March /2006

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

2. Belém São Luís Fortaleza Tocantins Natal Teresina Parnaíba Recife João Pessoa Maceió São Francisco Aracajú Salvador Cuiabá Brasília Goiânia Paranaíba Belo Horizonte Campo Grande Grande Vitória Paraná/Tietê Paraíba do Sul Paranapanema Rio de Janeiro São Paulo Itaipu Iguaçu Curitiba Uruguai Argentina Florianópolis Jacui Porto Alegre Brazilian Electricity System • Installed Cap. = 92,865 MW • Hydroelectric = 71,060 MW - 76.5 % • Thermal = 19,798 MW - 21.3 % • Nuclear = 2,007 MW - 2.2 % • 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 • 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 Source: MME/ANEEL (Jan 2006)

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

4. Percentage of potential hydroelectric in operation

5. 350 300 250 200 US$/MWh 150 100 50 0 fev/96 fev/97 fev/98 fev/99 fev/00 fev/01 fev/02 mai/96 mai/97 mai/98 mai/99 mai/00 mai/01 nov/95 nov/96 nov/97 nov/98 nov/99 nov/00 nov/01 ago/95 ago/96 ago/97 ago/98 ago/99 ago/00 ago/01 Short term marginal cost – spot price (US$ / 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

6. 2004 Power Sector Model • Motivation • Skyrocketing energy costs • Severe rationing in 2001-2002 (20% of the country’s 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. Old and New Energy Demand New energy(expansion projects) Existing generation Old Energy Existing PPA’s 2005 2006 2007 2008 2009 2010 2011 2012

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

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

10. Distribution tariffs (1/6) Who pays? Free consumers captive consumers A2 A3 A4 A2 A3 A4 B1 B2 B3 B4 Distribution network charge TE (energy) Distribution network charge Infrastructure Taxes Infrastructure Taxes

11. Distribution tariffs (2/6) Annual Adjustment & Periodic Revision Signature of the contract Annual adjustment of the tariffs Periodic revision of the tariffs 1999 2000 2001 2002 2003 2004 Extraordinary revision of the tariffs

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

13. Distribution tariffs (4/6) Controllable costs x x Net Asset-base value Gross Asset-base Value Reference Firm Rate of return Depreciation Rate Reintegration of depreciation Expenses ($) O&M Costs ($) Investors´ Payment ($) + + Controllable Costs

14. 140% 120% 100% 80% 60% 40% 20% 0% % Gross/IPCA Medium IPCA = 103.24% % Gross/IGPM Medium IGPM = 79.86% Distribution tariffs (5/6) Gross Asset Value Brazilian Index: IGP-M = General Market Price Index IPCA = Broad Consumer Price Index

15. 140% 120% 100% 80% 60% 40% 20% 0% %Net/IPCA s/ ADM Medium IPCA = 89.13% %Net/IGPM s/ ADM Medium IGPM = 68.07% Distribution tariffs (6/6) Net Asset Value Brazilian Index: IGP-M = General Market Price Index IPCA = Broad Consumer Price Index

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

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

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. ANEEL • 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)

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

22. ANNEL’s 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 • (consumer’s desire X ability to pay)

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

24. Thank you ! www.aneel.gov.br Phone: (+55) 61 2192-8603 Fax: (+55) 61 2192-8711 institucional@aneel.gov.br