TARIFF SYSTEM IN BRAZIL FOR FIXED SWITCHED TELEPHONE SERVICE (FSTS)

1. TARIFF SYSTEM IN BRAZIL FOR FIXED SWITCHED TELEPHONE SERVICE (FSTS)

2. Current tariff system Tariffs for end users Network usage tariffs New contracts Tariffs for end users Network usage tariffs

3. SERVICE PLANS: SET CONDITIONS FOR PROVIDING FSTS (AMOUNTS, RULES AND CRITERIA FOR APPLICATION) BASIC SERVICE PLAN: ESTABLISHED BY ANATEL INCLUDES PRICE CAP ADJUSTMENT APPROVED BY ANATEL ALTERNATIVE SERVICE PLANS: ESTABLISHED BY THE CONCESSIONAIRE ADJUSTMENT ACCORDING TO REGULATIONS TARIFFS CHARGED TO THE PUBLIC BY FSTS CONCESSIONAIRES

4. BASIC PLAN FOR CONCESSIONAIRES LOCAL CONNECTION AND MONTHLY SERVICE FEE USAGE PULSE (Ka 240) VARIATION BY TIME OF DAY/DAY OF THE WEEK LDN USAGE MINUTE/TENTH OF A MINUTE VARIATION BY LEVELS X TIME OF DAY/DAY OF THE WEEK LDI USAGE MINUTE/TENTH OF A MINUTE VARIATION BY LEVELS X TIME OF DAY/DAY OF THE WEEK

5. SUMMARY OF PRODUCTIVITIES

6. “Tariff to Use the Local Network (TU-LN): the amount paid to a FSTS Provider, per time unit, to use the Local Network to make a call.” “Tariff to Use the Inter-City Network (TU-ICN): amount paid to a FSTS Provider, per time unit, to use its Inter-City Network to make a call.” FSTS LOCAL 1 FSTS LOCAL 2 FSTS LDN TARIFFS TO USE FSTS NETWORKS $ PUB. USER 1 USER 2 TU-LN TU-LN

7. SUMMARY OF PRODUCTIVITIES

8. SCENARIO FOR EVOLUTION – FSTS Hoy 2005 2008 2011 New Contracts Price Cap Price Cap+ Retail Based Costs Evaluation of New Alternatives • Underway, first interconnection cost estimate • Comparison of tariff level • Adjust interconnection tariffs to approximate cost levels • New concept -- Separate Accounting • Implement cost-based remuneration as of 2008 • In-depth knowledge of costs (regulatory body and operators) • Implement the network cost-based remuneration model • Consolidate the cost-based model • Evaluate new remuneration alternatives: • Bill & Keep (with tariff restructuring) • Structural separation • Others Implementation Define the level and working procedures among operators, providers and ANATEL Review and monitoring Reconciliation/ refinement Monitoring Concludingthe model Estimate costs based on accounting data Road Map of Costs Putting the model into practice Gradual Evolution of Knowledge of Industry Cost Dynamics Plan cost consideration Define the cost model to be used

9. PROPOSED ADJUSTMENTS TO EXTEND CONCESSION CONTRACTS, 2006-2025

10. MAINTAIN MONITORING OF END USER TARIFFS BY THE PRICE CAP MONTHLY FEE AND MINUTES FOR LOCAL SERVICE LEVELS X TIMES OF DAY FOR LDN GROUPS OF COUNTRIES X TIMES OF DAY FOR LDI STANDARDIZE VARIATION % OF ITEMS AT 5% EMPHASIZE: FLEXIBILITY IN EVOLVING BASKETS OF FSTS PRICE CAPTARIFF ITEM AND PERCENTAGE VARIATION

11. ADOPTING THE IST INDEX COMBINES OTHER TRADITIONAL INFLATION INDICES TO BE CONSTRUCTED AND MANAGED BY AN INDEPENDENT INSTITUTION. EMPHASIS REDUCES RISKS OF SECTORAL SLANT BETTER PERCEPTION OF CONCESSIONAIRE ACCOUNTS INDEX OF INFLATION

12. PRELIMINARY ASSESSMENT OF CONCESSIONAIRE EXPENDITURE BREAKDOWN

13. ADOPTING A NEW METHODOLOGY TO SET PRODUCTIVITY FACTORS FOR 2006/2007 SIMPLIFIED METHODOLOGY BASED ON PHYSICAL AND ECONOMIC DATA REGARDING PRODUCTS SUCH AS THE MONTHLY FEE (FOR LOCAL SERVICE) AND THE MINUTE OF USAGE), MATERIALS, PERSONNEL, SERVICES AND DEPRECIATION FACTORS AS OF 2008 METHODOLOGY CONSIDERING OPTIMIZATION OF THE COSTS OF OFFERING THE SERVICE PRODUCTIVITY NEVER LOWER THAN ZERO. PRICE CAPPRODUCTIVITY

14. ADOPTING A REDUCTION FACTOR FOR ATYPICAL INFLATION VARIATIONS 0 (ZERO) FOR IST VARIATIONS IN THE PERIOD CONSIDERED, UP TO 10% (TEN PERCENT); 0.01 (POINT ZERO ONE) FOR IST VARIATIONS IN THE PERIOD CONSIDERED, OVER 10% (TEN PERCENT) UP TO 20% (TWENTY PERCENT); AND 0.02 (POINT ZERO TWO), FOR IST VARIATIONS IN THE PERIOD CONSIDERED, OVER 20% (TWENTY PERCENT). PRICE CAPPRODUCTIVITY

15. 1st STAGE 2006-2007 T.U.S. PROPORTIONAL TO END USER TARIFFS (RETAIL BASED) TURL = M X USAGE TARIFFS (MIN./VCA) M=0.5 (FOR 2006) M=0.4 (FOR 2007) TUIU = 0.3 X LEVEL 4 TARIFFS 2nd STAGE 2006-2007 ADOPT T.U.S. CONSIDERING LONG-TERM COST MODEL COST-BASED INTERCONNECTION TARIFFS

16. THANK YOU!Marcos Bafuttobafutto@anatel.gov.br