Message-ID: <27523113.1075844212023.JavaMail.evans@thyme>
Date: Mon, 28 May 2001 01:16:00 -0700 (PDT)
From: luiz.maurer@enron.com
To: sergio.assad@enron.com, jose.bestard@enron.com, fred.sampaio@enron.com, 
	jose.reis@enron.com, debora.klinger@enron.com, 
	joao.albuquerque@enron.com
Subject: ASMAE taking the [wrong] view on Annex X - Ignorance or bad faith?
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Last Friday, Patricia Arce, (Mario Arce's daughter and a full time  ASMAE 
employee) was expressing her [distorted] views  to the press on why 
generating companies should not abide by Annex V. She was not speaking on 
behalf of ASMAE: however, she was probably reflecting ASMAE view. 

I did not mean to shoot the messenger, but I could not refrain myself from 
expressing an opposite opinion.

There are two problems in Patricia's view:

1) She is not supposed to express any views on contracts. MAE should only 
settle contracts, but never attempt to arbitrate or solve bilateral contract 
disputes. The lack of clarity on this point is the sole responsible for MAE's 
frustrated attempt to solve the Angra II - Furnas conflict in the last 6 
months.  Informativo Regulat?rio # 4 explores the issue in more detail.

2) She was dead wrong. Quite na<ve arguments. 



A few arguments why Gs should indeed abide by Annex V (we may use externally, 
as you see fit)

1) Gs were forced to sign Initial Contracts.
 * So what? It is a regulated contract by nature, as so many others, such as 
CUST, CUSD, CCT, CCD. Does it mean that parties signing those other 
agreements should not abide by their clauses?

2) Gs and Ds did not have chance to negotiate terms and conditions
 * So what? I asked Patricia why should any agent sign the Market Agreement 
without any chance to negotiate its terms (it is by definition an adhesion 
contract). Does it mean that agents should not abide by the MAE Agreement 
provisions? Guess what the answer was? None

3) Some Gs did not sign Annex V - e.g. Furnas, which [apparently] disobeyed 
Annel's instructions (as per Law 9.648/98)
 *  This is serious
 *  That means that in addition to not be bound by Contract, those Gs do not 
want to abide by Law? No response

4) Some companies do not have Annex V
 * So what? Discussion is about Annex V
 * Those companies should follow specific provisions on their supply contracts

6) Ttariff (energy price) was not subject to negotiation as part of the 
Initial Contracts - therefore, they were not able to price the risk 
represented by Annex V
 *  So what?
 *  Many contracts have regulated prices. All use of system contracts have 
regulated prices.
 *  Furthermore, the privatized generators had chance to price the Annex V 
risk. Why giving them a windfall now? (Since it is a zero sum game, a 
windfall for generators is tantamount to a loss to distributors)

7) Annex V was not designed to deal with rationing: it was designed to 
mitigate hydrological risks due to central dispatch
 * Wrong
 *  ERM (Mecanismo de Realoca??o de Energia) was the mechanism put in place 
to deal with risks deriving from a central dispatch in a hyper tight pool 
operation
 *  Annex V was indeed designed to deal with rationing. It is called "dry 
period relief" clause. It was proposed by the generators and approved by 
Annel. The spot price is a "proxy" for the depth of rationing. One should not 
evoke rationing.


I think it is advisable to have a strong legal opinion on how Annex V is 
"bullet proof". In the meantime, let me share my views:

 * There is very limited room for negotiation whatsoever on Annex V and on 
the [ridiculous] proposal made by generators that merchant plants should 
collect part in cash and part of their sales in [junk] bonds. We should make 
this clear at the outset. 

 *  We should make Minister Patente realize  that Mario Arce's proposal is 
non-sense. Changing established contracts or setting caps on spot prices  is 
a bad precedent. No bail out for the ones who did mitigate perfectly known 
risks. A cap on spot is equivalent to what the Central Bank did for Makra and 
Fonte-Cindam (and became a public scandal) .  If we do want to create a 
market , we need to have responsible contracting. Irresponsible contracting 
should not be forgiven. If we do it, we will create a bad precedent and a 
poor environment for contracting. We have to show Minister Parente that 
irresponsible contracting has to be penalized at market rates (no caps on 
spot). Irreponsible contracting will not expand capacity. Breaching contracts 
will create an uncertain environment for new PPAs. Crisis will get worse and 
worse.

 *  Generators should have the burden of proof.  In the meantime, Annex V is 
effective and should be enforceable

 * Regarding California case, as mentioned by Mario Arce: It is a totally 
different situation. In California D/Cs were not allowed to contract. In 
Brazil they were strongly encouraged. Generators who signed Annex V could 
also have hedged their residual risks on Annex V.They did not. They acted 
irresponsibly. They second-guessed regulations. They did not help in 
expanding capacity. They knew goverment will bail them out and revoke Annex 
V. 

 *  The argument "no one should lose, no one should gain" during rationing is 
inconsistent with market signals. Some one has to lose, some one has to gain 
by definition. And [hopefully] someone has to go bankrupt. This will be a 
great lesson. People will start taking market signals more seriously. 
Otherwise, there will never be expansion and there will never be a market.

 *  We have to be as transparent as possible.

Finally, I suggest Enron to write a position paper on our own view on Annex V 
and caps on spot and deliver it to Minister Parente early this week. 

I volunteer to prepare a first draft, if you guys agree it is a good idea.

LM