Efecto de los parámetros de proceso en la distribución de esfuerzos

The Issuer is exposed to branch risks mostly due to the tariff system adopted in the sector and aimed at solving of political tasks of reducing social tensions through managing electric power tariffs rather than economic problems (production and investment stimulation).

The Company manages this risk by formulating economically substantiated tariffs while taking into account possible fluctuations in electric power generation and through negotiating a realistic budgeted balance sheet with the Federal Tariff Service. Despite the changes in the rules governing the new wholesale electric power and capacity market (NWECM), the existing tariffs fail to ensure a sufficient rate of return margin in electric power sales and obtaining the required investment resources.

The most significant for the Issuer developments in the electric power sector are as follows: - termination of JSC RAO UES of Russia;

- creation of a competitive electric power and capacity market.

Since 2001 the Russian electric power system has been significantly reformed and restructured. The purpose of the reforms and restructuring is, among others, making changes in the regulatory and legal basis of the electric power sector regulation, development of a competitive electric power and capacity market and progressive expansion of the said competitive markets aimed at reducing the electric power share sold at regulated prices (tariffs).

It is planned that as a result of the electric power system reformation, by 2001 a free market of electric power generation and supply, electric capacity and the associated services (except for the Far East and power supply to households) will be developed; and since that time wholesale prices of electric power and capacity are supposed to be quoted on a demand-and-supply basis. At the same time, this restructuring and liberalization process does not cover power supply for domestic use purposes where tariff regulation is still applied. Moreover, no free service market for power transmission, distribution, dispatcher services provision and other supply-related operations is supposed to be created. As a result of the reform, the Russian open joint stock company for power industry and electrification OJSC RAO UES of Russia, formerly the major state-owned power holding, has been divided like a number of other power companies engaged in the following operations performing: electric power generation, distribution and sale to end users, repair and technical maintenance. Today supply and repair-and-maintenance companies compete with each other in their respective fields.

Within the framework of the ongoing reform, the norms regulating the Russian electric power market including those related to the market liberalization, setting electric power tariffs, capacity market functioning and relationships between power producers ad consumers are being considerably amended. Besides, the reform of the electric power sector resulted in the liquidation on July 1, 2008 of OJSC RAO UES of Russia that used to hold a domination position in terms of expertise, experience and skills in the electric power field. While liquidation of this electric power monopoly was one of the reform targets, the absence of OJSC RAO UES of Russia may become an uncertainty factor in the market. Since the formal start of the reform in July of 2001, the time-limits of the reform stages implementation as well as frameworks of such stages have been changed several times, and the Government’s operating plan on liberalization of the electric power and capacity market for nondomestic use is unlikely to be executed within the established term and the declared goals are unlikely to ever be achieved.

As a result of the reformation process and due to the uncertainty connected with the process eventual completion and final extent, the Russian electric power market has been changed dramatically and keeps operating in the situation of relative uncertainty. Along with the existing risks inherent in the Russian electric power supply market, many other operational, commercial, technological, managerial, regulatory and other risks

may occur which are hard or may not be predicted and which are beyond the Issuer’s control. Such changes and associated uncertainty may have considerable adverse effect on the Issuer’s business, income and performance results.

In the Issuer's estimate, deterioration of the situation in the sector may be linked to:

1. Operational (production) risks related to physical wear, operating conditions violation and radical changes in the operating parameters of equipment. These risks may result in equipment breakdowns (accidents) and buildings destruction. Systemic accidents may split the power system, cause rolling blackouts and make basic equipment operate in emergency modes.

The operation of basic equipment at hydropower plants is quite intensive and accelerates the process of equipment wear and tear. The poor condition of equipment due to its physical and functional deterioration is the primary cause for the emergence of production risks, the main of which are:

- the threat of failure by a hydropower plant to perform in full the power grid's operating and regulating functions (frequency and voltage control, etc.), resulting in the hydropower plant's inability to tap the potential brought about by electricity sector reform;

- deterioration of HPP operational and economic performance indicators; - the onset of unfavourable environmental consequences;

- the threat of accidents resulting from the shortfall of electricity generation and in grave environmental and social consequences;

- the risk of injuries and occupational disease for the Company's personnel.

