
Date: Sun, 20 May 2001 14:13:00 -0700 (PDT)
From: luiz.maurer@enron.com
To: sergio.assad@enron.com
Subject: What is Enron's view on ongoing issues in the energy sector? Our
Enron's list of 10 commandments
Cc: richard.shapiro@enron.com, orlando.gonzalez@enron.com,
joe.kishkill@enron.com
Bcc: richard.shapiro@enron.com, orlando.gonzalez@enron.com,
joe.kishkill@enron.com

S,rgio:

As we agreed, I prepared this list of key regulatory points to be agreed
among ourselves. The idea is that this list should serve as a basis for
Enron's advocacy plan. As you pointed out, life has been so hectic and we
have been in some many battle fields,  that we did not have too much time to
discuss and agree on our update, own view. Therefore, some of us, including
myself, may have lost sight on what is ultimately good to Enron given the
complexity of issues and their state of flux. Given the potentially
conflicting coalitions we are part of, this should also serve as a basis for
defining our position and role in each of those institutions. Finally, this
could also serve as a basis for our internal and external communication
plans.


Overall Guiding Principles

1) As an overrarching objective for Enron all over the world, we defend,
inter alia, markets, competition both at retail and wholesale levels,
contract sanctity, free prices and customer choice.

2) We will balance our short term and long term interests to maximize company
shareholder's value;

3) We will focus our advocacy efforts on issues which have more impact on
shareholder's value;  we will constantly talk to our multiple internal users
to understand their needs and how those can be translated in terms of
regulatory support;

4) We will use several coalition groups to defend our interests; We  will
select the coalition groups more aligned with our own interests;

5) In case Enron's interests conflict with the interests of the coalitions we
are part of, we will defend and express our interests individually; we will
let our coalition groups know when our interest conflict with the general
view on a particular subject and that we will express our views separately.

6) As a consequence of the above, the first step is to have our own view. If
we do not know what the right way is, any alternative may look equally good
or bad.



10 Commandment list  - Issues Related to the Current Situation of the Energy
Sector in Brazil

1) We want the Wholesale Energy Market (MAE) to operate effectively asap. We
acknowledge that COEX, the stakeholder board has not worked properly over the
last 2 years. The consensus building process and the nature of the zero sum
game issues have prevented COEX to be effective. We advocate professional,
independent boards instead, as we do in most markets we participate
worldwide. Informativo Regulat?rio # 3 represent our best view on the subject
for Brazil;

2) Therefore, we applaud ANEEL in its recent initiatives to fix, inter alia:
(i) the ineffectiveness of COEX, by replacing it by COMAE, a professional
board; (ii) introducing penalties and guarantees for financial settlement
(COEX was not able to introduce any in the last two years, which has resulted
in a US$ 300 million default); (iii) we acknowledge that the Ordinances
published by ANEEL to fix the market are legally weak and may be challenged;
(iv) therefore, we should help ANEEL in drafting a new Market Agreement to
enhance the governance of the new board, make MAE the organizational
structure more effective and introduce penalties and guarantees which do not
overpenalize our long positions (loss sharing) ; (v) we will do  our best to
convince our peers about the proposed changes: however, if the agreed level
is too superficial to be useful in drafting the new MAE agreement, we will
present our view to ANEEL separately; (vi) we will advocate that companies
trading in the free market should have a non-discriminatory treatment within
MAE and COMAE. (vii) we will  strive to have e seat at COMAE appointed by the
free trading association.

3) We will advocate free market prices and no caps on the wholesale spot
price, even during rationing. (in fact, already capped at about R$ 300/MWh,
which represents the embedded cost of deficit). This conceptual view is
perfectly consistent with our expected Elektro, Eletrobolt, and wholesale
position - all of them long. We will strongly oppose any government
temptation to set additional caps on spot prices. On the contrary, we will
support any initiative to review the current cost of deficit, which we
believe to be underestimated. We have recently supported, as strongly
suggested by our trading group, ANEEL's proposal to significantly raise the
cost of deficit, particularly during rationing. We advocate that any caps on
spot prices create disencentives to capacity expansion and therefore will
aggravate the rationing crisis.

4) We defend Contract sanctity. In this regard, we will fight with Aneel to
have the pass-through of non-controllable costs for Elektro, such as power
purchases costs. Aneel has given its own interpretation to the concession
contract, whereby any cost increase occurring between two successive tariff
reviews should not be recovered. We defend the idea of a tracking account or
a similar mechanism. We will take the necessary measures against ANEEL,
either individually or as part of the distribution coalition group to defend
our interests.

