Spreadsheet: richard_shapiro__32135__Regulatory events Jan to April 2001
Sheet: Sheet1

 |  | REGULATORY EVENTS REPORT BRAZIL
 |  |  | January - April 2001
 | REGULATORY EVENT | BUSINESS UNIT AFFECTED | EXPECTED IMPACT | REGULATORY ACTION | CURRENT STATUS OR EXPECTED OUTCOME
 | ENERGY RATIONING | Virtually All as described below | *   Market institutions may be challenged on a permanent, irreversible basis; or, on the contrary, this may create an opportunity to strngthen  them | *  Regulatory Affairs leading four coalition groups (*) in a major advocacy effort to encourage Government to use market signals, preserve MAE, honor contracts, no caps on spot prices, economic incentives & penalties on the rationing quotas                              *  First movers - a sound position paper sent to Minister and all Government authorities showing how market signals could help alleviate crisis | *  So far, so good. Positive response from Government             * However, level of Government interference may increase, as rationing becomes more severe
 |  | - Elektro | *  Loss of Revenues                                        * Potential Exposure to  the Spot Market | * Concerted effort to maintain Dry Period Relief clauses in the Initial Contracts  (Annex V)                                                                                    * If this clause is maintained, long position on the MAE may offset loss of revenues; otherwise loss of EBITDA may achieve up to US$ 60 million | * No Government declared intention to review [NAME], despite pressure from generators to change the rules
 |  | - Eletrobolt Merchant | *  Dowside risk allocated to [NAME], potentially a deal-break; or seriously affect project feasibility | * Concerted effort to avoid any government interference on spot prices | * No Government declared intention to set caps - even though there may be multiple, less conspicuous ways to achieve this goal
 |  | - Free Market Deals (Wholesale and Retail) | * None, unless government decides to scale down all contract volumes ala Initial contracts | * Part of the concerted effort above | * No declared Government intention to intefere on freely negotiated supply contracts
 |  | - Cuiabá I | * Political pressure to operate at maximum capacity, burning fuel oil without CCC coverage | *   Discussions with ANEEL, Furnas, ONS and other government entities proving it is not feasible to operate unless fuel costs are shared by the system (CCC account) and proposing new alternatives to solve this problem and allow Cuiabá I to fully dispatch | * An agreement has been reached between ANEEL, Furnas and ENRON. Furnas will pay for the aditional diesel fuel (not shared through CCC). Existing contract will be added and ANEEL will allow Furnas to pas-through excess costs to tariffs.
 | INTERFERENCE ON WHOLESALE ENERGY MARKET (MAE) | Virtually all | * High expectations that the Wholesale Market will [finally] function | * Informativo Regulatorio # 3 has suggested in November 2000 that COEX should be replaced by a professional board
 | * ANEEL eliminated COEX, a 26 member stakeholder Board, replacing it by a professional one                                                                     * ANEEL has also established penalties, guarantees and gave more operational latitude to the Market Agent |  | * Without a minimally functioning Market, Eletrobolt would not be able to collect revenues                         * Also, Elektro would have no chance to sell its [expected] long position during rationing, substantially reducing EBITDA | *  ANEEL requested Enron to support those measures, both individually and in articulation with other coalition groups                               * Enron has been putting significant effort to support those measures (despite not being legally "bullet-proof") | * Despite the initial hostile reaction from most stakeholders, the situation has been placated.                  * Enron has helped ANEEL move the spotlight from the legal aspects to the drafting of a new Market Agreement, to improve and validate changes
 |  |  | Despite our support in the MAE governance, [NAME] have several important problems: possibility to interference on bilateral contracts, direct interference of ANEEL, conflic of interest etc | * ANEEL has agreed to open negotiations on the changes to be made in the MAE Agreement ( to introduce the new governance) | * A group of delegates of 3 distributors and 3 Generators will be discussing with NEEL the changes in the MAE agreement
 | REGULATORY EVENT | BUSINESS UNIT AFFECTED | EXPECTED IMPACT | REGULATORY ACTION | CURRENT STATUS OR EXPECTED OUTCOME
 | MARKET OPENING - RETAIL COMPETITION | Retail and Elektro | * Risks of delays in the establishment of retail competition  -planned for 50 kW in 2003 and 0 in 2005                                               *  If markets are open, D/Cs (including Elektro) may bear future PPA stranded costs due to lack of competition in natural gas industry; currently no regulatory relief | *  Enron has been very active, both individually and  in leading coalitions (particularly ABRACEEL) to defend the continued opening of the retail market.                                                      *  Enron has also discussed with the Regulator a feasible plan to get effective retail competition, on a cost benefit basis. We have defended the need to have hourly metering as a pre-requisite to allow a captive customer to switch                       * Enron has also insisted on the need to "unbundle" the rates, to separate the wire from the trading business and to elminate distortions in the current rate structure                                                                            * RA has also helped ANEEL to reconcile the need to have minimum contracting for D/Cs and to open the market                                                           * Finally, RA has opposed a proposed regulation giving free customers the right to switch back and forth between the regulated and unregulated tariffs. to avoid undue arbitrate opportunities | *   Despite the opposition from D/Cs, ANEEL is conceptually aligned with retail competition.                                         * However, ANEEL's regulations on unbundling are moving slowly, in expectation that a new Bill of Law, currently on Congress (PL 2905) will come to fruition                                     * ANEEL is also adamant to accept the need to provide regulatory oversight in case some of the existing PPAs being signed by D/C, become stranded
