Energy Sector Reform in RomaniaRegulatory Framework Developmentand Privatization Process

Florin GuguHead of Regulatory Dept. Romania

Athens, 26-27 June, 2007

2

• Enel is the third* largest listed utility in Europe with a market capitalisation of EUR 41 billion.

• The Italian Economy Ministry owns 31.6 %** of the company, leaving a free-float of some 70%, with 2.5 million shareholders.

• Its 60.000 employees work in 15 countries, producing and distributing power and gas in Europe, North and Latin America.

• Thanks to the strong commitment to Corporate Social Responsibility, Enel has been included in the world’s most selective ethical indexes, such as the FT4Good and the Dow Jones Sustainability Index.

A brief overview of Enel

Enel aims to be the most efficient, market driven, quality focused provider of power and gas, creating value for

customers, shareholders and people.

Enel aims to be the most efficient, market driven, quality focused provider of power and gas, creating value for

customers, shareholders and people.

* as of 7th July 2006

** 21,4% directly and 10,2% indirectly through state-run lender Cassa Depositi e Prestiti

3

Energy Sector Reform

HUGE CHANGES IN A SHORT PERIOD OF TIME

1999-2002

ANRE establishment

CONEL Unbundling

Secondary Legislation

2002-2006

Market openingPrivatization

DAMBM

GC M

4

REGULATORY REVIEW – General Issues

Legal Unbundling

New Energy Law 13/2007 sets July 1st 2007 as deadline for the legal unbundling in Romania

Distribution Companies will inherit the Distribution Licenses

Supply Company will receive a new Supply License

Regulated market (mandatory)

New Energy Law 13/2007 defines the role of Implicit Supplier (IS) and Supplier of Last Resort (SLR)

No further obligation for National Uniform Retail Tariff System beginning with July 1st 2007

Day Ahead Market (PZU) (voluntary)

New provisions in Law 13/2007 for consumers greater than 1MW to provide hourly load forecast => PZU contribution will be lower than 2% of average mix procurement costs

Balancing market (PE) (mandatory)

possible aggregation between captive, eligible and CPT (network losses); PE contribution will be lower than 2% of average mix procurement costs

5

Regulatory Period: 5 years, except for the first period which lasts for 3 years (2005-2007);

Efficiency increase (X factor) of 1% applied only to controllable OPEX;

The investors keep the profit accomplished from the efficiency increase over the level settled by the regulator during the first regulatory period; sharing mechanism afterwards;

Correction factor on complying with the required minimum level of quality;

Technical and commercial losses (CPT): In year 2012, for all distribution operators in Romania, the regulator will accept an average CPT of 9,5%.

WACC regulated values (in real values before tax):First regulatory period: WACC @12%;Second regulatory period: WACC @10%.

Initial RAB Value: The sum paid by an investor at the signing of a privatization contract for the purchase of the existing shares and for the newly-emitted ones will be used to settle the initial value of RAB (only for privatizations closed before 2006)

Distribution Tariffs Methodology: key principles

6

Issued on May 2005

The methodology will apply until the electricity market is fully opened

Key principle: the full pass through of justified costs in the final tariff

Electricity acquisition through a portfolio of ANRE – regulated contracts (regulated quantities and prices) with generators

Cost for trading on DAM and BM capped at 2.5%

Regulated margin is 2.5% of the cost of energy procurement

Government’s policy is to maintain a National Uniform Tariff (NUT) for captive consumers, at least until 2007;

Achievement of 2.5 % margin through the structure of energy acquisition

Supply Methodology: key principles

7

Conditions in y 2000

Historically, electricity prices were among the preferred tool

Cross-subsidies:» Heat ^ Electricity» Voltage levels» Residential ^ Industrial

Solution

Methodology for cost allocation in the case of CHPs

Methodology for cost allocation among voltage levels

Social tariff (intra-class cross subsidies were preferred against inter-class ones)

Direct targeting of social aids after July 1st 2007

Social Protection

8

Bill [€]

Standard Tariff

Social Tariff

E [kWh/month]

