Description of tariff policy

Electricity transmission tariffs

All Company branches use long-term tariff regulation methodology (RAB), with long-term regulation parameters approved till 2017. Permenergo branch operates under RAB since 2009, Chelyabenergo and Sverdlovenergo branches joined RAB tariffs in 2011. Basic principles of the RAB regulation system are: i) firms, subject to regulation, raise huge credit resources; ii) return on investments guaranteed; iii) reliability and quality of service are aligned with tariffs.

Long-term regulation parameters of the Company’s branches are stipulated by the following regulatory instruments: Permenergo branch^[39,40], Sverdlovenergo branch^[41,42] and Chelyabenergo branch^[43-45]. The Decree^[45] revised basic operating expenses for our Chelyabenergo branch downwards from RUB 2,831.71 thousand to RUB 2,705.69 thousand. This action was followed by our reconciliation statement filed with the Federal Tariff Service. After examination of the reconciliation statement the Federal Tariff Service issued the decree^[46] ordering the regional regulator to conduct a supportive analysis of the basic operating expenses. The regulator revised basic operating expenses upwards for 2016 tariffs to RUB 2,831.71 thousand.

Uniform (“pie”) tariffs comprise expenses of all grid companies operating in the region to be annually prescribed for the next year during the long-term regulation period. Pursuant to existing tariff regulation laws, a gross revenue requirement is subject to annual fine-tuning, adjusted for changed real and target calculations, executed investment program and achieved indicators of service reliability and quality. Electricity transmission tariffs are adopted by regional executive instrumentalities, liable for tariff regulation, on relevant territories of the Company’s service area. Uniform (“pie”) electricity transmission tariffs to be enforced in 2017 were approved by the following tariff decisions of the relevant regional regulators: Permenergo branch^[47], Sverdlovenergo branch^[48] and Chelyabenergo branch^[49].

In the Chelyabinsk region the growth of uniform (“pie”) electricity transmission tariffs to be enforced in 2017 for other customers exceeded the set tariff ceiling due to the sizes of investment programs of grid companies operating in the region. Pursuant to the Federal law^[50] last-mile contracts were terminated since 2014, except for several Russian regions with prolonged last-mile contracts. The Chelyabinsk region is enlisted as a region with last-mile contracts prolonged till 01.07.2017 for those consumers that concluded electricity transmission contracts combined with last-mile facilities rental contracts, compliant with tariff decisions by 01.09.2013.

A standalone HV-1 tariff, calculated as a FSK fee plus a cross-subsidy fee, was introduced for such consumers. The cross-subsidy fee (RUB/thousand kWh) in the Chelyabinsk region totals RUB 440.0 (01.01.2015-30.06.2015), RUB 290.4 (01.07.2015-30.06.2016) and RUB 145.2 (01.07.2016-30.06.2017).

Structure and dynamics of revenues in 2015-2017:

Electricity transmission revenues contribute most to the overall revenues. FY2017 transmission fees totaled RUB 69,873 million (98.3% of the total revenues), correlating to FY2016 figures (97.3% of the total revenues). Transmission fees gained RUB 6,170 million or +9.7% due to grown uniform (“pie”) electricity transmission tariffs and reduced load loss prices factored in by the WEM prices (- RUB 1,107 million or -46.9% YoY). Company’s FY2017 average flat rate grew by 8.7%, compliant with regulator-approved tariffs. FY2017 connection fees totaled RUB 874 million (-34.6% YoY) due to absence of large-scale contracts requiring immense capital construction, like it was in 2016.

The breakdown of changes of gross revenue requirement (in terms of electricity transmission):

Movements of the gross revenue requirement for electricity transmission services are presented in the figure below (RUB million):

Key factors that changed the “pie” gross revenue requirement in 2017 are:

Permenergo branch 7.4% boost of the “pie” GRR (RUB 1,295 million)	7.0% (or RUB 186 million) increase of the payments to other grid operators, impacted by grown individual tariffs of the regional grid operators and absence of the GRR-smoothing instrument, since these firms operate under the long-term GRR indexation methodology. 3.7% (or RUB 121 million) decline of the payments to FSK, affected by reduced UNES losses compensation rate (actual figures). 7.6% (or RUB 333 million) hike of the loss compensation expenses, influenced by 7.8% boost of the loss compensation prices. The gross revenue requirement for own needs of the branch grew 12.2% (or RUB 897 million), positive “smoothing”, applied by the regulator, amounting to RUB 358 million (however, the regulator applied RUB 499 million negative adjustment of gross revenue requirement based on actual numbers of the previous periods).
Sverdlovenergo branch 1.5% rise of the “pie” GRR (RUB 471 million)	2.1% (or RUB 237 million) increase of the payments to other grid operators, impacted by grown individual tariffs of the regional grid operators. 1.0% (or RUB 76 million) decline of the payments to FSK, affected by reduced UNES losses compensation rate (actual figures) and UNES contracted capacity (due to migration of customers to direct contracts with PAO FSK UES). The regulator recognized 0.8% (or RUB 31 million) increase of the loss compensation expenses in the tariff decision, influenced by 4.7% hike of loss compensation price and 3.7% (66 million kWh) lowering of the normative losses due to reduced net supply at the boundaries of operational responsibility area of the branch. The gross revenue requirement for own needs of the branch grew 3.1% (or RUB 279 million), positive “smoothing”, applied by the regulator, amounting to RUB 1,081 million (however, the regulator applied RUB 710 million negative adjustment of gross revenue requirement based on actual numbers of the previous periods).
Chelyabenergo branch 2.1% boost of the “pie” GRR (RUB 381 million)	12.9% (or RUB 205 million) increase of the payments to other grid operators, impacted by grown individual tariffs of the regional grid operators due to inclusion of payments to FSK into GRR of some grid operators, connected to the UNES networks at HV-1 tariff rate till 01.07.2017. 3.9% (or RUB 231 million) decline of the payments to FSK, affected by migration of HV-1 customers to direct contracts with PAO FSK UES since 01.07.2017. 6.7% (or RUB 210 million) increase of the loss compensation expenses, influenced by 6.3% boost of the loss compensation prices. The gross revenue requirement for own needs of the branch grew 2.8% (or RUB 197 million), positive “smoothing”, applied by the regulator, amounting to RUB 382 million (however, the regulator applied RUB 103 million negative adjustment of gross revenue requirement based on actual numbers of the previous periods).

