Subject: EPE Dispute with Furnas/Privileged and Confidential
From: [email-masked]
To: [email-masked], [email-masked]
Cc: [email-masked], [email-masked], [email-masked]
Date: Fri, 26 Jan 2001 08:21:00 -0800 (PST)

John Novak called me Wednesday to assist in handling a dispute involving EPE 
and the Cuiaba project.  EPE entered into a PPA with Furnas, the government 
entity buying power to sell to distributors.  Furnas is wrongfully 
withholding its consent to assignment required by the banks (OPIC and KfW) 
for financing this project.  We believe Furnas is acting  in bad faith and 
has no contractual right to withhold its consent which gives EPE a right to 
issue a default under the PPA. 
EPE issued a default notice to Furnas and Eletrobras (the guarantor of 
Furnas' obligations under the PPA) in  September of 2000.  The grace period 
to cure the default has expired and EPE is now analyzing whether to proceed 
with termination of the PPA, to initiate arbitration over the dispute, or to 
follow some other course of action.  

Furnas  is using the assignment consent as leverage to hold up financing and  
force EPE to renegotiate the PPA because of commercial risk and loss it has 
incurred resulting from delay of  Phase II of  project.  By way of 
background, EPE issued a force majeure notice under the contract last year 
for delay in building the project as a result of the Mato Grosso attorney 
general's investigation and imposition of tedious environmental measures that 
have caused significant delay in building the gas pipeline to the plant over 
the ridges region of Caceres.    EPE has no contractual obligation to remedy 
Furnas' losses resulting from a valid force majeure delay and no obligation 
to renegotiate the contract.  The PPA contains an ICC arbitration clause 
(arbitration in Paris) and Brazilian law governs the contract.  We are also 
investigating alternative remedies to resolve the matter.  

John Gardiner of Skadden Arps in New York will act as counsel on 
international arbitration.   Fernado Serec with Tozzini Freire Teixeira e 
Silva Advogados in Sao Paulo will advise us on the Brazilian law aspects of 
this dispute.  Please call me if you have any questions 56159.
Regards,
Michelle