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INSIDE THE ELECTRIC BILLPUBLIC UTILITY INFORMATION

National Electric Energy Agency - Brazil

Board of Directors

Jerson Kelmangeneral-director

Edvaldo Alves de SantanaJoísa Campanher Dutra SaraivaJosé Guilherme Silva Menezes SennaRomeu Donizete Rufinodirectors

BrasíliaSeptember 2008

N A T I O N A L E L E C T R I C E N E R G Y A G E N C Y

INSIDE THE ELECTRIC BILLPUBLIC UTILITY INFORMATION

Cataloging in Publication Data - CIP

NATIONAL ELECTRIC ENERGY AGENCY - BRAZIL Address: SGAN 603 Módulos “I” e “J” - Brasília - DFZip Code 70830-030Telephone: 55 (61) 2192-8600Ombudsman: 144E-mail: [email protected]: http://www.aneel.gov.br

EditionGabriela Leal

WritingDaniel Martins D'albuquerque Gabriela LealSimonne Rose de Souza Neiva Coelho

RevisionSalete Cangussu

Art Project and Layout Christian Dantas

TranslationArabera Traduções Técnicas Ltda.

Revision in English – Superintendency of Economic RegulationBruno Hatori Vidal

B827i Brazilian Electricity Regulatory Agency.

Inside the electric bill : public utility information / Brazilian Electricity Regulatory Agency. Brasília: ANEEL, 2008.

32 p. : il.

1. Electric bill Brazil. 2. Electric tariff. 3. Tariff charge. 4. Public service. I. Title.

UDC 621.31:330.567.2(81)

CEDOC

Inform consumers, companies, authorities and society in general about the policies and regulations of the electric sector, as a form of reducing asymmetry of information between utilities and users, is one of the Brazilian Electricity Regulatory Agency (ANEEL)'s guidelines.

Conscientious of the importance of that task, ANEEL faces the challenge of explaining one of its most complex attributions: set an energy tariff that is, at the same time, fair for the consumer and enough to guarantee the utility's economic-financial balance.

Translate the puzzling mechanism of tariff composition and readjustment, in a simple, direct manner, is ANEEL's objective upon launching the primer “Inside the Electric Bill”. Through this guide, several factors are presented that influence the value of the electricity bill, concerning the impacts of peculiarities existing in the service territory of each company.

ANEEL intends to, with this information, show the role and the limitation of the regulatory comission in this process. In the endless search for balance between defining the fair price for those who pay for energy and an adequate remuneration for those who provide services, with the security of continuous, reliable and good quality supply, ANEEL fulfills legal decisions that outreach its decision competency. One of these decisions is the strong incidence of sector charges and tributes in the energy cost, with great impact on the tariff.

With this initiative, this Agency presents the electricity tariff's “anatomy” that, despite having some specifications, according to the region and the distribution utility's profile, present, in their calculation, the same methodology.

We wish you good reading!

INSIDE THE ELECTRIC BILL

PRESENTATION

The multiplicity of applications and the mainly in the North region, which main convenience of usage of electricity became characteristics are the limitation of energy an essential resource for man's survival and exchange and thermoelectric generation.essential for the nations' socio-economic development. In Brazil, the generation of electricity by the use of the strength of river The main sector agents are the waters (hydroelectric generation) answers, generators, which produce energy; the currently, for 75% of the total capacity transmission companies, responsible for installed in the country. transporting energy from the point of

generation to the consumer centers; the The country's electric systems is made distribution companies, which take the

up by the National Interconnected System energy to the consumer's house, and those (SIN – Sistema Interligado Nacional) – a who commercialize it, authorized to buy and large transmission network that allows the sell energy to free consumers, or in other exchange of energy between the regions of words, those who need more than three Brazil – and by the Isolated Systems, located thousand kilowatts (3 thousand kW).

In the past years, the Brazilian electric areas of generation, transmission and sector suffered several transformations. It commercialization of energy, demanded migrated from the state monopoly to a from the State designing the adequate competitive market, with the entrance of new structure. For this reason, in 1997, was agents in the control of energy distribution created a sector regulating agency – the companies and new investors, a role Brazilian Electricity Regulatory Agency exercised previously by the State. (ANEEL) – autarchy in special regime,

linked to the Ministry of Mines and Energy The complexity of the new model with (MME).

the introduction of different agents also in the

HOW DOES THE BRAZILIAN ELECTRIC SECTOR WORK AND HOW DOES ANEEL PERFORM?

07

?

DISTRIBUTION

GENERATION

TRANSMISSION

COMMERCIALIZATION


ANEEL has as basic functions to The new model preserved ANEEL and normalize the policies and the guidelines the National Electric System Operator established by the Federal Government for (ONS), responsible for coordinating and the electric sector, inspect service rendering supervising the centralized operation of the to society and diminish eventual conflicts that Brazilian interconnected system. It also may arise among different sector players. It created new actors, such as the Energetic also falls to ANEEL the function of granting the Research Company (EPE), linked to MME, right of exploring services, an activity whose function is to carry out studies delegated by the Ministry of Mines and Energy necessary for the planning of the expansion (MME). of the electric system; and the Chamber of

Electricity Commercialization (CCEE), for In 2004, the Federal Government decided negotiation of energy on the free market.

to implement the “New Electric Sector Model”, through Laws n° 10.847 and 10.848, keeping

Finally, to supervise service conditions the formulation of policies for the electric and suggest actions to avoid the lack of sector as an attribution of the Executive energy, it instituted the Electric Sector Power, through MME, with consultancy by the Monitoring Committee (CMSE), also linked to National Council of Energetic Policy (CNPE) MME.and the National Congress.

