From: luiz.maurer@enron.com
To: sergio.assad@enron.com, richard.shapiro@enron.com
Cc: jose.bestard@enron.com, fred.sampaio@enron.com, debora.klinger@enron.com
Date: 2001-05-07 10:04:00+00:00
Subject: Intervention in the MAE

As per Sergio's and Rick's request, please find enclosed a quick summary on 
the ANEEL's  "intervention" in the MAE.

This note is organized in four main sections:

a) What was it?
b) Initial reactions
c) Enron's view
d) Next steps


a) WHAT WAS IT?

 Aneel has recently issued a series of three Resolutions (160/161/162) 
significantly changing the structure and governance of MAE. It has also 
amended some of the MAE rules regarding penalties and guarantees on financial 
settlement.

 In terms of structure, ANEEL has empowered ASMAE to develop its 
responsibilities. ASMAE  is the organization in charge of developing MAE's 
basic operational functions, such as metering, contract registering, spot 
price calculation and financial settlement. It also has a role in developing 
the MAE rules, an effort which started in November 1998 and has not yet come 
to fruition. ASMAE formerly reported to COEX, the MAE Board of Directors, 
According to the recently enacted Resolution ASMAE will have now a solid line 
relationship with ANEEL and it was empowered to develop it basic 
organizational functions more independently from the Board of Directors.

 In terms of governance, ANEEL has terminated COEX, a 26 stakeholder Board in 
charge or runinng MAE and preparing the MAE rules. The Resolution was 
effective immediately. In lieu of COEX, ANEEL has created COMAE, a new 6 
member professional  Board, in charge of overseeing ASMAE and developing MAE 
rules, on an ongoing basis. COMAE should be operational in two months.  
ANEEL,Distributors and Generators should appoint two voting members each. 
Similarly to COEX, COMAE will still report to the MAE General Assembly, where 
all stakeholdershave a seat (votes are equally split between generators and 
distributors)

 In terms of MAE rules, ANEEL has now imposed penalties and guarantees. Those 
were part of the MAE rules since the very beginning, but they have never been 
implemented. The original MAE rules encompassed a broader range of penalties. 
ANEEL has focused solely on the the penalties of financial nature, the ones 
strictly necessary to have the financial settlement up and running.

 There is a 60 day period to put the new organization and governance in 
place. In the meantime, ASMAE will continue its routine functions. If doubts 
arise, ASMAE will clarify directly with ANEEL 


b) INITIAL REACTIONS

 Most companies were shocked with the new Resolutions. The Resolutions were 
issued on a Friday, late afternoon, to allow agents to dissipate their anger 
over the weekend. The measures were considered a unilateral "coup-de-etat"  
kind of intervention. A lot of criticism was raised on the "legality" of the 
process. Initial reactions challenged ANEEL's ability to intervene in the MAE 
rules and terminate COEX.

 Similar reactions were expressed the following week. A COEX meeting (void in 
legal terms) was held the following week to verbalize people's angers and 
discuss next steps. An immediate General Assembly was scheduled. Several COEX 
members got really upset. Reasons vary: some are questioning the necessity of 
those actions, although most agree that COEX was not a functioning organic 
body. Some COEX member got very emotional: afterall, their hierarchical 
positions inside their organizations depend on the status granted  by being a 
COEX member.  

 ANEEL invited CEOs from all affiliated companies to explain the rationale 
behind those measures and avoid direct confrontation with COEX, whose members 
are motivated by more parochial views. The meeting was useful and most of the 
negative reaction was placated.

