My initial reaction:

1) Rationing Losses

I was afraid of this outcome. At least on the surface, I do not like it.  

I have the impression that  it  washes away Elektro's initial long position as Elektro as it puts and end to Annex V discussions. I would have to see the numbers to check  that this solution is equivalent to Annex V (for Enron). It depends on how one defines "rationing losses". 

This solution is perfect  for companies like AES, who were both short in the generation and  in the distribution  businesses. They win on both sides. How are they going to treat Annex V provisions when load curtailment reduces to 10% and Annex V becomes a liability for Elektro? What is going to happen with Annex V? (It may be part of the agreement - it is not clear though)

From an elecric sector perspective, this solution corroborates the bail out and the lack of contract sanctity. Bad for future investments. 
It would be much more acceptable to increase bulk tariff for generators and allow full pass-through. 

2) OK

3) This had already been achieved. It was an MP (Law) enacted by Minister Parente. The only way we were able to get it was to take Aneel to court (here comes my point again - why not being equally bold regarding Annex V? Perhaps AES influence on Abradee?)

What are the terms of final settlement? Will they have any provision regarding Annex V?

" By  solving the pending issues for the rationing losses, thus eliminating the Annex 5 controversy the MAE should function normally, allowing us to operate Eletrobolt and settle against the pool"

Three comments:

1) Technically not correct - MAE recently stopped because of a legal  injunction of Itaipu  energy. 
2) It is key to have a functioning MAE for Eletrobolt. Why has Abradee voted in favor or procrastinating MAE operation three times in the recent past and Enron has not exercised a dissenting vote?

" Our team has led the sector negotiations for months since the rationing, and have been instrumental in convincing the government of the need for implementing these changes"   

I would rather not comment on this statement




 -----Original Message-----
From: 	Shapiro, Richard  
Sent:	Tuesday, November 13, 2001 4:20 PM
To:	Maurer, Luiz
Subject:	FW: ESA government negotiations/ corrected



 -----Original Message-----
From: 	Gonzalez, Orlando  
Sent:	Tuesday, November 13, 2001 4:18 PM
To:	James A Hughes/ENRON_DEVELOPMENT@ENRON; Lavorato, John; Horton, Stanley; Shapiro, Richard; Mark E Haedicke/HOU/ECT@ENRON
Cc:	Assad, Sergio; Wiggs, Brett; Joao.Carlos.Albuquerque@enron.com; Soares, Britaldo; Novak, John
Subject:	ESA government negotiations/ corrected

Disegard previous e-mail.
We  reached a conceptual agreement with the government representatives on Sunday night.  The main points are:  

     1. Rationing losses:   Defined methodology giving distribution companies recovery over the next 36 months of rationing losses realised   from June 01 until the end of rationing in 02. Recovery includes financial compensation. Immediate funding of 80% through BNDES, with Brazilian government funds. Loans liquidated over the 3 year period as tariff increases are realised.  Funding scheduled by December 15th.  Elektro Ebitda impact of approximately R$163 million or US$ 63 million. Corrected numbers in second email

       2.  April/May MAE settlement :   Market will settle under current rules due to pre-rationing conditions, confirming the procedures used on Elektro's books.  Impact of approximately R$ 18 million or US$ 7 million. 

       3.  Parcel  "A" for the future:  All non-controlable costs to which LDC's are subjected to including power purchases, sector charges, are passed through to final tariffs either using a tracking account mechanism or by aligning adjustment dates with  the LDC tariff revision date.  Tracking account will be subject to financial compensation from the date costs are incurred until the effective pass through and collection , eliminating a major risk for the distribution sector. Elektro Ebitda impact  2002 forward of R$ 60 million or US$ 19 million, as had been considered in the 2002 plan.  This methodology represents major risk mitigation going forward, as the initial power supply contracts are renewed starting in 2003.

        4. Parcel A from the past:   Min Parente has agreed to the concept recovering non controllable  that were not passed through to tariffs since late 1999 using the same methodology agreed to for future recoveries and has a dedicated team from the Federal Attorney General's office targeting a final solution in ten days.    Elektro impact  is R$145 million or US$ 55 million in 2001. The proposed mechanism for recovery is after the 36 months for the rationing losses.  

We are currently finalising a memo of understanding and the government team is winding up the settlement with the generators in order to finalize the terms of the overall agreement.

Min Parente has committed to resolving the open issues affecting investors in the power sector.  These  agreements represent a major step forward, significantly improving  the value of our businesses. By  solving the pending issues for the rationing losses, thus eliminating the Annex 5 controversy the MAE should function normally, allowing us to operate Eletrobolt and settle against the pool.  

Total amounts for the sector represent about R$ 10 billion or US$3.8 billion at the current rates.  Our team has led the sector negotiations for months since the rationing, and have been instrumental in convincing the government of the need for implementing these changes.