Sectoral risks

As a result of reorganisation of the electricity production sector new a new business environment has evolved for its businesses. The level of development of the normative base, regulating relationships on the wholesale market was inadequate and, as a consequence, disagreements with retail suppliers in relation to volumes of electricity consumption are factors that make for a growth in the level of debt for the Company.

Minimising this risk is done by developing a positive legal policy in relations with retail suppliers and involving municipal, regional and, in some cases, Federal organs of executive power in resolving disputes with the aim of holding construction negotiations with debtor organisations, as well as by eliminating the causes of disputes with consumers.

At the current time there is an unresolved question on unconditional restitution on a rental contract for the ‘last mile’ between FSK EES and Kubanenergo. As the cross subsidisation period has been extended to 2014 means this problem will not go away. Despite notification by FSK EES to consumers of the non-extension of direct contracts the latter have a chance via judicial proceedings of rejecting Kubanenergo services. Management of this risk is being carried out by ensuring the timely manner of annual submission of documents on transfer of facilities by lease to Kubanenergo to the Ministry for Energy of Russia, as well as by monitoring deadlines for extending rental contracts for the ‘last mile’ and compliance with the conditions of contracts with FSK EES.

Regulatory risks

In connection with the policy being carried out at the present time by the Government of the Russian Federation to control growth in tariffs for natural monopoly services there is a risk that the regulating authorities will stipulate tariffs for electricity transmission services lower than the economically viable level. As the main type of activity at Kubanenergo is providing electricity transmission services and technological connection of consumers to electricity networks, the tariff levels set by the regulating authorities have a direct effect on the Company’s revenues. This risk could lead to the impossibility of full reimbursement of economically sound expenses and limit the volumes of investment in developing Kubananergo electricity production and distribution.

To gradually attract investment since 2011 regulation of the Company's activities has been carried out by implementing the Regulatory Asset Base method, which should ensure increases in volumes of investment in the electricity distribution sector necessary for renewal of prime power.

However, as the previously approved rates of growth in tariffs compared to the preceding period were lowered (in 2011 to 15% and in 2012 to 6%) but the date of the next readjustment was postponed from 1 January to 1 July 2012, Kubanenergo has been obliged to temporarily curtail its investment activities.

As a subject of a natural monopoly, the Company is exposed to the risk of breaching antimonopoly legislation as it pertains to providing electricity transmission and technological connection services. To reduce this risk regulations and standards for consumer service have been drawn up and information about services is disclosed in accordance with the legislation of the Russian Federation.