4) Along the same lines of Contract Sanctity, we will defend Annex V, which
is a contractual provision to scale down Initial Contract volumes upon
rationing. According to several Elektro's analysis developed thus far,
preserving Annex VI will represent a substantial benefit to Elektro, even
able to offset the negative impact our foregone revenues during rationing. If
Annex V is revoked and the reduction of Initial Contracts is calculated on
the basis of actual load redution, as proposed in the rumor mill, we will
forego US$ 60 million in terms of EBITDA. We will refuse to negotiate with
our suppliers (e.g. Duke, AES) any changes in the Initial Contracts which
entail any transfer of risk/costs between generators and distributors. We
will also express our protest to any Brazilian Government authorities tempted
to change the Annex V, under the assumption that contract sanctity is being
violated and that this creates additional regulatory uncertainty. We will
also claim that revoking Annex V will jeopardize the success of the rationing
plan because of the "free ride" effect. We will not advocate any bail-out of
companies negatively affected by Annex V because they poorly evaluated the
impact of Annex V when companies were privatized. We will argue that Annex V
was designed specifically to deal with rationing situations and therefore
there is not any excuse to  change the rules now. We will not agree to set
additional caps on spot, not even the proposal to maintaing it as it is
(which will represent about US$ 10 million to Elektro). (Caps are actually a
disguised way of partially revoking Annex V)

5) We will support Aneel's Resolution 145, recently published, whereby any
new generation (back-up, self generator), no matter its size, is allowed to
sell to any market player, at freely negotiated prices (before they could
sell to the host utility only). Similarly, we support any other initiative to
give a non-discriminatory treatment to  new generation, which should be free
to trade energy at freely negotiated basis.

6) We will support the use of correct economic signals to foster demand
reduction during rationing. To avoid California's mistakes, we will advocate
that the correct signals should link the wholesale and retail prices. We will
advocate the government to establish a quota system and establish an overlay
of correct economic signals (MAE spot prices)  for those exceding their
quotas. We will oppose rolling blackouts on the grounds that it does not
provide the best economic allocation of a scarce resource; nor it is
effective for a long-term energy rationing (as opposed to California, where
the issue was peak shaving). Furthermore, as recently pointed out by CERA,
rolling black outs as initially proposed in Brazil are a significant
departure from markets and will open new avenues for market  intervention and
contract breaches. We will rebuff those who argue that there is no demand
elasticity in electricity prices. By linking the success of the rationing
program to free movements to the MAE price we are protecting our long
positions both at Eletrobolt and at Elektro. We acknowledge that the increase
in electricity prices may create a taste for energy rationing measures in the
medium term. While the financial  impact  of energy rationing  has not been
quantified for Elektro, we also assume the appetite for markets and energy
services may create new business opportunities for Enron .

7) We will support ANEEL in its attempts to open the market to retail
competition in 2003 (proposed threshold level of 50 kW). We  do not accept a
commonly accepted argument that minimum contracting requirements for
distribution companies are inconsistent with the opening of the retail
market. Instead, regulatory safeguards should be put in place to prevent
distribution companies to become stranded, by sharing this burden among the
captive and free market segments. California CTC is an example, but
government should look at best practices.

8) We will advocate for competition at the natural gas as a key ingredient to
competition in the electricity market  (Informativo Regulat?rio # 1). We will
also advocate for open access in the pipelines. We will express our contrary
views against any discriminatory measure trying to protect Petrobr?s role as
the sole gas supplier, in order to avoid effective competition in the natural
gas.

9) We will leverage our best expertise to propose a solid capacity plan to
the government, able to alleviate the energy crisis in the medium term. We
will talk about the necessary actions to be taken to eliminate regulatory
risks faced by generators and distributors. We will express our views on how
to create a healthy contracting environment,  to foster competition and
expand capacity. We will oppose any measures which create a non-level playing
field, both at the production or consumption side. If emergency actions are
needed, they should be used on a temporary basis only (e.g. Petrobr?s' being
the sole provider of gas molecules and FX hedge).

9) Finally, we should take advantage of the current window of opportunities
and all the power granted to the Ministry of Rationing to (or at least try
to) get  the energy sector fixed toward a more competitive industry.  We
acknowledge that the crisis will be used as a scapegoat why privatization and
that  the competitive model has not worked. We will express our opposite
views and we will propose pragmatic measures instead.  We acknowlege that it
will be very difficult to reach consensus among so diverse parties/interests.
COEX is a typical example on how the endless search for consensus was
tantamount to lack of efficiency of the overall process. Given that, we
should express our coherent, market based views to the Government. We will
use our coalition groups on a selective basis whenever this attitude
strengthens our points of view. In case conflicts emerge, we will preserve
the coherence of our ideas as a whole.


LM