Analysis of revisions of the average electricity transmission tariff (adjusted for net supply on generator voltage level), RUB/kWh:

Analysis of average 2017 electricity transmission tariff progression shows that:

• 8.4% hike of the Permenergo’s average tariff resulted from 7.4% boost of the “pie” gross revenue requirement and 1.0% decrease of the “pie” net supply.
• 5.7% hike of the Sverdlovenergo’s average tariff resulted from 4.0% decrease of the “pie” net supply and 1.5% rise of the “pie” gross revenue requirement.
• 14.2% hike of the Chelyabenergo’s average tariff resulted from 2.1% boost of the “pie” gross revenue requirement and 10.6% decrease of the “pie” net supply, affected by migration of HV-1 customers to direct contracts with PAO FSK UES since 01.07.2017.

Technological connection fee

Pursuant to the Guidelines on calculation of connection fees, adopted by the Decree^[51] to be enforced by the Company’s branches in 2017, the regulators of the Perm, Sverdlovsk and Chelyabinsk regions have set the standardized tariff rates, as stated by Chapter IV of the Guidelines, maximum capacity unit rates, as stated by Appendix No.2 of the Guidelines, calculated in a manner stated by Chapter III of the Guidelines, and connection fee formulas.

The regulators have set a RUB 550.0 (plus VAT) connection fee for all Company’s branches to be applied to filers, requesting connection of grid equipment with capacity of 0-15 kW inclusive (incl. previously connected capacity at the point), when facilities, referred to the 3rd reliability category (from one source of electricity supply), are connected, provided that the distance between the boundaries of a filer’s land plot and Company’s facilities at 20 kV inclusive does not exceed 300 m in urban areas (cities and small towns) and 500 m in rural areas.

Permenergo branch:

The decree ^[52] has approved:

• С1 standardized tariff rate, fractioned into activities from clause 16 (except subclauses b and c) of the Guidelines;
• С2 standardized tariff rate (construction of aerial power lines), С3 standardized tariff rate (construction of cable power lines) and С4 standardized tariff rate (construction of substations of various types), differentiated by voltage class, wire section and equipment type. Besides, standalone standardized tariff rates were approved for filers requesting 0-150 kW (inclusion of as many as 50% construction prices into the fee);
• Connection fee (for maximum capacity unit), fractioned into “last-mile” activities (construction of aerial and cable power lines, sectionalization units, transformers) and differentiated by voltage class;
• connection fee formulas.

Sverdlovenergo branch:

The decree ^[53] has approved:

• С1 standardized tariff rate, fractioned into activities from clause 16 (except subclauses b and c) of the Guidelines and differentiated by voltage class and maximum capacity;
• maximum capacity unit rates, fractioned into “last-mile” activities (construction of aerial and cable power lines) and differentiated by voltage class.

The decree ^[54] has approved:

• standardized tariff rates to reimburse expenses incurred by grid companies operating in the Sverdlovsk region: С2 (construction of aerial power lines), С3 (construction of cable power lines) and С4 (construction of substations of various types) to be differentiated by voltage class, wire tagging, wire section and category, pole types, laying method and equipment type;
• connection fee formulas.

Chelyabenergo branch:

The decree ^[55] has approved:

• С1 standardized tariff rate, fractioned into activities from clause 16 (except subclauses b and c) of the Guidelines;
• С2, С3 and С4 standardized tariff rates to be differentiated by voltage class, wire tagging, wire section and laying, type of poles and equipment. Besides, standalone standardized tariff rates were approved for filers requesting 0-150 kW (inclusion of as many as 50% construction prices into the fee between 01.01.2017 and 30.09.2017) and zero standardized tariff rates (between 01.10.2017 and 31.12.2017);
• maximum capacity unit rates, used to calculate connection fee and differentiated by voltage class and maximum capacity. Besides, standalone standardized tariff rates were approved for filers requesting 0-150 kW (inclusion of as many as 50% construction prices into the fee between 01.01.2017 and 30.09.2017) and zero standardized tariff rates (between 01.10.2017 and 31.12.2017);
• connection fee formulas.

The regulator also establishes an individual fee for technological connection to United National (All-Russia) Electric Networks to be applied to a filer, should the need to perform activities stated in Appendix No.1 of the Guidelines arise.

Average maximum capacity unit rates in 2015-2017.

The chart shows how Company’s average capacity unit rates changed for the period. Increased maximum capacity unit connection prices in 2017, compared to 2016, are mainly fueled by the reduced claimed connected capacity.