world bank document...documerit of the world bank for official use only =ia 3z277- -72 rep,rt no....

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Documerit of The World Bank FOR OFFICIAL USE ONLY =iA 3Z277- -72 Rep,rt No. 8233-BR STAFF APPRAISAL REPORT BRAZIL ELECTRICITY TRANSMISSION AND CONSERVATION PROJECT MAY 28, 1990 LA1 Department Latin Americaand the Caribbean RegionalOffice lhis document has a restricted distribution and may be used by recipients only In the performance of their oMc6l duties. Its contents may not otherwise be disclosed without World Bank authori=ton Public Disclosure Authorized Public Disclosure Authorized Public Disclosure Authorized Public Disclosure Authorized Public Disclosure Authorized Public Disclosure Authorized Public Disclosure Authorized Public Disclosure Authorized

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Page 1: World Bank Document...Documerit of The World Bank FOR OFFICIAL USE ONLY =iA 3Z277- -72 Rep,rt No. 8233-BR STAFF APPRAISAL REPORT BRAZIL ELECTRICITY TRANSMISSION AND CONSERVATION PROJECT

Documerit of

The World Bank

FOR OFFICIAL USE ONLY

=iA 3Z277- -72Rep,rt No. 8233-BR

STAFF APPRAISAL REPORT

BRAZIL

ELECTRICITY TRANSMISSION AND CONSERVATION PROJECT

MAY 28, 1990

LA1 DepartmentLatin America and the Caribbean Regional Office

lhis document has a restricted distribution and may be used by recipients only In the performance oftheir oMc6l duties. Its contents may not otherwise be disclosed without World Bank authori=ton

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Page 2: World Bank Document...Documerit of The World Bank FOR OFFICIAL USE ONLY =iA 3Z277- -72 Rep,rt No. 8233-BR STAFF APPRAISAL REPORT BRAZIL ELECTRICITY TRANSMISSION AND CONSERVATION PROJECT

CURRENCY EQUIVALENTS

Currency unit - Brazilian Nc J Cruzado (NCz$)NCz$1.O0 - 100 centavosUS$1.00 - NCz$l.l0 1/NCz$l.00 US$0.909

MEASURES AND EQUIVALENTS

kW (kilowatt) - 1,000 W (Watts)MW (Megawatt) 1,000 kWkWh (kilowatt hour) . 1,000 Wh (Watt hour)GWh (Gigawatt hour) 1,000,000 kWhkV (kilovolt) . 1,000 V (Volts)kVA (kilovolt-ampere) = 1,000 VA (Volt-amperes)T.o.e. (Ton. of oil equivalent) - 3,560 kWh (35% efficiency)Bbl (barrel of oil) = 0.15 T.o.e.MVAr (Megavar) . 1,000,000 VAr (reactive volt-amperes)

FISCAL YEAR

January 1 to December 31

1! Exchange rate prevailing in May 1989 was used for all calculations inthis report. Since then, the Cruzado has been devalued several times,and in March 16, 1990 it was renamed the cruzeiro- The rate ofexchange on March 15, 1990 was US$1.00 = Cr$38.40.

Page 3: World Bank Document...Documerit of The World Bank FOR OFFICIAL USE ONLY =iA 3Z277- -72 Rep,rt No. 8233-BR STAFF APPRAISAL REPORT BRAZIL ELECTRICITY TRANSMISSION AND CONSERVATION PROJECT

FOR OMCIAL USE ONLY

GLOSSARY OF ACRONYHS

BNDES Banco Nacional do Desenvolvimento (National DevelopmentBank)

CEMIG Companhia Energitica de Minas Gerais (Minas Geraisstate-owned utility)

CERJ Companhia de Eletricidade do Estado de Rio de Janeiro(Rio de Janeiro state-owned utility)

CESP Companhia Energetica de sao Paulo (Sao Paulo state-ownedutility)

CHESF Companhia Hidro-Eletrica de Sao Francisco(ELETROBRAS subsidiary in charge of generation andtransmission in the North-East)

CIER Regional Interconnection CommissionCNE Commissao Nacional de Energia (National Energy

Commission)CNP Comissao Nacional de Petr6leo (National Petroleum

Committee)COELBA Companhia Energdtica da Bahia (Bahia state-owned

utility)CONPET Conservation and Preservation of Production and Use of

Petroleum ProductsCONSERVE Energy Conservation FundCOPEL Companhia Paranaense de Energia (Parana state-owned

utility)CPFL Companhia Paulista de Forga e Luz (SAo Paulo state-owned

utility)DNAEE Departamento Nacional de Aguas e Energia Eletrica

(National Department of Water and Electric Energy,electric sector regulatory agency)

DRELOR Distribution Network Rehabilitation and Loss ReductionProgram

ELETROBRAS Centrais Eletricas Brasileiras, S.A. (Federally-ownedelectric utility holding company)

ELETRONORTE Centrais Fletricas do Norte do Brasil, S.A.(ELETROBRAS subsidiary in charge of generation andtransmission in the North)

ELETROPAULO Eletricidade de Sao Paulo (Sao Paulo state-ownedutility)

ELETROSUL Centrais ElEtricas do Sul do Brasil S.A. (ELETROBRASsubsidiary in charge of generation and transmission inthe South)

EMP Master Plan for Environmental Conservation and Recoveryin the Works and Services of the Electric Power Sector

ESCELSA Espirito Santo Centrais Eletricas, S.A.(ELETROBRAS subsidiary in charge of distribution instate of Espirito Santo)

ESIS Energy Strategy and Issues StudyFND Fundo Nacional de Desenvolvimento (National Development

Fund)FURNAS Centrais Eletricas Furnas, S.A.

(ELETROBRAS subsidiary in charge of generation andtransmission in the Southeast and Center-West)

This document has a restricted distribution and may be used by recipients only in the performanceof their official duties. Its contents may not otherwise be disclosed without World Bank authorization.

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GGF Global Guarantee FundRV High VoltageIESS Integrated Energy Strategy StudyLIGHT Light Servi9os de Eletricidade S.A. (ELETROBRAS

subsidiary in charge of distribution in the city of Riode Janeiro).

LPG Liquid Propane GasLRMC Long Run Marginal CostsMIC Ministry of Industry and CommerceM of I Ministry of InfrastructureMOF Ministry of FinanceMME Minist4rio das Minas e Energia (Ministry of Mines and

Energy)PECO Program for Economizing FuelPETROBRAS Petr6leos Brasileiros S.A. (Federally-owned petroleum

company)PROCEL National Electric Energy Conservation ProgramPRODEL Voluntary Program to Economize Diesel and LubricantsPROEN Program to Rationlize EnergyPSRP Power Sector Rehabilitation PlanRAP Rate Adjustment PlanRENCOR Reserva Nacioaal de Compensacao de Remunera9&o (National

Compensation Reserve for Remuneration)REVISE Revislo Institucional do Setor Eletrico (Power Sector

institutional Structure and Policies Study)RF Reversion FundRGF Global Reversion FundRIMA Relat6rio de Impacto do Meio Ambiente (Environmental

Impact Assessment Study)SEAP Secretaria de Abastecimentos a Pregos (Secretariat of

Supplies and Prices)SEPLAN Secretaria do Planejamento (Secretariat of Planning)SEST Secretaria de Controle de Empresas Estatais (Secretariat

for the Control of Public Enterprises)SOE Statement of Expenditures

/~~~~~~~

i

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BMA21L

STAFF APPRAISAL REPORT

ELECTRICITY TRANSMISSION AND CONSERVATION PROJECT

TABLE OF CONTENTS

Page No.

I. THE ENERGY AND kOWER SECTORS .................. . . ....... *......... 1

A. Introduction ............... ............ ...... ........ ... I

B. Energy Sector ... .. ..................................... .1Enorgy Resources ..... ............... ........... 1.......Energy Supply and Demand . ... # .... ................... 2Energy Sector Investments ........................ ... .2

Energy Pricing . . .. ................................ 3Institutional Structure ...................... ......... . 4Energy Conservation ..................... ................ 5Environmental and Social Aspects in the Energy Sector....6

C. Power Sector ..................................... 7Power Sector Issues .... ....................... .......... 7Organization ......... # ...... ................... 7Institutional Reform .......... ........................ 8Growth of Demand . ................ .................... .9System Expansion Planning ................................ 9Electricity Tariffs . .... ............................... 10Sector Financial Performance ............. 12.............. 12Debt Compensations by the Government .. . 15Electric Energy Conservation .................. *#* ..... 16Environmental Aspects ........................ ........... 16

D. C-overnment Policy in the Energy Sector ................. 17

E. The Bank's Role ..... .. ................... ........... 18Bank Strategy ......................................... laBank Lending and Sector Work . .8......................... lThe DRELOR Program ....... ............................. 20

This report is based on the findings of a preappraisal and an appraisalmlssions which visited Brazil during June 1989 and September 1989respectively. The appsaisal team comprised Messrs. Larrieu (Task Manager),Vietti (Sr. Financial Analyst), Bates (Principal Economist), Velez(Economist), Waldrop (Financial Analyst) and Osorio (Power Engineer).

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Page No.

II. THE BORROWER AND POWER MARKET ................................ .-21

A. The Bo5rrower . ................... 21Iutroduction ............. . . 21Background .. ............... 21Organization and Management .. .21

Financing Role .. ... . ................. 22Planning and Budgeting. . . 22Training and Staff Relations ... 22Accounting and Auditing .. .23

Prospective Beneficiaries. . . 23

B. The Power Market ......................... 23Historic Power Market.. . 23Future Power Market . .24Transmission and Distribution Losses . .25

III. THE PROJECT ............ ......................................... 26

A. General Information ..... . . .26Background ..... .26

Project Objectives ... 26Project Description . . .27Project Cost ..... ...... 28Project Financing . . ..................................... 30Legal Arrangements . . . ... 30Financial Framework . . .31Beneficiaries ... 34ELETROBRAS. . . 35Procurement . .. 36Disbursement .. .39

Project Risks ... 39

B. Transmission Component .. 40Background .. 40Criteria for Selecting Beneficiaries and Sub-Projects...40Project Supervision and Implementation .41Environmental Aspects .42Least Cost Solution .. 43Economic Justification .43

C. Demand Management and Conservation .44Introduction .. .44

Program Description ..... 45Program Costs . .46Benefits and Justification . .48Return on Investment . .48

Project Files ........... .48

IV. AGREEMENTS REACHED AND RECOMMENDATION .... 49

Page 7: World Bank Document...Documerit of The World Bank FOR OFFICIAL USE ONLY =iA 3Z277- -72 Rep,rt No. 8233-BR STAFF APPRAISAL REPORT BRAZIL ELECTRICITY TRANSMISSION AND CONSERVATION PROJECT

ANNEXS

Page No.

Annex 1.1 Gross Domestic Production of Primary Energy ............. 51

Annex 1.2 Gross Domestic Consumption of Primary Energy ............ 52

Annex 1.3 Electric Power Tariffs in Brazil .. 53

Annex 2.1 Power Market Forecast ...... .. 72

Annex 3.1 1990-93 Transmission/Substation Expansion Program ....... 77

Annex 3.2 Investment Program ...................................... 82

Annex 3.3 Rates Adjustment Plan (RAP) ............................. 87

Annex 3.4 Financial Covenants and Financial Performance Ratios .... 89

Annex 3.5 Key Indicators of Historic Financial Performance . .92

Annex 3.6 Power Sector Electricity Revenues .. . 94

Annex 3.7 ELETROBRASs Historic and Forecast Statements .. 97

Annex 3.8 Estimated Disbursement Schedule . ............... 101

Annex 3.9 Project Executing Body .................... 102

Annex 3.10 Performance Indicators ................................. 103

Annex 3.11 Reporting Requirements ................................. 108

Annex 3.1' Economic Analysis .... ............................. llO

Annex 3.13 Demand Management and Conservation Programs ............ 113

Annex 3.14 Project File ..................................... ....... 121

Map 21996 South-Southeast System-Lucation of Pro4ect

Map 21997 North-Northeast System-Location of Project

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BRAZIL

ELECTRICITY TRANSMISSION AND CONSERVATION PROJECT

PROJECT SUMMARY

Borrower: Centrais Eletricas Brasileiras S.A. (ELETROBRAS)

Guarantors Federative Republic of Brazil

Beneficiaries: ELETROBkAS and several state and federal utilitieswhich wil' be selected in accordance vith agreedtechnical and financial criter.L

Amounts US$385 million equivalent

Termss Repayment in 15 years, including five years ofgrace, with interest at the Bank's standardvariable rate.

Relendina Terms: ELETROBRAS will retain US$30 million to finance theNational Electric Energy Conservation Program(PROCEL), and will relend US$355 million to theother beneficiaries under the same financial termsand conditions as the Bank loan plus an snualadministration fee equivalent to one half of onepercent (1/2 of 1Z) on the corresponding amountsdisbursed and outstanding. The beneficiaries wouldbesr th* frreAgn exchange risk on the Bank loan.

Obiectives andDescrintions The proposed loan will support the Government's

efforts to assist and rehabilitate the powersector, by reinforcing the priority given to:(i) investments in new transmission systems toreduce risks of power shortages and resultanteconomic losses; (4i) energy demand management andend-use conservation, which will permit deferringcapital investments in some generating schemes;(iii) operating efficiency by reducing systemlosses through the rehabilitation of existing powernetwork-; and (iv) resolution of urgent tectoral,institutional and financial issues. The projectmeasures would complement the ccntinuedimplementation and monitoring of sector-wideconditionality contained in the Power Sector(Adjustment) Loan (2720-BR).

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The project comprises: (i) a time-slice (1990-93)of the transmission investment and rehabilitationprograms of several power utilities, includingconstruction of H.V. transmission lines andinstallation of transformer capacity at powersubstations; and (ii) Part A (1990 & 1991) ofPROCEL being implemented by ELETROBRAS, whichincludes works (installation of more efficientpublic lighting fixtures, loss reduction schemes),studies (load management, system loss reduction,improvement of efficiency in industrial processes)and research (improvement of electrical equipmentperformance, use of improved insulation materialsand construction techniques for building/houses).The project would be executed under the supervisionof ELETROBRAS through a project implementation unitwhich would review, select and monitor theexecution of the sector utilities' time-sliceprogram defined under adequate technical, financialand institutional criteria.

Risks: The transmission component faces no specialphysical risks, as similar transmission -works havebeen successfully completed in the past. The mainrisk derives from financial difficulties:electricity tariffs and other prices had been belowadequati levels. Financial difficulties are beingaddressed through specific measures (regardingtariffs, equity contributions and borrowings)associated with the selected power utilitiesfinancial programs, which are designed to improvethe utilities' financial performance. Failure toimplement such measures may adversely affect theutilities' finances and may result in delays in theexecution of the proposed project. To reduce thisrisk, agreement was reached with the Govermnent andELETROBRAS that as condition of Bank's Boardapproval, loan effectiveness and loandisbursements, as applicable, specific tariffactions and financial 'measures based on the needsderived from the beneficiaries investment andfinancial programs should have been implemented.

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Estimated Costs: USS millionLocal Foreizn Total

A. Transmission ProPram

ELETROBRAS Group

ELETROSUL 174.8 116.5 291.3LIGHT 336.3 224.2 560.5Sub-Total 511.1 340.7 851.8

Maior State Utilities

CERJ 11.4 7.6 19.0CESP 186.0 124.0 310.0ELETROPAULO 349.6 233.0 582.6C'EMIG 397.1 264.8 661.9COPEL 119.2 79.4 198.6CPFL 91.5 61.0 152.5COELBA 183.1 122.1 305.2Sub-Total 1,337.9 891.9 2,229.8

B. PROCEL 38.3 26.2 64.5

Total Base Cost 1,887.3 1,258.8 3,146.1

Physical Contingencies 184.9 123.3 308.2

Price Contingencies 209.8 141.6 351.4

Interest During - 46.21/ 46.2Construction

Total Investment 2,282.0 1,569.9 3.851.9

EstimatedDisbursements:

US$ millionBank FY 1991 1992 1993 1994 1995

Annual 45.021 80.0 110.0 90.0 60.0Cumulative 45.0 125.0 235.0 325.0 385.0

Rate of Return: Over liZ rate of return (estimated to be theopportunity cost of capital in Brazil) on theinvestment programs of each utility, using agreedtariffs as a proxy measure of benefits.

11 Of which US$15.0 million to be financed by the Bank loan.V Including initial deposit of US$35 million in the Special Account.

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I. THE ENERGY AND POVER SECTORS

A. INTRODUCTION

1.01 The Bank's strategy in the energy sector in Brazil is to supportthe Government in moving towards economically efficient energy pricing andinvestment policy, taking into account environmental, macroeconomic,regional and social considerations (para. 1.47). Specific elements in thisgeneral strategy are: (a) basing the energy investment program on arealistic demand forecast and the least-cost method of supplying thedemand; (b) bringing energy prices closer to economic costs, especially atthe regional and retail levels; (c) strengthening energy sectorinstitutions, and improving coordination among them toward the effectiveexecution of an integrated national energy policy; (d) wider use of market-based incentives; and (e) increasing participation of the private sector.Energy development in Brazil must take place in a manner consistent withsound environmental and natural resources marnagement.

1.02 To implement this strategy, it is necessary to address a number ofkey policy issues, in the areas of pricing, investment, institutionalstructure, demand management and conservatior, and the environment. Suchinsues, including the macroeconomic linkages, can only be addressed at thelevel of the energy sector as a whole, and clearly require a long-termperspective. The Electricity Transmission and Conservation Project wouldaddress an important subset of the above issues, viz. financial andinstitutional matters and energy conservation. The remaining issues arebeing dealt with by the Bank in other ongoing and future lending operationsand through energy sector work. On the Brazilian side, the Government,through the National Energy Commission (CNE),is carrying out the IntegratedEnergy Strategy Study (IESS), under terms of reference agreed with theBank. The IESS is scheduled for completion in May, 1990 to serve as animportant input for energy policy-making by the new President. The IESShas already provided a valuable focus for the Bank's continuing dialoguewith the Brazilian authorities on the full range of energy issues andpolicy. The Bank will continue to closely monitor the satisfactoryexecution of the IESS.