 |  |  | * Risk of postponing the begining of Initial Contract declination (due to 2003).    LDCs will keep tariffs that mix competitive energy prices with Initial Contracts tariffs (cheaper) for a longer period. In this enviroment the existing cheaper regulated tarifs will still block the introdution of a competitive retail market. | * ENRON has been very active to prevail the declination established by Law #9648. In many meetings with governmental authorities we have pointed the need of a real free retail market for the country. | * No Government declared intention to postpone the declination of Initial Contracts
 | REGULATORY LAG &  TARIFF PASS-THROUGH ISSUES | *  Basically Elektro                            * Indirectly, [NAME] and Cuiabá II, as pass-through issues limit D/Cs willingness to contract new energies | * "Regulatory Lag" impact due to ANEEL's denial to recognize pass-through of cost increases from the moment they are incurred (between two successive annual tariff readjustments)  - those "uncontrollable" costs, or [NAME],  include Itaipu, Fuel Account, Sector Levies, etc.                                                                        * As of today, regulatory lag impact represents about US$ 42 million | * Initial technical discussion with ANEEL did not come to fruition. We proposed the creation of a "tracking account" mechanism                                    * Subsequently, technical advise and expert testimony (NERA and legal position papers) was sought, as part of Public Hearing 07/2000                             * Since this is an industry wide issue, ABRADEE decided to take legal action against ANEEL (ongoing), under the allegation of Concession Contract breach | * ANEEL adamant about any "retroactive rate making" idea                                   * ANEEL has been backed by Finance Ministry, afraid that rise in tariffs may trigger inflation                      * As part of Public Hearing 07,  ANEEL has implicitly accepted that any economic desequilibrium between successive tariff readjustment may trigger an extraordinary review (good news); but still a long way to agree on details
 | UNECONOMIC BYPASS | Elektro | *  Uneconomic bypass has been intensified by ANEEL's recent ruling (Resolution 456) | * Utilities alerting ANEEL about the unintended consequences, and requesting a rewiew of the entire regulated rate structure, across all customer groups | * Under discussion. D/Cs currently working on the "unbundling" of wire tariffs for free customers                 *  However, still a long way to go. Current rate structure embeds historical distortions. Utilities afraid of changing the rate structure on an individual basis and cause a massive migration of their free clients
 | REGULATORY EVENT | BUSINESS UNIT AFFECTED | EXPECTED IMPACT | REGULATORY ACTION | CURRENT STATUS OR EXPECTED OUTCOME
 | VN AND ENERGY COST PASS-THROUGH ISSUES | * Elektro                                          * [NAME], Cuiabá II and any other "new plant", as pass-through issues limit D/Cs willingness to contract new energies | * Currently, VN has been increased from US$ 32 to US$ 36-37/MWh, making new thermal plant construction more feasible and increasing pass-through benchmark for D/Cs                                             * Unfortunately, VN still capping purchases on a spot basis  - encouraging D/Cs to lobby for caps on spot prices | * Regulatory affairs articulated, via APINE,  a quick response in early January, protesting against ANEELs attempt to maintain VN in US$ 32-33 range                                               * Utilities lobbying ANEEL to rise cap on VN purchases, over and above the prudent minimum contracting requirements | *  Long term, VN should be replaced by competitive bidding. VN suffers the "one size fits all" syndrome, and it is not able to differentiate between base and peaking power. Utilities starting to lobby in this direction                * Short positions pass-through capped at VN may be disastrous to utilities during rationing (PG&E and SCE problem revisited);                                             * ANEEL has established a relief on short position dues to dry period relief clauses in the Initial Contract
 | ITAIPU | * Elektro and potentially free trading, as it unfavorably impacts liquitity of the market | [NAME]' attempt to secure property rights on part of Itaipu capacity and associated energy. (current and future, as two additional turbines are planned to be installed)   * Preliminary calculation indicates a financial impact to Elektro of US$ 40 million/year (or more, if short position have to be settled at MAEs high spot prices) | * Enron has been leading an industry wide efforts to rebuff [NAME] claims, both on legal and technical grounds                            * Recently, the subject was taken to a simplified arbitration process in the Wholesale Market (COEX), which secured D/Cs property rights. A Legal Opinion from independent major [NAME] gave full support to our position. First battle won, but ANEEL's intervference on MAE has left the issue still open. | * We understand those are very complex legal issues, far beyond the scope of MAE and ANEEL. We acknowledge that issues will end up being decided in court, after an expected lengthy process.
