WACC assumptions. We use a discount rate in the range of 14.8% to 15.1% in our models. The variation stems from different cost-of-debt assumptions derived from ranking the companies according to their credit quality. RusHydro and Mosenergo have the highest credit rating, followed by OGK-3, OGK-4, TGK-1 and TGK-10. We use an unlevered beta of 1.45 for the generation sector, a 7.5% risk-free rate of and a 5.5% long-term equity risk premium.

Liberalization of the market is supported by the state. At the moment, some 30% of electricity in Russia is traded on the free wholesale market. The rest is sold at regulated tariffs which are set once per year on a “cost-plus” basis. The 1st of July 2009 is a major milestone in market liberalization, as the share of freely-traded electricity is set to go up from 30% to 50%. Gradual deregulation originally approved by the government envisages full liberalization in 2011, and the recent news flow suggests that the state intends to stick to this plan.

We assume a two-year roll back for most investment projects. We took the current utility sector’s long-term investment program as the basis for our forecasts. Then we rolled back almost all of the investment projects for two years, leaving only those that are already under construction and have a clear completion schedule announced by generation companies. The Ministry of Energy intends to make an official review of the program in 3Q09.