ANEEL's MissionProvide favorable conditions for the electricity market to develop between the

agents and in benefit of society.

Balance

Government

StrategicInterests

RegulatedAgents

Adequate Agents

Contracts honored

Clear rules

Consumers

Tariff inexpensivenees

Quality of service

Garantee of rights

Public Interest

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Between the 1970s and 1990s, there was for inflation control – the minimum just one electricity tariff in all of Brazil. The remuneration planned for the distribution utility consumers from various states paid the same wasn't reached, generating a vicious cycle, value for energy consumed. This value with breech between distributors and guaranteed the remuneration of the generators and lack of economic-financial distributions utilities, despite their efficiency, capacity for carrying out new investments. In and the companies that didn't profit were this context, Law n° 8.631/1993 arose, though maintained by those that did and by the Federal which the tariff became set for each Government. distribution utility, according to the specific

characteristics of each utility's service territory.This tariff modality did not encourage the

companies to be efficient, because the entire And, in 1995, Law n° 8.987 was approved cost was paid by the consumer. For several which guaranteed the economic-financial regions – among them the contention of tariffs balance to the utilities of electricity distribution.

Since then, one tariff per concession This way, the energy tariffs reflect area (geographic territory where each peculiarities of each region, such as number company is obligated by contract to supply of consumers. kilometers of network and electricity) was established. If this area market size (quantity of energy served by a coincides with that of one state, the tariff is determined infrastructure), compared one in the federative unit. Else, different energy cost, state tributes and others.tariffs co-exist within the same state.

WHY IS THE ENERGY TARIFF DIFFERENT IN EACH STATE?

Editing of Law 8.631/93 which put an end

to tariff uniformizing and to guaranteed remuneration.

Introduction of the economic-financial

balance concept (Law 8.987/95).

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IT IS IDEAL THAT THE TARIFF BE ENOUGH TO:

Guarantee the supplying of energy with quality

Guarantee service renderers sufficient profits to cover the efficient operational costs and remunerate

investments necessary to expand the capacity and guarantee good serve quality

10

It is the distribution utility's obligation to take should be covered by the energy tariff. In electricity to its consumers. To fulfill this general, the electric bill includes the commitment, the company has costs that indemnification of three distinct costs:

WHAT ELSE IS INLAID IN THE COST OF ENERGY THAT REACHES THE CONSUMERS?

energy generation

energy transportation to the houses (wires)

transmission + distribution

chargesand taxes+ +

?

How much is paid per component on an electric bill of R$100.00 (average/Brazil 2006)

R$ 35,00

R$ 30,00

R$ 25,00

R$ 20,00

R$ 15,00

R$ 10,00

R$ 5,00

R$ 0,00

R$ 33,27

R$ 5,96

R$ 27,50

R$ 33,27

Purchase of Energy

Transmission

Distribution (Component B)

Charges and Taxes

R$ 40,00

Source: Economic Regulation Department (SRE) ANEEL 07/2007

Starting with Law n° 10.848/2004, the Additionally to these costs, there are value of energy generation bought by the charges and taxes (related in the next item), distributors to resell to their consumers which are not created by ANEEL, but by began to be determined in public auctions. laws. Some of them are included only on the Before this law, the distribution companies distribution cost, while others are included could freely buy energy to be resold, with a in the generation and transmission costs.price limit set by ANEEL. The objective of the auctions is to guarantee competition and best prices, besides the transparency in the When the electric bill arrives to the cost of energy purchase,. consumer, he pays for buying energy

(remuneration of the generator), the The transportation of energy, from the transmission (the transmitting company's

generation point to the final consumer, is a costs) and the distribution (services natural monopoly, for the competition in the rendered by the distributors), plus the segment doesn't bring economic benefits. charges and taxes determined by law, For this reason, ANEEL performs for the destined to the government. If we consider tariffs of this segment to be composed just by the component “charges and tributes” apart, the costs that effectively relate to the in 2006, the costs were R$8.54 and services rendered, in a manner to make R$24.73, respectively, summing R$33.27 them fair. for this component.

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12

TO FIND OUT MOREEven if the consumer doesn't use electricity or a determined

period, when he travels, for example, the distributor charges a minimum value on the bill. This takes place because the company has to maintain its electric system and its service structure in perfect functioning for the consumer to be able to use energy at the moment he wants. Or in other words, even if the switch is not one, the entire electric network should be maintained in a stand-by to serve the consumer unit. This is the so-called availability cost, present in the applicable tariffs for billing the served consumer units in low supply tension.

ANEEL Order 456/2000 established the minimum values for each profile of residential consumer. For the mono-phase* and bi-phase units with two conducers, the minimum chargeable value 30 kWh, even if there is no consumption. For bi-phase units*, the minimum charge will be equivalent to 50 kWh, and for tri-phase * units the value will correspond to 100 kWh.

