DISCUSSION DOCUMENT

1. DISCUSSION DOCUMENT IMPACT OF RATIONING AND MAE INTERVENTION ON ENRON LINES OF BUSINESSES São Paulo, May 10, 2001 For internal use only

2. OBJECTIVES OF THIS DOCUMENT • I - Present what is happening in the energy sector in Brazil • Energy Rationing • MAE Intervention • II - Discuss Enron’s views and expected impact on our businesses • III - Agree on next steps

3. I. WHAT IS HAPPENING IN THE ENERGY SECTOR IN BRAZIL?

4. ENERGY RATIONING • Government has [finally] accepted the need to implement an urgent energy rationing plan • Encompassing 80% of Brazilian market, in the industrial heart of the country • Expected cut: +20% of the load, from June till November; the end of dry season • So far, government has underestimated crisis and adopted cosmetic measures • Experts anticipated the crisis in late 1999 - reservoirs being depleted at fast pace • Government did not address new generators’ concerns on regulatory risks • Finance Ministry officials - we “would rather have rationing than to allow the pass-through of dollar denominated generation costs” • How to implement the 20% cut? Still being debated. Initial idea was to establish quotas per customer groups, with penalties for non-compliance • Serious doubts have been cast on the feasibility of the quota system • Legal basis for the penalties • No time for D/Rs to get prepared - systems, quota setting, customer handling • Very likely, a rolling black-out system ala California • Final decisions to be made on May 23; to be effective June 01 !

5. MAE INTERVENTION • ANEEL has recently issued a series of Resolution significantly changing the governance and structure of MAE, the Wholesale Market • Eliminated COEX - replaced by COMAE, a 6 member independent Board • Established a solid hierarchical relationship between ASMAE and ANEEL • Set penalties and guarantees [yet limited] • A 60 day transitional period - in the meantime, ANEEL in the driver’s seat • Within 30 days, ANEEL to publish new guidelines for the Market Agreement • Actions perceived as a “coup-de-etat”, by most stakeholders • An “intervention”, defeating the purpose of a free wholesale market • Several agents challenging the legality of the intervention • Enron’s view • Badly needed, MAE never worked - but weak on legal grounds • We have publicly raised concerns about MAE governance system

6. II - ENRON’S VIEWS AND EXPECTED IMPACT ON OUR BUSINESSES

7. IN A NUTSHELL • Energy rationing and MAE intervention are bringing a lot of anxiety • Uncertainties on the direction of change • How will it impact our businesses? • In the medium run, will it kill the market? • We have been very attentive to those changes - and lobbying to preserve some key institutions such as MAE, contracts, free spot prices, competition, etc. • Elektro and Eletrobolt are the ones which entail more risks and opportunities • Elektro • Lost sales and revenues; also liability issues before the final customer • On the other hand, great opportunity to sell our long positions on the spot • Eletrobolt • Risk of a non-functioning market or intervention in the spot prices • On the other hand, a significant upside with spot prices skyrocketing • A relatively comfortable position given agreement with Petrobrás THE FOLLOWING PAGE SUMMARIZES THE EXPECTED IMPACT ON EACH ONE OF OUR BUSINESSES

8. EXPECTED IMPACT ON ENRON

10. WHAT ARE WE DOING ABOUT IT? • Enron has been active and outspoken • Crisis should not be an excuse for challenging contract sanctity (including pass-through issues) and for delaying competition • A well functioning MAE is key to to bring more capacity on line and mitigate the impact of rationing • So far, ANEEL/MME have not violated any of the basic market principles • We have supported ANEEL in the “intervention” of the MAE • Aknowledging that it was badly necessary • Providing valuable technical and legal inputs to ANEEL on how to get a good new Market Agreement in place • Leading coalition groups to support the overall effort and not challenge ANEEL on legal grounds • We have been active in helping the government in the design of the rationing process • Finding the best trade-off between the technical and the operational aspects • To mitigate potential exposures on Elektro

11. III. NEXT STEPS

12. FOLLOW UP ISSUES • On Rationing • Following up the subject closely • Getting Elektro prepared for either scenario - quotas or black-outs • Keeping a close eye on Elektro’s financials - knowing exactly what we should lobby for • So far, a functioning market and maintaining Initial Contracts is key • The distribution coalition group has advocated for a rolling black-out - no more time to implement quotas as originally designed • On MAE intervention • Continued support to ANEEL - contingent upon the fact that intervention was meant to help, not to destroy the market • Drafting a new MAE agreement and leading this discussion among our coalition groups • Approach ANEEL on an individual basis to provide our detailed contributions WE WILL KEEP YOU POSTED AS THOSE PROCESSES EVOLVE

13. ADDITIONAL SUPPORT CHARTS

14. I - ENERGY RATIONING - What is the situation? - What are we doing about it? - Follow up issues

15. WHAT IS THE SITUATION? • Government publicly admitted that “Rationalization Plan” has not worked, and the situation is now serious (“like a war”) • Good response on supply side (several incremental MW) • But no response at all from demand • More drastic [tentative] plan jointly announced by ANEEL/MME • At least 20% D reduction, by quotas by customer group • Huge penalties for customer’s not achieving their individual quotas • Effective June 01 - quotas to be reviewed quarterly • Immediate Reactions • On legal grounds - no basis for penalizing customers • ABRADEE, CBIEE - too complex a system, no time; start with rolling black-outs • ABRACEEL - attach to MAE price (cost, not penalty) and give proceeds to D/Cs • A lot of confusion • Quotas, rolling black-outs? • Penalties, incentives, both? • To be decided by the National Council of Energy Policy on May 23

