Tariff regulation risks

Our key business lines are energy transmission and connection that are regulated by the state. To keep tariffs for end users the state imposes restrictions on the growth of a regulated tariff element, and this is a disadvantage for IDGC of Urals, OAO. The risk appeared in 1Q 2011 as a result of Government Decree #1172 dd. 27.12.2010. According to the Decree average boiler tariff growth for energy transmission for 2011 shall not exceed 15% on the previous year. IDGC of Urals constantly works hard over economic grounding for tariff-included expenses as well as controls own expenses and tariff completion. We prepare and submit justifying materials and information to regional regulators as well as work out and approve long-term development programs. Strengthening of responsibility for grounding of expenses included into RGR and adoption of maximum possible RGR by the regulators are main measures to manage the risks.

Transition to RAB is aimed at cutting down the influence of state tariff regulation on the Company’s operations. Permenergo branch is one of the pilot projects that transited to RAB in 2008. Other branches transited to RAB regulation during 2011. However, the transition has lead to the risk factors related to non-fulfillment of such long-term RAB parameters as rate of return and internal rate of return. To minimize the factors the Company implements cost-cutting programs and plans its activities according to approved tariffs.

It is not inconceivable that under restricted growth of end-user and network rates local regulator may approve considerable revenue growth for several gridcos by cutting down (or retaining) revenues of IDGC of Urals in favor of other gridcos. Key directions for risk minimization are submission of justifying materials to the local regulators that prove the necessity of expense increase not less than average network tariff growth as well as cooperation with local regulator on firm position with regard to required advanced growth of expenses since the Company is a strategic regional company.