LATIN ENERGY 2005 Regulatory Process JERSON KELMAN December 8th, 2005 Head of ANEEL December 8th, 2005 Rio de Janeiro – RJ

Which institution is in charge? 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

Which institution is in charge? 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

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: auditing, authorizations & auctions

ANEEL’s equilibrium ANEEL Consumers Agents Government Reasonable tariffs Quality of service Guarantee of rights ANEEL Agents Government  Adequate remuneration Contracts honored Predictable and clear rules Strategic interests Development model Universal service

Extraordinary revision Distribution tariffs Annual Readjustment & Periodic Revision Signature of the contract Annual readjustment of the tariffs Periodic revision of the tariffs 1999 2000 2001 2002 2003 2004 Extraordinary revision of the tariffs

Distribution tariffs Service Revenue captive consumers Who pays? Free consumers A2 A3 A4 B1 B2 B3 B4 A2 A3 A4 Distribution network charge TE Distribution network charge Distribution network charge (infrastructure) Distribution network charge (taxes) Distribution network charge (infrastructure) Distribution network charge (taxes)

Distribution tariffs Energy Purchase + + Transmission Cost Composition RS = Pass-through Costs + Controllable Costs Energy Purchase + Transmission Cost Public Charges O&M + Investors’ Payment Assets Depreciation

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

Asset base value Gross 0% 20% 40% 60% 80% 100% 120% 140% % Gross/IPCA Medium IPCA = 103.24% % Gross/IGPM Medium IGPM = 79.86% Brazilian Index: IGP-M = General Market Price Index IPCA = Broad Consumer Price Index

Asset base value Net 0% 20% 40% 60% 80% 100% 120% 140% %Net/IPCA s/ ADM Medium IPCA = 89.13% %Net/IGPM s/ ADM Medium IGPM = 68.07% Brazilian Index: IGP-M = General Market Price Index IPCA = Broad Consumer Price Index

Anatomy of the Electricity Rates Electricity Rates Composition Generation 31,77% Transmission 7,80% Distribution 26,43% Public Charges & Taxes 34,00%

Distribution tariffs Domestic consumers November 29, 2005 R$/MWh

Risks of investments in infrastructure Legal, institutional and macroeconomic stability Environmental Licensing Regulatory stability (ANEEL)

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)

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