Measures to manage this risk:

The management of production risks of JSC RusHydro affiliates is part of the Issuer's system of making technical and economic decisions in the process of planning the programmes of technical impacts on equipment (within the framework of the prospective programmes of technical upgrading and rehabilitation, repairs and maintenance).

JSC RusHydro is actively introducing risk management methods, including an automated system of production risk management, to raise the efficiency of the management of risks related to the reliable operation of the Company's production assets.

There is an average statistical probability of equipment breakdown. All of the Issuer's basic production assets have been insured. Apart from that, the Company is carrying out a whole range of measures to ensure the proper reliability of its equipment and structures, namely:

- repairs are carried out in full;

- the Company is implementing a long-term programme of technical upgrading and rehabilitation for the planned period of 2006-2020 as approved by the Company's Board of Directors;

- the Company is introducing modern diagnostic techniques excluding the stoppage of equipment; - the Company constantly optimizes the structure and the amount of spare parts;

- the Company has introduced tenders for the selection of service and supply companies to raise the quality of services and materials, the responsibility of counterparties and cut costs.

As there exists a probability of the occurrence of systemic accidents, the Company has introduced and is modernizing an automated safety system in accordance with modern requirements to ensure systemic reliability. The centralized automated safety system is designated to ensure systemic reliability across the entire power system in case of the occurrence of local accidents.

JSC RusHydro manages risks in the sphere of compliance with industrial safety rules as part of its production risk management system through the observance of federal legislation on industrial safety and by using the mechanism of production control of compliance with JSC RusHydro industrial safety requirements which is based on this legislation.

2. Environmental risks express themselves in the possibility of oil leakages from the HPP hydropower units into the river, excess of dam (reservoir) marks in headwater or tailwater sections.

Fines for possible oil leakages cannot seriously influence the Company's financial solvency so this risk can be considered as insignificant. Also, in the process of implementing measures stipulated by the long-term programme of technical upgrading and rehabilitation, the Issuer is replacing the elements and parts of hydropower turbines with modern and highly

environmentally friendly equipment.

The excess of the reservoir level in the upper or lower mark can result in the flooding of the near-shore zones where production and dwelling facilities as well as natural complexes are located. The reservoir level is regulated in strict

compliance with the schedule approved by the interdepartmental operational group. To prevent flooding, protective dams and facilities are used while their owners are responsible for keeping them in proper condition and timely strengthen collapsing dam sections. For its part, the Company uses meteorological forecasts during high-water periods to promptly notify water consumers of possible river levels so that they could take necessary protective measures.

JSC RusHydro is introducing an environmental management system in compliance with the ISO-14001-2004 international standard to further improve its environmental activities.

3. Risks related to the construction of alternative power facilities by large consumers. The reform of the Russian electric power sector aims, among other things, to create a competitive environment in the sphere of electricity generation and supply in Russia. The construction of alternative power facilities by large consumers can result in the decrease of the volume of electricity generation and sale by the Issuer in the future.

The Issuer's measures to manage this risk:

The Issuer is carrying out active work with consumers to build long-term mutually advantageous relations and neutralize this risk.

The Issuer's additional measures to reduce the above risks:

- raising operational efficiency with the implementation of the programmes of cuts in production costs and saving; - carrying out work to increase the share of long-term power supply contracts in the total volume of contracts signed; - the conduct of a weighed financial policy by the Issuer.

4. The risk of uncertainty of power generation (the risk of water content). The risk of uncertainty of power generation for the Issuer involves the impossibility to estimate exactly the volume of generated power in the medium- and long-term perspective. Mainly, this risk has effect on the fulfilment of obligations for power supply for a new wholesale electricity and capacity market.

