Annual report 2010

10. Internal Control and Risk Management SystemRegulatory RisksThe electricity industry is a regulated branch ofeconomy. Electricity distribution tariffs are regulatedby the duly authorized tariff-setting bodiesof the constituent entities of the RussianFederation. Due to the tariff limitation policy pursuedby regional authorities, the established tariffsrisk to be lower than cost effective level.Transition to Regulatory-Asset-Base (RAB) regulationalso gives rise to the risks of results of theinitial investment capital base assessment beingcontested by independent appraisers. Further -more, there is a possibility of financial lossesrelated to the incorrect forecast of the structureof electricity distribution by voltage rate andlosses caused by a decrease in the reliability andquality of provided services. To mitigate theserisks, the Company interacts with the FederalTariff Service of the Russian Federation (FTS) ofthe Russian Federation and the duly authorizedtariff-setting government bodies of the constituententities of the Russian Federation to justifythe declared tariffs. Investment programs inthe constituent entities of the Russian Federationare being approved. They specify the scope andsources of financing of the investment programsof SDCs under long-term regional developmentprogram. The Regulations for Gathering ReportingData and Calculating the Indicators of the Level ofReliability and Quality of Services Being Providedby Territorial Grid Organizations was approved.The SDCs of JSC IDGC Holding, as natural monopolies,are exposed to the risks of recognition of thebreaches of anti-monopoly laws with regard tocompliance with the laws on natural monopolies.To mitigate these risks, regulations and customerservice standards were developed and informationis being disclosed in accordance with the laws ofthe Russian Federation.Financial RisksThe SDCs of JSC IDGC Holding, operating in theRussian Federation, are not directly affected bythe risk of changes in the foreign currencies tothe national currency exchange rates since salesrevenue are ruble-denominated and the importedequipment and materials being purchasedaccount for minor percentage of the Company’stotal expenses.The SDCs of JSC IDGC Holding maintain raisedloans and advances in strict compliance with theexecuted agreements, tracking liquidity indicators.In this regard, the risk of non-performanceby the SDCs of JSC IDGC Holding of their obligationsrelated to loans and advances in due timeand in full is assessed as minor.The SDCs of JSC IDGC Holding are attractive borrowersfor banks and have open credit limits.Borrowings are raised primarily at fixed rateslower than the market average. Therefore, the riskof losses resulting from sharp changes in thecredit policy of creditor banks is minimal.The inflation rate is among significant factorsaffecting the Company’s expenses and, consequently,financial result. According to theFederal State Statistics Service, in December2010, the Consumer Price Index was 8.8% yearon-year.Despite the stabilized growth of theRussian economy, the Company believes thatthere is a risk of likely drop in the principal rawmaterials quotes and the growth of the mainglobal currencies against the ruble rates, causinga possible increase in the inflation rate versus itsplanned value.81