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CG/LA Infrastructure recently released its latest Strategy Report "Brazilian Wholesale Electricity Tariffs, 2000 - 2010."

The Strategy Report examines the structure of Brazil's tariff system, forecasts future pricing, and offers specific insights about the potential of Brazil's power market (one of the largest in the world) as it evolves toward a competitive marketplace. The report assesses the role of private generators, traders and public institutions as the market moves toward full competition.

Mark D. Hoff, Director of CG/LA's Power Advisory Service, explains that "Wholesale tariffs are a critical for international and domestic firms deciding on whether to participate in Brazil's energy market. As the Brazilian wholesale market evolves toward a competitive marketplace, pricing will become far less predictable, which will increase both risks and rewards for electricity investors."

CG/LA's wholesale pricing forecasts are presented in the context of three scenarios - one of which suggests price volatility, on a steep upward curve. "Brazil's electricity industry is clearly at a crossroads," according to Norman Anderson, CG/LA's CEO, "and prices will certainly rise after 2003 - the question is how much, and at what cost to economic growth." The Report points at that the sector is braving three transitions: ownership is stuck halfway along the track from public to private ownership; the energy matrix is hydro dominant, but projects the majority of additional capacity in thermal megawatts; and government regulators are still too heavy-handed -- not yet reconciled to unleashing the power of the market for pricing, investment and location decisions.

CG/LA's three scenarios - Globo, Escada and Jeito - yield different pricing curves and timelines for tariff increases:

• Globo, or "Free Market" scenario: Market forces rapidly push up Brazilian wholesale pricing from 2003 through 2006 and beyond to match world price levels.
• Escada, or "Step Up" scenario: Brazil's wholesale prices follow stepped price increases, as the government tries to contain price rises while market forces drive pricing to new plateaus in regular cycles.
• Jeito, or "Expert" scenario: Brazil's government does not allow full deregulation, continues to hold down prices, and contains price volatility at the cost of market inefficiencies and limited power sector growth.

According to Anand Hemnani, CG/LA's Brazil Director, "The Globo scenario's bullish pricing forecast will be attractive to power developers, owners, and operators, and alarming to the Brazilian government. There is a real chance that high electricity prices will interrupt the government's growth plans."

The Strategy Report suggests a number of trends:

• Tariffs for industrial consumers (40% of total demand) – already among the world's lowest -- will rise, perhaps not as quickly as foreign electricity investors would like, but faster than long-sheltered industrial customers would like. Strong institutional pressures keep prices low and counteract market forces that would otherwise apply upward pressure.
• Wholesale tariffs in general will tend to be flat until about 2003, rising only about 20% through the period, and then at a faster rate thereafter - and at a much faster rate according to the Globo scenario.
• The onset of 100% competitive pricing in 2006 will create steady price increases - these will be steep, and unpredictable, because Brazil's power market will remain short on generation capacity.
• Brazil's spot power market, currently handling less than $1 million in annual transactions, will increase to as much as $15 billion by 2010.

This unsettled tariff environment will paradoxically create numerous opportunities for fast-moving, flexible and decisive executives. Two examples cited in the report:

• As increasing volumes of power become subject to competitive pricing in 2003 and beyond, profits will go to generation firms that can leverage available capacity to offer innovative contracts to Brazil's many large power consumers.
• Brazil's spot market, which now serves primarily as a pricing reference mechanism, will become increasingly important as current long-term contracts expire. The firms that are able to leverage trading skills to bring power to the market during peak periods in a system that is short on capacity will make good margins.

The report also analyzes the following key issues that power sector investors will need to pay attention to:

• How much new generation capacity will get built? The most important unknown is how much generation capacity will be built over the next few years to support Brazil's strong power demand. "If developers succeed in building significant new capacity, there will be more electricity entering the market, and less pressure to bid prices up for existing supplies," says Mr. Hoff, citing Argentina as a case in point.

• How will Brazil's restructuring program proceed? Brazil enters the new century with an incomplete electricity restructuring effort. Privatization of the distribution market is almost complete, with roughly 65% of the market in private hands. But generation is a different story, with only about 18% of the market privatized, and no clear schedule set for additional privatizations. "Private generators are a couple of years away from increasing price competition and perhaps driving more innovative contract structuring and increased spot market activity," says CG/LA's Hemnani. "Regulators will continue to hold prices down until the power market is able to act according to market forces," he adds.

• What will happen to natural gas pricing? Brazil's regulated gas market is still largely controlled by state oil company Petrobras. Brazilian regulators can manipulate gas prices to suit policy goals, whether to benefit Petrobras, other specific domestic companies, or to guarantee stability and transparency for foreign firms that intend to build gas-fired thermal generation. "There is enough Southern Cone gas, and enough developers looking to market it in southern and central Brazil, that gas-fired thermal generation should achieve the government's goal of 15,000 MW in the next ten years," says CG/LA CEO Anderson.

CG/LA's Power Advisory Service is an annual subscription service in which virtually all power firms active in Latin America participate. The service addresses the daily and strategic needs of executives through a series of bundled decision resources, including weekly Market Insight briefings (analysis and strategy), Strategy Reports, inquiry privileges with the firm's analysts, and access to the firm's Decision-maker and Competitive Intelligence data bases.

CG/LA Infrastructure is the leading market research and strategy firm focused on the Latin American electricity and water/wastewater marketplaces. The firm has offices in Washington, Boston and Sao Paulo. Research is made available to clients on a subscription basis.

Upcoming Strategy Reports include:

• "Power Privatizations in Brazil: 2000 - 2003"
• "New Economy Ventures in Latin American Electricity Markets"
• "Telecommunications Strategies of Power Companies in Latin America"

To receive more information on CG/LA or to sign-up for the Latin America Power Advisory Service, please contact:

Mark D. Hoff
Director, Power Advisory Service
Phone: 781.863.8389
Fax: 781.862.1510
E-mail: mhoff@cg-la.com
www.cg-la.com