March /2006

Jerson KelmanDirector-GeneralANEEL

ELECTRIC SECTOR FRAMEWORK

ELECTRIC SECTOR FRAMEWORK

Platts 10th Brazil Energy Conference

2

João Pessoa

Jacui

Porto Alegre

Florianópolis

Curitiba

São Paulo

Rio de Janeiro

Paraíbado Sul

Uruguai

Vitória

BeloHorizonte

Itaipu

Grande

Paranaíba

Paraná/Tietê

Campo Grande

Iguaçu

Tocantins

Belém

São Francisco

Parnaíba

São Luís

Teresina

Fortaleza

Natal

Recife

Maceió

Aracajú

SalvadorCuiabá

Goiânia

Brasília

Paranapanema

Argentina

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

Source: MME/ANEEL (Jan 2006)

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

Brazilian Electricity SystemBrazilian Electricity System

3

Brazilian Electricity Mix (TWh) 2005

Source: MME / BEN 2005 / EPE

4

Percentage of potential hydroelectric in operation

100

83

64 61 6055

4537

21 18 1611 6 4 1

24

0

10

20

30

40

50

60

70

80

90

100

France

Ger

man

y

Japan

Norway

USA

Switzla

ndIta

ly

Canad

a

BRAZILIn

dia

Colom

bia

China

Russia

Peru

Indon

esia

Congo

5

Short term marginal cost – spot price (US$ / MWh)

0

50

100

150

200

250

300

350

ago/

95

nov/9

5

fev/9

6

mai/

96

ago/

96

nov/9

6

fev/9

7

mai/

97

ago/

97

nov/9

7

fev/9

8

mai/

98

ago/

98

nov/9

8

fev/9

9

mai/

99

ago/

99

nov/9

9

fev/0

0

mai/

00

ago/

00

nov/0

0

fev/0

1

mai/

01

ago/

01

nov/0

1

fev/0

2

US

$/M

Wh

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

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

Existing generation

2005 2006 2007 2008 2009 2010 2011 2012

Existing PPA’s

Demand

Old Energy

New energy(expansion projects)

Old and New Energy

8

Results of the Energy Auctions

100% 100% 100% 98,8% 94,3% 94,7%

0%10%

20%30%40%

50%60%70%80%

90%100%

2005 2006 2007 2008 2009 2010

Percentage of demand covered by

PPA’s

PPA’s Old energy: US$ 39.0 bi New energy: US$ 29.6 bi Total: US$ 68.7 bi

Average Price (US$/MWh)

41.27 36.14

32.81 29.27 25.00

50.92 55.55 55.28

-

10

20

30

40

50

60

2005 2006 2007 2008 2009 2010

Beginning of Supply

US$

/MW

h

Old Energy New Energy

9

Generation

Free Consumers

Captive Consumers

Free Consumers

DistributionTransmission

Distribution Distribution Tariff Tariff

Financial flux

TUSTTUST TUSD TUSD

TUSD - TUSD - Distribution network charge + taxes

TUST – Distribution network charge + taxesDistribution Tariff = Energy + TUSDDistribution Tariff = Energy + TUSD

PPA – Power Purchase Agreement

TUSTTUST

TUSTTUST

PPA (energy)

PPA (energy)

10

Distribution tariffs (1/6)

Who pays?

Service Revenue

B3B3

Taxes

TETE

((energy)energy)

Infrastructure

Distribution network Distribution network chargecharge

B2B2 B4B4B1B1A4A4A3A3A2A2

captive consumerscaptive consumers

A3A3

Distribution network Distribution network chargecharge

A4A4A2A2

Free consumersFree consumers

TaxesInfrastructure

11

Annual adjustmentAnnual adjustmentof the tariffsof the tariffs

Periodic revision Periodic revision of the tariffsof the tariffs

Signature Signature of the contractof the contract

Distribution tariffs (2/6)

Annual Adjustment & Periodic Revision

1999 2000 2001 2002 20042003

Extraordinary revision Extraordinary revision of the tariffsof the tariffs

12

RS = Pass-through Costs + Controllable Costs

Distribution tariffs (3/6)

Composition

Energy Purchase

+

Transmission Cost

+

Public Charges

O&M+

Investors’ Payment+

Assets Depreciation

13

Controllable CostsControllable Costs

x

Investors´ Payment ($)Reintegration of depreciation

Expenses ($)+

Net Asset-baseNet Asset-base valuevalue

Net Asset-baseNet Asset-base valuevalue

Rate ofRate ofreturnreturn

Rate ofRate ofreturnreturn

O&M Costs ($)+

xGrossGross

Asset-baseAsset-baseValueValue

GrossGrossAsset-baseAsset-base

ValueValue

DepreciationDepreciationRateRate

DepreciationDepreciationRateRate

ReferenceReferenceFirm Firm

ReferenceReferenceFirm Firm

Distribution tariffs (4/6)

Controllable costs

14

Distribution tariffs (5/6)

Gross Asset Value

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

15

Distribution tariffs (6/6)

Net Asset Value

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

16

Generation

Distribution 26,43%

Public Charges & Taxes

34,00%

Transmission 7,80%

Electricity Rate Composition

31,77%

17

0.00

50.00

100.00

150.00

200.00

250.00

300.00

350.00

400.00

450.00

Tariff of domestic consumersR

$/M

Wh

November 29, 2005

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

• 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)

ANEEL

21

ANEEL’s equilibrium

ANEELANEEL

• Reasonable tariffs • Quality of service• Guarantee of rights

• Reasonable tariffs • Quality of service• Guarantee of rights

• Adequate remuneration• Contracts honored• Predictable and clear rules

• Adequate remuneration• Contracts honored• Predictable and clear rules

• Access to all• Inflation control• Access to all• Inflation control

Consumers

Government Agents

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

• Legal, institutional and macroeconomic stability

• Environmental Licensing

• Regulatory stability

Remaining risks of investments in infrastructure

Thank you !

www.aneel.gov.br

Phone: (+55) 61 2192-8603

Fax: (+55) 61 2192-8711

institucional@aneel.gov.br