The Issuer's measures to manage this risk:

This risk is minimized within the framework of the unified sales service of JSC RusHydro with a package of measures to: - prepare proposals on changing the regulatory framework in terms of the freedom of one-day power generation

planning by HPPs and the filing of price proposals for the whole volume;

- protect the interests of HPPs in interdepartmental operational groups under the Federal Agency for Water Resources; - conclude hedging bilateral contracts on the day-ahead market (including contracts on the purchase of power to meet

obligations).

Considering the above-mentioned, the Issuer believes that a possible deterioration of the situation in the electric power sector, negative changes in the process of operation and production and the construction of alternative power facilities by

large consumers can affect the Issuer's activities but cannot seriously influence the Issuer's ability to fulfil obligations on securities.

Risks related to a possible change in the prices of raw materials, services used by the Issuer in its activities (separately on the domestic and external markets) and their influence on the Issuer's activities and the fulfilment of the Issuer's obligations in relation to securities

The Issuer does not use fuel for the generation of electric power. The Issuer is developing the untapped energy potential of Russian rivers and other renewable energy sources, producing environmentally clean energy and simultaneously making it possible to release hydrocarbon fuels for other purposes in the future.

In this connection, the Issuer is not exposed to the risks of potential changes in the prices of raw materials and services. The risks of increases in the prices of equipment and other material and technical resources used by the Issuer in its activities

These risks are largely associated with inflationary processes in the economy and can be minimized with the following measures:

- raising operational efficiency based on the programmes of cuts in production costs implementation (the creation of a competitive environment in the sphere of the purchase of works and services, the optimization of spending on repairs and maintenance, capital construction, etc.);

- the conduct of a weighed financial policy as regards compliance with payment discipline to minimize the risks of insolvency and ensure the Issuer's financial stability and observe business planning standards.

Risks related to a possible change in the prices of the Issuer's products and/or services (separately on the domestic and external markets) and their influence on the Issuer's activities and the fulfilment of the Issuer's obligations as regards its securities

The risks associated with a possible change (decrease) in the selling prices of electricity on the wholesale market (the day- ahead market, the balancing market) are among the main risks for the Issuer.

The Issuer sells the entire "liberalized" volume of electric power on the wholesale market at free, unregulated prices, which creates the risk of losses that the Issuer may sustain if the average-weighted selling price falls below the level of variable expenses on electricity production. At the same time, there is a risk that the Issuer may increase expenses on the purchase of electric power to meet its obligations under regulated contracts (contracts on the sale of electric power (capacity) at tariffs approved by the Federal Tariff Service of Russia), in the event that electricity selling prices go up on the wholesale market.

Under the schedule of the wholesale market liberalization approved by Russian Government Resolution No. 205 of 7 April 2007, the volumes of electric power (capacity) sold on the wholesale market at regulated prices are intended to decline gradually. Starting from 1 July 2008, electric power (capacity) sold at regulated prices accounts for 75% of electricity production and consumption balance. However, as electricity sales at free, unregulated prices are gradually increased, the risks associated with larger expenses on the purchase of electric power under regulated contracts will become less pronounced and will lose their relevance by 2011 when the wholesale electricity (capacity) market is fully liberalized.

The transitional model of the electric capacity market launched on 1 July 2008 implies the sale of electric power capacity by the Issuer at prices not lower than the level of semi-fixed costs (the tariffs of electric capacity) and, therefore, the risk of price changes on the electric capacity market is insignificant.

Since the establishment of JSC RusHydro as a consolidated operational company, the tariffs of HPPs (PSPPs) have seen the fastest growth in the sector mainly due to the inclusion of the investment component in electricity rates, which is a logical result of underestimated requirements for the financing of the production needs of HPPs in previous years.

The influence of a possible deterioration of the situation in the sector on the Issuer's activities and its ability to fulfil its obligations in relation to securities

The Issuer is Russia's largest hydropower company, playing a key role in the country's economy. The Issuer believes that any possible deterioration of the situation in the Issuer's sector, negative changes in the process of operation and production and the construction of alternative electricity facilities by large consumers can affect the Issuer's operations but cannot seriously influence the fulfilment of the Issuer's obligations in relation to securities.