B. ENERGY SECTOR

Energy Resources

1.03 Brazil is endowed with substantial energy resources, bothrenewable and nonrenewable. According to the National Energy Balance, asprepared by the Ministry of Infrastructure (M of I), formerly the Ministryof Mines and Energy (MME), the proven energy resources in 1987 included:petroleum, 352 million tons of oil equivalent (toe); natural gas, 96million toe; coal, 6,604 million toe; hydroelectric power, 271 million toeper year. There are also substantial deposits of shale gas, peat anduranium, but their economic potential is far less.

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1.04 In addition, a significant proportion of the bagasse produced bythe sugar industry is utilized in producing 'heat and electricity for itsown internal needs -- in its sugar and alcohol ditstillation processes -- asurplus exists which could be applied to cogeneration and publicelectricity supply. The Bank is supporting the study of this option byproviding financial resources through the proposed loan under PROCEL.

Eneray SUDR1V and Demand

1.05 Data on primary energy production and censumption are in Annexes1.1 and 1.2. Primary energy consumption in Brazil increased at 5.3Z perannum from 1970 to 1987, rising from 75 to 181 million toe and essentiallykeeping pace with the growth of GDP during the same period. During1970-1979, the growth rate averaged 6.42 p.a., while GDP grew at 8.6?,implying an apparent income elasticity of about 0.7Z. Between 1980 and1987, energy consumption and GDP increased at 3? and 3.1Z p.a.respectively, with a consequent increase in the apparent income elasticityto a little over 1. However, the price of gasoline, alcohol, LPG, domesticelectricity and, for most of the period, industrial electricity rose moreslowly in the 1980s than in the 1970s or even declined in real terms.

1.06 Primary energy production expanded by 5.4?, rising from 57 to 144million toe between 1970 and 1987. Imported energy as a ratio of totaldomestic energy demand increased from 24Z in 1970 to 37? in 1979, declinedto 16? in 1985, and then rose again to 21? in 1987. Petroleum imports,which were 340 million bpd in 1970, peaked at nearly 1 million bpd in 1979and then fell to a little under 500,000 bpd by 1987. Dependence on theMiddle East for oil imports fell from over 90? in 1979 to 802 in 1987.

1,07 The increase in primary energy production during the 1970s wasprovided mainly by hydropower and, to a lesser extent, coal and sugar cane.Between 1980 and 1987, the contribution of petroleum and sugar caneincreased dramadAcally, although hydropower continued to meet a substantialpart of the growth in energy demand. The relative shares of the differentenergy sources in final primary energy consumption evolved as follows:petroleum rose from 34? in 1970, to 43? in 1978, and then declined to 33Xin 1987; fuelwood diminished steadily from 432 in 1970 to 17? in 1987;hydroelectricity rose from 16? in 1970 to 30t in 1987; sugar cane expandedfrom 5? in 1970 to 11? in 1987; and coal and gas, while still comparativelyminor in the energy matrix, made impressive advances, from 3.1Z and 0.2?respectively in 1970 to 5.5? and 2.2Z respectively in 1987.

Eneray Sector Investments

1.08 During the 1980s, more than half of all Federal investment inState-owned enterprises was in the energy sector -- Petr6leos BrasileirosS.A. (PETROBRAS) (22Z), and Centrais Eletricas Brasileiras, S.A.(ELETROBRAS) (35Z). Total annual investment by PETROBRAS has beenUS$1.9-2.4 billion during the past three years, well below the levels inthe early 1980s (US$3-4 billion). The bulk of this investment goes to oiland gas exploration and production. In addition to financing all of thisinvestment from its own resources or fvom borrowing on its own account,PETROBRAS made annual net transfers of revenues to the Government of

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US$2.6-4.2 billion. Total annual investment in the electric powersubsector averaged US$4-S billion for most of 1977-1987. While grossinternal cash generation equalled 55-602 of the subsector's investmentrequirements, the level of debt service was high, resulting in negative netearnings. After taking into account the subsector's other financialcommitments, the Brazilian electric power subsector has probably receivednet transfers of US$5-6 billioa from the public sector in the last two-three years, a drain which has escalated rapidly in real terms since the1970s. The energy sector i, likely to cortinue to account for asignificant part of Brazi;'s public investment, as energy demand and theeconomy grow.

Energv Pricing

1.09 As a general principle, energy prices need to reflect more closelytheir scarcity value or opportunity costs. For non-tradeable forms ofenergy, this value is the long-run marginal cost (LRMC) of supply,including geographical differences, in order to encourage efficient inter-fuel substitution -- which will reduce the overall costs of energy consumedin the country -- and energy conservation. This principle may have to betempered to meet: (i) the basic needs of low-income households, especiallyin poorer regions such as the Northeast; and (ii) sector financial andcost-recovery objectives. Efficient pricing and investment policies wouldimprove resource allocation within the energy sector; strengthen publicsector management, and help the macroeconiomy in terms of public investment,external debt and debt service, the public sector deficit, the balance oftrade, and inflation.

1.10 In the electric power subsector, with Bank support (e.g. underLoan 1300-BR - Northeast Power Distribution) Brazil has made considerableprogress in formulating a marginal-cost based tariff structure. However,the basic tariff is nationally uniform which implies for the interconnectedsystems some economic cross-subsidies from the North and North-East to thehighe.-cost South and South-East regions. A more critical issue on tarifflevels is a financial one, since the high inlebtedness of the sector hassharply reduced its potential for self-financing. Furthermore, infinancial terms, the cross-subsidies flow in the opposite direction.Higher tariff levels are needed to increase resource mobilization,alleviate serious financial shortages and reduce the impact on the publicsector deficit (see para. 1.08). Finally, it can be observed that theelectricity tariff structure provides a minimum level of consumption at atariff which is affordable to low-income consumers. Additional details onelectricity pricing are in chapter III.

1.11 In the hydrocarbons subsector, Brazil has taken reasonable stepsto adjust the level of prices fcr petroleum products, even during periodsof high inflation. At present, the average domestic price of a compositebarrel of oil products is above the border parity equivalent (adjusting fortransport costs to the final consumer). Howaver, this price level isachieved mainly by a high gasoline price, which cross-subsidizes otherpetroleum products and also alcohol. Naphtha, LPG, fuel oil, alcohol andkerosene are subsidized relative to their economic costs; and while dieseland gasoline are priced above economic costs, the latter is over-priced

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relative to the former, which has caused some undesirable inter-fuelsubstitution. LPG is subsidized primarily because of its role in thebudget of low-income families, although the low price may also haveencouraged its (clandestine) substitution for gasoline, as a vehicle fuel.

1.12 Like electricity, petroleum product prices are subject to a systemof uniform national retail prices, but the negative impact on resourceallocation is mirimal: where the subsidies per unit of product are high,the absolute consumption is low (principally in the North and Center-West),more significantly, the tax element in petroleum products prices is low byworld standards -- around 1OZ of the average retail price on March 1, 1989.The need for higher taxes should be reexamined in light of the Government'sfiscal deficit.

1.13 The high level of international petroleum prices in the 1970s andearly 19808 led to a national strategy that emphasized -- throughinvestment and pricing policies -- increased energy self-sufficiency viathe development of domestic energy resources. As a result, the electricitysector allocated more of its investment resources to hydroelectric, coaland nuclear generation than would have been the case if the sector hadadopted strictly least-cost investment programs. The economic costs of thealcohol program to the economy were particularly high, since the economiccost of production exceeds the opportunity value of alcohol (measured bythe economic cost of gasoline). The annual subsidy to alcohol is estimatedon this basis to be in the order of US$1.25-1.5 billion.

Institutional Structure

1.14 Energy planning, decision-making and policy implementation inBrazil nave been characterized by a lack of coordination and clearly-defined goals. Two of the major players in the energy sector are large andpowerful public enterprises, ELETROBRAS and PETROBRAS, under thejurisdiction of the M of I. At the same time, there are numerousprivately-owned companies or individual entrepreneurs in subsectors such asfuelwood, coal and alcohol, which are subject to different or no central.control. The Ministry of Industry and Commerce (MIC), for example,oversees alcohol, while fuelwood operates under private enterprisearrangements. While the Federal Government, through Secretaria de Controlede Empresas Estatais (SEST) within the Ministry of Finance, in principleapproves the investment programs of all public utilities, to ensure theirconsistency with the overall level of public sector investment spending, inpractice its efforts are handicapped by a shortage of staff. In addition,the Government is typically swayed by short-term annual budgetary ratherthan long-term objectives.

1.15 The situation with regard to energy pricing is illustrative. TheDepartamento Nacional de Aguas e Energia Eletrica (DNAEE) and ComissloNacional de Petr6leo (CNP), in the case of ELETROBRAS and PETROBRASrespectively, have pursued different policies in establishing the prices ofelectricity, petroleum products and alcohol. The prices of natural gas areestablished in yet a different way, according to different criteria, by theindividual States. Further distortions are introduced by SEAP, which mustapprove all retail energy prices in light of the Government's anti-inflationary policies, which are invariably in conflict with pricingprinciples based upon economic cost.

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1.16 In hydrocarbons, PETROBRAS responded well to its mandate to leadBrazil towards greater self-sufficiency, and has become a success story inLatin America. PETROBRAS has a monopoly in several areas of hydrocarbons:exploration and development; import and export; marine and pipelinetransport; and (virtually) refining. However, it is about 26Z privatesector vwned and displays a strong commercial orientation. In consequence,it is efficient and technologically advanced, with su.lcessful internationaloperations. Recent changes in the Constitution banned new risk co!ntracts,but "farm-ins are permitted on existing acreage. Hence, there is still alarge presence of international oil companies in upstream oil operations inBrazil and the private sector has invested more than US$l billion inexploration and development activities.

1.17 As far as the electricity sub-sector is concerned, theinstitutional structure served the nation well in the past. Following thenew Constitution, important changes are needed and takirg place, as therespective roles of Federal and State agencies are redefined. (paras. 1.26and 1.28).

Eneray Conservation

1.18 As energy costs, energy consumption/GDP and environmental concernsrise, urgent attention needs to be given to the rational use of energy,especially in industry. Various indices of energy intensity shce-v an upwardtrend relative to the unit value of output. For example, the aggregatefinal consumption of energy and of commercial energy, in t.o.e. per 1970dollar of GDP, increased respectively from 0.288 and 0.235 in 1980 to 0.304and 0.260 in 1986. In particular, electricity consumption per unit ofoutput in industry has risen sharply since 1980, as has the consumption ofboth petroleum products and electricity per unit of agricultural output.While the experience naturally varies between different types of industry,specific electricity consumption has risen in a wide cross-section ofBrazilian industries since 1980.

1.19 In general, both price and non-price policy tools may be used toimprove energy efficiency. Experience from a variety of countries showsthat the level and structure of energy prices is a critical element in anyeffective energy demand management and conservation strategy. Notably,energy prices can induce the desired entrepreneurial behavior, for examplewith regard to the choice of type of fuel, technological process andinvestments in energy saving measures (including, but not restricted to,retrofitting). Technical methods, legislation, education and promotion arealso useful policy tools to induce energy conservation.

1.20 Brazil has pursued a variety of approaches to promote energyconservation. In 1981, MIC launched an ambitious program promoting therationalization of energy use in industry. A Special Energy ConservationFund (CONSERVE) was established in the Banco Nacional do Desenvolvimento(BNDES) to provide free energy audits as well as conservation loans atsubsidized interest rates, to industry. CONSERVE was principally a programto substitute petroleum products with electricity rather than a broadprogram of energy conservation. Some progress has beon made but there isstill scope to improve the implementation of energy conservation measures.

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1.21 Apart from CONSERVE, energy conservation measures in Brazil haveincluded pricing, advertising campaigns, improvement of industrialprocesses and power system loss reduction. Although energy prices ingeneral and electricity prices in particular have undergone a long-termdecline in real terms. there was some recovery in 1987 and 1988. Thesubsidized industrial electricity tariffs for the promotion of oilsubstitution ("Eletrotermia" loads) were discontinued as of December 31,19F'- and implementation of long-run marginal cost pricing is proceedingwell. Recently, the Government launched a National Program of ElectricEnergy Conservation (PR'CEL). PROCEL is targeted to stimulate electricityconservation and it is being supported by the Bank through this loan(paras. 3.51 through 3.58). The Bank intends to support further thePROCEL, through its electric power lending program. Other conservationprograms have generally been less successful, notably the Program forEconomizing Fuel (PECO), the Voluntary Program to Economize Diesel andLubricants (PRODEL) and the Program to Pationalize Energy (PROEN). Giventhe importance of energy conservation and the plethora of programs, CNE hasproposed an umbrella agency to bring about some degree of consistency andcoordination. According to CNE's proposal, a Program of Conservation andRationalization in the Production and Use of Petroleum Products (CONPET)would complement PROCEL and subsume other programs such as PRODEL. TheIESS (para. 1.02) will also reconsider Brazil's entire energy conservationpolicy.

Environmental and Social Asoects in the Energy Sector

1.22 The electric power sector faces important environmental andresettlement issues in the construction of hydroelectric generationschemes. Major improvements have been achieved under the Power Sector Loan(2720-BR) in the capability of the sector to address them (paras. 1.43 and1.44). Other environmental and social issues facing the energy sector are:(a) the depletion of forests, due to indiscriminate land clearing andincreasing charcoal production for the iron and steel industry; (b) air andwater pollution caused by the consumption of high-sulphur industrial fuelsand by alcohol producers; (c) the dispossession of sharecroppers in theNortheast, due to the development of large sugar plantations for alcohol;(d) insufficient compliance with existing regulations regarding oildrilling and control of work camps to protect existing Amazon Indians;(e) potential environmental problems from open-cast coal mining in theSouth; (f) air pollution related to the operation of coal-fired powerplants; and (g) environmental and safety aspects of nuclear power plants.The environmental issues relating to the power sector are being monitoredby the Bank through the implementation of the Environmental Master Plan(EMP) agreed under the Power Sector Loan (2720-BR). Other non-powerenvironmental and social issues are being addressed by the Government withBank assistance through the proposed National Environmental Loan currentlyunder preparation and other operations.

1.23 PETROBRAS has identified environmental concerns as one of itshighest priority areas. An environmental unit was recently established atheadquarters in Rio and environmental "cells, have been established at theoperating level in individual refineries. No project is allowed to go

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forward without an environmental evaluation and every project proposal mustbe sent to the appropriate State environmental agencies for comment andapproval. Aside from tackling the environmental and safety issues relatedto the production, refining and transport of petroleum products, PETROBRASis making efforts to assist with reducing the air pollution caused by theconsumption of high-sulphur industrial fuels in the main cities, notablySao Paulo.

C. POVER SECTOR

Power Sector Issues

1.24 The power sector confronts a set of policy issues, the mostimportant of which aret environmental protection, energy conservation,demand management, sector finances, institutional reform, and optimalinvesting (through improved balance between generation, transmission, anddistribution). The proposed loan would help the sector to address aparticularly crucial subset of these issues -- namely, sector financesthrough tariff increases, optimal investments through increased funding fortransmission works, and energy conservation and demand management throughthe implementation of a specific program (PROCEL) to optimize the use ofelectricity. Other Bank loans are currently helping to address the policyissues related to environmental protection and institutional refor4. Withrespect to environmental protection, the Government is implementing andextending the guidelines set forth in the Environmental Master Plan (para.1.43); and the Bank is monitoring their implementation under Loan 2720-BR.With respect to institutional reform, also under Loan 2720-BR, theGovernment provided the Bank with preliminary findings on the RevisloInstitucional do Setor Eletrico (REVISE) (para. 1.28). Completion ofREVISE and implementation of its recommendations is expected to occur oncethe new administration (which took office in March 1990) concludes itsreview.

Organization

1.25 The Brazilian power sector, one of the largest and most complex inthe world, is in general reasonably well organized although importantchanges are needed and taking place. The past 50 years have beencharacterized by progressive nationalization and growing centralization,resulting in the consolidation of a few large and hundreds of smallutilities into a relatively compact structure of state and federally-ownedutilities. The power sector is under the jurisdiction of the M of I. In1962, ELETROBRAS was established under the M of I as a mixed-economycorporation. It functions as a holding company (of four major powergeneration subsidiaries: PURNAS, CHESF, ELETRONORTE and ELETROSUL and twodistribution companies LIGHT and ESCELSA) and as a sector development bank.ELETROBRAS holds the 50Z interest of the Government in Itaipu Binacional(the binational agency, with Paraguay, that operates the 12,600 MW Itaipuhydroelectric facility on the Parana River) and owns minority stockinterests in the state-owned utilities. ELETROBRAS also analyzes expansionplans for major generating and transmission facilities and coordinates andsupervises the interconnected public power system.

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1.26 The state owned utilities operate within the concessions of theircorresponding states. Origin, function, and organization are common forthem. They vere established by state decrees in the mid-1950s. Theyacquired most of the other power utilities (private and cooperative) oftheir respective states and have grown rapidly. In general, they areresponsible for planning, building, and developing systems of generation,transmission, and distribution of electricity, in their respective states,under the overall planning coordination of ELETROBRAS. General policydirectives are set by Administrative Councils elected by the respectiveGeneral Assemblies of shareholders. The members of the Councils representthe state governments, ELETROBRAS, private industry, and the managements ofthe corresponding companies. The Council appoints a Board of Directors tomanage the company, consisting of the President and the directors of thevarious departments (Administration and Finance; Distribution; Planning;Operations; Engineering and Construction). The organization of thecompanies normally includes an independent Fiscal Council, elected by theGeneral Assembly. This organizational structure permits efficientmanagement; and these companies, which carry out programs of carefulrecruiting, training, and placing of their work force, have achieved steadyincreases in their respective ratios of customers to employees.