For this value to not be charged, the consumer has the option of requesting that the distribution utility cut his consumer unit from the distribution network. However, when they decide to reestablish the energy consumption, they will have to pay a fee for the execution of reconnecting to the network.

*The mono-phase consumer unit is connected to the electricity network by one phase (where the energy runs) and one neutral (to close the circuit), or in other words, two conducers. The bi-phase connection is done through two phases and one neutron (three conducers), while the tri-phase is connected by three phases and one neutral (four conducers). The number of phases should increase the greater the load is (demand and consumption) of the consumer unit to guarantee more quality and safety in the energy supply. For example, in a house where there are few household appliances and the energy consumption is small, the consumer unit will be mono-phase. If new electric equipment is installed, an energy overload may happen and, in this example, the first sign that the consumer should reinforce installation and change to a bi-phase is the constant activation of the breaker.

Phase

Phase

NeutralMonophase

Quarter phase

Tri phase

Neutral

PhasePhase

PhasePhase

Neutral

They are contributions defined in laws Check on the table below the value of approved by the National Congress, used for sector charges paid by consumers in 2006.specific purposes.

Observe that each charge determined impact the tariff, and, consequently, the by law is justifiable, if assessed individually. consumer's payment capacity.However, when considered in a group, they

WHAT ARE TE SECTOR CHARGES AND WHAT ARE THEY FOR?

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13

Source: Economic Regulation Department (SRE) ANEEL 07/2007* updated until 06/11/2007** 2006/2007 Cycle

Charge What it is for

How much was collected in 2007 in

sector charges (R$ Million)

CCCFuel Consumption Bill

Subsidy the thermal generation mainly in the Northern region (Isolated Systems)

2,870.6

RGRGlobal Reversal Reserve

Refund assets connected to the utility and promote the electric sector expansion

1,327.7*

TFSEE - Service Inspection Fee

Electric Energy Provide resources for ANEEL's functioning 324.97

CDEEnergetic Development Account

2,313.1

ESSSystem Service Charges

85.9

PROINFA Subsidy the alterative Energy sources 637.7P&D – Research and

Development and Energetic Efficiency

Promote scientific and technological researches related to electricity and the sustainable use of

Natural resources331.9**

ONSSystem’s National Operator

Provide resources for the functioning of the ONS

10.7

CFURHFinancial compensation for the

use of Water resources

Compensate financially the use of water andproductive lands for the electricity

generation1,232.74

Pay for the energy generated according to the Brazil/Paraguay Treaty

414.26Itaipu Royalties

The electric system charges should cost approximately R$ 9.5 billion in 2007


Provide the energetic development from alternative sources; promote energy service

universalization, and subsidize the Low Income residential sub-class

Subsidize the maintenance of reliability and stability of the National

Interconnected Electric System

They are compulsory payments due to On electric bills, municipal, state and the government, coming from a legal federal taxes are present. The distributors determination, which guaranteed resources just collect and pass on these taxes to the to develop its activities. In Brazil, the tributes competent authorities for their charging.are embedded in the prices of products and ANEEL publishes, through a resolution, services. This means that on water, electric the value of the energy tariff, not including and phone bills, in the purchase of food the taxes, by consumer class (residential, products and goods and in the contracting of commercial, industrial, etc.). Based on several services, the consumers pay these values, the energy distributors tributes, at a later date passed on to the include the taxes (PIS, COFINS, ICMS and public accounts by the companies that CIP) and emit the electric bills that the collect them. consumers pay.

Social Integration Programs (PIS) and Contribution to the Social Security Financing (COFINS): charged by the Union to maintain programs aimed at the worker and to serve the Federal Government's social programs. The application of these taxes was recently altered, with elevation in the value of the electric bill. With the issuance of Law n° 10.637/2002, 10.833/2003 and 10.865/2004, PIS and COFINS had their rates altered to 1.65% and 7.6%, respectively, in a non accumulative manner. This way, the average rate of these taxes varies with the volume of credits verified monthly by the distribution utilities and with the PIS and COFINS paid on the costs and expenses during the same period, such as energy purchased for resale to the consumer. The table on the next page shows the two calculation systems.

WHAT ARE Taxes AND WHAT ARE THEY FOR?

TAXES LAID ON THE ELECTRIC SECTOR

FEDERAL Taxes

?

$

- Tax on Circulation of Merchandise and Services (ICMS): foreseen in article 155 of the 1988 Federal Constitution, this tax lays on the operations related to the circulation of merchandise and services and is the competency of the State governments and the Federal District. The ICMS is regulated by each state's tributary code, or in other words, established in law by the legislative houses. Thus they may vary. The distribution utility has the obligation to carry out the charging of the ICMS directly on the bill and pass them on entirely to the State Government. Its calculation is also done based on gross revenue, as the demonstration below.

STATE TAXES

14

Previous System (cumulative) Current System (not cumulative)AliquotsAliquots

PIS - 1.65%PIS - 0 .65%COFINS - 7.60%

Example - not cumulativeExample - cumulative

PIS PISGross Profit Gross Profit

COFINS COFINSPIS/COFINS to pay 1-PIS/COFINS to debit

Costs and/or Expenses

2-PIS/COFINS to credit(incident on costs and expenses)

PIS/COFINS to pay (1-2)

R$ 10,00.00R$ 65.00R$ 300.00R$ 365.00

R$ 10,00.00R$ 165.00R$ 760.00R$ 925.00

R$ 4,000.00

R$370.00

R$555.00

3.65%Effective or average”

Aliquot5.55%

COFINS - 3.00%

Effective or average” Aliquot

The PIS and COFINS are calculated based on gross revenue, or in other words, the taxes themselves are part of the calculation base.

