Facing difficulties

Rick

As you know, the energy sector is facing several challenges: MAE
intervention, rationing, drafting a new market agreement and the like. It is
all happening as we speak.

In my capacity of President of the Brazilian Association of Energy Traders, I
have defended correct economic signals, have a functioning MAE, keeping
market rules stable, creating wholesale and retail competition, honoring
contract sanctity, and the like. More importantly, that rationing should not
be an excuse for "revoking" supply and demand

Those are not ideologic positions only. They represent, in my view, the best
interest for Enron in the short, medium and long terms. We have already
agreed on that in a recent Enron executive commitee. That means, I am in fact
wearing Abraceel hat to defend Enron's best interests.

Just two examples on how those principles are linked to our interest (among
many others)

a) By defending contract sanctity, we defended Elektro's contractual position
on Annex V, which sets a formula on how financial contracts decline during
rationing. Simulations have indicated that our long position, even during the
deepest rationing will offset loss of revenues. On the contraty, w/o Annex V
loss of EBITDA may be US$ 60 million in 2001

b) By defending the integrity of MAE, spot prices and the like, we are paving
the road for Eletrobolt's success.

Needless to say, Abraceel message has been consistent "across the board".
For example, if one believes on markets, we have to defend the use of market
signals (economic incentives/penalties) during rationing. And prices to
allocate a scarce resource. Also, as a corollary, no intervention in spot
prices, which will, in turn, make our Eletrobolt merchant plant feasible.

I feel very comfortable in defending Enron's interests and wearing my
Abraceel hat. There is a positive synergy.

However, Orlando is the President of ABRADEE, the Brazilian Association of
Distributors. The interests of ABRADEE are not always the interests of free
market (seldom are); nor they are the interests of Enron. For example,
ABRADEE as a group, criticizes the government for changing MAE governance;
they wanted rolling black-outs instead of economic signals; they advocate
caps on spot and the like.

Needless to say, there is a [potential] crash here, with some internal
reverberations.

Today, the government announced the rationing plan. It is based on quotas
with an overlay of economic signals (tied to wholesale prices). This is
consistent with markets and what ABRACEEL has been saying on and on. However,
ABRADEE wanted rolling black-outs. (paving the road for eliminating MAE
rules and setting caps on spot to avoid exposures)

Guess what happened? Orlando is being pressured by his peers to criticize the
plan and kill it. I am convinced that the government made the right decision
(and we helped influence it)

The subject has received a lot of press coverage on TV, radio and other
media. Abraceel has been viewed as one of the champions of market forces.
Last Tuesday, I was invited to express our views to the "Minister of the
Rationing" and I think I was quite persuasive in showing that there is
elasticity in demand, MAE should work asap, intervention was necessary,
government should refrain from the temptation to set caps on spot, etc. Most
of those statements where contrary to what Abradee had stated in the very
same meeting. The plan the Government announced today embeds several elements
of market forces. It was a sudden shift from the plan announced a few days
ago, where market signals were completely neglected. (CERA has recently
referred to it as a "step away from market forces"). And it was indeed.

Internally, we have been managing this tension in a productive way for Enron.
However, the situation is getting more complicated, as tension increases.
Orlando is getting a little uncomfortable because his peers perceive Luiz
Maurer as someone against the interest of the distribution business.

In sum, there is an internal issue going on. I do not want to be a trouble
maker. However, I feel that we have now a window of opportunities to make
things work. (or at least to try to) Our relationship with ANEEL and with the
powerful Ministry of Rationing has been excellent. I feel we should take
advantage of it and put a stick on the ground. That is our culture.

I think that spending too much time and energy in building consensus among
different stakeholders is not going to lead us anywhere (beside, we know that
we do not want markets). That is what we have been doing at COEX in the last
two years, with no material results. We have remained silent in key issues
waiting for this consensus to happen. This has been the case for the market
intervention. The market is misinterpreting our views. For example, there was
a press article today, stating that Enron, together with AES, were
dominating COEX and are trying to revert the situation back to the old regime
(stakeholder board). What a gross misinterpretation of our views !!
Informativo Regulatorio # 3 has conveyed the opposite message and it has
inspired ANEEL to start fixing the mess !! They gave us the credit. We are
still silent on our view, waiting for consensus to happen.

May be I am in too much of a hurry, because I am leaving soon. But I feel
that we have a window of opportunity to make things happen (or at least
knowing that they are not going to happen any time soon). And we are not
taking advantage of it.

I am not expecting any immediate action from you. Just for you to be aware on
what is going on and share some concerns. If you have any comments or any
advise, please let me know. I have even considered to resign Abraceel
leadership to avoid future internal conflicts.

Luiz Maurer