1.27 The DNAEE is the regulatory agency. It grants licenses forgenerating plants; assigns concessions; approves expansion plans; and setstariff levels under the principle of service-at-cost plus an adequatereturn on capital, and tariff structures on the basis of long-run marginalcosts (LRMC). In some areas, the approval of other Federal authorities isalso requireds e.g., that of the President for major licenses andconcessions. and of the Ministry of Finance (MOF) for tariff increases.

Institutional Reform

1.28 Under Loan 2720-BR and terms of reference satisfactory to theBank, the Government has carried out the REVISE Study to review theinstitutional structure and certain policies of the electric power sectorincludings (i) the overlapping functions and the undue concentration ofresponsibility, and the need for a better definition of the roles anddegrees of autonomy of the various sector entities and concerned Governmentagencies, both federal and state; (ii) pricing issues, including theproblems experienced in implementing the scheme for equalizing the rate ofremuneration for all electric utilities, combined with a system of uniformnational tariffs at a time when the actual rate of return earned underauthorized tariffs is below the statutorily prescribed 101 minimum; and(iii) the potential for increased participation of private interests in theelectric power sector. It was also agreed that the Bank would have areasonable opportunity to comment on the findings and recommendations ofthe REVISE, and that the Government would carry out a plan of action toimprove the operational efficiency of the sector based on therecommendation of the REVISE and taking into account the Bank's comments.A draft report was furnished to the Bank for comments in early 1989. Arevised version will be issued by mid-1990, after the new Government (whichtook office on March 15, 1990), has had the opportunity to review the studyrecommendations and propose specific action plans. The Government hassubmitted to the Bank: (i) a formal request of a waiver in relation to the

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submission to the Bank of the action plan for REVISE: and (ii) asatisfactory justification on the delays of the study and explanation ofthe current situation. It has also agreed to periodically exchange viewswith the Bank on the progress of completing and approving the REVISE study.

Growth of Demand

1.29 In 1988, national average consumption of electricity was about1.300 kWh per capita. The industrial sector used 54Z of the electricityconsumed and the residential sector 21Z. Electricity consumption rose atan average annual rate of 11Z in 1975-80, and 72 in 1980-88, which is stillhigh compared to similar countries. Current projections are for demandgrowth at about 5.2Z p.a. The forecast of lower rates of growth reflects:(i) Brazil's current economic constraints; and (ii) implementation of theongoing electricity demand management and conservation programs, which willbe further strengthened through the proposed loan.

System Exzansion Plannini

1.30 ELETROBRAS has the primary responsibility for the coordination ofexpansion planning in the power sector. Distribution planning is theresponsibility of each individual utility company. The participation ofELETROBRAS in the global assessment of the adequacy of the level ofinvestments of the individual utilities ensures a consistent approach.ELETROBRAS is subject to the supervision of DNAEE in the preparation. of itsplans, and the plans themselves are subject to the formal approval of M ofI. Since 1981, SEST has exercised the responsibility for approving thelevels of investment of public utilities to ensure consistency with thelevel of public sector investment spending (para. 1.14).

1.31 ELETROBRAS has sound analytical and planning capability toformulate a least-cost investment program for the sector. The Bank hasmonitored this program and encouraged the power sector to seeks (i) a morereasonable balance in the allocation of investment spending for generationplants and for transmission and distribution networks; and (ii) a more £

economic mix of generation among fuel sources: hydro, coal, natural gas,and, most recently, nuclear. In late August 1988, the Covernmenttransferred to the power sector the responsibility for financing andbuilding two nuclear power plants, Angra II and Angra III. Construction ofAngrA II is at an advanced stage (70Z completed) while construction ofAngra III is just beginning. ELETROBRAS has provided a satisfactoryeconomic justification for inclusion of Angra II in the least-costinvestment program. However, the economic viability of Angra III has notbeen duly demonstrated, especially in relation to its proposedcommissioning date (para. 3.02). The issue of power system reliabilityalso has become increasingly important due to the sharp cutbacks ininvestment, as has the rehabilitation of electric power transmission anddistribution facilities, especially in the smaller systems, where technicallosses are higher. The implementation of the components included in theproposed project will contribute to improve system reliability and reducesystem losses.

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Electricity Tariffs

1.32 In 1977, the Bank began a dialogue on econcGic pricing with theGovernment, starting with the training of a small, influential core groupof power sector staff in DNAEE and ELETROBRAS in the practical estimationand application on long-run marginal cost (LRHC) based prices. Concurrentlythis group initiated a comprehensive study of electricity tariffs,supported by the Bank (under Loan 1300-BR) and assisted by Electricit6 deFrance as consultants. The study was completed in March, 1.979, and thefirst step to initiate tariffs based on the principles of LRMC was taken inOctober, 1981 (by decree No. 86463). To date, the LRMC tariffs have beenfully implemented for all high-voltage consumers, who account for some 502of total consumption. Implementation for remaining consumers is scheduledfor completion in 1991. In terms of the tariff level, the averagepublished price of electricity (i.e., published tariffs plus related taxes)is estimated to be close to LRMC. However, the lags in the tariffadjustment mechanism, combined with the high rate of inflation, led to anP-eerage electricity price billed (tariff plus related taxes actually billedto consumers) for most of 1989 equivalent to only about 752 of the LRMC(Annex 1.3, tables 6 and 7).

1.33 Already, the impact of LRMC pricing on dema,,d has beensignificants it is estimated that 2100 MW of demand have been shifted frompeak to off-peak hours, reducing investment requirements by about US$3.1(see figure 1 on page 11). A further displacement of 1000 MW of peakdemand is expected by the end of 1992, and 500 MW more by the end of the19909 (worth a combined US$2.3 billion), as medium- and low-voltageconsumers are subjected to the new tariff structure. With regard to thetariff structure, the prices for non-residential consumers exceed LRMC,although the price actually billed for most of 1989 fell short by some 252due to time lags. In the case of residential tariffs, prices (includingtaxes) are still below LRHC, while the effective price actually billedfalls short by more than 50?. While social argument can be made for somesubsidized electricity to low-income consumers, there appears to be no casefor the current systematic subsidy to all residential consumers. Thestructure of the residential tariff should, therefore, be re-examined todefine a reasonable degree of electricity consumption to satisfy basicneeds, beyon-; which all additional consumption would be charged at fullLRMC. Details on electricity tariffs are set forth in Annex 1.3.

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FIGURE 1. CONSERVATION IMPACT OF MARGINAL COST PRICING

PEAK

DAILY LOAD FACTR1 A - - * * 82 - 73%

-*-87 8 3% .1.3 - 91 = 90% 198 (BEFORE IMFLEMENTNG

.% - i-MARGINAL COST PRICING)

121987 (AFTER IMPLEMENTINGTHE BLUE TARIFF)

2 1.1 _ 1991 (EXPECTED)

1.0- 1 (EXECTED)

0.9-

0.8 *I*.

0-

0 4 a 12 iB 20 24

HOURS

PKiW46232

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Sector FinanciaA Performance

1.34 The power sector has an important role to play in the developmentof Brazil; but for over a decade, its declining financial situation hasreflected the sffects of inadequate tariff increases on the part of theGovernment and corresponding shortfalls with respect to important sourcesof financing -- revenues and internal cash generation. Before 1978, thepower sector anjoyed a long period of robust financial performance becausethe Government implemented a realistic tariff policy and provided adequateequity contributions. After 1978, real tariffs and hence sector financialperformance declined, and borrowing as a source of investment financingincreased. In the early 19809, the Government introduced programs toincrease tariffs, but these programs did not reverse the deterioratingfinancial trend due to defects inherent to the programs, delays in theirimplementation, and precelence given to other strategic objectives.

1.35 In 1985, to improve sector finances and to rationalize sectorinvestment expenditure, the Government, with the assistance of the Bank,drafted a comprehensive Power Sector Rehabilitation Plan (PSRP), and in1986, in connection with Loan 2720-BR, they agreed on a PSRP for 1986. Asa measure of its importance, tCe PSRP was embodied in a Presidential decree(EM 114/86). The final PSRP reflected s"ctor financial targets which wereconsistent with the March 1986 Cruzado Plan for macroeconomicstabilization. Among other measures, the Cruzado Plan featured economy-wide price controls and a freeze on tariff increases; and consistencybetween the Cruzado Plan and the PSRP required the deferral of substantialtariff increases to 1987 and subsequently.

1.36 During 1986-88, the sector's financial performance (as measured bythe return on remunerable assets), slowly improved, but by less than calledfor in the original updated PSRP (EMs 008187 and 073/88). Due to financialconstraints, actual investment le-els were below forecast. Theunsatisfactory performance of the sector reflected the policy of theGovernment to defer improved sector finances in favor of other objectives(such as reducing inflation). Throughout this period, there wascontinuous dialogue between the Government and Bank on the investmentprogram and the corresponding financing plan in connection with Loan2720-BR and a proposed second power sector adjustment operation which nevermaterialized.

1.37 In June 1987, the Bank suspended processing of the second powersector adjustment operation due to the introduction of a secondmacroeconomic stabilization plan, the Bresser Plan, which, by freezingpower tariffs, voided new commitments (EM 008/87) to improve sectorfinances. These new commitments had been made in connection with release(December 1986) of the second tranche (US$250 million) of Loan 2720-BR; andhad served as the basis for appraising the second operation. Following theexpiration of this freeze, and while preparing a new PSRP, the Governmentintroduced substantial monthly tariff increases during the latter part of1987, thereby increasing the average annual basic tariff by 26.6Z in real

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terms over the corresponding level in 1986. However, even with theseincreases, the actual performance in 1987 fell short of that expected inthe revised PSRP (para. 1.40). (According to sector authorities, theurging of the Bank played a positive, if secondary, role in convincing theGovernment of the need to raise tariffs in real terms).

1.38 In 1988, the Bank renewed its effort to process a second powersector adjustment operation based on revised commitments reflecting aslower pace of financial rehabilitation (EH 073188); but due todisagreement with the Government with respect to including a proposednuclear power plant (Angra III) ir the expansion program of t.:te sector, theBank again suspended processing and then abandoned the effort.

1.39 The sector turned in a mixed financial performance in 1988. Asshown below, the average level of basic tariffs increased over that of 1987(by 11.62 in real terms), but the level of net cash generation wasadversely affected by higher operating costs, especially labor (as requiredunder the new Constitution) and higher-than-forecast levels of debt service(due to the depreciation of the US dollar vs. other hard currencies andhigher-than-forecast repayments of foreign-currency debt). Incircumstances of financial constraint, the sector invested US$6,187 million(in June 1989 prices) or 89? of the forecast level. This was a substantialachievement in as much as the sector had not received expected financingfrom the World Bank (sfice 1986) or other financial institutions, althoughit did generate substantial financing in the form of short-term loans andarrearage with contractors.

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1,40 The min Indicators of seator financial performance for the yearo1986-1988 show the f 'lowing evolution:

1985 19 17 1969(stated In prices of June 1969, uair.0 the VC) I/

(I) Avo. rev./kWh sold(US *1ls)Actual 66.18 62.18 69.72 65.08Forecast 1 -- 65.78 76.70 89.8?

(11) Ave. basic teriff/kWh sold(US mills)

Actual 46.19 42.75 54.12 00.42For est -- 40.66 62.84 71.70

(111) InvoetmntExpenditure(Use millon)Actual 6,874 4,901 7,682 6,167Forecast - 7,174 8,791 6,9U8

(iv) Return on Remuner-able Asset (U)Actual 8.4 4.6 6.4 7.7Forecast - 6.t 6.0 7.0

(v) Self-financing (M) .Actual -75.2 -109.7 -54.2 -89.4Forec at -- -47.8 -12.9 20.7

(vi) Concu_mr-baeedfinancing (U)!/Atual -45.1 -78.0 -87.6 -56.8Forecast -- -24.8 21.9 20.7

(vii) Total borrowing/Investment (U)!IActual 184.4 144.8 890.0 40.6Forecast --- 90.7 52.8 68.6

(vill) Adjusted debt-service coverage)!/Atual .44 .88 .S0 .48Forecast -- .58 .62 .9P2

Rote of exchanges U31.00: NCZ81.U72.For 1698, EU 114/86; for 1967, EM N8/87; for 19088, EM 078/80.

J Self-financing: net Internal cash generation divided by invostmentexpenditures.

J Consumer-bxasd financing: the sum of not Internal cash generation andother consumer-based funding divided by Investoont expenditures.'Other coneumer-based funding' includoe the sum of revenues from theICNS, Reversion, and the Compulsory Loan (a Annex 8.6).

i Total borrowing/investmsnt: annual long-term borrowing divided bycorresponding investment expenditures.

& Adjusted debt-service coverage: gro" Internal cash generation dividedby debt service less the sum of refinancing loans ('roll over') andGoverment contributions to cover debt-service obligat$ons.

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1.41 In January 1989, the Government introduced a new macroeconomicstabilization plan, the Summer Plan, which featured a tariff freeze lastingfor six months. As a consequence of this freeze, the real level of tariffsas of June 1989 was 36.1! below the level as of December 1988. In July1989, the Government reinstated the practice of monthly tariff increases(which remains in force) (para. 3.14): and in August it formulated asatisfactory tariff recuperation plan which it twice reformulated at therequest of the Bank (October 1989 and January 1990) to take account of therapidly increasing rate of inflation. Although by December 1989 theGovernment had raised the real level ot tariffs by 28.52 over the levelprevailing in June 1989, the average annual level of tariffs in 1989deteriorated as compared to that of 1988 (Annex 3.3). The Rate AdjustmentPlan (RAP), which includes a tariff recuperation plan, is satisfactory andwill achieve agreed financial targets, provided that monthly rates ofinflation do not exceed planned tariff increases (paras. 3.14 and 3.15).

Debt Compensations by the Government

1.42 In 1988, the Government and some of the power utilities engaged inan exercise of mutual iebt reduction through acomDensationsn which improvedthe balance sheets of the latter, i.e., reduced amounts mutually owedwithout an actual exchange of cash. This situation had its origins inpower-tariff and cost-of-service legislation which provided that shortfallsin earnings below the minimum return on remunerable assets could be addedto the rate base for tariff-making purposes and thereby be recovered overtime. (These shortfallF are considered to be a debt owed to the powersector by the Government). In essence the "compensations' were anaccounting exercise which was not reflected in the flow-of-funds statementsof the power utilities, but whl.. was shown on the so-called "Conta doResultado a Compensars or the "CRC" account of the cost-of-servicestatement with DNAEE. Given the shortfalls of tariff levels over the lastten years, the cumulative earnings shortfalls were large. 'While theamounts on "CRC" accounts were growing due to low tariff levels, many ofthe operating companies owed increasing amounts to the Government fornon-payment to the Global Guarantee Fund (GGF). The GGF was designed totransfer revenues from the financially stronger companies (earningremunerations above the average) to the financially weaker companies inorder that all companies should earn the rate of return on remunerableassets common to the sector.

1.43 The background of the ecompensations," has its origin during 1987-- that is, a crisis in the operation of the GGF. The main contributors tothe GGF, the power companies of the states of the South and Southeast, oninstructions of their sharehoiders, withheld payments to the Fund. Thisaction reflected dissatisfaction on the part of the states in the South andSoutheast with the low level of tariffs. To remedy this problem, theGovernment authorized the implementation of tariff increases; and powertariff legislation was amended to require transfers only after individualcompanies had earned a return on remunerable assets of 12Z. This scheme iscalled Reserva Nacional de Compensacoes de RemuneragAo (RENCOR). Further,negotiations for 'compensations' were undertaken by individual powerutilities with the Government to reduce debts owed to the Government withcorresponding reductions on the "'RC' account. Iu 1988, four of theoperating subsidiaries of ELETROBRAS reduced amounts owed to the Government

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by almcst US$2.1 billion. In 1989, DNAEE, ELETROBRAS, various state powerutilities, and the Ministry of Finance negotiated another reduction throughcompensation amounting to about US$4.1 billion.

Electric Energy Conservation

1.44 In December 1985, through "Portaria Interministerial" No. 1877/85,the Government launched a program to establish policy measures, integrateactivities and secure financing necessary to implement PROCEL (paras.3.51-3.58). The main objectives of the program are to rationalize the useof electricity through increased power system efficiency, reduceelectricity waste, and optimize resource allocation. Some progress hasbeen made in the areas of: (i) demand management, through efficient pricing(para. 1.33); (ii) distribution network rehabilitation and loss reductionwith the Bank's support through existing Loans (2138-BR, 2364-BR, 2565-BR);and (iii) specific conservation projects developed based on. the resultsobtained from 2,400 energy audits perfoxmed within industrial consumers andfrom 10,600 energy surveys within residential and commercial consumers.Important complementary actions included the education and advertisingcampaigns undertaken by the sector though the distribution of over2,000,000 energy saving manuals among consumers and intensive publicadvertising cmpaigns through TV, radio and newspapers. These objectivesare being supported through the proposed loan.

