Message-ID: <14727724.1075844209002.JavaMail.evans@thyme> 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 Mime-Version: 1.0 Content-Type: text/plain; charset=ANSI_X3.4-1968 Content-Transfer-Encoding: 7bit Bcc: richard.shapiro@enron.com, orlando.gonzalez@enron.com, joe.kishkill@enron.com X-From: Luiz Maurer X-To: Sergio Assad X-cc: Richard Shapiro, Orlando Gonzalez, Joe Kishkill X-bcc: X-Folder: \Richard_Shapiro_June2001\Notes Folders\All documents X-Origin: SHAPIRO-R X-FileName: rshapiro.nsf 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