15

- Contribution for Financing the Public Lighting Service (CIP): foreseen in article 149-A of the 1988 Federal Constitution which establishes, among the municipalities' competencies, to regulate, according to the specific law approved by the Municipal Chamber, the form of charging and the CIP calculation base. Thus, any and all responsibilities for project, implementation, expansion, operation and maintenance of public lighting installation services are attributed to the Municipal Public government. In this case, the distribution utility just collects the public lighting fee for the municipality.

MUNICIPAL TAXES

Method OF CALCULATION

The gross revenue base of the ICMS, PIS The distribution utility, receiving the and COFINS tributes is established by values charges on the electric bills, corresponding federal laws and implies that discriminates the taxes to be collected to the the value of these tributes integrate the Union the component referring to the PIS calculation base on which lays on its and COFINS, and to transfer to the States, respective rates. according to the corresponding state laws,

the part equivalent to the ICMS.

+-X-

Value to be charged from the consumer

value of the tariff published by ANEEL

1 - (PIS + COFINS + ICMS)=


In the graphic above it can be observed represents just 5.96% of the electric bill that, since 2001, the value of the value and that these investments are transmission cost was the item that grew the essential for allowing the flow of energy most in the electric energy market between regions in the periods of lack of (125.34%). This increase happened due to rain. The second segment which grew the heavy investments made in the tranmission most (108.11%) was charges and taxes grid, (high tensions) to allow the flow of which represent more than 33.27% of the energy between the different regions of the electric bill value, being, therefore, the country, in the intention of increasing the greatest impact item, after generation. The reliability of the national electric system distribution (75.5%) and the energy concerning the availability of water in the purchase (103.94%) had the lowest growth. reservoirs of the hydroelectric plant. Even though, this increase was higher than

inflation for the period (page 24), for However, it is pointed out that this item reasons that will be explained later.

AVERAGE TARIFF BRAZIL

Generation Transmission Charges + TaxesDistribution

R$ 49,65(32,23%)

R$ 101,26(33,27%)

R$ 8,05 (5,22%)

R$ 18,14 (5,96%)

R$ 47,69(30,95%)

R$ 83,70(27,50%)

R$ 48,66(31,58%)

R$ 101,27(33,27%)

0

50

100

150

200

250

300

350

2001 2006

R$

/MW

h

R$ 154,05 / MWh(100%)

R$ 304,37 / MWh

125,34%

103,94%

75,5%

108,11%

97,6%

Source: SRE ANEEL 07/2007

16

The electricity distribution utility signed In this contract the rules are set for with the Union (Granting Power), since electricity distribution service rendering and 1995, a “concession contract”, which is a three tariff settlement mechanisms are public document and available on the foreseen.Agency's Internet page (www.aneel.gov.br).

HOW IS THE ENERGY TARIFF VALUE DEFINED?

THESE MECHANISMS ARE APPLIED TO:

Tariff Readjustment

Tariff Review

Extraordinary Tariff Review

Allow the energy tariff to be fair to consumers

Define a tariff sufficient enough to cover the service costs with the quality level established by ANEEL

Remunerate the investments acknowledged as prudents

Encourage the increase of efficiency and the quality of services rendered by the distribution utilities

Guarantee service covering the market without geographic or income distinction

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17


Component A: uncontrollable costs that are just passed on to the energy tariff and are independent from the distribution company's management (in the example of the condominium, the costs of water and taxes, which the manager just divides among the residents).

Component B: controllable costs, or in other words, managed by the distributor itself. Part of this component are the expenses with operation and maintenance, the quota of depreciation and remuneration of the investments (in the example of the condominium, these are the costs with staff, cleaning products and construction projects, which the manager has a way to manage).

To understand how these mechanisms are applied to maintain the distribution leasers' economic-financial balance, follow the reasoning below:0

Imagine you are the manager of a value that, added to that paid by the condominium who needs to determine others, will compose revenue capable the monthly value to be paid by the of covering condominium expenses, residents. You will pay the costs with c o n s t r u c t i o n p r o j e c t s a n d water and taxes, which, actually, are investments.just divided among the residents. To a certain extent, this also applies to There will also be other costs, such as the Regulatory Agency in the definition staff payments, cleaning products and of the energy tariff. ANEEL, following construction projects, which can be to utility contracts dispositions, set controlled to spend more or less, values that, added up, represent according to the condominium's need. revenue sufficient for the distribution Thus, you will have to apply the utility to cover its efficient costs and dispositions of the condominium make prudent investments for the decree to collect, from each resident, a maintenance of service quality.

The revenue required by the company, called “distribution service revenue”, can be divided in two large set for passing on costs:

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Component A

Energy Purchase

Distribution service Revenue

Sector Charges

Operational Costs

Transmission Depreciation Quota

Investment Remuneration

Component B

Understand how the updating of this revenue is done by the mechanisms mentioned, according to Law n° 9.427/1996 and the Concession Contract.

