company’s management also signed other significant agreements, namely:

• Agreement for measures to secure a reliable electricity supply between the Company and the Tomsk Region Administration;
• Tripartite cooperation agreement among the Company; Eurocontract – High-Voltage Switchgear, Russia; and China XD Electric Co., Ltd, China.

Since one of the Company’s strategic goals is to keep up with recent advances and developments in the design, construction, and operation of distribution networks and the global integration of the Russian electric grid sector, the Company took extensive measures to become a member of the International Conference on Electricity Distribution (CIRED). Headquartered in Brussels, CIRED is the largest international association uniting electric grid companies of about 40 countries and dealing with electricity distribution and supply, including economic issues (cost reduction, power supply organization and management, electricity market development, and planning).

The General Meeting of CIRED National Committee. Electricity Distribution Grids Nonprofit Partnership in Saint Petersburg on June 20, 2012, admitted Holding and all of its subsidiaries as full members into the Liaison Committee of CIRED in the Russian Federation.

With a view to exchanging experience and technological information between Russian and US electric grid companies, IDGC of Centre, a subsidiary of the Company; the Belgorod Region Government; San Diego Gas & Electric (SDG&E); and the City of San Diego Mayor’s Office, California, USA, signed the Memorandum of Understanding on May 24, 2011. As part of the Energy Twinning initiative promoted by the Company as an innovative model of international business cooperation between Russia and foreign countries, the energy companies of both countries held several events in 2012.

For instance, the Russian and US electric utilities conducted negotiations April 8–14, 2012, at the SDG&E office in San Diego and at the University of California, mainly discussing the development of the Smart Grid pilot project, which can unite the two cities with a single technology of a smart grid based on Russian and US scientific advances in energy efficiency and energy conservation.

Another candidate for town twinning in energy in the regions where the Company has a presence is Kaliningrad, a city where Yantarenergo operates. Kaliningrad hosted a Russia-US seminar dealing with a wide range of issues related to the development of smart grids in the electricity supply system. The seminar was attended by representatives of Carnegie Mellon University, Pennsylvania, United States, who presented their Smart Grid Maturity Model (SGMM). The seminar discussed the possibilities of introducing the SGMM into the Kaliningrad Region’s electric grid infrastructure and creating the new generation of electricity networks based on up-to-date control equipment, promising diagnostic systems, and high-speed data transmission and processing techniques.

A significant step in developing Holding’s international cooperation was relations fostered with German partners, including Siemens AG, the German Energy Agency (dena), and the Russian-German Energy Agency (rudea). The Company collaborates with Siemens both bilaterally and multilaterally, with the participation of the German and Russian-German energy agencies. The quadripartite memorandum opens up opportunities for effective cooperation to raise the efficiency and system reliability of Russia’s electricity distribution grid sector. The core of the partnership is to attain a substantial reduction in electricity losses in distribution networks. Specifically, it is planned to find optimum solutions for upgrading 0.4-kV networks to the 10-kV voltage class because 0.4-kV facilities cause most problems for the electricity distribution grid sector, which suffers from the highest electricity losses.

Some of the Siemens technologies were first put into practice at Holding’s facilities. These include the SF6 DTC module installed at the Kotorosl substation, Yaroslavl. In 2011, a similar agreement for cooperation with Siemens was also signed by one of Holding’s operating companies, IDGC of Centre. Under this project, the Holding subsidiary provided network connection in the spring of 2012 for Siemens Transformers, a manufacturer of transformers of over 6 MW. IDGC of Centre invested about 200 million rubles. The priorities under the agreement also include carrying out energy efficiency projects in the Voronezh Region, promoting the potential for research and production, and developing joint innovative projects in electricity distribution.

The Company continued in 2012 to take an active part as an observer in the work of the Electric Power Council of the Commonwealth of Independent States. The results of the Company’s efforts include a working group established on the Company’s initiative to build an interaction system for CIS electric utilities for the purposes of remedying serious process failures and emergency situations caused by acts of nature or human activities. Specific proposals were made with respect to the development of an interstate system for preventing and remedying emergency situations caused by acts of nature or human activities at power facilities in CIS countries. Specifically, proposals were prepared with respect to interaction among national energy companies, customs and legal procedures for the transportation of goods and personnel across national frontiers for joint operations in the event of accidents or for training purposes. Agreements were reached about defining the principles of providing training and personnel for accident recovery crews for remedying process failures; monitoring their movement; and establishing and using emergency reserves of primary equipment and spare parts, and about the development of a model for promptly notifying people of power outages.

As one of the world’s largest electric grid companies, the Organization is open to international cooperation and will continue its all-out efforts to build up cooperation with foreign partners.