Position of the Company in the Industry

• 2.1 Region Included in the Company Area of Service – St. St. Petersburg
• 2.2 Region Included in the Company Area of Service – Leningrad Region
• 2.3 Competitive Environment

Competitive Environment

JSC "Lenenergo" is a regional distribution grid company, and it performs its activity on electric power transmission on the territory of two constituent entities of the Russian Federation with separate tariff regulation: St. Petersburg and the Leningrad Region. Each of the two regions sets its own tariffs for the services on electric power transmission.

The position of the grid company in the market of electric power transmission is primarily determined by the composition of power network facilities and its location on the territory of the region. For now, JSC "Lenenergo" is the largest network company in the region. In 2010, the share of electric power market in part of electric power transmission directly to consumers connected to the Company’s networks was estimated at 73.7% in St. Petersburg, and 64.4% in the Leningrad Region, considering those consumers connected to the networks of JSC "Lenenergo" indirectly through power installation of generating companies.

Currently, there exist three levels of grid companies in Russia, which were created following technological and administrative-territorial indications:

Level 1: federal grid company, which owns lines of 220 kV and higher. The company performs its activity on the whole territory of the Russian Federation, its branches are located in all regions of Russia.

Level 2: interregional distribution and other grid companies, which were formed following the reorganization of RAO UES. These companies own 110-0.4 kV networks and render services on electricity transmission on the territory of the region of their location.

Level 3: local grid companies, which own mainly 0.4-10 kV networks. These companies were mostly founded on the basis of wholesale entities – resellers or large industrial trades of consumers, which allocated electric power transmission into a separate type of activity.

JSC "Lenenergo" is among distribution companies of the second level, in other words a network company performing activity for electric power transmission via its own networks in territory of only two regions: St. Petersburg and Leningrad region.

Along with JSC "Lenenergo", activities at connecting consumers on the territory of St. Petersburg and the Leningrad Region are performed by:

• JSC "St. Petersburg Electric Networks",
• MES of the North-West - branch of JSC "FGC UES",
• JSC "Leningrad Regional Managing Electro Network Company" (JSC "LOESK"),
• A number of adjacent network companies, whose spheres of responsibility are fixed by resolutions of the governments of the corresponding regions of the Russian Federation.

Regarding activity on technological connection, the competitive environment of JSC "Lenenergo" includes:

• JSC "St. Petersburg Electric Networks" - on the territory of St. Petersburg,
• JSC "Leningrad Regional Managing Electro Network Company" - on the territory of St. Petersburg.

The territorial borders of JSC "St. Petersburg electric networks" include not only the substations financed from the budget of St. Petersburg and put on the balance of JSC "SPEN", but also networks of JSC "Lenenergo". A similar situation has developed on territory of Leningrad region.

At present, competition between the grid companies of the region is practically absent. The competition between the grid companies is possible if several grid organizations in the region own the networks of the same voltage level on the same territory. For now, regional and local grid organizations own 0.4-10 kV networks, but the competition in the given segment of the market of services in electric power transmission is practically absent, as, basically, consumers at the given voltage level is the population and budgetary consumers, the cost of servicing which exceed the revenue received from rendering of services to the given consumers. However in the future, due to approval of some political decisions, competition may appear.

It is possible to refer to such political decisions the one considering approval by regulation authorities in 2010 of the method of "boiler" tariffs for electric power transmission in such a manner that JSC "Lenenergo" is "a uniform window" ("the holder of the boiler") on the conclusion of contracts for electric power transmission with consumers of services – sales companies (Warranting suppliers), and directly with consumers. This decision does not provide almost any advantages to JSC "Lenenergo" as JSC "Lenenergo" involves services of the adjacent network organizations (ANO) and pays for services of electric power transmission to JSC "FGC UES". Thus, the costs for services in electric power transmission over the networks of ANO and JSC "FGC UES" in revenues for electric power transmission of JSC "Lenenergo" amounted to 44% in 2010. Therefore, significant costs for services of ANO and JSC "FGC UES" in the required gross revenue of JSC "Lenenergo" limit own required gross revenue of the Company.

In 2010, the tendency to reduce the volumes of rendered services of electric power transmission to the consumers connected to JSC "Lenenergo" networks through "last mile" objects was observed. In particular, the consumer "Syassky CBK" legally signed the contract for services on electric power transmission directly with JSC "FGC UES" in quarter 4, 2010. As a result, the volume of the services rendered by JSC "Lenenergo" was reduced, and the revenues from transmission decreased by RUR 39.2 mln.

This problem is system-wide in nature and is primarily caused by imperfection of the current legislation of the Russian Federation regarding the use of the Unified Energy System objects. During the subsequent periods, there remains the risk of transition of consumers to direct relations with JSC "FGC UES", as well as a decrease in volumes of electric power transmission services rendered by JSC "Lenenergo".