Implementation of Energy Markets - Lessons learned from Brazil

1. Implementation of Energy Markets Lessons learned from Brazil Luiz Maurer Niagara-on-the-Lake, Ontario, Canada June 08, 2000

10. INITIAL CONTRACTS MECHANISM Spot Market Current Situation Competitive Market (Bilateral Contracts) Transition period (Initial Contracts) Year

11. WINDFALL PROFITS - STRANDED COSTS Cost (U$/MWh) Rate of Return on Asset Base = 10 % Cumulative Generation (TWh) O R D E M E P R O G R E S S O

13. COMPLEXITY GROWS EXPONENTIALLY WITH THE NUMBER OF CUSTOMERS Number Cumulative Market Share Threshold of (TWh) Customers High Low ----------------------------------------------------------------------------- 300 kW 8.400 41,2 27,0 100 kW 38.400 44,4 30,0 50 kW (*) 61.400 44,9 30,6 All 37.500.000 100,0 100,0 (*) Assumes for all voltage levels Source : Working Paper – Project RE-SEB, 1997

21. Evolução a Mercado MAE IMPLEMENTATION - WHEN? YEAR 2000 ? (*) Assumes definitive metering Intial Plan Aproved By theCOEX Revision during MAE budget (February 99) Absorption of GCOI by MAE Provisional Rules (Revocation of MP1819) Delays to adopt the definitive Rules Forecast Revised Estimates (Abril 99) (July 99) (September 99) (January 99) 1998 1999 2000 ASMAE Definitive Market Rules Accounting & Settlement Computer Systems Interim Metering Systems/Devices 2001 2002 Fase I Fase I Fase I.0 + Fase I.1 Fase II Fase II Fase II Final Approval of Core Rules (February 2000) “ Pseudo Mercado ” Evolução a Mercado Delays in Submission to Aneel AP 2/2000 da ANEEL (April 2000) “ Pseudo Mercado ” (*) Resolution 222 to be revoked (*) (*)

23. EVOLUTION OF MARKET RULES DESIGN Added Value 1996 1997 1998 1999 2000 100 % 75 % 50 % 25 % Restructuring Starts Old GCOI rules Sep. 96 MME Consolidated Report Jul. 97 Market Agreement Aug. 98 WEM Rules in Algebraic Format MME Product Nov. 98 25 % 60 % 90 % 95 % 98 % 99 % Revised Rules by MAE in Algebraic Format Nov. 99

26. APPENDICES BRAZIL AND ARGENTINA ELECTRIC SECTORS

27. BASIC CHARACTERISTICS ARGENTINA * Tight Pool * Thermal to Hydro Competition * Pool price based on thermal bidding and “cost of water” * Spot price smoothing for load ; also capacity fee * Initially very contracted - today 42 % spot * No hydro dispatch risk mechanism * Some emerging merchant plants * Multiple nodal prices, which include T short term costs * One agent to operate the system and settle contracts * Up and running BRAZIL * Very tight pool * Hydro - thermal still subsidized * Pool price based on central cost calculation - no bidding for now * No spot price smoothing, except capacity fee, to avoid spot price to reach VLL * Fully contracted (ICs) - Expected 10 to 15% spot * Hydros share dispatch risk * No merchant plants - unlikely * 4 Pool prices (sub-markets), adjusted for short term losses * Two agents: one to operate the system, one to settle contracts * Under implementation O R D E M E P R O G R E S S O

28. INDUSTRY STRUCTURE REAL MARKET POWER HAS TO CONSIDER * Sub-markets, T constraints * Cross-ownership * “Behind-the-market” contracts * Single buyer model * Vertical desintegration requirements (T/G) Isolated Systems (17 D/Rs) 2 % O R D E M E P R O G R E S S O ARGENTINA BRAZIL 72 %  40 GENERATORS 14% 14 % 62 % 11 GENERATORS 10% 28 % 76 %  40 DISTRIBUTORS 24 %  10 D/Rs 80 % 16 DISTRIBUTORS 18 %  60 D/Rs Bi-national Cos State Owned 18 Other Gs Itaipu share allocated to  20 D/Rs