March /2006 Jerson Kelman Director-General ANEEL ELECTRIC SECTOR FRAMEWORK Platts 10th Brazil Energy Conference

2 João Pessoa Jacui Porto Alegre Florianópolis Curitiba São Paulo Rio de Janeiro Paraíba do Sul Uruguai Vitória Belo Horizonte Itaipu Grande Paranaíba Paraná/Tietê Campo Grande Iguaçu Tocantins Belém São Francisco Parnaíba São Luís Teresina Fortaleza Natal Recife Maceió Aracajú Salvador Cuiabá Goiânia Brasília Paranapanema Argentina Installed Cap. = 92,865 MW Hydroelectric = 71,060 MW % Thermal = 19,798 MW % Nuclear = 2,007 MW % Consumption Units = 56.3 million Energy Production = 335,4 TWh/y (55% of South America) Peak Load = 60,910 MW (United Kingdom or Italy) HV Transmission Lines = 84,512 km Source: MME/ANEEL (Jan 2006) Generation: 2000 plants 10 largest companies account for 70% of the installed capacity; 3 of them are private Altogether, of the installed capacity… 15% private Transmission: 26 utilities 60% private Distribution: 64 utilities 80% private Brazilian Electricity System

3 Brazilian Electricity Mix (TWh) 2005 Source: MME / BEN 2005 / EPE

4 Percentage of potential hydroelectric in operation

5 Short term marginal cost – spot price (US$ / MWh) In a predominantly hydro system, spot prices are usually low; when they rise, because of the drawdown of the reservoirs, it is too late for new investments

Power Sector Model Motivation –Skyrocketing energy costs –Severe rationing in (20% of the countrys energy consumption) –12 million people without access to electricity Main Features –Introduce efficient contracting mechanisms for captive consumers –Ensure reliable supply for all consumers (Government planning & environmental license) –Universal access, with special tariffs for low-income consumers –End of dealing between generators and distributors, including self-dealing; generators now bid to meet de aggregated demand of a pool of distributors

7 Existing generation Existing PPAs Demand Old Energy New energy (expansion projects) Old and New Energy

8 Results of the Energy Auctions Percentage of demand covered by PPAs PPAs Old energy: US$ 39.0 bi New energy: US$ 29.6 bi Total: US$ 68.7 bi

9 Generation Free Consumers Captive Consumers Free Consumers DistributionTransmission DistributionTariff Financial flux TUST TUSD TUSD - TUSD - Distribution network charge + taxes TUST – Distribution network charge + taxes Distribution Tariff = Energy + TUSD PPA – Power Purchase Agreement TUST TUST PPA (energy)

10 Distribution tariffs (1/6) Who pays? Service Revenue B3 Taxes TE (energy) Infrastructure Distribution network charge B2B4B1A4A3A2 captive consumers A3 Distribution network charge A4A2 Free consumers Taxes Infrastructure

11 Annual adjustment of the tariffs Periodic revision of the tariffs Signature of the contract Distribution tariffs (2/6) Annual Adjustment & Periodic Revision Extraordinary revision of the tariffs

12 RS = Pass-through Costs + Controllable Costs Distribution tariffs (3/6) Composition Energy Purchase + Transmission Cost + Public Charges O&M + Investors Payment + Assets Depreciation

13 Controllable Costs x Investors´ Payment ($) Reintegration of depreciation Expenses ($) + Net Asset-base value value Net Asset-base value value Rate of return return O&M Costs ($) + x GrossAsset-baseValueGrossAsset-baseValue DepreciationRateDepreciationRate ReferenceFirmReferenceFirm Distribution tariffs (4/6) Controllable costs

14 Distribution tariffs (5/6) Gross Asset Value 0% 20% 40% 60% 80% 100% 120% 140% % Gross/IPCAMedium IPCA = % Gross/IGPMMedium IGPM = 79.86% Brazilian Index: IGP-M = General Market Price Index IPCA = Broad Consumer Price Index

15 Distribution tariffs (6/6) Net Asset Value Brazilian Index: IGP-M = General Market Price Index IPCA = Broad Consumer Price Index

16 Generation Distribution 26,43% Public Charges & Taxes 34,00% Transmission 7,80% Electricity Rate Composition 31,77%

17 Tariff of domestic consumers R$/MWh November 29, 2005

18 Which institution is in charge? (1/2) Policy Congress National Council of Energy Policy – CNPE Long Term Planning (supply and demand balance) Ministry of Mines and Energy – MME Energy Research Company – EPE Regulation Brazilian Electricity Regulatory Agency – ANEEL

19 Which institution is in charge? (2/2) System Operation National Operator of the Power System – ONS Monitoring and coordination Electric Sector Monitoring Committee – CMSE Accounting and clearing Chamber of Commercialization of Electric Power – CCEE

20 Independent decision-making by the Board in public meetings Administrative autonomy Board members are approved by the Senate and have mandates Responsibilities: Legislative: regulation (rules) Judiciary:settling disputes Executive:technical and economical auditing, authorizations & auctions (by delegation) ANEEL

21 ANEELs equilibrium ANEEL Reasonable tariffs Quality of service Guarantee of rights Reasonable tariffs Quality of service Guarantee of rights Adequate remuneration Contracts honored Predictable and clear rules Adequate remuneration Contracts honored Predictable and clear rules Access to all Inflation control Access to all Inflation control Consumers Government Agents

22 ANNELs challenges Achieve administrative autonomy Maintain technically capable staff (presently underpaid) Improve regulation methodology based on the first cycle of tariff reviews Establish a better connection between quality of service and cost (consumers desire X ability to pay)

23 Legal, institutional and macroeconomic stability Environmental Licensing Regulatory stability Remaining risks of investments in infrastructure

Thank you ! Phone: (+55) Fax: (+55)