Looking Beyond the Energy Crisis:

Scenarios for a Renewed Brazilian

Electric Power Sector

Washington, March 2002

Pedro ParenteMinister of the Presidency

Acting Minister of Mines and EnergyHead of the Energy Crisis Committee

OUTLINE

The Brazilian electric sector

Introduction

The electric sector model

2001 crisis - Origins and management

Revitalization of the model for the electric sector Crucial questions

Were the lessons learned?

Introduction to the Brazilian Electric Sector

Large capacity dams, in 7 basins with Large capacity dams, in 7 basins with different hydrologic regimesdifferent hydrologic regimes

Generations in the differentGenerations in the different basins are linked through huge basins are linked through huge transmission lines, in sometransmission lines, in some cases longer than 1,000 kmcases longer than 1,000 km

There are 91 hydroelectric plants and There are 91 hydroelectric plants and more than 69,000 Km of transmission more than 69,000 Km of transmission lineslines One of the world’s largest inter-linked One of the world’s largest inter-linked systemssystems

Electric sector characteristics

I NT

ER

LIG

AÇ

ÃO

NO

RT

E-S

UL

HIGH DEPENDENCE ON HYDROLOGY

Assured Energy (2001)*: 364,000,000 MWh

Current total generation capacity of the inter-linked system is 74,000 MW, for an demand at the peaks of:

before during after rationing rationing rationing

56,000 MW 44,000 MW 48,000 MW

Total Generation Capacity

Hydroelectric

Conventional thermal

Nuclear thermal

Wind/Small hydros

Total Capacity

Itaipu (Paraguay)

Imports

Total Supply

Inter-linked system - Installed capacity (MW)

61,555

6,944

1,966

2,345

72,810

5,500

1,150

79,460

82

9

3

3

92

7

1

100

69,448

17,024*

1,966

5,645

94,083

6,200

3,438

103,721

67

17

2

5

91

6

3

100

2001 (%) 2004(e) (%)

* Including emergency thermals (e)=estimate

69,510

67,048

63,97163,110

61,57162,487

3.54%

4.59%

1.47%

1.35%0.99%

56,000

58,000

60,000

62,000

64,000

66,000

68,000

70,000

72,000

1995 1996 1997 1998 1999 2000

YEAR

TR

AN

SM

ISS

ION

SY

ST

EM

EX

TE

NS

ION

(K

m)

ENERGY TRANSMISSION SYSTEM Total extension (Km) and annual increase (%)

48

108

AVERAGE TARIFFS

Generation

Distribution

20.5 20.5

57.657.6

R$/MWh US$/MWh

Brazilian Electric SectorModel

BRAZILIAN ELECTRIC SECTOR MODEL

BEFORE 1996

• Totally public owned

• Generators owned by the Federal Government

• Distributors owned by State Governments

• Model failed in the beginning of the 90’s

BRAZILIAN ELECTRIC SECTOR MODEL

THE NEW MODEL

• Competition in Generation and retailing

• Regulation in transmission and distribution

• Based on Private investments

• Independent regulatory body to ensure adequate balance between utilities and consumers and high quality of services

Prices in the spot market are based on a computational model: agents don’t make price offers

Prices in the spot market are very volatile There is almost no free consumers No external price references for price caps for

captive consumers

BRAZILIAN ELECTRIC SECTOR MODEL

CURRENT INADEQUACIES (1 OF 2)

Wholesale market not working properly Calculation of assured energy needs to be

revised Implicit subsidies Public utilities still account for a large portion of

the market

BRAZILIAN ELECTRIC SECTOR MODEL

CURRENT INADEQUACIES (2 OF 2)

Evolution of the wholesale market pricesSoutheast/South system

66

0

10

20

30

40

50

60

70

80

90

100

jan-93 jul-93 jan-94 jul-94 jan-95 jul-95 jan-96 jul-96 jan-97 jul-97

Marginal Operation Costs in the SE/S system from January 1993 to August 1997

US$/MWh.