 | [NAME] | Basically Elektro | * Several ongoing regulations being discussed, covering issues such as access to transmission, mandatory investments in grid reinforcement, expansion of service coverage, rural cooperatives territory definition, life line rates, etc. | * Elektro actively participating in several discussion groups and following up closely bills of Law 2905/00 and 1921/99, being discussed in Congress, dealing, inter alia,  with those aspects | * Mounting pressure from ANEEL to increase electric service coverage   * Utilities fighting back to make sure proper investment are fully recovered in the service territory
 | DEAL SUPPORT | Elektro, Wholesale and Retail | Gradual opening of the market leading to some deals, both at the wholesale and retail levels. | * General support to wholesale and retail teams, to help them understand the new model, capture opportunities and limit potential exposures                                        * In most cases, due to the uniqueness of the new deals and to the fact that there are still many gaps, Regulatory Affairs has to work together with ANEEL  to help clarify or ammend existing regulations                               * Regulatory also has to be constantly advocating to have a functioning MAE, and continued opening of the market. For example, we have been opposing to a recent ruling from ANEEL which prevents public service concessionaires (85% of the generation in Brazil) to freely trade energy; this provision will limit market liquidity, particularly while most G is still in government hands | * Regulatory  has been supportive to the deal making activity in the required timeframe; our support encompasses  the legal, wholesale and retail departments.                           * We have also established a good dialogue with ANEEL, which has been responsive to resolving issues on access, free market, and others.  * On a higher advocacy level, we have lobbied to preserve market institutions, and use the impending rationing crisis to strengthen, as opposed to destroying the still embryonic electric energy market      * However, still a limited number of deals are due to the lack of physical and financial liquidity in the market
 | REGULATORY EVENT | BUSINESS UNIT AFFECTED | EXPECTED IMPACT | REGULATORY ACTION | CURRENT STATUS OR EXPECTED OUTCOME
 | ASSET DEVELOPMENT - CUIABA I | Cuiabá I Power Plant
 | * Delays in Pipeline Construction |  | * Plant has been operating with fuel oil, but  costs not entirely covered by the national fuel account (CCC), entailing significant losses to Enron; mounting political pressure to dispatch 450 MW because of the imminent rationing | * Regulatory has lead the effort to make the plant fully qualify for CCC, until the pipeline is comissioned in late 2001 | * CCC extended in time for the equivalent of one simple cycle unit (225 MW); the fuel not covered by CCC will be reimbursed by Furnas.
 | * Furnas' attempt to renegotiate contract terms and conditions |  | * Cuiabá was essentially a capacity contract. Furnas wants to revisit its terms and conditions, under the allegation that contract is not taking market risk after MAE was implemented                                              * Furnas has proposed to take the subject to COEX for mediation by a special dispute committee to be created | * Regulatory has lead the effort to maintain the contract conditions; a legal case was built to demonstrate why the new MAE rules should not overide the original terms and conditions                                                                               * Enron has strongly refused to have COEX resolving contractual disputes; we have recently published Informativo Regulatorio # 4 suggesting how contractual, regulatory, and MAE disputes should be resolved, therefore protecting the sanctity of Cuiaba I contract and avoiding MAE/COEX to muddle with those issues | * Negotiations with Furnas not coming to fruition; Enron preparing legal case to terminate the contract; legal notices already sent and now clock is ticking                                                 * COEX now defunct; special care to be taken in the drafting of the new Market Agreement to avoid MAE interference in bilateral issues
 | ASSET DEVELOPMENT - ELETROBOLT | Eletrobolt Merchant Plant | * Risk deriving from MAE rules (or the lack thereof), particularly caps on spot and a loss sharing mechanism which overpenalizes long positions in the MAE | * Regulatory supporting the MAE "intervention", lobbying for no caps and drafting a new MAE agreement which limits loss sharing exposure | * Ongoing efforts. So far Government has not demonstrated intention to set caps; discussions on new MAE agreement to start soon. In other hand, recent "Medida Provisória" (equivalent to LAW) isued by the Government allows intervention on MAE.