Environmental Asnects

1.45 Since the mid-1970s, Brazil has made significant progress towardsimplementing environmental and social safeguards in the power sector,especially with respect to the harmful side effects of large hydroelectricprojects on riverine ecosystems and human populations. By 1985, ELETROBRASand various regional utilities had created environmental units, carried outstudies, and in 1986 ELETROBRAS prepared a 'Manual for Studies ofEnvironmental Effects of Electric Systems' (the EMP). The power sector EM?aims at minimizing adverse environmental and social impacts in the contextof ongoing and future generation projects by: (a) undertaking a largenumber of environmental studies and impact evaluations at the inventory andfeasibility stages of planning for power projects; (b) identifying :heleast damaging environmental and social options; (c) excluding powerprojects with high environmental and social costs; and (d) assuring thatthe highest environmental and social standards are adhered to in thoseprojects which are licensed for construction. It has since served as thebasis for environmental studies in the various stages of planning andimplementation of electric systems. The studies proposed in the EMP alsoprovided the basis for preparing Environmental Impact Assessments (RIMAs),which have been, since 1982, a fundamental legal requirement for licensingthe construction and operation of electric systems (power generation plantsand transmission lines), by relevant federal and state level environmentalagencies. While this manual became an effective first step for sector wideprogress in environmental management, ELETROBRAS and the regional utilitiessoon recognized the need to follow it up in more depth, including socialquestions.

1.46 In this context, since 1986, ELETROBRAS started to implement theguidelines included in the EMP in connection with Loan 2720-BR. The EMP(available in the Project Files) consists of sections on: (i) national

H

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environmental policy, legislation, regulations, and guidelines; (ii)specific guidelines to improve environmental plannin, and operation in thepower sector, including criteria to assess environmental costs and benefitsrelated to the construction and operation of power projects; (iii)preparation of environmental and social action plans on a project-by-project basis; and (iv) measures to strengthen the institutionalcapabilities of the Lector for implementing the EMP. Together with thegeneral federal guidelines for the preparation of RIMAs, the EMP providesguidelines for the treatment of environmental, resettlement, and indianmatters. It is a dynamic instrument to assure and further improve theenvironmental and social performance of the power sector. The EMP isperiodically updated. The implementation of the EMP has resulted in: (a)an improvement in the environmental, resettlement and Indian assistanceprograms, which have been carried out since 1986 by ELETROBRAS and theElectric Power Sector Companies in compliance with its guidelines, (b) theintroduction of environmental considerations in the investment selectionprocess, and (c) the substantial strengthening of the environmentalanalysis capacity of the sector institutions.

D. GOVERNMENT POLICY IN TEE ENERGY SECTOR

1.47 The sharp increases in international oil prices in the 1970s had aserious impact on Brazil's economy and especially on its balance ofpayments position, and profoundly affected the Government's energy policy.Brazil's dependence on imported petroleum had increased in every year since1970, reaching a peak of 851 of total petroleum needs in 1979 and makingBrazil the largest net petroleum importer among developing countries. Inconsequence, a national energy strategy was articulated, with three basicaimst (i) to improve energy conservation, including to reduce electricityconsumption and to optimize the power sector investment as well as othermeasures to reduce certain uses of petroleu;. products, through inter-fuelsubstitution; (ii) to increase the production and the proven reserves ofdomestic oil and natural gas; and (iii) to maximize the utilization ofother domestic energy resources, in particular hydro and sugar canebagasse, for generating electric energy. Tne strategy was translated intoseveral specific programs/policies. In terms of supply, greater emphasiswas placed on investments in petroleum exploration, production andrefining; hydroelectric and nuclear power plants; and alcohol production.Some studies were conducted in alternative energy sources, e.g. vegetableoil to replace diesel, but with no practical results. More recently,natural gas production and use have been expanded. On the demand side, arelatively low price has been set for alcohol and diesel, to encouragetheir substitution for gasoline, while a high absolute level wasestablished to cover the much larger financial costs; a relatively lowdiesel price has been set to stimulate the diesel fleet, again insubstitution for gasoline, wood and coal burning were promoted in ceramicsand cement respectively to substitute for fuel oil; and tariff incentiveswere provided for the consumption of hydroelectric power, at a time ,hen itwas in excess supply, again to reduce fuel oil use.

1.48 These programs and policies succeeded in reducing Brazil'sdependence on imported petroleum from 852 in 1979 to 472 in 1987 (paras.1.06-1.07). However, this success was achieved at a price, since the

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resources needed to increase the domestic energy supply required a majorincrease in public expenditures, which contributed significantly to thecountry's foreign debt, fiscal deficit and inflation (para. 1.08).

E. THE BANK'S ROLE

Bank Stratefy

1.49 The Bank's strategy in Brazil has been to support policies andinvestments that encourage economic growth and social development in thecontext of macroeconomic stability. The emphasis is on efficient naturalresource use and resource allocation, improved public sector management,and anpropriate targeting and delivery of support to the poor. The energysector is a key element in this strategy: a secure and efficient supply ofenergy is indispensable to economic growth. As capital intensity and highforeign exchange requirements characterize the sector, rational investmentand pricing policies are being promoted by the Bank, to lead to a moreefficient development and use of energy resources.

1.50 The Bank's strategy for the energy sector is being elaboratedthrough its sector work Energy Strategy and Issues Study (ESIS), itslending operations and its involvement in the IESS. Particular attentionis being given to the links between the energy sector and the macroeconomy.This work has shown that the key policy issues, including the macroeconomiclinkp'es. can only be addressed at the level of the energy sector as awhole; and that they require a far-sighted approach, extending beyond thescope of any single Bank operation.

1.51 The Bank will support the Government in its sector objectlves andmaintain the dialogue with the power sector during a difficult politicaland economic period. Bank involvement in the power sector will reinforcethe priority given tos (i) increasing investments on new transmissionsystems which are substantially delayed in their implementation causingserious risks of power shortages and resultant economic losses; (ii)deferring capital investments in some generating schemes and achievingelectricity savings by implementing energy demand management andconservation measures; (iii) improving operating efficiency by reducingsystem losses through the rehabilitation of existing power networks; and(iv) the resolution of urgent sectoral issues on institutional andfinancial aspects. These measures would complement at a project-specificlevel, the continued implementation and monitoring of sector-wideconditionality in the Power Sector (adjustment) Loan (2720-BR). Inparticular, they will consolidate the gains achieved in the past in thepower sector and progress further in achieving efficiency by providingfinancial support to investment operations which will be processed, each ofthem focusing on the one or more key elements which support and enhance theobjectives defined under Loan 2720-BR.

Bank Lendini and Sector Work

1.52 Since 1949, Bank loans to the Brazilian power sector have totalledUS$3.6 billion. The earlier loans financed mainly hydroelectric plants andassociated transmission facilities; however, since the late 1970s, most

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have been for transmission and distribution projects. In 1986, Loan2720-BR was made to assist the Government in rehabilitating the sector(para. 1.22). Besides financing high-priority investments, Bank lendinghas sought to promote rationale tarift policies, to monitor sectorfinances, and to help strengthen sector coordination and planning. TheBank has also made efforts to act as a catalyst for mobilizing additionalexternal resources for the sector; these efforts, however, have beenhampered by unresolved issues related to the Brazil's external debt.

1.53 The proposed operation would be the tenth loan to ELETROBRAS.1

ELETROBRAS has acted basically as a financing agency to channel theresources to the executing agencies. No PPAR on these loans has yet beenissued. ELETROBRAS' performance has been satisfactory in all operations,except when its role was expanded as the Bank delegated its functions ofappraisal and supervision of the beneficiaries of Loans 2138-BR and 2364-BR(para. 1.56). The proposed loan includes a series of measures andconditions which are expected to greatly improve ELETROBRAS' role asintermediary (paras. 3.39 and 3.42).

1.54 During the past three years in connection with Loan 2720-BR, byworking with Government and sector authorities, the Bank has assisted theGovernment in its efforts to: (i) rationalize the sector investmentprogram; (ii) rehabilitate the sector financially; and (iii) increase thesector capacity to deal with environmental and social issues. With respectto (ii), progress has been less than expected (paras. 1.36 - 1.39).

1.55 In 1986, the Government, in connection with Loan 2720-BR, issuedthe EMP, setting forth environmental protection guidelines which arecurrently being implemented through project-specific Environmental ActionPlans. Since 1986, in the context of continuing dialogue with the Bank --but without new Bank loans to the power sector -- the Government arrangedfor adequate staffing of agencies (Federal, state and sector), charged withenforcing the guidelines, including the carrying out of RIMAs (paras.1.43-1.44). Such actions constitute a remarkable response to the problemsof protecting the environment. The consistent use of the guidelines in theplanning and design of large projects in the Amazon region has led tointroduction of measures to ameliorate their negative effects on theenvironment or the local Amerindian population, i.xcluding the re-design ofprojects and consideration of reducing the scale of projects.

1.56 Twelve performance audit reports on power sector projects2 havebeen distributed to the Executive Directors. These reports conclude thatdespite construction delays, cost overruns in some cases, and the beginningof a deteriorating financial trend in the late 1970, Bank-financed projects

1/ 1300-BR (05|76); 1538-BR (05/78); 1939-BR (01/82); 2138-BR (05/82);2364-BR (12/83); 2365-BR (12/83); 2564-BR (08/85); 2565-BR (08/eS);2720-BR (07/86).

2/ Sec H 75-646 of September 4, 1985; Sec M 77-532 of June 28, 1977;Sec M 789-34 of January 16, 1978; Sec M 79-82 of February 12, 1979;Sec M 79-756 of October 23, 1979; Sec M 79-757 of October 23, 1979;Sec M 79-905 of December 29, 1979; Sec M 81-532 of June 22, 1981Sec M 84-632 of July 9, 1984; Sec M 85-697 of June 7, 1985;Sec M 85-1343 of July 3, 1985; Sec M 86-327 of March 24, 1986.

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have been substantially successful. In general, these reports emphasizethe important and positive role played by the Bank in the Brazilian powersector.

1.57 There has been only one lending operation in hydrocarbons, the SaoPaulo Natural Gas Distribution Project in 1988 (Loan 3047-BR). Somehydrocarbons sector work was also carried out, including the Oil and GasSector Review of 1983 (Report 4816-BR) and the Public Sector InvestmentReview of 1985 (Report 6600-BR). Loan 3047-BR permitted the Bank toestablish a significant starting role in the development of natural gas,principally at the retail level, and broadened its involvement in issuesrelated to general energy sector policy, planning and implementation.However, for further progress with the policy dialogue, a directrelationship with PETROBRAS, the key player in the hydrocarbon subsector.is planned, starting with a Hydrocarbon Transport and Processing projectwhich has been already appraised.

Distribution Network Rehabilitation and Loss Reduction Program (DRELOR)

1.58 The Bank is currently financing distribution expansion works,power network rehabilitation and loss reduction programs - DRELOR - forvarious state-owned utilities through Loan 2164-BR. Most of thecorresponding subprojects are expected to be completed with delays of twoto three years. The reasons for the delays are in line with those whichapply to the whole power sector, namelys (i) low tariff levels led to lowinternal cash generation; (ii) the Federal Government experienceddifficulties with the former revenue transfer mechanism; (iii) the stategovernments provided counterpart funds at lower-than expected levels; (iv)the smaller beneficiaries experienced delays and difficulties in securingthe cofinancing needed to complete their individual subprojects; (v) thebeneficiaries experienced large arrears in a-counts receivable; and (vi)the processing of procurement matters was substantially delayed. (Startingin 1987 there has been substantial improvement in the processing ofprocurement matters). Additionally, ELETROBRAS was not able to provide theexpected level of advice, supervision, and support, particularly for theless-developed companies, some of which appear to need to strengthen theirtechnical staffs to implement their subprojects adequately. In late 1987,ELETROBRAS appointed a full-time coordinator and assigned additional humanresources from other ELETROBRAS departments, reactivating project executionand improving supervision and procurement monitoring. Purthermore, underthe proposed loan ELETROBRAS has agreed to establish a project implementa-tion unit (para. 3.42) which will be also responsible for monitoring Loan2364-BR. At the request of the Bank, ELETROBRAS recently submittedsatisfactory programs reformulating the implementation and disbursementschedules and financing plans of the subprojects of the various state-ownedutilities.

1.59 ELETROBRAS is carrying out an agreed Action Plan (AP) to completeDRELOR by June 30, 1991. The AP includes reprogramming, approval andimplementation of the investment plan (physical targets and their timing);and corresponding financing scheme (reallocation of a portion of theundisbursed balance of Loan 2364-BR, contributions from ELETROBRAS and therespective states, self-generation of the utilities and other sources).

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II. THE BORROWER AND POWEd MARKET

A. THE BORROWER

Introduction

2.01 The borrower would be ELETROBRAS, which would onlend the proceedsof the proposed loan for the power transmission subprojects to federal andstate utilities, under the same terms and conditions as the Bank loan plusan annual administration fee of one half of one percent (1/2 of 1X) on thecorresponding amounts disbursed and outstanding. The project would beexecuted under the supervision of ELETROBRAS, which as intermediary, willbe responsible for selecting the different beneficiaries and sub-projects,subject to Bank approval, and for monitoring project implementation.

Background

2.02 ELETROBRAS was created in 1962 by Law No. 3890-A as a vehicle forconsolidating existing public utilities, centralizing management of thesector and encouraging orderly regional expansion and long-term growth.ELETROBRAS is a omixed economy" corporation operating under thejurisdiction of the M of I, and responsible for the planning, financing,coordination and supervision of the operation and expansion of theBrazilian power sector.

2.03 By law, at least 51 percent of the company's voting stock mustalways be owned directly or indirectly by the Brazilian Government, whichcurrently holds 99.8 percent of total company shares and 100 percent ofvoting stock. In accordance -with its charter, ELETROBRAS must apply theresources allocated to it for the development of the electric energy sectorof Brazil, coordinate the activity of and render financial, technical andadministrative assistance to its subsidiary and associated companies, andimplement the national electric energy policy under the guidelines issuedby M of I.

Orianization and Management

2.04 ELETROBRAS is governed by an Administrative Board of Directorscomprised of the Prerident (appointed by the President of the Republic ofBrazil); five Directors who are elected at the General Shareholders meetingfor a term of three years and who head up the various departments of thecompany (Coordination, System Operations, Economics and Finance, Planningand Engineering, and Corporate Management); four Counselors, elected for aterm of three years, who are associated with public power companies underfederal concession and have experience in technology, finance or businessmanagement; and two Counselors, again elected for a term of three years,one representing public bodies other than the Federal Government andanother representing private shareholders. An Executive Board, comprisedof the President and the five Directors, has responsibility of makingpolicy recommendations to the Board and managing the day-to-day activitiesof the company. The organizational sLructure of ELETROBRAS is consideredto be adequate to serve the company's needs.

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Finauclna Role

2.05 Because of its function as holding comp ny. financial agency anddevelopment bank for the Brazilian power sector, ELETROBRAS plays a pivotalrole in the development of the sector. It finances projects of subsidiaryand associated companies. ELETROBRAS, thus becomes heavily dependent onsector based resources for its finances. This tends to make ELETROBPAS'financial conditions mirror the trends in the finances of the sector.

2.06 ELETROBRAS raises funds from four sources, as follows:

(a) Statutory Resources. ELETROBRAS receives and distributes fundsfrom two statutory sources, the Compulsory Loan and the GlobalReversion Fund (GRF).

(b) Government Funds. There are two sources of funding from theFederal Government: its reinvestment of ELETROBRAS' dividends andspecial budgetary appropriations.

(c) Internally Generated Funds. Internal sources of funds inclutdedividends paid on its investments by its subsidiaries andassociated companies, and interest and principal from loansadvanced to its borrowers.

(d) Borrowings. ELETROBRAS raises both domestic and foreign currencyloans, by onlending or investment in power utilities. Annualborrowings targets for ELETROBRAS are established in accordancewith the sector budget approved by SEST.

Planning and Budzeting

2.07 ELETROBRAS has long been at the center of sector technical andfinancial planning, both in the short-term (through the budgeting prooess)and the long-term. Since 1981, however, ELETROBRASt responsibility for thebudgetary process has been reduced with the centralizing of decision-makingin SEST (an agency of the Secretariat of Planning - SEPLAN). Besidesbudgeting and related financial planning, ELETROBRAS has primaryresponsibility for the coordination of medium and long-term planning in thepower sector and preparation of system expansion plans. Planning functionsare carried out satisfactorily.

Training and Staff Relations

2.08 ELETROBRAS' staff is competent and well trained. At present, somedifficulties in recruiting and retaining staff exist because, in order tofight inflation, ceilings for salaries of top management of government-runentities have been established and salary increases havre not kept up withinflation. The Federal Government has also established a zero-growth ratein the number of personnel of ELETROBRAS (currently 1,982). ELETROBRASwill therefore be obliged to improve the productivity of its staff.

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2.09 ELETROBRAS has a comprehensive and up-to-date training program,for personnel of all Brazilian power utilities. This training program hasalso been extended to other South American power companies, members of theRegional Electric Integration Commission (CIER).

Accountint and Auditing

2.10 ELETROBRAS's accounting system is satisfactory. The InternalAuditing Department, which reports to the President, carries out anadequate program of financial audits and follow-up on past recommendations.ELETROBRAS employs as its external auditors the firm Price Waterhouse,whose performance has been acceptable to the Bank. In addition, the FiscalCouncil, appointed by the Shareholders' meeting, carries out externalcontrol duties in accordance with Brazilian law.

Prospective Beneficiaries

2.11 The prospective beneficiaries of the Bank loan are the followingstate utilities: CESP, ELETROPAULO and CPFL all operating in the state ofSao Paul.o; COELBA (Batiia); COPEL (Parana); CERJ (Rio de Janeiro); and CEMIG(Minas Gerais). ELETROBRAS subsidiaries which would benefit from the loanare LIGHT (Rio de Janiero) and ELETROSUL (generating utility). Serring themore well developed states of Brazil, the prospective beneficiaries areamong the larger, better organized, and financially stronger state-ownedutilities. Origin, function, and organization of the prospectivebeneficiaries are described in para. 1.26.

