THE ARGENTINE REGULATORY FRAMEWORK VIS-À-VIS THE CURRENT POLITICAL CRISIS AND ITS SOCIOECONOMIC CONSEQUENCES

Description of the regulatory framework The context in the ´80s Poor quality service Low internal efficiency High unavailability of the installations High level of losses particularly due to the stealing of electricity power Poor client satisfaction Cross subsidized; political tariffs; no generation of resources for network expansion Unclear signs for the economy

Description of the regulatory framework The context in the ´90s The new regulation permitted to: Stimulate competitiveness wherever possible by encouraging the private investments Separation of the industry segments, whether monopoly ones or those subject to the market laws Guarantee free access to Transmission and Distribution Regulate Transmission and Distribution with fair and reasonable tariffs with appropriate rate methodologies.

Description of the regulatory framework The context in the ´90s Achievements: Private investment was attracted (more than 9 billion US dollars in ten years) Significant increase in the supply (From 13.2 GW in 1992 to 20,7GW in 2000) Substantial upgrade in quality of service (From 13.6 cut/client-year in 1922 to 4.6 cut/client-year in 2000) Sharp decrease in power and energy prices (From 48,7 U$/MWh in 1992 to 27,6 U$/MWh in 2000)

Description of the regulatory framework The context in the ´90s Main issues to tackle: Decrease of investment in Generation Transmission quality were not coherent with those required by the Distribution Companies. Keep the legal certainty in Distribution

A new game rules Effects on public service utilities companies “Pesofication” of tariffs originally expressed in US dollars Barring from modification or indexation of tariffs Announcement of a renegotiation process, unfulfilled to this date

A new ball game Consequences: Legal certainty and property rights were violated The regulatory framework was altered The electricity industry became the subsidizer of all the sectors in the demand Most companies will be forced into financial default The sector is unable to renegotiate debts in US dollars, as it cannot schedule reformulation of contracts, tariffs or revenue

Proposals to overcome the crisis Emergency stage: Immediate increase of tariffs Re-adjustment stage: Define a reference rate and a pathway to attain it. Determination of the “Regulatory Asset” Recovery stage: Additional tariff increases over the reference rate to recover financed regulatory assets

Proposals to overcome the crisis $/kWh Time Regulatory Assets Recovery of Regulatory Asset Pathway to reformulation of tariff Reference rate Inv. Miant. Debta Rent. Maintenance Investment Profitability Power (pass through) Debt Current Tariff Tax Reduction of taxes Tax Power

The current context Two presidential candidates will compete in a runoff on May 18, 2003 With slight differences, both their proposals involve: i) Upholding legal certainty, within the new framework; ii) Emergency tariff hike, sparing needy households; iii) Renegotiating contracts and setting up a background tariff within a term of 12/18 months; iv) Defining a tariff pathway; v) Clean slate for losses incurred in by companies between January 2002 and the end of renegotiation.