In Brazil, prices in the spot market are not

the driver for new supply

Long term contracts (PPA’s) are the driver

for new supply

AS A RESULT:

BRAZILIAN ELECTRIC SECTOR MODEL

Origins and management of

2001 crisis

• Below average hydrology

• Delays in investments in plants and transmission lines

• The model inadequacies

• Delays in the implementation of the model

• An ill-suited administrative structure within the government to manage the new model in a totally different environment

2001 CRISIS

ORIGINS

• Federal Government took immediate responsibility for the crisis. There was no finger pointing within levels of government and/or agencies

• A “crisis cabinet” was created at the highest government level, with powers commensurate to

the task

2001 CRISIS

MANAGEMENT

• Decisions taken in this cabinet were, in general, final, i.e., did not depend upon other government instances

• All the lines in the plan of action were implemented.

Two out of five were concluded, and the remaining are fully under way

2001 CRISIS

MANAGEMENT

1) Program for the reduction of demand

2) Structural program to increase the energy supply

3) Emergency program to increase the energy supply

4) Conservation

5) Revitalization of the model for the electric sector

PLAN OF ACTION

Total demand reduction (Rationing period= Jun/2001 to Feb/2002)

* For the Northern region, the basis period was not May/Jun/Jul 2000

Northregion

North-eastregion

South-eastregion

Load reduction in relationto May/Jun/Jul 2000 (*) 15.7% 15.6%

Load reduction in relationto the same base-period2000/01

18.3% 19.5% 19.8%

Load reduction in relationto the initial estimates for2001/02

24.6% 20.7% 21.2%

North: 782,000 MWh (equivalent to Pará (*) state)

Northeast: 4,700,000 MWh (equivalent to Bahia state)

Southeast and Mid-west: 20,500,000 MWh (equivalent to Minas Gerais state)

The load reduction in households was on average 24.4% during the rationing period

(*) except electrointensive industry

Total energy saved : 26,000,000 MWh

Total Saved Energy During Rationing

Load Evolution (1994-2001)

17000

19000

21000

23000

25000

27000

29000

JAN FEV MAR ABR MAI JUN JUL AGO SET OUT NOV DEZ Méd.

2001

2000

1999

1998

1997

1996

1995

1994

23,198

25,848

25,560

23,961

23,112

22,086

21,252

20,096

Southeast/Mid-West

averageMW

• In 2001, the load equalled that of 1997. Cumulative GDP growth from 1997 to 2001 was 11.2%. Still, GDP grew 1.5% in 2001.

1) Program for the reduction of demand

2) Program to increase the energy supply

3) Emergency program to increase the energy supply

4) Conservation

5) Revitalization of the model for the electric sector

PLAN OF ACTION

POWER PLANTS IN THE STRUCTURAL PROGRAM (MW)

2001* 2002 2003 Total

HYDROELECTRIC (24) 1,397 3,050 2,421 9,990

THERMAL (38)** 1,354 2,530 3,928 11,434

COGENERATION 125 83 500 708

WIND 2 261 394 1,050

IMPORTS (5) 98 1,088 400 2,386

TOTAL (MW) 3,042 9,299 7,762 28,040

TRANSMISSION LINES (18) - Km 505 1,371 4,350 9,250

SUBSTATIONS (8) - MVA

4,347

6,297

INCREASE IN SUPPLY

TYPE OF INVESTMENT

SMALL HYDROELECTRIC (SHPs) 66 134 119 319

900* Actual.** Considering a non-performance of 20% in the program.

2004

3,122

3,622

-

393

800

7,937

3,024

-

1,050

EMERGENCY THERMAL (58) - 2,153 - 2,153-

ESTIMATED INVESTMENTS (2001 - 2004)

Private Public Total

HYDROELECTRIC (24) 7,883 3,356 11,239

THERMAL (38) 12,395 4,371 (*) 16,776

IMPORTS (5) 1,317 - 1,317

TRANSMISSION LINES 3,770 1,167 4,937

OTHER SOURCES (**) 5,715 480 6,195

TOTAL

%

34,054

78,4

9,374

21,6

43,438

100

TYPE OF INVESTMENT

(R$ Million)

(*) Mostly PETROBRAS in association with private firms.