A) TARIFF READJUSTMENT: reestablishes the purchase power of the distribution utility's revenue, according to the formula foreseen in the concession contract. It takes place annually, on the contract anniversary, except in tariff review. For the application of this formula, all of the distribution company's uncontrollable costs (Component A) are calculated, or in other words, the new values of sector charges, energy purchase and transmission costs are verified. The other costs, contained in parcel B, are adjusted for the IGP-M, from Getúlio Vargas Foundation. The adjustment of parcel B still depends on another component, the X factor, an index set by ANEEL at the time of the tariff review. Its function is to divide with the consumer the distribution company's productivity earnings, due to the growth in the number of consumer units and of the increase of the existing market consumption, which contributed to the tariff inexpensiveness.

Parcel A (updated) Parcel B x (IGP-M - X Factor)+Readjusted Revenue

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TO FIND OUT MORE

Until 2004, the Tariff Readjustment Index (IRT) accounted for the variation of some items in Component A just on the day before the distribution readjustment date, as foreseen in the concession contract (Economic IRT). This way, if the dollar value used for the purchase of energy by the distribution company rose or fell on the day before the readjustment, the calculation would be done on that quotation, not considering the oscillation of the currency value throughout the year. This hindered the precise calculation of the company's cost variations. For this reason, in November 2004, the Government created the Compensation Account of Component A Items (CVA), which began to account for the register of variation of some Component A items during the entire period between one readjustment and another (IRT Financial).

In the example of the condominium, suppose that even if the annual fee has risen from R$ 500 to R$ 550 (10%) there was the need for an extra fee of R$ 30. In this case, R$50 would be the Economic IRT and R$ 30 would be the Financial IRT. The value to be paid in the year will have been R$ 580. The next year, the new readjustment will be based on the normal fee value, of R$ 550, and not the total of R$580, which includes the extra fee. Or in other words, if it is readjusted again 10%, the normal fee, which was R$ 550, will increase R$ 55 and reach R$ 605, because the R$ 30 referred to the extra fee. This way, since you paid R$ 580, upon having to pay R$ 605 you will realize an increase of just 4.31% and not 10%. For a similar reason, the energy consumer perceives a different readjustment than that announced, for the percentage defined by ANEEL is not applied on the previous tariff, but on the previous tariff value minus the financial index of the past readjustment.

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B) PERIODIC TARIFF REVIEW: allows for the repositioning of the tariff after the complete analysis of the efficient costs and remuneration of prudent investments, in an average interval of four years. This mechanism differs from the annual readjustment due to being more extensive and taking into consideration all the costs, investments and revenues to set a new tariff platform, adequate for the company's structure and for its market. To obtain a result that doesn't depend just on the information provided by the distribution company itself, which could contaminate the review process, ANEEL uses the “reference company” methodology. It is a theoretic model that reflects effective operational costs for an ideal distribution utility and the prudent investments made by the distribution company for service rendering and which will have right to remuneration of the tariffs charged from the consumers. This investment is called Remuneration Base.

The depreciation costs refer to the necessary quantity for the formation of financial resources designated to replacing the investments made prudently for electricity service rendering at the end of its useful life. The capital remuneration refers to the reward paid to the investor for the capital employed in service rendering. This mechanism is prospective, or in other words, the distribution utility's historic costs are not considered as a reference for its future costs. The future reference costs are created by ANEEL to encourage the distributing companies to seek greater efficiency.

However, when holding a tariff review, a new value is reached for Component B, which should, also, be added to the value calculated for Component A.

Updated Component A New value for Component B+

Reviewed Revenue:

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Operational

costs

Depreciation

quota

Investment

Remuneration

- reference company

- remuneration base x depreciation rate

- remuneration base x return rate


TO FIND OUT MORE

C) EXTRAORDINARY TARIFF REVIEW: is aimed to serve the very special cases of justified instability. It can take place at any time, when some unpredictable event affects the utility financial-economic balance, such as the creation of a new sector charge. Until the moment, few cases justified its application.

In the application of electricity tariffs, the consumers are identified by consumption classes and subclasses: residential; industrial; commercial and service; rural; governemnt; public lighting; public service and own consumption. Each class has a distinct tariff structure, according to the peculiarities of energy consumption and the power demand.

Until 2003, there was a crossed subsidy in the calculation of tariffs, or in other words, the consumers fit in the Low Tension classes, such as residential, paid part of the costs of consumers served in High Tension, such as the industrial consumers. With the issuance of Decree 4.667/2003, guidelines were determined for opening and realigning tariffs, in a manner that, each year starting in 2003, the subsidy was reduced a little, until be extinct in 2007. For that reason, in the period of 2003 to 2007, the Low Tension tariff updating indexes will have been lower than the High Tension ones.