THE POER MARKT

Historic Power Market

2.12 The proposed beneficiaries of the Bank loan supply electricity tonine states located primarily in the South, Southeast and Western regionsof Brazil: Mato Grosso (North and South), Minas Gerais, Parana, Rio Grandedo Sul, Rio de Janeiro, Santa Catarina, So Paulo and Bahia (Northeastregion) with 38Z of the Brazilian territory and a population of 97 million(67Z of Brazil's total). The aggregate gross yearly generation andinstalled capacity of the above regions is about 1,750 kWh/inhabitant and430 watts/ inhabitant respectively, which are considered higher than theindicators for the whole country (1,460 kWh/inhabitant and 340watts/inhabitant).

2.13 ELETROSUL (federal utility) and CESP (utility of the state of SaoPaulo) are responsible for power generation and they provide theelectricity consumed in the areas of their concessions through bulk salesat high voltage levels (500 kV, 440 kV, 345 kV, 230 kV, 115 kV) to thestate-owned utilities and municipal companies. CEMIG (Hinas Gerais) andCOPEL (Parana), which also generate a considerable amount of power withintheir concessions, sell electricity (both own-generated and purchased atbulk from the federal utilities) to their consumers through their extensivedistribution networks at high and low voltage levels. The other utilities(COELBA, ELETROPAULO, LIGHT, CERJ, CPFL) are mainly responsible fordistributing electricity within their concessions.

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2.14 Increase of total electricity supply varies widely amongconcessions. As illustrated in the table below, electricity supplyincreases were high (7.6? p.a.) in concessions such as COPEL's (Paran6)because of industrial and agricultural growth. In other c'ncessions, suchae tie ones of LIGHT and ELETROPAULO, which serve mainly the cities of Riode .aneiro and Sao Paulo, electricity supply increased at a lower pace (5Zand 4.22 p.a. respectively), mainly due to the greater saturation of theirpower markets as these areas are more developed. Annex 2.1, Tables 1through 5 illustrate in detail the evolution of the beneficiaries' powermarket.

Actual Power Market

AverageAnnuaI

1980 198S IncreaseS las Lose" Deand Sales Lossos Demnd Sales DOmandowh Gwh Mw osh owh w X X

CEMIG 17,876 1,469 2,900 28,874 2,867 4,400 5.9 5.4CERJ 8,011 as8 eon 5,048 680 0G 6.7 5.0CESP 89,861 2,388 62,668 8,263 3.7COELBA 8,566 424 700 6,142 644 1,100 7.1 6.1COPEL 6,415 491 1,00 9,727 738 1,7W9 7.6 6.6CPFL 7,981 68 1,5gm 12,678 024 2,800 5.9 5.7ELETROPAULO 84,760 2,760 6,ooo 48,459 8,416 7,700 4.2 8.2ELETROSUL 8,246 S5W 12,410 770 5.2LIGHT 14,084 1,841 2,400 20,680 2,128 3,400 6.0 4.5

2.15 The composition of the proposed beneficiaries' eleztricity supplyby categories has changed in general during 1980-1988. Residentialconsumption has increased its share by about 2Z (in the case of CPFL from21.32 in 1980 to 252 in 1988) reflecting thus: (i) actual regional birthrates; and (i$) migrations to large urban centers. Industrial consumptionhas decreased its share by about 4? (in the cases of CEMIG and COELBA from77? in 1980 to 72? in 1988 and f;-om 452 in 1980 to 37Z in 1988respectively) reflecting the current economic problems of Brazil, whichhave adversely affected the expansion of the industrial sector.

Future Power Market

2.16 The Brazilian power utilities prepare market forecasts employingunified methodological guidelines which were issued in 1976 by DNAEE. Thepower market forecast of the beneficiaries for 1989 - 1995 were prepared onthe basis of moderate targets for expanding electricity coverage to thepopulation, realistic assumptions about the possibility of implementinglarge industrial projects, and modest increases in electricity consumptiondue to current economic perspectives. Market projections were jointly madeby ELETROBRAS and their subsidiaries or the distribution companies, basedon: 1i) extrapolation of historical electricity consumption trends;(ii) econometric correlation between electricity consumption and socio-economic indicators (income, population), and (iii) evolution of existingand future industrial loads. The market forecast in the areas served bythe beneficiaries are adequate and they are consistent with the power

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market projections for the country as a whole and expected economic growthin the regions served by them. The supply forecast and system losses aresummarized below.

Power Market Forecast

AverageAnnual

1989 1995 IncreaseSales Losse Demnd Sales Loss Demand Sales Dmandowh owh mw Q h G h W X X

CEMIG 29,728 2,689 4,600 42,776 8,88Z 6,499 6.3 6.2CERJ 5,181 1,082 900 6,992 995 1,299 4.9 6.5CESP 49,897 2,899 86,561 2,724 2.1'02EA 6,59 766 1,100 19,040 1,920 1,709 7.8 6.8COPEL 9,971 T48 1,800 14,899 1,117 2,690 6.9 6.1CPFL 12,698 844 2,390 17,093 1,997 8,699 5.1 4.8ELETROPAULO 49,059 3,676 8,400 68,944 4,789 10,499 4.8 8.6ELETROSUL 14,699 905 20,899 1,869 5.8LUNT 21,389 2,189 8,809 27,265 2,727 4,899 4.1 4.5

2.17 The proposed beneficiaries' total electricity supply is expectedto increase during 1989-95 at annual average rates ranging from 42 in themore developed areas, to 72 in less developed areas, such as Bahia(COELBA), due to: (i) the expected commissioning of ne-. industrialundertakings; and (ii) COELBA (as well as other beneficiaries) were notable to provide service to potential new consumers (suppressed demand)because of financial constraints. The market forecast for thebeneficiaries is adequate as it is in line with the Brazilian sectorprojections and with the country economic projections for the same period.The composition of the beneficiaries' electricity sales structures are notexpected to change substantially during the period. Details of forecastelectricity sales, requirements and demand are included in Annex 2.1,Tables 1 though 5.

Transmission and Distribution Losses

2.18 The share of transmission and distribution losses has decreased byabout 12 (from 82 to 72 of supply) mainly due to the installation ofvoltage and power factor compensating equipment. The proposedbeneficiaries' total transmission and distribution losses during 1988 werein general within acceptable levels and in line with commonly acceptedlevels for utilities in developed countries. Except for utilities such asCERJ (State of Rio de Janeiro) and COELBA (Bahia); whose system losses wereabout 17.52 and 10.52 of total supply respectively, system losses averagedabout 71. System loss levels should decrease during 1989-1995 due tobetter *itilization of the transmission systems and improvement indistribution systems, in particular through the implementation of theelectricity conservation program under the project. An important factor toachieve this objective would be the adequate and timely implementation ofthe beneficiaries investment programs in transmission and distribution.

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II. THE PROJECT

A. GENERAL INFORMATION

Background

3.01 In January 1986, because of the financial difficulties faced byvirtually all of the power utilities, and because of the economic importanceof the sector, the Government requested the assistance of the Bank in asector rehabilitation program. Such assistance materialized in the form ofthe Power Sector Loan (Loan 2720-BR, US$500 million), an adjustment loanwhich the Government used to finance equity contributions to individualpower utilities. The loan was approved and fully disbursed in 1986 againstgeneral ivrports.

3.02 T'he Bank also planned to process subsequent investment loans tohelp finance sector expansion. In addition, to maintain and extend thegains achieved in the financial, institutional, and environmental policiesof the sector during 1986-88, the Bank maintained a close dialogue with theGovernuent asnd the sector while preparing a proposed second power sectoradjustment operation. However, the processing of this loan was discontinuedbecause of disagreement with the Government on the construction of the AngraIII nuclear power plant. Subsequently, the processing of a proposedEnvironmental Reform and Energy Conservation Adjustment Loan was alsodiscontinued due to deteriorating macro-economic conditions.

3.03 Despite substantial tariff increases, debt service compensation andsome of the agreed equity contributions during 1987 and 1988, the levels ofinvestment in transmission works fell short of targets mainly due to sectorfinancial constraints. These targets were set under the Power Sector Loanand they aimed at correcting the imbalances in the composition of powersector investments during the late 1970's and early 1980's when about 63Y ofthe total sector investment was allocated to generation projects and only222 to transmission works. To remedy these investment imbalances and inview of the limited access of the sector to financial markets, theGovernment requested in June 1989 financial assistance from the Bank for theimplementation of the 1990-93 trarsmission program included in the expansionplans of various sector utilities. The project will assist the sector tomeet the target levels of investments in transmission works which, asoriginally set, will amount to about 301 of the total investments (Annex3.2, Table 5).

Proiect Obiectives

3.04 The principal objectives of the proposed loan are to: (i) optimizeinvestment in the power sector through increased funding for high prioritytransmission works; (ii) improve sector finances, primarily through tariffincreasest (iii) expand energy conservation and demand management programsunder the National Electric Energy Conservation Program (PROCEL) and(iv) improve sector institutional arrangements through the implemontation ofthe REVISE. These measures would complement the continued implementationand monitoring of the sector-wide conditionality in Loan 2720-BR. Theproject will also help maintain the Bank's dialogue with the power sectorduring a difficult political and economic period. This will permit the Bankto monitor closely: (i) the beneficiaries' operational and financial

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performance. through review and approval of their investmexut programs andfinancing plans; (ii) measures to strengthen their institutional, technical,and financial capabilities; (iii) the implementation of energy conservationmeasures to achieve power loss reduction and improved electricity usagethrough PROCEL (see para. 3.54 for a description of PROCEL); and(iv) measures to address a subset of the most urgent sectoral issues oninstitutional and financial aspects, including implementation of: REVISE(para. 1.28); and financial measures to improve the performance of theproposed beneficiaries (paras. 3.14-3.19).

Proiect Descrimtion

3.05 In previous investment lending to the power sector, the physicalscope of the projects was narrowly defined and proceeds of the Bank loanswere allocated to one or exceptionally to very few beneficiaries. Before1980, most of these loans financed the construction of large hydroelectricpower stations; after 1980, they supported specific transmission anddistribution works. Furthermore, specific amounts from the proceeds of theBank loans were allocated to each beneficiary. In general, implementationof the above projects took about six to seven years. and proceeds of theBank loans were disbursed during up to eight years. The slow pace ofdisbursements has raised serious concerns both within the Government and theBank regarding the efficiency of the transfer of Bank resources and the highcost cf financing as a result of both delays in project implementation andexcessive commitment fees.

3.06 Based on this experience, a broader conceptual approach has beenformulated in the proposed loan. Essentially this operation would finance atime-slice (1990-93) of the transmission investment programs of up to ninepower utilities in order to support the construction of new transmissionlines and power substations. Having expressed interest in participating inthe Project, as many as nine operating companies are expected to benefitfrom the proceeds of the proposed loan being allocated to this projectcomponent. No specific amounts have been allocated to benefit each thepotential beneficiary. The specific project components will be implementedby the strongest and most capable ones (potential beneficiaries aresELETROSUL, LIGHT, CESP, ELETROPAULO, CPFL, CEMIG, COPEL, COELBA and CERJ).The use of Bank resources would be related to the ability and efficiency ofeach beneficiary. The utilities to benefit from the Bank loan, as well astheir transmission works to be financed with proceeds of such loan, will beselected in accordance with comprehensive technical, financial andinstitutional criteria (paras. 3.20 and 3.40). These selection features,together with Bank's financing of a part of the associated civil works(para. 3.30) should accelerate the transfer of Bank resources, therebyreducing the disbursement period and lowering the financial costs whileenabling the Bank to continue addressing effectively power sectorobjectives: financial, technical, institutional and environmental. Inaddition, the proposed loan will help finance Part A of PROCEL.

3.07 The proposed project includes the following components:

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(a) 1990-93 Transmission Prosram: Construction and rehabilitation ofabout 11,400 circuit-km of high voltage transmission lines;construction of new substations and expansion of existing onesadding an aggregate of about 25,400 MWA of power transformercapacity and 5,400 MVAR of power reactors/capacitors banks. Thesefacilities comprise the 1990-93 investment targets of the nineutilities. The Bank loan will finance equipment, materials andcivil works, for about 82 of the total programs' cost. Details ofthe beneficiaries' transmission programs are included in Annex 3.1,Tables 1 through 5.

(b) Part A of the Electric Energy Conservation Programs (PROCEL)t Thisprogram will be implemented by ELETROBRAS during the period 1990-91and includess (i) studies related to co-generation, furnaces, andimproved power uses in buildings; (ii) purchase and installation ofabout 100,000 units of efficient public lighting fixtures; (iii)purchase and installation of about 500 MVAr of distributioncapacitor banks to reduce system losses; (iv) purchase oflaboratory and metering equipment; and (v) training on theapplication of energy conservation technology and practices. TheBank will finance the studies and equipment included in PROCELprograms. Details of PROCEL are in paras. i.51-3.58.

Proiect Cost

3.08 The proposed program for 1990-93 comprises a four-year least costtransmission expansion program of the nine power utilities, as set fortn inthe latest review of the Plano 2010, the sector's long-term expansion plan.About US$340 million equivalent, of the proceeds of the loan would be usedby the sector utilities to purchase equipment and materials and to securecivil work contractors to construct the different works included in their1990-93 transmission investment programs. About US$30 million equivalentwill be used by ELETROBRAS in connection with PROCEL. About US$15 millionwill finance interest during construction on the Bank loan during the firsttwo years of project implementation. The estimated project cost, includingphysical and price contingencies as well as interest during construction, isUS$3,852 million, of which US$1,570 million, or about 412, is the overallforeigr exchange currency component. Details of the beneficiaries'investment programs are in Annex 3.2, Tables 1 through 5, and a summary ofexpected costs is given below:

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Proiect Cost

USS millionLocal Foreign Total

ELETROBRAS Group's Transmission

ELETROSUL 174.8 116.5 291.3LIGHT 336.3 _24.2 560.5Sub-Total 511.1 340.7 851.8

State Utilities' Transmission

CERJ 11.4 7.6 19.0CESP 186.0 124.0 310.0ELETROPAULO 349.6 233.0 582.6CEMIG 397.1 264.8 661.9COPEL 119.2 79.4 198.6CPFL 91.5 61.0 152.5COELBA 183.1 122.1 305.2Sub-Total 1,337.9 891.9 2,229.8

PROCEL 38.3 26.2 64.5

Total Base Cost 1,887.3 1,258.8 3,146.1

Physical Contingencies 184.9 123.3 308.2

Price Contingencies 209.8 141.6 351.4

Interest During Construction - 46.2 46.2

Total Cost 2,282.0 1.569.9 3,851.9

3.09 The cost estimates were prepared by the utilities' planning andconstruction staff. They are based both on preliminary and detailed designand comprehensive bill of materials and equipment as well as detailedevaluation of the corresponding civil works and erection costs. Theseestimates were calculated utilizing constant May 1989 prices. They includetaxes and import duties as applicable (about 1OZ of the base costs).Physical contingencies are about 1OZ of the base costs, which is sufficientgiven the nature of the works and the degree of accuracy of the aboveestimates. It is assumed that periodic local currency devaluations wouldcompensate for differences between the projected US dollar and localinflation rates. However, construction costs have risen more rapidly thandevaluation recently, and project costs will be carefully monitoredthroughout project implementation. Price contingencies have been calculatedutilizing the Bank's latest forecast of price increases (O.D. 6.50, Annex B- November 1989): 4.9Z p.a. for 1990-93.

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Proiect Pinancing

3.10 The Bank loan amounting to US$385 million is equivalent to about252 of the project foreign exchange (direct and indirect) component. Aportion of the Bank loan equivalent to US$340 million would help finance theTransmission Program and about US$30 million of the Bank loan will supportthe implementation of the conservation measures included in the PROCEL. Theremaining costs would be financed as followss (i) US$1,936 million (502)through internally-generated funds; (ii) US$131.2 million (32) fromGovernment contributions; (iii) US$400 million (112) from ELETROBRAS; and(iv) US$1,000 million (262) from other sources (commercial banks, supplier'scredit, FND and possibly official ex ernal cofinancing).

3.11 The proposed Bank loan includes US$15.0 million to finance theinterest during construction and other financial charges during the firsttwo years of project implementation in order to alleviate the heavyfinancial burden imposed on the beneficiaries and ELETROBRAS by the legacyof inadequate tariffs, the implementation of the ongoing expansion programand the present limited access to other financing. The following tablesummarizes the expected sources of fundst

Financing PlanUS$ million

Local ForeignSources Sources Total 2

Beneficiaries' Internal Cash Generation 1,935.7 - 1,935.7 50

State Government Contributions 131.2 - 131.2 3ELETROBRAS own-resources 400.0 - 400.0 11IBRD Loan - 385.0 385.0 10

Other Loans 1.000.0 - 1,000.0 26

Total Funding 3,466.9 385.0 3.851.9 100.0

Legal Arraniements

3.12 The borrower of the Bank loan, ELETROBRAS, would retain US$30million of the proceeds to help finance the PROCEL program being implementedunder its Coordination Department. With the remaining 922 or US$355 millionof the loan, ELETROBRAS would make subsidiary loans to the beneficiaries,under the same conditions as the Bank loan plus an annual administration feeof one half of one percent (1/2 of 12) on the corresponding amountsdisbursed and outstanding. The beneficiaries under the transmission sub-project would bear the interest and foreign exchange risks of the loan.During negotiations, agreement was reached with ELETROBRAS that as acondition of disbursement for each beneficiary, a satisfactory subsidiaryloan agreement between ELETROBRAS and the beneficiary would have beensigned. The proceeds of the Bank loan to each b;neficiary would bedetermlned once beneficiaries and subprojects have been selected inaccordance with the criteria in paras. 3.39-3.41.

