JSC Interregional Distribution Grid Companies Holding was established as a result of the reorganization of RAO UES of Russia through a spin-off in accordance with the decision adopted by the Extraordinary General Meeting of Shareholders of RAO UES of Russia on October 26, 2007.

The issuer's authorized capital in the process of the reorganization was composed of RAO UES of Russia's incremental capital and undistributed profit of previous years transferred under the separation balance sheet.

The incorporation of JSC IDGC Holding, established as a result of the reorganization through a spin-off, was registered on the Uniform State Register of Juridical Persons on July 1, 2008.

As specified in RAO UES of Russia's "5+5" Strategy Concept approved by the Board of Directors of RAO UES of Russia on May 29, 2003, the purpose of setting up the issuer was to spin it off as part of the reorganization of RAO UES of Russia into a separate company that would receive shares in all interregional distribution grid companies held by RAO UES of Russia.

Reorganization of RAO UES of Russia
Electric Power Industry Reform Background

As early as the 1980s, the electric power industry of the country started showing some signs of stagnation: generation facilities were renewed slower than electricity consumption increased.

During Russia’s economic crisis in the 1990s, electricity consumption fell substantially while the renewal of facilities came to a stop almost completely.

On the whole, the situation in the electricity sector was as follows:

• Russian utilities had worse performance indicators (fuel consumption rates, average equipment efficiency, working generation capacity, etc.) than their peers in developed countries.
• Nothing encouraged efforts to improve efficiency, plan electricity generation and consumption patterns in an efficient manner, or conserve energy.
• Some regions experienced power interruptions, were affected by an energy crisis, and were threatened by highly probable major power failures.
• Customers were lacking in payment discipline; it was common practice for them to avoid paying utility bills.
• The sector’s entities were not informationally or financially transparent.
• The market was closed to new, independent entrants.

All of this made it necessary to restructure the electricity industry, causing electric utilities to enhance their efficiency and encouraging far more investment in the sector. Otherwise, the further expansion of economic relations with foreign counterparties would result in Russian companies' losing economic competition not only in foreign markets but also domestically.

Russia's electricity industry reform is aimed primarily at enhancing the efficiency of the sector's entities, creating conditions for the industry's development built on stimulated investment, and securing a reliable and uninterrupted power supply for customers.

In this connection, the Russian electric power sector underwent a radical transformation: the government regulation system in the sector was modified, the competitive electricity market was formed, and new companies were set up.

The reform changed the industry's structure: natural monopoly operations (electricity transmission, dispatching) were separated from potentially competitive operations (electricity generation and retail supply, repair and maintenance services) to replace the vertically integrated companies responsible for all of these functions by new entities engaged in specific business activities.

The companies that emerged from the reform process are entities engaged in certain business activities (generation, transmission, etc.) and controlling the relevant core assets. In terms of the scope of their core business, the new companies outstrip former regional monopolies: the new companies comprise entities operating in several different regions or operate nationwide.

Therefore, conditions are being created for the development of a competitive electricity market where prices are determined by supply and demand rather than regulated by the government and where competition compels market participants to reduce their costs.

The goals and objectives of the reform were outlined by the Government in its Resolution No. 526 of July 11, 2001, "On the Reform of the Electric Power Industry of the Russian Federation."

Taking account of subsequent changes in the regulatory and legal framework, the goals and objectives of the reform were defined in more detail in RAO UES of Russia's "5+5" Strategy Concept for 2005–2008.

Transmission networks were transferred to the control of the Federal Grid Company, distribution networks were integrated into Interregional Distribution Grid Companies (IDGCs), and the functions and assets of regional dispatching administrations passed to the nationwide System Operator.

Generation assets were also consolidated into interregional companies. These are two types: Wholesale Generation Companies (OGKs) and Territorial Generation Companies (TGKs). OGKs comprise power plants specializing primarily in electricity generation. TGKs are mainly made up of combined heat and power plants (CHPPs) that produce both electricity and heat. Six of the seven OGKs operate thermal power plants and one (RusHydro), hydraulic generation assets. Thermal OGKs were formed on an extraterritorial basis while TGKs comprise power plants located in neighboring regions.

In December 2007–January 2008, the target structure of all thermal OGKs and TGKs was formed and the first phase of RusHydro's consolidation was completed.

The process of spinning off grid companies is complete. AO-Energos were reorganized, and all 56 transmission companies came into existence.

The reorganization of RAO UES of Russia finished on June 30, 2008. As a result of the reorganization of RAO UES of Russia, JSC IDGC Holding was established through a spin-off.