 No one is now is now considering any legal action against ANEEL. Most 
stakeholders agree that something had to be done, despite the fact that the 
way ANEEL invervened was disastrous and with doubtful legal validity. The 
issue now is to prepare a new Market Agreement, containing the basic mandates 
and addressing utility's concerns.


c) Enron's view

 Enron thinks that the proposed changes were badly needed. Enron has publicly 
and in several occasions expressed its view about COEX role in MAE 
implementation. In Informativo Regulat?rio # 3, issued back in November 2000, 
we blamed the stakeholder nature of COEX for most of MAE problems. Nothing 
was being decided. COEX attempted to get the MAE rules in place for more than 
two years without success. No one (except a few, including Enron) was 
interested in getting MAE up and running. Rather, most agents were interested 
in conforming the MAE rules to meet their ad-hoc individual parochial 
interests. The COEX attempt to deal with the nuclear issue was a clear na<ve, 
retreat to objectives. Procrastination was the rule of the game. In sum, COEX 
was not working. The California experience served to surface and enlighten 
the maladies of stakeholder's Board. In several instances, we proposed a 
professional Board and some form of ANEEL's intervention, as it had the 
ultimate responsibility to have a functioning market. R

 ANEEL has reportedly taking our comments into account. Regulatory Affairs 
is  proud to have influenced  this process. However, we think ANEEL should 
have acted a long time ago. ANEEL now has a sense of urgency. It fully 
understands that a non-functioning market would be an obstacle to anyone's  
building new short term generation, on a merchant basis. This incremental 
generation is key to mitigate the impact of rationing. 

  No one doubts that ANEELs intervention was a "coup-de-etat". Legally 
speaking, it is also questionable. ANEEL is backed by the Ministry of Energy 
and by other Federally owned generations, who have many votes in the MAE. 
Despite those deficiencies,  we believe the changes are in the right 
direction.

 ANEEL has called Enron and asked for our  individual support as well as to 
use our influence in the coalitions groups we are part of (ABRADEE, APINE, 
CBIEE and ABRACEEL), to help mitigate the anger and help get the new Market 
Agreement in place. Apparently ANEEL did not call any other private utility. 
We explained ANEEL how delicate the situation is. The only way to proceed is 
to shift the spotlight from the legal issues and try to focus on a new MAE 
Agreement, to be signed by all parties. This would require ANEEL some 
willingness to negotiate and compromise. They accepted our suggestion. We 
have also expressed our view that ANEEL should not further interfere in the 
MAE rules, spot pricing and contracts. Our support is contingent on the 
integrity of market and contracts, even during a serious rationing. The 
impending rationing indeed represents a temptation for the regulator to 
further interfere, set caps on spot and the like.

 We have focused most of our effort in examining the three Resolutions and 
proposing changes & improvements to be incorporated into a new MAE Agreement. 
There are many aspects which need to be clarified/improved in the new 
governance and structure as proposed by ANEEL. For example, the hierarchical 
lines between ANEEL, COMAE, ANEEL, General Assembly and Board of ASMAE need 
clarification. Similarly, the penalty rules need a lot of work to be ready to 
be implemented.

 We have prepared several suggestions and we have circulated among industry 
players, asking for inputs and feedback. No one is really focused on the new 
MAE Agreement. Discussions are still very emotional at this point in time. 
However, we feel that some progress has been made. Coalition groups  are not 
talking about challenging the Resolution on legal grounds. This is unlikely 
to happen on an individual basis. The situation is relatively  under control.

d) Next Steps
 
 Despite the progress in mitigating the initial anger, there is still a long 
way to go. Our initial recommendations to improve the Resolutions, 
distributed to industry players, should be technically discussed and agreed. 
COMAE members should be appointed: ideally, utilities should agree on the 
COMAE members specs, on a slate of candidates and on a process for final 
COMAE members selection. Finally, a new MAE Agreement should be signed. None 
of them are trivial tasks from a political standpoint.  ANEEL has established 
a 60 day transitional period and a safety net if nothing happens: ANEEL 
itself would choose the members and will maintain the Resolutions as they 
are. 

 We are also going to use ABRACEEL to lobby for COMAE seats (one or two) to 
be appointed by traders. So far, this group has not been represented in the 
COEX and in any other MAE formal or informal discussion groups.  We feel 
traders are handicaped and that this is detrimental to the market as a whole 
Distributors avoid retail competition while generators avoid wholesale 
compatition. Collectively, they avoid competition and therefore the 
implementation of the market. Traders are the only ones who strongly advocate 
competition, on a genuine basis.

 All of this will keep Regulatory Affairs busy for the next months.