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Financial Framework

3.13 in 3uly 1989, after discontinuing price cotitrols ,,ee para. 1.41),the Government outlined the policies, measures, and objectives which wouldconstittite the financial framework for the beneficiaries for 1990-92.Central to this framework are the policies of the Governmert on tariffs (theRate Adjustment Plan -- RAP), debt service "rolled over", and equitycontributions 1nd debt service capitalized and/or compensated (which wouldinvolve budgetary allocations on the part of the Federal Government or thegovernments of the states). The RAP was reformulated in October and earlyDecember, 1989 to take account of the very high inflation of late 1989 andearly 1990.

3.14 Rate Adiustment Plan (RAP). Tariff levels, as measure3 by averagerevenue per kWh sold, are an important indicator for assessing the financialperformance of the sector and of the individual utility. To assess thefinancial performance of the sector during high inflation, ELETROBRASdeveloped a model for calculating monthly levels of average revenue per kWhsold (which takes into account forecast/actual market data, consumptionstructure per category, tariff per category, day of the mornth on which theincrease is enacted and percent of increase). Annex 3.^ shows that theGovernment, through a program of monthly tariff adjustment", increased thelevel of tariffs in real terms by 26.6S annually in 1987 and 11.62 in 1988.In the last quarter of 1988, tariff levels achieved a ten-year high In realterms. Although the structure of tariffs continued to be based on LRMCprinciples, there was a 39Z erosion in the real level of tariffs betweenDecember 1988 and July, 1989, due to the imposition of price controls. InJuly, the Government announced its intention to reinstate its program ofmonthly tariff increases and to recover the level of 1988 and then maintainin real terms.

3.15 By implementing real monthly tariff increases, the Governmentexpects to reach a target tariff l3vel of NCz$103.40/MWh (or TJS$54/MWh sold)stated in prices of July 1989. Achievement of this level would be acondition of effectiveness. The current tariff level is 902 of the targettariff level. The Government also intends to align the structure of tariffswith LRMC by increasing tariff levels in real terms for certain categoriesof consumers. At negotiations, an agreement was reached that a tariff levelof at least US$54/MWh will be maintained as a 12-month average after theBank loan becomes effective, and as an annual average in 1991 andthereafter.

3.16 'Roll-over" Policy. "Roll-over" -- the rescheduling or deferral ofdebt-service payments on loans denominated in foreign currency -- is animportant source of financial relief for the sector under currentcircumstances of limited resources and increasing investment needs. TheGovernment has been managing 'roll-overd policy under public sectorbudgetary practices -- tbat is, by annually establishing through legislationthe percent of foreign-currency debt-service payment to be covered duringthe year. For fiscal 1990, legislation establishes coverage at 10O and752, respectively, of the annual foreign-currency debt service owed byfederal and state power utilities. For 1991 and 1992, similar bills areexpected.

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3.17 Eauitv Contributions. Debt-Service Compensations and BudietarvPolicies. The Federal Government does not foresee specific budgetaryallocations for equity contributions in the Federal utilities. However,equity contributions may be required to comply with covenants of "adjusteddebt service coverage" agreed with the Bank in connection with the proposedloan. Should this be the case, ELETROBRAS, the major shareholder andcreditor of the Federal utilities, would convert into equity a portion ofthe debt service owed by its subsidiaries to meet agreed standards of debtservice coverage.

3.18 There are no uniform approaches concerning the budgetaryallocations by the state governments to the state power utilities. To dealwith these uncertainties, there will be provision under legal arrangementsbetween ELETROBRAS, the utilities, and the state governmer.ts for stateequity contributions sufficient to permit the state power utilities to meetagreed standards of "adjusted debt-service coverage". Because the stategovernments are still discussing the level and allocation of the ICMS(Imposto de Circulacao de Mercadorias e Servigos) and have expressed nofinal decision on allocating its proceeds, the state utilities are not ableto forecast the level of equity contributions from that source with the samedegree of certainty as formerly.3

3.19 The above financial framework, including the RAP. should enable theproject beneficiaries to perform satisfactorily and to execute their sub-projects in a timely manner. By November 30 of each year, there would be areview of the financial framework as part of the dialogue between Governmentand power sector with the Bank. It is expected that such dialogue wouldlead to adjustment of the main parameters in light of changingcircumstances.

3.20 Financial Criteria for Selecting Beneficiaries. Prepared byELETROBRAS, the Manual for Selecting Beneficiaries and Sub-projects (seeparas. 3.39-3.41) sets forth the financial criteria for selectingbeneficiaries -- a set of common conditions for all potential beneficiaries,plus sets of specific conditions for three categories of utilities:generating companies, companies contributing to RENCOR, and companiesreceiv'.ng RENCOR allocations. A summary of the financial conditions isgiven in the paragraphs below.

3.21 The common conditions are compliance with respect to: (a)commitments with other IBRD or ELETROBRAS loans; (b) Article 5 of Decree2432/88 and approved by Legislative Decree 35/89 (which require liquidationof arrearage in connection with RENCOR (para. 3.22), RGF, and electricitybills); (c) adequate management of working capital, especially thecollection of public sector electricity bills and payments to suppliers andcontractors; and (d) timely compliance with reporting requirements.

3/ The ICMS takes the place of an old tax, the IUEE - Imposto 1jnico deEnergia Eletrica. Under the prior Constitution, the proceeds of theIUEE were collected by the Federal Government and then distributed tothe utilities (60Z), and the balance to states and municipalities forinvestment in the state utilities. Under the new Constitution, thestates receive the proceeds of the ICMS for state general expenditures.

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3.22 The specific conditions imply different performance standards basedon the beneficiaries financial characteristics. Under the present financialorganization of tE.e sector, as established by RENCOR, the generatingcompanies of ELETROBRAS support the financial performance of the stateutilities because the differential between bulk and retail tariffs favorsthe latter. This policy is aimed at permitting the state utilities toachieve higher, legal rates of remuneration, thereby facilitating theoperations of the mechanism which transfers funds within the sector. Giventhe uniform national tariffs system and the mechanism for transferringfinancial resources, utilities contributing to RENCOR rather than receivingRENCOR allocations, are expected to have relatively better financialperformance.

3.23 As in prior projects (Loans 2564-BR, 2565-BR, and 2720-BR),individual beneficiaries would be selected based on a balanced assessment ofcurrent and projected financial performance with reference to four keyfinancial ratios: (a) the rate of remuneration (that is return onremunerable assets as defined and calculated under Brazilian law); (b) aratio of 'adjusted" debt-service coverage -- to be achieved by the majorshareholders converting enough debt into equity or mak.ng sufficient capitalcontributions to permit the beneficiaries to achieve agreed coveragetargets; (c) a ratio of debt incurred in one year to corresponding capitalexpenditures, by which beneficiaries agree not to borrow more than apercentage of investment expenditure; and (d) a ratio of total long-termdebt to total net fixed assets,4 which also restricts the beneficiariesborrowing. (A more detailed description of these covenants and relateddefinitions is in Annex 3.4). Below is a summary of the key ratios offinancial performance set forth in the Manual:

4/ "Total net fixed assets" means the sum of fixed assets, constructionwork-in-progress, and deferred charges to fixed assets, lessaccumulated depreciation and amortization.

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Categories of Beneficiaries

Key Ratios of Companies con- Companies re-Financial Generating tributing to ceiving RENCORPerformance Comnanies RENCOR allocations

(a) Rate ofReturn onRemunerableAssets (Z) 6 to 8 10 to 12 a to 10

(b) 'Adjusted" not less not less not lessDebt-Service than 1.1 in than 1.5 than 1.5Coverage 1990 and in-Ratio (X) creasing

annuallythereafter

(c) Debt/Capital not higher not higher not higherExpenditure (Z) than 65 than 70 than 65

(d) Total Deot/Total Net Fixed not greater not greater not greaterAssets (Z) than 67 than 67 than 67

Beneficiaries

3.24 Historic Performance: The financial performance of the powercompanies is mainly determined by the Federal Government, which sets tariffslevels, authorizes investments and borrowing, provides "roll-over" financingfor debt-service, and manages the revenue-sharing mechanism (RENCOR). Inthese circumstances, utilities have a limited margin for affecting their ownperformance. Moreover, the generation and transmission companies performdifferently from the distribution ones, especially as the Government iscurrently operating the RENCOR in a manner which favors the latter. Theperformance of the distribution companies also differs depending on whetherthey are serving concentrated or extended markets.

3.25 Annex 3.5 illustrates the financial performance of the operatingcompanies which are expected to be beneficiaries of the proposed loan. In1988, the sector annual average tariff level, US$54/IWh, permitted theseoperating companies to achieve a satisfactory financial performance, asmeasured by: (a) return on remunerable assets; (b) adjusted debt-servicecoverage; (c) ratio of annual debt to corresponding capital expenditures;and (d) ratio of total debt to total net fixed assets.

3.26. Outlooks As measured by the average revenue per kWh sold, thefinancial performance of the sector deteriorated in 1989 as compared to 1988because oft (i) a freeze on the level of tariffs during the first half ofthe year; and (ii) very high and accelerating monthly rates of inflationduring the last half of the year; (iii) the low level of Government equity

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contributions; and (iv) the limited amount of borrowing available to thesector. In connection with preparation of the proposed Project and toaddress the financial problems of the sector, the Government, in discussionswith the Bank, has formulated a financial framework (paras. 3.14 to 3.19)for the power sector that would enable the project beneficiaries to performin a financially satisfactory manner. The main component of this framework,RAP, had to be reformulated in October 1989 and January 1990 to take intoconsideration the accelerating monthly rates of inflation. Notwithstandingthe implementation difficulties attending RAP, the sector target tarifflevel of US$54/MWh -- which was attained in 1988 and which is required to beattained as a 12 month average (after the Bank loan becomes effective) andas an annual average in 1991 and thereafter -- is expected to besatisfactory from the point of view of the beneficiaries -- that is, itwould enable them to cover their operating costs, debt service, and areasonable portion of their investment program. Annex 3.6 sets forthdetails on the basic tariffs and other elements constituting average revenueper kWh sold. During negotiations, the Government agreed with the Bank toreview annually, by November 30, the adequacy of this tariff level.

ELETROBRAS

3.27 Role and Operating Structure: The financial situation ofELETROBRAS, as sector holding company and bank, must be analysed differentlyfrom that of the power sector utilities (Annex 3.7). ELETROBRAS main assetsare "Loans and other Financing Granted" (58t of total assets), permanentassets (Stock of Subsidiaries) (40?); and current assets (21). Total debtsamount to about 45? (43? long term and 2Z current) of total assets; netequity, about 55Z. Revenues have been mainly derived from interest andcommitment fees on loans and Other Financing Granted (60Z), dividends (about3Z) and Equity Adjustments (372) (non-cash capital gains resulting fromassets revaluation in its subsidiaries).

3.28 Historic Performance: ELETROBRAS has traditionally enjoyed a soundfinancial performance; its banking operations have been managed cautiouslyand within prudent exposure limits. The results of its holding companyactivities have followed the fluctuations of the power sector and themacroeconomic situation. Consequently, earnings have deteriorated incomparison with the prosperity of the mid-1970's, although partiallycompensated by the Equity Adjustments by which the stock held by ELETROBRASmaintained a strong appreciation. ELETROBRAS' operating results have beensatisfactory in the last five years, except in 1987, when the negativeimpact of CHESF and ELETROSUL performances (mainly due to accountingadjustments and monetary corrections of assets i- operations) resulted in aglobal loss. There is no evidence to substantiate the claim by some thatELETROBRAS' subsidiaries are favored as borrowers.

3.29 Outlook: The financial tramework set out (paras. 3.14 to 3.19)will allow ELETROBRAS to perform at satisfactory levels, even though theRENCOR does not favor its subsid.aries (para. 3.22). To ensure satisfactoryperformance, during negotiations, the Bank obtained the following agreementsfrom ELETROBRAS: (a) to seek Bank concurrence for borrowing if: (i) its

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ratio of total coverage (the sum of gross internal generation of funds plusinterest and financial charges divided by the sum of debt service plusdividends) is less than 1.1; or (ii) its ratio of long-term debt to equityis greater than 602 to 40?; and (b) to carry out its operations inconformity with a ratio of financial investments (other Financing Granted byELETROBRAS divided by its total outstanding debt) of not less than 1. Amore detailed description of these ratios and related covenants is includedin Annex 3.4.

Procurement

3.30 Items eligible for Bank financing include foreign exchange andlocal costs oft (i) equipment and materials such as power transformers,reactor and capacitor banks, substation ancillary equipment (switchgears,circuit breakers, switches, PTs, CTs), conductors and structures fortransmission lines and substations; (ii) civil works and erection contractsassociated with the installation of the above equipment and materials; and(iii) items included in the PROCEL, such as studies, laboratory instrumentsfor testing and metering, high-efficiency public lighting bulbs, capacitorbanks and telecommanded load control equipment.

3.31 Except for the purchase of laboratory/metering/telecommanded loadcontrol equipment and contracting consultant's services to be procured inconnection with PROCEL, proceeds of the proposed loan would only beavailable to finance bid packages with an estimated value above US$1.0million. Bids for erection and civil works with an estimated value ofabove US$5.0 million as well as all bids for the supply of equipment andmaterials would be awarded under ICB procedures in accordance to Bankguidelines. Bids for erection and civil works with an estimated value ofless than US$5.0 million would be awarded under LCB procedures approved bythe Bank. These procedures were reviewed and found acceptable by the Bank.Eligible foreign firms will be allowed to participate in the LCB process.In connection with PROCEL, international shopping and direct purchasemethods in accordance with Bank guidelines would apply to the procurementof equipment (laboratory, metering instruments and telecommanded loadcontrol equipment). Bank guidelines would apply to the contracting ofconsultants, who would carry out the PROCEL studies. Bids for capacitorbanks and public lighting under the PROCEL should be grouped in order toform bidding packages valued at least US$500,000.

3.32 As in previous power loans and for purposes of evaluation ofproposals, Brazilian suppliers of equipment and materials with a localaggregate value of at least 50S of the price of the goods will be given amargin of preference of 15 or the applicable import duties, whichever islower. In the case of the erection and civil works contractors, no marginof preference would be applied. The Bank has agreed with ELETROBRAS andthe power utilities on the contents of standardized bidding documents bothfor the supply of equipment and materials and for securing erection andcivil-works contractors under ICB and LCB. During negotiations, agreementwas reached with ELETROBRAS to mandate the use of such bidding documents.

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3.33 LCB is not expected to affect the economy and efficiency of theproject because: (i) given that the works to be procured under LCB arerelatively small and technically simple, it wvuld be unlikely that foreigncontractors would be attracted to bid on such works; and (ii) given thatthere is a sufficient number of well-qualified local contractors, therewould be strong local competition. Documentation (bidding documents, draftcontracts, evaluation reports and award recommendations) corresponding toall bid packages subject to ICB and to be financed with the Bank loan willbe subject to prior Bank review. Regarding LCB procurement for civil worksfinanced by the Bank, the first two procurement documentation packages willbe subject to prior Bank review.

3.34 The following table summarizes the procurement arrangements forthe project:

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USII ILION

Procurement Method

I --------------------------------------------------------- TOTAL

ITEM iCe 1/ LCB2/ IS 8/ DP 4/ Other 6/ COST

TRANSMISSION SUB - PRO4JT

a) Substation Equipment 115.0 554.4 - - - 666.4

and materials (115.0) (0.0) - - - (118.;)

b) Transax;sion Lines 100.0 769.8 - - - 889.3

Equipment and Mateial, (100.0) (0.0) - - - (100.0)

c) Civil and Erection 88.0 2,147.8 - - - 2,202.8

Contract. ( 8.0) (70.0) - - - (128.0)

Sub - Total 270.0 8,471.2 0.0 0.0 0.0 8,741.2

(270.0) (70.0) (0.0) (0.0) (0.0) (840.0)

PROCEL

d) Laboratory and Load - - 7.0 2. - 9.2

Control Equipment - (8.0) (1.2) - (7.2)

a) Studieo 6/ - - - - 4.8 4.8

(4.8) (4.8)

f) Capacitor Banks 11.0 10.8 - - - 21.8

(11.0) (0.0) - - - (11.0)

g) Public Lighting 6.0 6.5 - - - 12.8

(6.0) (0.0) - - - (6.0)

h) Other Prorme - 18.0 - - - 15.0

- (0.0) - - - (0.0)

i) Training - - - - 1.7 1.7

Sub - Total 17.0 81.8 7.0 2.2 6.8 64.8

(17.0) (0.0) (6.0) (1.2) (5.8) (0.I0)

TOTAL PROJET 2d7.0 S,S03.0 7.0 2.2 6.S 8,805.7

(287.0) (70.0) (6.0) (1.2) (8.8) (870.0) 7/

NOTE:

1/ SCB * International Coepetitive bidding.

2/ LCD a Local Competitive Bidding.

S/ IS I International Shopping applicable only to the purchxe. of laboratory and

metering equipment under PRICEL.

4/ OP * Direct Purchase applicable only to the purchase of laboratory and

metering equipment under PROCEL.

6/ Other a Contracting conaultants servicee under Bank guideline./*cholarehipe abroad.

6/ Include. the following studie;: Load Managesent (QS6 0.7 million); Furnace, (MS 1 million);

Power Sector/Public/Comerciel Building. CUS 1.6 million); Cogeneration (QJ8 1.8 million).

7/ This figure exclude. an allocation of US11 18 million from the Bank loan

to finance interest during construction during the first tao years of projoet implementation.

