Elektro’s Short Position x Market Deregulation

1. Elektro’s Short Position xMarket Deregulation February 2001

2. Elektro’s Short Position • Market Growth Forecast and Initial Contracts Reduction leads to the following short position at Elektro:

3. Regulatory Framework: Deregulation • Customers can choose their power supplier according to deregulation schedule and current contracts term: • Customers’ option to choose another supplier can reduce Elektro’s short position:

4. Scenarios • The current tariff structure for regulated customers leads to cross-subsidization benefiting large industrial customers (A2) • Unregulated customers can buy the commodity from another supplier and pay a wire tariff to Elektro • Wire tariff is currently set by ANEEL, and Elektro has filed a restructuring proposal • The level of wire tariff can significantly impact client decision to exercise the option

5. Assumptions • Energy price for customer: • Regulated customer: based on January 2001 tariff and forecasted tariff increases (1) • Unregulated customer: competitive market price (linked to VN) • Elektro’s cost of energy: • For regulated customers: average cost of energy • For the unregulated customers: marginal cost of energy (1) (1) Except for the current free customers, for which the readjustments were made according to each contract.

6. Current Potentially Free Customers • Based on regulation / existing contracts

7. Customer Decision and Impact at Elektro • Scenarios: • Probable Scenario: A2 customers (except Corn Products, which has a co-generation project) are likely to remain regulated; A3a and A4 (mid-size industrial and commercial) tend to leave based on current wire tariff • Sensitivity: Wire tariff restructuring reduces incentive for the A3a and A4 customers to exercise option • In both scenarios, Elektro is not going to renew the contracts with current free customers (Melhoramentos, Serrana and Luk) • Impact on Elektro’s market: Current Wire Tariff Restructured Wire Tariff

8. Impact on Elektro’s Short Position Current Wire Tariff Restructured Wire Tariff

9. Scenarios Comparison

10. Conclusion and Recommendations • Power Supply Strategy • Even considering the future deregulation steps, Elektro’s short position is around 100 MW in 2002 and 400 MW in 2003 • Considering the deals on the pipeline, prices are below pass-through limits (competitive VN) for Elektro’s tariff reviews although could be above price curve forecast back-end depending on the term of the contract • Elektro has two possibilities: • If the market reduction is smaller than expected, short position will be partially uncovered, and Elektro will be exposed to market price volatility. The already contracted energy will be passed-through • If the market reduction is greater than expected, energy surplus will have to be negotiated at the free market prices higher than contracted energy prices • Elektro should then be conservative in its market reduction forecast, using the sensitivity scenario to cover its positions up to 2003 • The negotiation of energy needs for 2004 on should wait for better market knowledge, regulation definition (e.g. the right of the customers without demand metering to choose another supplier)