 | GAS I - INTERRUPTIBLE TRANSPORTATION DEAL | Natural Gas Unit and LDCs | *  Enron has been assigning a significant effort to have free access to Bolivia-Brazil pipeline, on an interruptible transportation basis             *  Since this was the first request to a de facto break [NAME]' monopoly on transportation, it has encountered a lot of resistance | Regulatory Affairs has been playing a significant role, after long negotiations with [NAME] have not come to fruition. RA requsted ANP, the National Hydrocarbons Regulator to mediate, since ANP regulates the entire oil industry. Because of the uniqueness of the deal and ANP's lack of experience, this was a lengthy, conflicting process | *  ANP has finally made a decision supporting Enron's request. Additionally, RA had to go for a second ANP arbitration process for Enron to have 11 delivery points citygates for the interruptible gas. This was also a successful attempt. The almost a year "fight" has created a precedent to other companies and paved the road for gas unbundling. After Enron, British Gas filed a similar complaint, this time requesting for firm capacity, curently being held idle by [NAME]. ANP accepte BG allegations. Other gas companies to follow
 | GAS II - OPEN ACCESS - REVIEW OF ANP ORDINANCE 169 | Natural Gas Unit and LDCs | * The above arbitration processes, triggered by Enron's filing for interruptible transportation, have revealed the necessity or a thorough review in the existing regulations on pipeline transmission use                                                              * ANP prepared a new regulation package which is meant to make access non-discriminatory and to expedite the arbitration processes | *  RA significantly contributed in this hearing, aiming at improving the access rules.                                          * Enron also provided the know how to neutralize [NAME]' continued attempt to limit access | *  Expected changes include a technical clarification of pipeline capacity and loads, bid process for free capacity, incremental tariff for expansion of the pipeline system in order to allow a third party to invest in the expansion of the existing pipeline system   *  In the future, access will likely be simpler, less discriminatory
 | REGULATORY EVENT | BUSINESS UNIT AFFECTED | EXPECTED IMPACT | REGULATORY ACTION | CURRENT STATUS OR EXPECTED OUTCOME
 | GAS III - OPEN ACCESS - A CONTINUED EFFORT | Natural Gas Unit and LDCs | * The above arbitration processes and the preparation of ANP ordinance 169 were landmarks;                  *  However, effective non-discriminatory access still depends on other regulations. Ordinance 169, when enacted, will not suffice | *  Enron has identified and has been supporting the continuation of the implementation of new regulations to consolidate a competitive environment in the natural gas industry.                                                  *  Besides Ordinance 169, RA has helped prepare TCG (General Terms and Conditions) and Conflict Resolution Ordinance.                    * We have been leading and participated in several discussion groups | * Despite [NAME]' opposition, free access to pipelines, on a non-discriminatory basis is becoming a reality
 | REVISITING REGULATORY ROLE | Regulatory Affairs | * Need to streamline Regulatory Affairs South America and focus on deals as opposed to advocacy.                                     *  The need to streamline is aligned with Enron's South America's plan to reduce its asset position and increase profitability of existing businesses | * Regulatory has been reassessing its roles and resources to provide the most cost-effective support to Enron's existing and streamlined lines of businesses.                           *  RA has pointed out that the market is still at embryonic stages, and requires a lot of regulatory support to bridge gaps in the existing legislation.  Therefore, pure "deal support" will not help Enron achieve its goals;                                  * This is particularly important because most ot Enron's deals are unique.                                                      * As a consequence,  the issue cannot be simply phrased as "only deal support, no advocacy", but rather an adequate blend of those, taking into account the maturity of the market, deals to be developed and long term goals | * RA is in the midst of this process, which involves a continued dialogue with new top management, helping them become more acquainted with the nuances of the regulatory arena, the kind of support RA plans to provide, and the benefits entailed                   * RA is currently analyzing the business goals and assessing the regulatory resources at several levels, ranging from pure deal support to advocacy at higher levels   * Due to the more limited resources available, RA is proposing an "extended regulatory" business model, whereby the regulatory responsibilities are spread among the entire organization and RA plays more of a coordinating role
 | Glossary
 | (*) ABRADEE - Brazilian Association of Distribution Companies
 | CBIEE - Brazilian Association of Investors of the Electric Sector
 | ABRACEEL - Brazilian Association of Energy Trading Companies
 | APINE - Brazilian Association of Independent Power Producers  (IPPs)
 | ANP - National Hydrocarbons Regulatory Agency
 | ANEEL - National Electricity Regulatory Agency
 | ONS - National Independent System Operator
 | MAE - Wholesale Energy Market
 | COEX - A 26 stakeholeder Board in charge of running MAE