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Disbursement

3.35 The loan is expected to be fully disbursed in about five years(1991-1995, Annex 3.8), a disbursement period which does not correspondwith the Bank's standard disbursement profiles. Two innovative features ofthe operation are expected to lead to rapid !nplementation anddisbursements (i) the project would consist of priority works to beconstructed simultaneously by several power utilities to be selected basedon the criteria of institutional capacity and financial strength; and(ii) Bank funds would finance both goods and materials and associatederection and civil works, thereby avoiding implementation delays due tolack of counterpart funds. The four-year implementation period has beenused to calculate project price contingencies.

3.36 Proceeds from the proposed loan would be disbursed againstexpenditures which should be submitted to the Bank fully documented forcontracts valued more than US$500,000 equivalent. Other expenditures wouldbe disbursed against statements of expenditure (SOE) certified byELETROBRAS. The loan proceeds would be applied to:

(a) 100 2 of expenditures for erection and civil works contracts,procured under procedures acceptable to the Bank;

(b) 10OZ of foreign expenditures for imported goods, or 1002 ofthe ex-factory cost for local goods, purchased through Bank ICB procedures;

(c) 1002 of foreign expenditures for imported laboratory, metering andtelecommanded load control equipment and training; and

(d) 1002 for consulting services and related expenditures.

To accelerate implementation, two Special Accounts would be opened: one atthe Central Bank for payment of local expenditures (CESA) and another atcommercial bank abroad to cover foreign expenditures (FESA). The initialdeposit into each account would be US$20 million and US$15 millionrespectively. The loan closing date would be June 30, 1995.

Prolect Rlsks

3.37 The transmission component faces no special physical risks. Theproject implementation unit established within ELETROBRAS should ensuretimely implementation of the subprojects included in the beneficiariesexpansion plans. ELETROBSRAS and the beneficiaries have been adverselyaffected by the financial problems of the power sector. These problems arebeing addressed through a program of tariff increases, capitalization, debtroll-over and cost reduction measures which are to be agreed in the contextof the proposed project (paras 3.14 through 3.19 and 3.23). Failure toimUlement or insufficient action on the above matters could however,negatively affect institutional performance and/or result in program andproje:t delays.

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B. TRANSMISSION COMPONENT

Backaround

3.38 The transmission component is an integral part of the sectorinvestment program which was prepared on the basis of the long-termexpansion plan, Plano 2010, a comprehensive planning study completed in1988. The Bank has reviewed both the Plano 2010 and the details of thebeneficiaries expansion plans and (except for the nuclear program - AngraIII), they were found to be sound least-cost development programs. Theinvestment programs were defined on the basis of criteria accepted by theBank and the power sector. The criteria includes (a) maintaining the samebasic least-cost expansion sequence for generation projects recommended inthe Plano 2010; (b) giving priority to the completion of transmission anddistribution projects required to transfer and distribute the energygenerated by projects now being commissioned, and to construct the newnetworks required to improve system reliability; (c) postponing and scalingdown some schemes included in the generation plans (mainly coal andnuclear); and (d) implementing energy conservation measures (PROCEL) inorder to defer some scheduled investment and enhance power systemefficiency. The beneficiaries' expansion plans have been adjusted andreduced to reflect the market requirements during the forthcoming four yearsand to reflect realistically the beneficiaries' ability to finance theirexpansion program. Agreement was reached that the beneficiaries would notenter into contractual arrangements regarding the implementation ofgeneration and transmission projects costing in excess of US$200 millionuntil their technical, economic and financial justification had beenconfirmed in a manner satisfactory to the Borrower and the Bank.

Criteria for Selectina Beneficiaries and Sub-Proiects

3.39 ELETROBRAS, through the Project Implementation Unit (para. 3.42),will be responsible for carrying-out detailed analysis and assessment of allthe criteria and conditions necessary for the selection of both beneficia-ries and sub-projects. Rigorous and objective eligibility criteria has beenestablished to select beneficiaries and subprojects. The selection will bebased on the individual utility's: (i) ability to properly implementprojects; (ii) adequacy of its financial situation and expected performance(para. 3.23), and (iii) economic and technical soundness of its investmentprogram. The criteria and conditions are compiled in the Manual forSelection of Beneficiaries and Sub-Projects, which was reviewed by the Bankand found adequate.

3.40 The main eligibility criteria for the selection of subprojectsinclude: (a) conforming with the least-cost alternative within the contextof the beneficiaries' and sector least-cost investment plans; (b) being apriority work within the beneficiary and sector expansion plans, based onmarket/supply requirements, quality/reliability of supply, regionalinterconnections; (c) meeting accaptable technical and economic standards;(d) cost and scope not to be different from the reference cost and scopeincluded in the sector expansion plan; and (e) submission of acceptableEnvironmental Impact Statements (RIMA's) including implementation of

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measures to mitigate adverse impacts derived from the construction oftransmission works. The RIMA's should be prepared in accordance toprevailing Brazilian legislation (para. 3.43).

3.41 The main eligibility criteria for the selection of beneficiariesinclude: (a) financial capacity, which will be assessed mainly on the basisof agreed financial performance (para. 3.23), (b) compliance with thefinancial convenants established under prior Bank loans (para. 3.21); and(c) institutional capability, which will be assessed on the basis of theutility arrangements for project administration, implementation andmonitoring as well as on existing experience in engineering, construction,procurement, finances and project supervision. During negotiationsagreement was reached with ELETROBRAS ont (i) the contents and utilizationof the Manual for Selection of Beneficiaries and Subprojects; (ii) thespecific quantitative and qualitative assessment parameters based on thecriteria described above for selecting beneficiaries and subprojects andapplied in a fair and objective manner; (iii) its commitment to superviseproperly the implementation of the project; (iv) review and approval by theBank of the beneficiaries and subprojects selection; and (v) that as acondition of loan effectiveness that at least 5 beneficiaries and theircorresponding subprojects have been selected based on the agreed criteriaincluded in the Manual.

Proiect SuDervision and Imilementation

3.42 The project would be executed under the overall supervision ofELETROBRAS, which as intermediary will be responsible for selecting thedifferent subprojects and beneficiaries as well as for monitoring theimplementation of the different project components. It will also supervisethe implementation of the conservation program (PROCEL) and the completionof the projects under Loan 2364-BR. ELETROBRAS has agreed to establish ahigh caliber Project Implementation Unit which would be responsible for theabove tasks. Having analyzed data corresponding to the selection ofcompanies and subprojects, ELETROBRAS would send its recommendations to theBank for approval. The Unit is to be managed by a competent project managerwith qualifications and experience satisfactory to the Bank, assisted byfull-time specialists in the areas of technical, economic, financial,institutional, procurement, project supervision and monitoring; and loanadministration matters. Annex 3.9 includes the unit arrangements.ELETROBRAS has submitted appropriate documentation reflecting: (i) detailedarrangements for this unit, including descriptions of the functions andresponsibilities of each position; and (ii) details setting forth proceduresand processes. During negotiations agreement was reached with ELETROBRAS onthe above matters and that it would maintain the implementation unit in amanner satisfactory to the Bank. A condition of effectiveness of theproposed loan is that the project implementation unit be fully operational.

3.43 The beneficiaries' engineering departments expect to completeshortly the final engineering designs for their corresponding subprojects aswell as the final bill of materials for the purchase of equipment,materials, and construction works. The utilities are utilizing (asrequired) specialized services from consulting engineering firms and/or

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specialized individual experts currently under contract with them. Thetechnical staff of the utilities are very competent and it is expected thatproject final designs would be prepared adequately. In accordance toestablished practices, the beneficiaries are likely to contract bothinternational and regional-based contractors for construction works whichhave vast experience in these type of works. Installation of very largeand/or sophisticated equipment would be done by the suppliers under thesupervision of the beneficiaries. Installation of other equipment such ascontrol, protection and distribution panels, required for substation controlrooms would be carried out hv force account. Both installation of equipmentand construction works would be under the supervision of the correspondingconstruction departments of the beneficiaries. With the above arrangements,it is expected that the project would be adequately completed, asdemonstrated in the successful implementation of complex ongoing projects.

3.44 Procurement, manufacturing, installation and construction of thedifferent works in the project are expected to be carried out during theperiod September 1990 - December 1994. The corresponding key dates aresummarized belows

Activity Period

Issuance of bidding documents September l990 - December 1992Contract awards March 1991 - June 1993Commissioning of works January 1993 - December 1994

Project execution will be monitored against target dates included in theproject implementation schedule to be agreed once projects and beneficiariesare selected in accordance to the Project Manual (paras. 3.39 - 3.41).During negotiations, agreement was reached with ELETROBRAS to comply withperformance indicators to monitor operational, financial and managerialperformance. The tinancial indicators are included in Annex 3.4 (para.3.23); the technical indicators are included in Annex 3.10. StartingDecember 31, 1990, ELETROBRAS will submit quarterly progress reports on theproject and beneficiaries in accordance to the detailed reportingrequirements included in Annex 3.11.

Environmental Aspects

3.45 The subprojects included in the beneficiaries' 1990-93 transmissionexpansion plans do not present major environmental problems. Some of thetransmission lines will be constructed utilizing existing right-of-ways asthey are additional circuits (but to be constructed in independentstructures) to existing transmission lines. For transmission linesconnecting new consumption centers, line routes are considerably distantfrom urban centers. Most of the substation works are extensions to existingones, therefore not presenting any additional environmental or aestheticproblems. The new substations would be constructed with due regard toenvironmental and aesthetic criteria in accordance with prevailing Brazilianregulations. The beneficiaries of the proposed loan will compensateproperty owners as required by the national legislation. Clearing of right-

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of-way would be kept to a minimum and natural drainage patterns are notexpected to be affected. The project selection criteria (para. 3.40)include specific provisions for preparing adequate Environmental ImpactAssessments (RIMA's) as required by each individual project and in line withBank's environmental policies.

Least Cost Solution

3.46 The transmission expansion programs of the beneficiaries for1990-1993 were planned on the basis of their corresponding: (i) power marketforecasts; (ii) system load flow studies; (iii) system stability analyses,and (iv) system contingency evaluations based on probabilistic methods. Theresults of the above studies, which were carried out in accordance withunified planning criteria used by the power sector, indicate that theproposed project should be implemented as promptly as possible. Theexpansion of existing substations and construction of new substations aswell as the addition of high voltage transmission lines are justifiedbecause of the necessity to serve additional system loads, to transfer theenergy generated at the power plants to the consumption centers, to reducesystem losses and promote electricity conservation, and to improve currentlevels of system reliability and quality of supply.

3.47 The selection of the proposed transmission line configurations(voltage level, structures, conductor sizes, span lengths and routing) isbased on economic comparison with other possible configurations. In eachparticular case, the beneficiaries select the alternative with the lowestpresent value (least cost solution) at a discount rate of 11Z net (theopportunity cost of capital in Brazil). Furthermore, substation capacities(power transformers, capacitors, reactors) and their lay-outs have beenestablished to minimize investment and operational costs over the facility'suseful life, taking due consideration both to substation load requirementsand to applicable technical standards currently being used in the sector.The selection of the proposed facilities and their configurations isadequate.

Economic Justification

3.48 Rates of return were calculated on the 1990-1993 investmentprograms for each of the beneficiaries and they include all thecorresponding investments in generation, transmission, and distributionfacilities necessary to meet electricity demand (Annex 3.12). The economicnet cost streams include: (i) capital investments on generation,transmission, sub-transmission, distribution and general investments(buildings, furniture, etc.) to be made by the beneficiaries and; (ii) costsof operation and maintenance related to the capital investments includingthe energy purchased from others. Since benefits of the beneficiariesarising from their investment programs cannot be quantified with precision,the use of a proxy is required. Therefore, the economic net benefit streamswere measured by the forecast revenues from the incremental sales ofelectricity, attributed to the facilities included in the correspondinginvestment programs, on the basis of the implementation of the tariffprogram agreed with the Government and ELETROBRAS as a condition of

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effectiveness of the loan (para. 3.15). This estimate of benefits is aminimum measure of the consumer's willingness to pay for electricityservices, which has already been demonstrated since the average tariff levelcovenanted for loan effectiveness is the same as the level that prevailed in1988.

3.49 The rates of return of the beneficiaries 1990-1993 investmentprograms utilizing the above tariffs are summarized belowt

Utilities Rate of Return (%)

CEMIG 16CERL 32CESP 12COELBA 16COPEL 17CPFL 33ELETROPAULO 27ELETROSUL 10LIGHT 17

3.50 The above results confirm that, with the planned tariff increases,the rates of return of the utilities 1990-1993 investment programs would beabove the opportunity cost of capital (OCC) in Brazil (about llS). Theabove rates of return do not fully measure consumer surplus and the socialbenefits of residential and public uses, or the indirect benefit to industryand commerce, whose production and employment depend on reliable electricitysupply. Thus, these rates of return are deemed to be a minimum measure ofthe benefits derived by the project. If revenues based on current tariffs(November 1989) are used as a proxy for benefits, the IRR is below the OCC,indicating that tariffs should be raised for economic efficiency reasons.This is fully consistent with the conclusion reached in para. 3.15, thattariff levels should be increased to ensure sector financial viability.

C. DEKAND MANAGEMENT AND CONSERVATION

Introduction

3.51 In December 1985, through 'Portaria Interministerial" No. 1877/85,both the ministries of Mines and Energy and of Industry and Trade launched aprogram to establish policy measures, integrate activities and securefinancing necessary to implement PROCEL, a comprehensive electricityconservation plan under the overall management of ELETROBRAS. The mainobjectives of the program are to balance electricity consumption (byenhancing efficiency in its usage), and electricity supply (by improving thepower system resource allocations and operational patterns) and to reduceboth marginal and average investment costs. These objectives are expectedto be achieved through the implementation of adequate policies andlegislation, provision of necessary financing, and establishment of anadequate core framework to develop the demand management and conservationprograms. Of paramount importance is to set adequate electricity tariffswhich convey proper price signals in order to encourage adequate investmentsboth on the supply and demand sides.

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3.52 Because of the inadequate support available in the past toimplement the policy reforms and measures included in the PROCEL, as well asthe financial constraints imposed on the power sector as a result of thecurrent macroeconomic difficulties of Brazil, PROCEL has been implemented ata slower pace than originally scheduled. At the same time, significantprogress has been made through the design of new tariff structures based onlong run marginal costs and through the implementation of basic low-costconservation measures. Meanwhile the Government also has been pursuing acomprehensive distribution network rehabilitation and loss reduction programwith the Bank's support through existing Loans (2138-BR, 2364-BR, 2565-BR).Based on the initial success of these actions, the Government and the sectorare placing increased priority on demand management and conservation (DMC)programs to complement supply planning options. Programs underconsideration include: continuous support for economically efficientpricing; programs on load management; improvement of construction andequipment standards; energy audits of all consuming sectors; support forincreased energy efficiency in industrial processes; transmission anddistribution loss reduction programs; and broad educational and informationdissemination programs. In addition, privately owned cogeneration projectsare under study as part of a broader policy initiative to extend the realmof alternatives in energy supplies, specifically from biomass fuels such asbagasse.

3.53 The limited funding available for DMC has restricted progress inthis area. Additional financial support is needed to implement these lowmarginal costs, energy supply savings programs. These programs range fromshort-lead-time, rapid-payback activities which could be classified as 'goodhousekeeping' to significant capital investment programs in such areas asindustrial drive motor replacement. All of the programs included in the DMCprovide significant energy efficiency improvements (demand reduction) atmarginal costs which are below the costs of the system LRMC of supply. ThePROCEL sub-project is based on the establishment of comprehensiveconservation policies and on specific programs to be implemented under theoverall supervision of ELETROBRAS and with the participation of state-ownedutilities. The programs include actions related to load management, energyefficiency, loss reduction, and cogeneration. During negotiations agreementwas reached with ELETROBRAS to carry-out the measures and actions includedin Part A of PROCEL in a manner satisfactory to the Bank, including theprovision of funds for execution of PROCEL.

Proaram Descriotion

3.54 The proceeds of the Bank loan being allocated to Part A of PROCELwill help finance the DMC programs which are to be implemented during 1990and 1991. A summary of the components included in Phase I is given in thefollowing paragraphs. Detailed description of these programs is included ir.Annex 3.13.

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(a) Load Management (LMP). This program includess (i) consolidation ofthle electricity pricing system based on long-run marginal cost(LRMC) and improvement of the average system power factor -reactive power - (indirect LWM); and (ii) implementation of pilotprograms for load management through centralized telecommanded loadcontrol schemes; decentralized telecommanded load control schemesand devices especially designed to restrict demand (direct LMP).The telecommanded load control equipment and devices to restrictdemand are to be financed with proceeds of the Bank loan.

(b) Energy Efficiency - This program is addressed to enhance the end-use of electricity by industrial and commercial consumers throughstudies and complementary actions and it includes the followingprogramss (i) electrical furnaces; (ii) public sector andcommercial buildings; (iii) public lighting; (iv) laboratoryequipment and training; (v) energy audits; and (vi) industrialdemonstrations and information dissemination.

(c) Loss Reduction - This program includes the installation of about5,000 MVAr capacity of capacitor banks through distributionnetworks belonging to different Brazilian power utilities.

Cd) Cogeneration - This program includes studies on cogeneration usingresidual biomass fuels such as bagasse from the sugar/alcoholproduction process.