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High TensionA1 supply tension equal to or greater than 230 kVA2 supply tension of 88 kV to 138 kVA3 supply tension of 69 kVA3a supply tension of 30 kV to 44 kVA4 supply tension of 2.3 kV to 25 kVAS - supply tension less than 2.3 kV, served by the underground distribution system and invoiced in Group A exceptionally

Low TensionB1 residential and low income residentialB2 rural, rural electrification cooperative and irrigation public serviceB3 other classesB4 public lighting

Consumer Classification

No. The tariff updating mechanisms sector legislation in effect. About the ( r e a d j u s t m e n t a n d r e v i e w s ) a r e subject, check the understanding of determined in the concession contracts, min is ter Edson Vid iga l , f rom the signed between the Union and the Superior Court of Justice:distribution companies, and based on the

CAN ANEEL NOT ADJUST THE TARIFFS?

“It is certain that on the opportunity of celebration of the concession contract of the electricity distribution utilities, as authorized by the pertaining legislation, clauses were inserted foreseeing maintenance mechanisms of its economic-financial balance, such as the tariff readjustment. These mechanisms have origin in the tariff policy previously approved by the National Privatization Council (CND), and are vital for public service rendering to be able to give conformity with the constitutional and legal principal that fall upon it, and which don't just allow, but make possible the celebration of such contracts between the government and the private that is ready to negotiate with the Administration, notably when handling concession contracts with long term duration.

Thus I already decided in a similar hypothesis (SL57-DF): the non-fulfillment of contract clauses, hindering the real tariff value update, in the terms foreseen in the concession contract, causes serious financial harm to the distribution company, and may seriously affect the quality of services rendered and its maintenance, implying the absence of investment in the sector, harming the users, causing negative reflections in the public economy, therefore inspires insecurity and risks in the contracting with the Public Administration, repelling investors, resulting in severe consequences also for public interest as a whole, besides, of course, influencing negatively the Brazil Risk". (our underlining).

I understand that public interest is not summed in the contention of tariffs being evidenced, also, in the continuity of energy supply; in the maintenance of public service concession contract, in a manner to make possible investments in the sector, for the country to not return to the darkness. This way, the non-fulfillment of what was legally agreed to, with the official seal from the Judiciary Branch, can, in this case, affect its economic-financial balance, especially because there is no way to omit the Country's real inflation that will affect those it contracts in long term.”

(SLS 162, 2005/0126743-9, dated 09/20/2005)

23

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WAS THE TARIFF READJUSTMENT SUPERIOR TO THE INCREASE OF THE MINIMUM WAGE AND OTHER PUBLIC SERVICE?

The sector model adopted to update raised above the IGP-M, due, mainly, to the electricity distribution company's the increase of number of charges and tariffs is not based on inflation indicators their values.or on the minimum wage correction. Just in the years that tariff readjustments take In the graphic below, we compared place is the IGP-M used to update the the energy increases with other public i tems conta ined in Component B services and other indicators, from (controllable costs). In these years, 2003, the first year of the tariff review Component A, which reflects the sum of cycle, until March 2007 (before the costs that are divided among the beg inn ing o f the second cyc le ) , consumers of a concession, have been according to IBGE data (%):

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Inte

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IPC

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IGP

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24

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* Nominal variation from 2003 to March 2007. According to DIEESE, the real increase (with inflation discounted by the INPC of the period) is 32.1%.

90,00

61,27 61,0458,25 57,39 56,37

54,4651,36 49,98

43,86 42,84 41,8038,36

29,8129,85

27,8221,84

25

Because this action is outside the the National Congress, and the energetic competencies attributed to ANEEL. The policies and tariffs are formulated by the laws, which ANEEL fulfills, are elaborated by Federal Government.

WHY DOES ANEEL NOT RECONCILE THE TARIFFPOLICY WITH THE MINIMUM WAGE OR THE WORKER'S INCOME?

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DOES ANEEL INSPECT THE DISTRIBUTIONCOMPANIES?

Yes. Inspection is an instrument that according to a set annual calendar. Eventual ANEEL and the state regulating agencies actions are also done, destined to the with pacts have available to guarantee the inspection of great relevance facts fulfil lment of legal and contractual throughout the year. Two important items obligations by the electric sector companies. are assessed during the ANEEL inspections The inspection actions are permanent, at the distributor:

the economic-financial aspect the quality of electricity supply

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And


ANEEL is systematically inspected by Besides these controls, ANEEL is the State Controllership of the Union (CGU) called, sporadically, to render information to by the Union Account Court (TCU) and by the the Public Ministry and Judiciary Power.National Congress's thematic Commissions.

WHO INSPECTS ANEEL?

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HOW DOES ANEEL ASSESS THE ENERGY SERVICE QUALITY?

The quality of electricity supplied by the interruption in the supply took place. If there distribution company is inspected by ANEEL is no fulfillment of goals the company can be as to the aspects of continuity and conformity fined in 1% of the invoicing. With the goals, with the levels of electricity tension. The the Agency's objective is to provide the continuity of the service observes the consumers a quality service with growing duration and the frequency of interruptions in improvement, as well as the guarantee of the energy supply and is measured by the gradual reduction of the global values of indicators included in the electric bill. these indicators. The distribution company

has to inform, on the electric bill or in a letter attached to the bill, the DEC and FEC values

ANEEL defines the goals for duration to be observed. The monthly goals for each (DEC) and frequency (FEC) indicators of the set of consumers units will be equivalent to interruptions in the energy supply in the 30% of the goal values of the annual values distribution area of each distributor. The established, while the trimester goals are DEC measures the time that a group of equivalent to 60% of the annual values. consumers went without electricity and the These annual goals are redefined in the tariff FEC indicates the quantity f times that review year for each distribution company.

