Creating A Vibrant Energy Market In Brazil No Bail Outs

ENRON WELCOMES BRAZILIAN JOURNALISTS CREATING A VIBRANT ENERGY MARKET IN BRAZIL Luiz T. A. Maurer Houston, October 04, 2001

INTRODUCTION ,[object Object],[object Object],[object Object],[object Object],[object Object],[object Object],[object Object],[object Object],[object Object]

IS THIS APPLICABLE TO BRAZIL? ,[object Object],[object Object],[object Object],[object Object],[object Object],[object Object],[object Object]

HAS THIS TRANSFORMATION LED BRAZIL INTO A CRISIS LIKE IN CALIFORNIA? AREN’T WE FOLLOWING A SIMILAR PATH? NO! ,[object Object],[object Object],[object Object],[object Object],[object Object],[object Object]

DESPITE SIGNIFICANT REGULATORY AND MARKET DIFFERENCES, INITIAL VERDICT WAS SIMPLE - “BLAME IT ON DEREGULATION”

WHY USING CALIFORNIA AS THE ONLY EXAMPLE ,[object Object],[object Object],[object Object],[object Object],[object Object],[object Object],[object Object],[object Object],[object Object]

BRAZIL AND CALIFORNIA MANAGED THE CRISIS IN A VERY DIFFERENT WAY ,[object Object],[object Object],[object Object],[object Object],[object Object],[object Object],[object Object]

CRISIS HAS LONG BEING ANTECIPATED

BRAZIL AND CALIFORNIA HANDLED THE CRISIS IN A VERY DIFFERENT WAY ,[object Object],[object Object],[object Object],[object Object],[object Object],[object Object],[object Object],[object Object],[object Object],[object Object],[object Object]

HOW THE CRISIS HAS BEEN HANDLED ,[object Object],[object Object],[object Object],[object Object],[object Object],[object Object],[object Object],[object Object]

RESULTS SO FAR HAVE MET TARGETS - MARKET SIGNALS DID WORK- MW Peak Consumption

HOW THE CRISIS HAS BEEN HANDLED ,[object Object],[object Object],[object Object],[object Object],[object Object],[object Object],[object Object],[object Object],[object Object],[object Object],[object Object],[object Object]

IF NOT LIKE IN CALIFORNIA, HOW TO EXPLAIN EXISTING CRISIS? BLAME IT ON MARKETS? ,[object Object],[object Object],[object Object],[object Object],[object Object],[object Object],[object Object]

TWO DIFFERENT CULTURES HAVE CREATED OBSTACLES FOR CONVERGENCE Natural Gas Electricity

THIS POOR CONVERGENCE, IN TANDEM WITH LACK OF REGULATORY CLARITY, HAS IMPACTED THE ENTIRE SUPPLY CHAIN ... Domestic Gas Imported Gas ,[object Object],[object Object],[object Object],[object Object],[object Object],[object Object],Gas Supplier GAS LDC IPP D/C ,[object Object],[object Object],[object Object],[object Object],[object Object],[object Object],[object Object],[object Object],[object Object],[object Object],[object Object],Free customer Captive customer ,[object Object],[object Object],[object Object],[object Object],[object Object],[object Object],[object Object],[object Object],… JEOPARDIZING THE SUCCESS OF PPT AND AGGRAVATING THE ENERGY CRISIS

WHAT SHOULD BRAZIL DO TO FULLY GET THE BENEFITS OF MARKETS AND COMPETITION?” ,[object Object],[object Object],[object Object]

THE SEAMLESS “VIRTUOUS CIRCLE” OF CONTRACTING REGULATORY/COMMERCIAL ENVIRONMENT CONDUCIVE TO CONTRACTING CULTURE OF CONTRACT “ SANCTITY” RESPONSIBLE CONTRACTING ATTITUDE

THE ELECTRIC SECTOR IN THE LAST TWO YEARS HAS BEEN PLAGUED BY MULTIPLE CONTRACT DISPUTES - MOSTLY AT MAE LEVEL

CONTRACT SANCTITY - A NAÏVE PROPOSITION? ,[object Object],[object Object],[object Object],[object Object],[object Object],[object Object],[object Object]

CONTRACTS ARE BASIC PILLARS OF THE NEW MODEL ,[object Object],[object Object],[object Object],[object Object],[object Object],[object Object],[object Object],[object Object],[object Object],[object Object]

COUNTRIES WHERE ELECTRIC SECTOR REFORM WAS UNDERTAKEN HAVE AN OUTSTANDING PERFORMANCE ON CONTRACTS Austria Australia Denmark Finland Germany New Zealand Norway U.K. U.S.A. Canada Italy Poland Portugal Algeria Argentina Chile China Mexico Thailand South Africa Brazil Peru India Indonesia Sri Lanka Source: The Fraser Institute: Economic Freedom of the World 2000 - Annual Report * Proxy for security of property rights and viability of contracts includes: (i) legal security of private ownership rights (risk of confiscation); (ii) viability of contracts (risk of contract repudiation by the government); (iii) rule of law: legal institutions supportive to principles of rule of law and access to a nondiscriminatory judiciary. LEGAL STRUCTURE AND PROPERTY RIGHTS INDEX (*) - 1997

- RESPONSIBLE CONTRACTING - REQUIRES ALL COSTS TO BE INTERNALIZED ,[object Object],[object Object],[object Object],[object Object],[object Object],Load growth for D/Cs Annex V for Generators Gas Rigidities Regulatory lag Retail competition FX Risk Low VN Cost of deficit MAE price Short positions Cost of contracting Costs of not contracting

IF BAILOUT IS PERCEIVED AS A POSSIBILITY, THERE WILL BE IRRESPONSIBLE CONTRACTING, LESS CAPACITY, MORE FREQUENT RATIONING ... … AND MORE PRESSURE FOR BAILOUTS ... Gas Rigidities Regulatory lag Retail competition FX Risk Low VN Cost of deficit MAE price Short positions Cost of contracting Costs of not contracting

IS THIS A DISCOURAGEMENT FOR NEW INVESTMENTS IN BRAZIL? ,[object Object],[object Object],[object Object],[object Object],[object Object],[object Object],[object Object]

OTHER IMMEDIATE CHALLENGES ,[object Object],[object Object],[object Object],[object Object],[object Object]

CONTRACT SANCTITY – FROM CONCEPT TO IMPLEMENTATION ,[object Object],[object Object],[object Object],[object Object],[object Object],[object Object],[object Object],[object Object],[object Object],[object Object]

HAVING MAE UP AND RUNNING ,[object Object],[object Object],[object Object],[object Object],[object Object],[object Object],[object Object]

ACCELERATE THE IMPLEMENTATION OF A COMPETITIVE MODEL ,[object Object],[object Object],[object Object],[object Object],[object Object],[object Object],[object Object]

ALIGN PRICES TO MARKET REALITY ,[object Object],[object Object],[object Object],[object Object],[object Object],[object Object],[object Object]

IN CONCLUSION ... ,[object Object],[object Object],[object Object],[object Object],[object Object],[object Object],[object Object],[object Object],[object Object],[object Object]

Creating A Vibrant Energy Market In Brazil No Bail Outs

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