EMERGENCY THERMAL (58) 2,974 - 2,974

(**) Other sources: Cogeneration, eolic, photoelectric and SHPs.

  Scheduled bids (2002/2003)*

Transmission lines: 6,250 KmTransmission lines: 6,250 Km

Feb. through Dec. 2002Feb. through Dec. 2002

Estimated investments: R$ 2.8 billionEstimated investments: R$ 2.8 billion

Hydroelectric Power Plants: 10,978 MWHydroelectric Power Plants: 10,978 MW

Estimated investments: R$ 16.5 billionEstimated investments: R$ 16.5 billion

* Source: ANEEL

28

Source: IIRSASource: IIRSA

SOUTH AMERICA

Infrastructure

Interconnections

BRAZILHighways

Navigation

Power: Itaipu

Guri (Venezuela)

Bolivia-Brazil pipeline

Argentina

1) Program for the reduction of demand

2) Program to increase the energy supply

3) Emergency program to increase the energy supply

4) Conservation

5) Revitalization of the model for the electric sector

PLAN OF ACTION

DEFINITION OF THE ELECTRIC ENERGYEMERGENCY SUPPLY FOR 2002-2003

Estimateddemand for

2002/03Structural Supply

Program 2001/03

Assumptionsfor hydrology

EmergencySupply Needs

2002/03

EMERGENCY SUPPLY

Guidelines

Additional energy supply, on a temporary basis,

to work as an “insurance” for the consumer

A public energy trader (SPC) was set up to buy

energy from independent producers

Contracting Emergency Generation: Results

117 proposals (> 4,000 MW)

2,100 MW selected

1,500 MW NE 600 MW SE

average price: 290 R$/MWh

100 R$/MWh fixed price 190 R$/MWh variable price

1) Program for the reduction of demand

2) Program to increase the energy supply

3) Emergency program to increase the energy supply

4) Conservation

5) Revitalization of the model for the electric sector

PLAN OF ACTION

Approval of Law Nº 10,295, on the National Policy for Approval of Law Nº 10,295, on the National Policy for

Rational Energy Use and Conservation Rational Energy Use and Conservation

Assistance Program for Micro-, Small and Medium Assistance Program for Micro-, Small and Medium

CompaniesCompanies

Regulatory Decree: Creation of Managing Committee Regulatory Decree: Creation of Managing Committee

for Indicators and Levels of Energy Efficiency (CGIEE)for Indicators and Levels of Energy Efficiency (CGIEE)

Conservation

1) Program for the reduction of demand

2) Program to increase the energy supply

3) Emergency program to increase the energy supply

4) Conservation

5) Revitalization of the model for the electric sector

PLAN OF ACTION

Revitalization of the model

for the electric sector

Created within the Crisis CabinetCreated within the Crisis Cabinet

Mission:Mission: To correct inadequacies and propose To correct inadequacies and propose

improvements to the power sector model.improvements to the power sector model. To preserve the model’s fundamentalsTo preserve the model’s fundamentals

Revitalization Committee

General Agreement of

the Sector

Implementation of measures

from 33 proposed

themes

• Resumption of private investments.

• Free competition in the sector (generation and retail).

• Proper market functioning.

