---------------------- Forwarded by Rob G Gay/NA/Enron on 01/31/2001 02:25 PM 
---------------------------


Jose Bestard@ENRON_DEVELOPMENT
01/30/2001 12:59 PM
To: Cuiaba LT
cc: "Luiz Sergio Assad" <assad@elektro.com.br>, "Fred Sampaio" 
<freds@elektro.com.br>, Jose Lucio Reis/SA/Enron@Enron, Luiz 
Maurer/SA/Enron@Enron 

Subject: Meeting With Furnas - Jan 29 01 - Tariff until Gas Commisioning

FYI
---------------------- Forwarded by Jose Bestard/ENRON_DEVELOPMENT on 
01/30/2001 12:55 PM ---------------------------

Created 01/30 10:55 AM   Modified 01/30 12:55 PM
Title: Meeting With Furnas - Jan 29 01 - Tariff until Gas Commisioning

Furnas:  Celso Ferreira, Roberto de la Nina
EPE: Jose Bestard, Laine Powell, Christiaan Huzier
Consent.- Before entering into the purpose of the meeting, I told Celso that 
we were sending him a letter to confirm our understanding from the previous 
meeting, that they are linking the approval of the Anex 4/Consent to changes 
in the contact. and that they refused to sign the original consent language. 
For avoidance of doubt, the text of both versions are included in the letter.
He said that our understanding was correct and that he would answer in the 
affirmative.
He was not familiar with the original text. I showed him my copy with the 
three initials. He asked whose initials were from Furnas. (I don't know - was 
not present at that meeting. Rick  and John may know).
Roberto de la Nina gave him the background from Furnas side.
Tariff and Commissioning. 
Celso started the session by drawing a diagram of the Contractual Obligation 
provisions compared to the Current Situation. He wanted to lead us  to pay 
the fuel differential, from 100% dispatch or alternatively buy from the MAE 
(lower cost to us).  
[Comment.- Irrespective of  the Force Majeure arguments that we have, the MAE 
make up possibility has to be used carefully to avoid  falling into the trap, 
by precedent, or assuming a market exposure that we presently do not have.]
I replied that his reading of the Contract was correct, except that he did 
not read the Force Majeure section.  We had the obligation to change to gas 
on the dates he mentioned, except that we have a Force Majeure due to the 
Government Actions, and therefore we have the right to change the schedule.
Celso replied that his people did not think this fit the case; i.e. 
"additional difficulty of drilling through rocks"; I replied that we have a 
strong case that everyone  knows about, including the regulator Aneel, which 
extended the use of the CCC until June 2001.
[Comment.- I expect Furnas to challenge our documentation to calculate how 
many days we are entitled due to FM causes. At the end there will be a 
"negotiated agreement", or the result or arbitration.]
Aneel Authorization.-  I told him that we needed to bring him up to date 
about Aneel's approval.
 Aneel sent us a letter that we were not authorized to operate in Combined 
Cycle, not that we had CCC account coverage during for CC operation.
Gave him a copy of the letter of our request to Aneel asking for both ; CC 
and CCC coverage. We were ready for 480 MW, but on diesel.
Celso asked what we would do if we got CC authorization but not CCC 
coverage.- I told him that we did not have the money to pay for the fuel, 
that we would have to convert back to Simple Cycle, use the current 
authorization for minimum use and wait  for the gas to be available to go 
through commissioning.
He said that under the contract we are obligated to provide power; that he 
would buy from the MAE and sent us the bill. I told him that under the 
Contract we can change the gas-change-over date because of FM. During a FM 
period our mutual obligations would cease, except that they in this case they 
had a capacity payment obligation given that the cause was Government 
action.  
He understood that they have a right to cancel the Contract after 12 months 
[Comment - but they would have the MAE exposure as well for the Initial 
Contracts]
Laine gave him an update of the ridge contruction and the parallel path that 
we will take on Ridge 10; drill and also seek a permit for a partial crossing 
of the first crest, drilling through the second crest, all withing the 
existing ROW.
Laine explained the processes and limitatios of returnind to SC operations 
and then back again to CC gas comissioning.

Our Proposal.-  Our proposal is that we get authorization to enter into 
operation as combined cycle unit; the CCC administration pays for the diesel, 
and receives the gas revenues as compensation. This keeps us and Furnas at 
the Contract equilibrium, and the Brazilian electric system has 480 MW 
combined cycle plant; providing stability to that area.
Under this proposal, until the gas gets there to start commissioning, ONS 
would dispatch the power plant according to economic dispatch at R$110/Mwhr; 
minimum 290 MW. The CCC covers the actual dispatch the MRE cover the dispatch 
to the Initial Contracts with Furnas.
I suggested that they join us for that petition to Aneel. He called Mario 
Santos to set up a meeting, to enlist the help of ONS in that petition as 
well.
The meeting is set up for Wednesday at 9:30 AM.   To prepare we need to 
provide the factual information, heat rates, costs, etc.