Social Tariff

9

Advantages

Intra-class is less distorting than inter-class cross subsidies

Less birocracy – the choice is done by the consumer

More focused on low-income consumers

Disadvantages

Still in contradiction with EU directives => has to be eliminated

No incentives for energy efficiency improvements

Not always a low consumption reflects a low income

Social Tariff

10

REGULATORY FRAMEWORK – Enel’s Perception

Aligned with EU provisions

Compliant with primary legislation in Romania

Sometimes deviating from the PRG signed with WB

Reduced predictability

Wholesale market distorted by preferential treatment

Room for amendments

ANRE needs to play a new role

Good business up to now + high potential for regional market

=> We expect better results for the future

11

In generalStabilityPredictabilityImmunity against political factors (regulator’s independence)

As regards regulated businessesAttractive remuneration of the invested capitalPass-through of the non-controllable cost components

As regards competitive businessesClear rulesNon-discrimination among players

Investors’ expectations from the regulatory framework

12

Conditions:Regulatory framework not completely issuedLack of any privatization experience recordPressure to do the privatization

Investor’s issuesAmplified risk perception“Italian regulatory model”

Regulator’s issuesPressure and responsibility“Single bidder problem”

First privatization

13

Secure the regulatory framework:

White paper for distribution tariff methodologyWhite paper for captive consumers’ tariff methodology

Guarantee the compliance of the newly issued regulatory framework with the declared white papers’ principles

Partial Risk Guarantee (PRG) with The World Bank

Regulatory framework adjustments

Comfort Letters issued by ANREContinuous open channel for communications among ANRE,

Enel, WB, GoR and the consultants of all parties

Together solving the problems

14

Partial Risk Guarantee (PRG) with The World Bank

Signed between:the Romanian Government the World Bank respectively Electrica Banat and Electrica Dobrogea

Will cover only limited and pre-defined risks caused by a change, a repeal of or non-compliance with the provisions of the regulatory framework relating to the:

distribution businesssupply to captive consumers business

15

Partial Risk Guarantee (PRG) with The World Bank (2)

Even if stipulated only with E.Banat & E.Dobrogea,the PRG is a guarantee for the

stability of the regulatory framework, and so it supports the entire distribution and regulated

supply business

PRG tool used for the first time

Never called, up to now

16

WAS IT A SUCCESS ?

First Privatization in Romania

17

WAS IT A SUCCESS ?

First Privatization in Romania

DEFINITELY YES !

18

Discos’ Privatisation in Romania

oltenia

banat

dobrogea

moldovatransilvanianord

transilvaniasud

muntenianord

munteniasud

• 4 Discos privatised in the period 2004-2005

• E. Muntenia Sud: privatised in 2007

• Three remaining Discos to be privatised in 2007-2008

19

The values which drive the Enel development in Romania

Care for people

We aim at growing personnel into responsible, accountable and performing leaders, by providing opportunities for professional development and by rewarding performance

Focus on performance

We will be focused in identifying and capturing all value creation opportunities, focusing on efficiency, productivity and right value of our energy

Invest in the community

We will pursue all profitable opportunities to reinforce our leadership position through investments and acquisitions, maintaining a socially responsible and safety oriented attitude towards the country and our stakeholders

People, Performance and CommunityPeople, Performance and Community

20

Drivers of future evolution

Why the South-Eastern Electricity market is potentially an attractive market for Investors?

– Significant demand growth potential

– Strong need for investment in new capacity to satisfy demand growth in the medium to long term

– In the early stages of market liberalization and/or with privatization programs running

– Investments risk mitigation for new entrants thanks to EU accession (Romania, Bulgaria)

21

There is no perfect regulatory framework

What does matter:StabilityPredictabilityImmunity to political influence

How to measure the quality of the regulatory framework:Compliance with the EU requirements and recommendationsUnbundlingMarket openingComplexity of the methodologiesAttractiveness for private investors

Conclusions

22

THANK YOU

FOR YOUR ATTENTION!

ENERGY IN TUNE WITH YOU