• Assurance of reliable energy supply, with mitigated tariff impact

Revitalization Committee

Solved deadlock and avoided paralyzation of

announced investments

Avoided financial hardship for generators and

distributors alike

Solved controversies related to non-manageable costs

(e.g. price of gas)

Mitigated impact on tariffs

Contributed to prevent repetition of events in the future

General Agreement (Dec.2001)

Schedule for implementation of measuresfrom the 33 proposed themes

Report with details on the 33 themes released

February 1st, 2002

Discussion with agents (1-2 months)

Releasing of each detailed measure for final

public discussion (1 month)

Implementation (1-2 months)

Total time frame: February to July 2002

A. Resume market operationA. Resume market operation

B. Reinforce market-based mechanismsB. Reinforce market-based mechanisms

C. Ensure adequate expansion of supplyC. Ensure adequate expansion of supply

D. Monitor supply reliabilityD. Monitor supply reliability

E. Improve interface between market and regulated E. Improve interface between market and regulated

segmentssegments

F. Stimulate fair competitionF. Stimulate fair competition

G. Realistic tariffs and consumer benefitsG. Realistic tariffs and consumer benefits

H. Improve functioning of institutional agentsH. Improve functioning of institutional agents

33 themes divided in 8 areas

Some of the priority measures

Assess the possibility of introducing price offers

by agents in the spot market

Improve the price cap (VN) system

Regulate the government-owned generation

trading

Establish a system to review the assured energy

granted to each hydro plant

Stimulate consumers to become free

Some of the priority measures

Review the distributors limits to self-generation

Proceed with unbundling

Introduce a system of early warnings

Increase the minimum level of long-term

contracts by distributors

Improve the economic signals embedded in the

tariff structure

40%

51%

19%

22%

33%

10%

31/Dez/01 31-jan 28-fev 31-mar 30-abr 31-mai 30-jun 31-jul 31-ago 30-set 31-out 30-nov 31-dez 31-jan 28-fev 31-mar 30-abr 31-mai 30-jun 31-jul 31-ago 30-set 31-out 30-nov 31-dez

% E

arm

ax 2002 2003

Safety Curve (2002-2003): Southeast/Mid-West

• Average hydrology for the 4th worst two-year periods of the historical time series, equivalent to 68% MLT in 2002 and 67% MLT in 2003

• Deliver 100% of demand in two years

Proposal for Government-owned generation

All energy belonging to these companies will be traded through public auctions Additional dividends earned by the Federal Government will be used to finance emergency plants, natural gas subsidy, etc.

Transparency

Interests of shareholders (both Government and

minority shareholders) and consumers are protected

General Consequences of theProposed Measures

Reinforcement of the model’s fundamentals

and market mechanisms Higher government intervention at the

regulatory level, not as entrepreneur Rights of private investors preserved

Stability, transparency and predictability

of rules

CRUCIAL QUESTIONS

CRUCIAL QUESTIONS

Given the special properties of electricity, how

to ensure in the long term the right balance

between supply and demand? Would a full free

market be able to do so?

Will it be possible for Brazil to fully eliminate the

bottlenecks in the transmission system? Will it

be worthwhile?

CRUCIAL QUESTIONS

Will it be possible in Brazil to introduce a system of

price offers by market agents, keeping at the same time

the centralized dispatch system?

What is the right balance between market freedom and

regulation?

Regardless of the freedom enjoyed by the sector, what

level of direct or indirect intervention power should be

granted to the government?

WERE THE LESSONS LEARNED?

In a special report as of Sept. 17, 2001, the Wall Street

Journal stated that the Californian Crisis “has taught a

lot about the do’s and don’ts of deregulation”. Let’s

use it to compare to what we have been doing in

Brazil. Here the lessons by the WSJ:

“Electricity is no ordinary commodity”

“Don’t leave utilities hanging on in the spot market”

WERE THE LESSONS LEARNED?

“Let consumers feel the pain - or pleasure”

“Be ready for surprises”

“Make sure consumers have choices”

“Have enough generating capacity ...”

“... But not too much capacity”

“You have to deliver” (it refers to the need of having a

good transmission grid)

“Regulators have to keep up”

Wall Street Journal

WERE THE LESSONS LEARNED?

Washington, March 2002

Pedro ParenteMinister of the Presidency

Acting Minister of Mines and EnergyHead of the Energy Crisis Committee

Looking Beyond the Energy Crisis:

Scenarios for a Renewed Brazilian

Electric Power Sector