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The consumers can contribute to the registering their complaints at the ANEEL improvement of their distributor's inspection Ombudsman (toll free call at 144) or with the presenting suggestions during the specific state agency with a pact.public hearings, held in the state to discuss the Distribution Company's Annual The inspection reports elaborated by Inspection Program; upon participating in ANEEL are public and can be found the annual research of the ANEEL on the Agency's electronic page Consumer Satisfaction Index (IASC) and (www.aneel.gov.br).

The conformity reflects if the energy like pressure is to the hydraulic system. The tension supplied to the consumer and the water that reaches the residences should variation of these levels is according to the have a certain level of pressure; on the values pre-established by ANEEL and contrary, it couldn't be used in the simplest adequate for the functioning of the tasks, like taking a shower. The same thing equipment and electro electronic appliances happens with electricity. Low levels or equipment of consumers in houses, stores, tension variation hinder the adequate use of factories, etc. equipment, with the risk of damaging them.

When the tension level is considered critical, To understand what tension level is, the functioning or performance of the

imagine that tension is to the electric system electronic devices is jeopardized.

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DEC/DIC (Equivalent Interruption Duration): indicates the number of hours, on average, that a consumer

goes without electricity during a period, usually monthly.

FEC/FIC (Equivalent Interruption Frequency per Consumer Unit): indicated how many times, on average,

there was interruption in the consumer unit.

The DMIC (Maximum Interruption Duration per Consumer Unit): indicates the maximum time of each interruption, seeking to keep the distribution company from

letting the consumer go without electricity during a very long period. This indicator began to be controlled starting in 2003.

DEC and FEC are verified per concession area. DIC and FIC areindividual indicators, verified per consumer unit.

Co

nti

nu

ity

Ind

icat

ors


HOW DOES QUALITY INTERFERE IN THE TARIFF? The quality of energy supplied at a or the enlargement of their homes in distinct

consumer unit (residence, store or industry) manners, but always according to their depends on the electric system that the income level and life quality they desire.distributing company built over years and of The costs to enlarge the electric system how this system is enlarged and maintained. and maintain it are considered at the time of

The demand grows with the appearance setting the tariffs practiced by the of new consumers and the increase of the distribution companies, during the tariff quantity of energy consumed by each client. review process. The resources applied in To serve the demand with the ideal quality the enlargement compose the investment level for the adequate service rendering base to be remunerated, and the determined by ANEEL, the company needs maintenance resources are part of the to enlarge and do maintenance of the company's operational costs.existing electric system. The enlargement ANEEL does not cover necessarily all can be done by building new substations, the costs presented by the distribution transmission and distribution lines or by companies. They should result from adopting equipment with new technologies. maintenances and enlargements held in the The maintenance seeks to preserve the products in service, or in other words, those system in good conditions for the adequate used in the energy distribution. It is also energy supply. necessary that they be held in a manner to

In a home, besides the estate respect the established quality criteria by the maintenance, periodic painting, cabinet Agency. Thus, in the tariff review process, fixing, electric and hydraulic installation, the costs presented by the company are there can also be the enlargement for evaluated by ANEEL to guarantee that those obtaining more comfort or by the use of a passing on the tariff are limited to those held new technology for domestic usage. having the finality of the adequate electricity

Different residents, with different distribution service rendering.degrees of demands, execute maintenance

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DO THE ELECTRIC LOSS, THEFT, FRAUD AND DEFAULTING CONSUMERS IMPACT THE ENERGY TARIFF?

Yes, the losses and bad debts are country, considering an average tariff of recovered, in part, by the distributors, which R$254.08 (without taxes) for February 2007 results in the increase of tariffs for all the was R$ 5.5 billion.consumers. The losses in the energy distribution are divided in technical losses Starting with the first tariff review cycle (inherent to energy transportation through the (2003-2005), ANEEL started giving special networks) and commercial or non-technical treatment to the matter, including in the tariff losses (non-measured or not-billed energy just part of the value of commercial losses and consumption, through measurement error, breech. The idea is to encourage the theft or fraud). Bad debts is the sum due by distribution companies to invest in the consumer due to lack of payment. reduction of these indexes to relieve the

burden of the honest, paying consumer.If we consider the 61 companies that went

through the tariff review process, the non- In the case of lack of payment, the technical losses were greater than 15 methodology applied in the first tariff review thousand gigawatts-hour (GWh) and the established a trajectory of reduction of the technical losses in the range of 22 thousand value to be recognized in the tariff period GWh. The cost of non-technical losses for the (2003/2007).

WHAT CAN BE DONE TO REDUCE THE ELECTRIC BILL?

Assess the possibility of reducing the quality level demanded from the distribution company for electricity distribution service rendering, since the degree of quality is proportional to the sum of investments required. Or in other words, to have better quality energy, it is necessary to have a greater volume of resource applied. It is worth pointing out the investments already made should be admitted and the new ones can be planned and implemented under the new orientation.

Reduce the number and value of sector charges and federal taxes that are included the electricity tariff.

NATIONAL CONGRESS

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Reduce the ICMS rate that lays on the electricity service.