17. WHAT ARE WE DOING ABOUT IT? • Enron/Elektro - the first ones to express our views • Contract sanctity (including pass-through), a functioning MAE • Right economic signals to bring more capacity • “Rationalization” plan will not suffice • So far, ANEEL/MME not violating any of the basic market principles • Divergent views in the market • ABRADEE - quotas will not work, go straight to rolling black-outs • ABRACEEL - quotas fine, but MAE signals • In parallel, we are finalizing Enron’s views on Public Hearing 02/2001 - “Cost of Deficit • Praise for the goal - it does need to be increased • Go straight to R$ +2300/MWh (instead of R$ 684/MWh) • It will set a cap on spot price during rationing

18. FOLLOW UP ISSUES • Follow up decisions by CNPE on May 23 • In the meantime, a flexible plan for Elektro • Be prepared either to rationing or quotas • War strategy - plan & resource requirements to handle either (or both) situations • Continually examine our financials; in particular how the bonus and penalty systems are supposed to be implemented • Act promptly if bonus/penalty system impair our financials • Keep on lobbying for contract sanctity (Annex V) and a functioning MAE, where we can sell our long positions

19. I - MAE INTERVENTION - What is the situation? - Potential impact our businesses - What are we doing about it? - Follow up issues

20. WHAT IS THE SITUATION? • ANEEL has recently issued a series of Resolution significantly changing the governance and structure of MAE • Eliminated COEX - replaced by COMAE, a 6 member professional Board • Solid hierarchical relationship with ASMAE • Established penalties and guarantees [still limited] • A 60 day transitional period - in the meantime, ANEEL in the driver’s seat • Within 30 days - ANEEL to publish new guidelines for the Market Agreement • Actions perceived as a “coup-de-etat”, by most stakeholders • An “intervention”, defeating the purpose of a wholesale market • Initial adverse reactions from COEX and General Assembly • Several agents challenging the legality of the intervention • Part of the anxiety mitigated after ANEEL invited all CEOs to explain rationale

21. POTENTIAL IMPACT ON OUR BUSINESSES DURING RATIONING (DIRECTIONALLY) • The Wholesale Energy Market has never functioned properly • Delays and procrastination in implementation • Partial, discriminatory rules (e.g. loss sharing) • Delinquency, aggravated by the Angra II case • A flawed governance system, based on a stakeholder board • The intervention brought new expectations to have a real, functioning market • Where one can register contracts, buy and sell energy • Where Eletrobolt may sell on a merchant basis (and collect money) • In a broad sense, the actions were positive to all of our businesses - particularly due to Enron’s long position

22. DESPITE THE PROS, ANEEL MEASURES ENTAIL SOME RISKS • An intervention is always an intervention, not a good precedent • ANEEL is now in the driver’s seat • Via ASMAE • Appointing 2 of the 6 voting members of COMAE • Is ANEEL going to use its power for further interfering in the market? Or being forced by a Law or Decree to violate its principles? • Setting caps on spot or any action to limit costs to consumers? • Vehicle to implement a political agenda? • Fragile from a legal standpoint - it may be challenged by one or more stakeholder on those ground (until MAE agreement is signed) • Given adverse reaction, are stakeholder going to subscribe to a new Market Agreement within the expected timeframe? • Given those uncertainties, will the intervention defeat its own merits? That is, to expedite the implementation of the MAE

23. WHAT ARE WE DOING ABOUT IT? • In general terms, we are supporting the idea • In the past, Enron has expressed its view about the poor governance of COEX and the urgent need to have penalties/guarantees (Informativo Regulatorio #3) • We have disseminated the idea that the intervention was indeed a “necessary evil” • In a recent meeting with ANEEL, involving all CEO’s, we proposed (and it was accepted) the idea of “negotiating” a new MAE Agreement • We are now selling the idea, among our coalition peers, that we should move to the next step, that is: • Proposing something that really works. Deadline = May 15 • And negotiating some relevant points with ANEEL • We have examined the Resolution in detail and shared thoughts with our peer companies • But mindset is still confrontational • Not too much effort in getting things done • In the worse case scenario, the current Resolutions as they stand now are still better than the previous status quo

24. FOLLOW UP ISSUES • Continued discussion with coalition groups - a few important meetings to follow this week • To change the confrontational mindset • To propose sound recommendations to ANEEL • Further thinking on how to make the new governance/structure work - still many lose strings • Should we have/express our own view on the subject? • Assuming coalition groups do not reach an agreement until May 15 • Or, if agreed points or level of detail do not satisfy our needs

25. III - INTERACTIONS BETWEEN THE TWO ISSUES - RATIONING AND THE MAE • In principle, those are separate issues • But they share some synergies - good and bad ones • Good ones - the need to attract additional capacity has forced ANEEL to intervene in the MAE trying to make it work • Bad ones - rationing may create significant exposures in the MAE - which in turn may encourage regulators to modify rules, set caps on spot, limit pass-through and other political actions, harmful to competition and to our long positions • So far, ANEEL has been quite consistent with our “principles”, or respecting contracts, making MAE work, let spot prices move freely • However, no one knows for how long • Lobby from agents with short positions is already a reality • Temptation and lobby to interfere in the spot price is ever present • Buzzword - “during rationing there should not be big winners or losers” always has political appeal