STATE

ANEEL


- PREFER household appliances, motors and light bulbs that have the Procel seal, for they are more efficient and use less energy;- UPON DOING electric installations, use adequate wires and do not mend them poorly;- AVOID using adapters (T sockets) to connect several devices;- SUBSTITUTE incandescent bulbs for compact or circular fluorescent bulbs;- TURN OFF light bulbs, air conditioners and the television in unoccupied areas and also don't sleep with the TV on;- DON'T PUT AWAY hot, uncovered food in the refrigerator and keep it organized to avoid the door from staying open for a long time;- DON'T PUT clothes to dry behind the freezer or refrigerator and regulate the thermostat according to the season of the year, for, in the cold weather, the temperature doesn't need to be a low;- MAINTAIN the freezer and refrigerator rubber seals in good conditions. If they aren't, replace them for new seals;- TRY to use the iron which overloads the electric network a lot - while other devices are off. To not turn it frequently, iron a large quantity of clothes all at once;- AVOID long showers and regulate the showerhead according to the season of the year;- WHEN using the washing machine, put the maximum quantity of clothes - or dishes in the dishwasher and use the adequate level or soap to avoid a lot of rinsing, and- COMMUNICATE to the distribution company when you identify irregular uses of energy, including theft or fraud.

Decrease the value of Contribution for Public Lighting Cost (CIP).

MUNICIPALITY

Reduce commercial losses.Increase inspection to halt adulteration of meters.Use new technologies to avoid energy theft and frauds.

Adopt attitudes to reduce electricity consumption.Tell the company when there is suspicion of theft or fraud.

DISTRIBUTION COMPANY

Consumer

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CHECK SOME TIPS

HOW DO I PARTICIPATE IN THE TARIFF DEFINITION PROCESS?

WHAT ARE THE ENERGY CONSUMERS' MAIN RIGHTS AND RESPONSIBILITIES?

ANEEL, to give transparency to its actions out loud to present contributions and and opportunities for society to participate in suggestions.the decisions it makes, holds public hearings In the cases of annual tariff readjustment, with the objective of obtaining subsidy and ANEEL, fulfilling the concession contract, just additional information to perfect the regulatory applies a specific formula, reason for which acts in the elaboration phase. The hearings, public hearings are not held. However, those disclosed ahead of time in newspapers, on interested in finding out about the decisions the radio and by TV broadcasting stations and about the tariff readjustments can watch the also on ANEEL's page, on the Internet, are ANEEL Board of Commissioners' meeting, open to all society. In them, the participants, which are public, broadcasted on the internet.properly enrolled, have the right to manifest

- HAVE at least 6 due date options for their electric bill;

- RECEIVE the electric bill at least 5 working days before the due date;

- BE INFORMED in up to 30 days about the solution of a complaint made;

- Be refundesd for eventual damage caused by faults in the electricity supply;

- Be warned at least 15 days ahead of time about the disconnection of electricity due to

lack of payment;

- REQUEST the verification of the meter reading, if your electric bill comes with a reading

much higher or lower than the normal;

- GET ELECTRICITY back at the most in 4 hours after it was unduly cut;

- HAVE ENERGY reestablished in 48 hours after the reason for cutting it ceases;

-HAVE AVAILABLE a book for complaints and suggestions in all the distribution

company's service posts.

RIGHTS

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-CELEBRATE supply contract with distribution company, when it will supply information

about the expected load. Significant alterations in this load should be communicated to

the company;

- INSTALL in adequate, easy access location the devices necessary for the consumption

meter and protection equipment;

- KEEP in your control, in condition of loyal, free depositor, the distribution company's

meter equipment;

-REFORM or substitute the consumer unit's internal electric installation that is not in

compliance with the standards, especially in relation to safety aspects;

- PAY PUNCTUALLY the services rendered for the energy supply;

-INFORM THE DISTRIBUTiOn company about the existence of users of limited

autonomy equipment, vital to the preservation of human life and dependent of electricity.

Thus, the user has the right to be warned about programmed interruptions. This warning

is mandatory, written, personalized and sent at least 5 working days in advance in

relation to the interruption, under the penalty of a fine of up to 2% distribution company's

revenue.

RESPONSIBILITIES

DO THE CONSUMERS HAVE REPRESENTATION AT THE DISTRIBUTOR?

Yes. All distribution company´s should term of one year.maintain an Electricity Consumer Council, The functioning of the councils as foreseen in Law n° 8.631/1993. The depends on their Annual Activity Plan, in performance of each council seeks to which their expected work strategy and guarantee energy supply quality for the expenses for carrying out each action consumer through orientation, analysis and should be detailed. The financial resources evaluation of the questions related to the for financing its activities are made tariffs and to the fitting of the service. available by the distribution company in a

The councilmen represent society per joint checking account with the Council. It is consumption category (resident ial , also up to the distribution company to commercial, industrial, rural and public supply installations and adequate structure power) and count on a representative from for carrying out all the expected and a consumer defense organ or entity. The approved activities from the Annual Activity president and vice-president are elected by Plan.the counc i l members to fu l f i l l a

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Address: SGAN 603 Módulos “I” e “J”Zip Code 70830-030

Telephone: +55 (61) 2192-8600Ombudsman: +55 144

E-mail: [email protected]: http://www.aneel.gov.br

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