Program Costs

3.55 The proposed DMC programs are part of the 1990-91 Part A PROCELinvestment plan. Its estimated cost, including physical and pricecontingencies, amounts to about US$64.5 million. Proceeds of the Bank loanamounting to US$30 million will be allocated to assist ELETROBRAS to financeit. Details of the cost estimates are given in the following tablet

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1990-91 Part A of PROCEL

USS millionIBRD ELETROBRAS

Financing Financing Total

a) Load Management

- Programs on reactive power 1.0 0.3 1.3- Pilot Programs (load control schemes) 2.2 1.0 3.2- Studies 0.7 0.0 0.7

Sub-Total 3.9 1.3 5.2

b) Energy Efficiency

- Electrical Furnaces 1.0 1/ 5.0 6.0- Public Lighting (100,000 units) 6.0 6.5 12.5- Power Sector Buildings 1.0 1/ 6.5 7.5- Public and Commercial Buildings 0.6 1 1.5 2.1- Energy Audits 0.0 1.7 1.7- Laboratory Equipment 5.0 1.0 6.0- Training 1.0 0.7 1.7

Sub-Total 14.6 22.9 37.5

c) Loss Reduction (500 MVAr) 10.0 10.0 20.0d) Cogeneration Study 1.5 0.3 1.8

Total 30.0 34.5 64.5

1/ Studies

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Benefits and Justification

3.56 All of the above programs provide significant potential for savingsin peak capacity, energy or both. As an aggregate, it is expected that theactions included in PROCEL will result in electric energy savings of about3,940 GWh per year after 1992 (equivalent to about US$1,300 million for theinstallation of about 900 MW of additional generating capacity). Details ofthe above benefits as well as of the quantification of derived savings areincluded in Annex 3.14.

3.57 The DMC component is in line with both Bank5 and Governmentstrategies to develop and implement schemes which enhance system efficiency.In fact the Bank loan will support and consolidate fundamental policy shiftsin the power sector recognizing the importance of demand management/conservation as a cost effective alternative to building new power supplyfacilities.

Return on Investment

3.58 The internal rate of return of the PROCEL programs on electricalfurnaces, public lighting and power sector buildings is estimated at about641

Proiect Files

3.59 Annex 3.14 includes a list of the documentation utilized to processthe above project and to prepare the SAR.

5/ In particular, the Bank has financed several power projects which have:(a) improved the power systems' efficiency and promoted energyconservation through project components aimed at reducing power systemlosses; and (b) improved power load management by establishing upgradedas well as new Load Dispatch Centers in order to enhance the quality ofpower supply by improving voltage levels, system power factors andcontinuity of service.

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IV. AGREEMENTS REACHED AND RECOMMENDATION

4.01 During negotiations, the Bank agreed with the Goverranent and/orELETROBRAS, on the following major conditionss

(a) For Effectiveness

(i) Rate Adjustment Plan (RAP): The Government shall have takenall necessary actions to comply with the terms of the RAPby increasing tariffs sufficiently to reach the target levelof US$54/MWh (para. 3.15);

(ii) Beneficiary and Sub-Proiect Selection: ELETROBRAS shall haveselected at least five beneficiaries and their respectivesub-projects on the basis of: 'a) agreed criteria set forthin the Manual for Selectin of Beneficiaries and Sub-projects; and (b) the specific quantitative and qualitativeassessment parameters included in the selection criteriawhich should be applied in a fair and objective manner.The Bank shall have reviewed and approved these selections(para. 3.41);

(iii) Proiect Implementation Unit: The Project ImplementationUnit shall have become fully operational in accordance toagreed: (a) detailed arrangements as shown in its organogramand as set forth in complete descriptions of the functionsand responsibilties of each position; (b) procedures andprocesses; and (c) technical staffing (para. 3.42);

(b) For Initial Disbursement to Each Beneficiarv

Ui) Subsidiary Loan Agreements: ELETROBRAS shall submit to theBank a signed copy of a satisfactory subsidiary loanagreement between ELETROBRAS and the beneficiary (para.3.12);

(c) During Proiect Implementation

(i) Rate Adiustment Plan (RAP): The Government shall take allnecessary actions to comply with the terms of the RAP bymaintaining the target tariff level of US$54/MWh as atwelve-month average after effectiveness and as an annualaverage in 1991 and thereafter (para. 3.15);

(ii) Annual Review: Not later than November 30 of each year,the Government shall exchange views with the Bank on thefinancial performance and condition of the sector (para3.26);

(iii) Beneficiary Selection and Sub-Proiect Selection: ELETROBRASshall carry out the Project based on: (a) the contents andutilization of the Manual for Selection of Beneficiariesand Sub-Projects; (b) the specific qurintitative and

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qualitative assessment parameters included in the selectioncriteria which should be applied in a fair and objectivemanner; (c) its commitment to supervise properly theimplementation of the Project. The Bank shall review andapprove the selected beneficiaries and gub-projects (para.3.41):

(iv) Proiect Implementation Unit, ELETROBRAS shall maintain theProject Implementation Unit, fully operational, inaccordance to agreed: (a) detailed arrangements as shownin its organogram and as set forth in complete descriptionsof the functions and responsibilties of each position; (b)procedures and processes; and (c) technical staffin, (para.3.42);

(v) Standard Bidding Documents: ELETROBRAS shall utilize andcause the beneficiaries to utilize satisfactory standardizedbidding documents for procurement of goods and civil worksin all procurement financed by the Bank loan (para. 3.32);

(vi) Borrowint by ELETROBRAS: ELETROBRAS shall seek theconcurrence of the Bank for borrowing if: (i) its totalcoverage ratio is less than 1.1; or (ii) its ratio of debtto equity is greater than 601 to 40Z (para. 3.29);

(vi(i) Financial Performance of ELETROBRAS: ELETROBRAS shall takeall action required to maintain a ratio of financialinvestment (loans and other financing granted divided bytotal outstanding debt) of not lower than 1 (para. 3.29);

(viii) Proiect Limitation: ELETROBRAS shall cause thebeneficiaries, through the corresponding subsidiary loanagreements, not to enter into any contractual arrangementsregarding the implementation of new generation andtransmission projects costing in excess of US$200 millionuntil the projects, respect.ve technical, economic, andfinancial justifications have been confirmed in a mannersatisfactory to ELETROBRAS and the Bank (para. 3.38);

(ix) Financial Performance of the Beneficiaries: ELETROBRAS shallcause the beneficiaries, through the correspondingsubsidiary loan agreements, to carry out their respectiveoperations in conformity with agreed operational, financial,and managerial performance indicators and shall submitquarterly reports, starting December 31, 1990, in accordanceto agreed reporting requirements (paras. 3.44);

(x) PROCEL: ELETROBRAS shall carry out in a satisfactory mannerthe works, studies and other components included in PartA of the Electric Energy Conservation Program (PROCEL)(para. 3.53).

4.02 With the above agreements, the project constitutes a suitable basisfor a Bank loan to the Government of Brazil for US$385 million equivalent, underterms and conditions applicable to Brazil.

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fB.rIW11Y TRXDN aEATlON MD COVATIO PRO.J8T

Cre Domtic Produetion of Primrv Enerov

TOE TO_*Rmds

SWC 170 1971 1972 1973 1974 1975 1976 1977 1978 1979 1900 tool 1902 1983 1984 1985 1966 1987

@4O-RDNArAE NEOY 10256 10551 10461 10481 11587 11328 11408 IS100 11818 1227S 1S830 16529 21464 25560 32487 36930 37611 S7823

Petrolsum 8009 8818 8158 0296 8648 856M 8S44 8025 8002 8262 9083 1067S 12984 16595 23216 27493 28784 2846S

Natural Cas 1153 1074 11.^ 1076 1357 1482 1498 1649 1763 1732 2011 2257 2763 3660 4471 4986_ 5186 5272

Steam Coal S99 641 644 589 815 729 934 1071 1324 1876 1463 1884 2153 2308 2605 2572 2448 23S8

metallurgical Coal 445 S28 527 520 717 547 632 755 829 906 978 713 718 787 821 887 a3 625

Uranium 0 0 0 0 0 0 0 0 0 0 0 0 2846 2269 1374 992 360 1130

RBIAMlE ENERCY 47008 48340 S1328 53175 36117 58165 60485 64898 66881 72494 78064 78762 b8047 89876 98708 103954 103217 106559

!,Vdroelectricity 11542 12528 14697 16788 19047 20968 24045 27109 29796 33308 37388 37922 40928 43928 48312 51729 52902 53785

Wood 81789 31809 32012 S1S20 32191 32789 81372 30409 29367 29814 30607 29809 29127 29727 32677 32138 81772 0710

Sugar Cane Dernvatives 35S6 3773 4221 4561 4535 4105 4662 6417 7166 8067 9081 9955 11844 15056 16842 18589 16796 20221

Other Renewblee 221 230 298 306 344 358 406 463 552 805 998 1076 1148 1165 1377 1498 1747 1843

TOTAL S7344 S8891 61689 6S656 67654 69488 71898 75898 78699 84769 91594 94291 104511 115445 131195 140884 140828 144382

Percent

SOLRCES 1970 1971 1972 1973 1974 1975 1976 1977 1978 1979 1980 1981 1982 1983 1984 1985 1986 1987

NN4-~A^LE BNCY 17.9 17.9 17.0 16.5 17.1 16.3 15.9 15.2 15.0 14.5 14.8 16.5 20.5 22.1 24.8 26.2 26.7 26.2

Petroleum 14.0 14.1 13.2 13.0 12.8 12.3 11.6 10.6 10.2 9.7 9.9 11.8 12.4 14.4 17.7 19.5 20.4 19.7

Natural Ga 2.0 1.8 1.8 1.7 2.0 2.1 2.1 2.2 2.2 2.0 2.2 2.4 2.6 3.2 8.4 8.5 3.7 3.7

Steam Coal 1.0 1.1 1.0 0.9 1.2 1.0 1.8 1.4 1.6 1.6 1.6 2.0 2.1 2.0 2.0 1.8 1.7 1.6

Metallurgical Coal 0.9 0.9 0.9 0.8 1.1 0.8 0.9 1.0 1.1 1.1 1.1 0.8 0.7 0.6 0.6 0.6 0.6 0.4

Uranium 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 2.7 2.0 1.0 0.7 0.3 0.8

r^BBtABLE ENRY 82.1 82.1 88.0 88.5 82.9 83.7 84.1 84.8 85.0 85.5 85.2 88.S 79.5 77.9 75.2 73.8 73.3 73.8

Hylroelactricity 20.1 21.3 23.8 26.4 28.2 80.2 S3.4 35.7 87.9 39.9 40.8 40.2 89.2 38.1 36.8 36.7 37.6 87.3

Wood 55.4 S4.0 51.9 49.5 47.6 47.1 43.6 40.1 87.3 85.2 33.4 81.6 27.9 25.7 24.9 22.8 22.6 21.3

Sugar Can* Derivatives 6.2 6.4 6.8 7.2 6.7 5.9 6.5 8.5 9.1 9.5 9.9 10.6 11.3 18.0 12.5 13.2 11.9 14.0

Other Renwablee 0.4 0.4 0.5 0.5 0.5 0.5 0.6 0.6 0.7 0.9 1.1 1.1 1.1 1.0 1.0 1.1 1.2 1.3

TOTAL 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0

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3h2lL

ELTMC1TY TRA MISSION ND C3NSIVATION PRDJECT

Cross Domstic Coneumtion of PrlinrS Engr

TOE Thomueed

S6O5cEs 1970 1971 1972 1973 1974 1975 1976 1077 1978 1979 1980 1981 1982 1983 1984 1985 1986 1987

NOWRIEBIEMALE E90Y 27567 29057 34410 40557 42725 47411 50831 53047 58B46 61616 606S0 58957 60433 59550 64810 66947 71517 74160

Petroleum 25060 26425 31710 37866 39793 43994 46794 47902 53406 85577 54319 52478 51856 50905 54124 54579 58081 593S1

Natural " a 169 254 311 260 519 571 627 1083 924 982 1123 1068 1462 2007 2480 3096 3550 4047

Steam Col 600 606 638 613 628 650 S97 725 1150 1097 1195 1794 2193 2163 2198 2472 2931 2607

metallurgical Coal 1738 1772 1761 1818 1785 2196 2813 3337 3867 38S9 4013 3617 376B 4475 6008 6800 695S 7231

Uranium 0 0 0 0 0 0 0 0 0 0 0 0 1154 0 0 0 0 814

REEABLE BERY 47088 48340 51228 S3175 56117 58165 60485 64398 66881 72494 78064 78762 83047 89876 98708 103954 103217 106559

Hydroelectricity 11542 12528 14697 16788 19047 20983 24045 27109 29796 33808 37383 37922 40928 43928 48312 51729 52902 53785

Wood 31789 31809 32012 31520 32191 32739 31372 30409 29367 29814 30607 29809 29127 29727 32677 32138 31772 30710 t

Sugar Cane Derivativoes 3536 3773 4221 4561 4535 4105 4662 6417 7166 8067 9081 9ss 11844 15056 16342 18389 16796 20221

Other Renmables 221 230 298 306 344 358 406 463 552 805 993 1076 1148 1165 1377 1498 1747 1843

TOTAL 746515 77397 85638 93732 98842 105576 111316 117445 125727 134009 138714 137719 143480 149426 163518 170901 174734 180719

Psrn

SO1CES 1970 1971 1972 1973 1974 1975 1976 1977 1078 1979 1980 1981 1982 1983 1984 1985 1W6 1987

NON-RENEABLE ENEROY 36.9 37.5 40.2 43.2 43.2 44.9 46.7 45.2 46.8 45.9 43.7 42.8 42.1 39.9 39.6 39.2 40.9 41.0

Petroleum 33.6 34.1 37.0 40.0 40.3 41.7 42.0 40.8 42.5 41.S 39.2 38.1 36.1 34.1 33.1 31.9 33.2 32.8

Natural Cas 0.2 0.3 0.4 0.3 0.5 0.5 0.6 0.9 0.7 0.7 0.8 0.8 1.0 1.3 1.5 1.8 2.0 2.2

Steam Coal 0.8 0.8 0.7 0.7 0.6 0.6 0.5 0.6 0.9 0.8 0.9 1.3 1.5 1.4 1.3 1.4 1.7 1.S

metallurgical Coal 2.3 2.3 2.0 1.9 1.8 2.1 2.5 2.8 2.7 2.9 2.9 2.6 2.6 3.0 3.7 4.0 4.0 4.0

Uranium 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.8 0.0 0.0 0.0 0.3 0.5

R91EAE ENBiCY 63.1 62.5 59.8 56.7 56.8 55.1 54.3 54 8 53.2 54.1 56.3 57.2 57.9 60.1 60.4 60.8 59.1 59.0

Hydroelectricity 15.5 16.2 17.2 17.9 19.3 19.9 21.6 23.1 23.7 25.2 26.9 27.5 28.6 29.4 29.5 30.3 30.3 29.8

Wood 42.6 41.1 37.4 33.6 32.6 31.0 28.2 25.9 23.4 22.2 22.1 21.6 20.3 19.9 20.0 18.8 18.2 17.0

Sugar Cane Derivatives 4.7 4.9 4.9 4.9 4.6 3.9 4.2 5.6 5.7 6.0 6.5 7.2 8.3 10.1 10.0 10.9 9.6 11.2

Other Renemables 0.3 0.3 0.3 0.3 0.3 0.3 0.4 0.4 0.4 0.6 0.7 0.8 0.8 0.8 0.8 0.9 1.0 1.0 .

TOTAL 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 ieo.0 100.0 100.0 100.0 100.0

Soureo Bfraail WE. National nerev Balance. 1988

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ANNEX 1.3

BRAZIL

ELECTRICITY TRANSMISSION AND CONSERVATION PROJECT

ELECTRIC POWER TARIFFS IN BRAZIL

1. The marginal cost pricing of electricity is an area of theBrazilian public policy where considerable analytical work has been doneand progress made on implementation. The Bank began a dialogue on economicpricing with the Brazilian Government in 1977, commencing with the trainingof a small group of power sector staff in the practical estimation andapplication of long run marginal cost (LRMC) based prices. Consequently,over the last decade or so, former pricing policy based on rather arbitraryaccounting costs has been gradually replaced--as agreed under several Bankloans--by a marginal cost based tariff structure. Impressive results inelectricity conservation have been achieved including most notably, adramatic improvement in the shape of the power system load curve, as aresult of the application of peak load pricing (see main text, para. 1.33).This has resulted in substantial investment savings (see Annex 3.14,Section A). Currently, the tariff structure is being redefined to reflectthe system's marginal cost structure even more closely, while tariff levelscontinue to be influenced significantly by financial, political and socialconsiderationit. This Annex describes and analyzes power tariffs inBrazil, focusing on: (i) the historical background of the present system;and (ii) the pricing criteria underlying the current structure.

HISTORICAL BACKGROUND

2. Until 1974, power tariffs varied among regions mainly according tothe accounting cost of supply. The tariff structure consisted basically ofarbitrarily allocated fixed charges associated with capacity costs andenergy charges associated with operating costs. Rate levels were basedexclusively on financial, political and social considerations.

3. In 1974 the Brazilian government made tariff levels and structuresuniform throughout the country, regardless of local differences in supplycosts. The Global Guarantee Fund (GGF), financed through a surcharge of upto 2Z on assets in operation of all utilities, was used to ensure that allcompanies earned the minimum legal rate of return on remunerable assets(102). In 1981, because of deteriorating tariffs, revenues shortfalls, andsub-legal returns on remunerable assets since the late 1970s, theGovernment changed the GGF role: financial resources were transferred toensure that all companies earned the rate of return common to the sector(see para. 28).

4. Also in 1974, tariff increases began to be differentiated infavour of domestic consumers. In 1979, this policy was complemented andreinforced with the introduction of a system of increasing block rates forresidential customers. This policy has been updated several times sincethen, each time either creating new consumption blocks or widening the gap

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Electric peor Notne I 8resll Fe e.*. P 2

between the different block rates, and always in such a way that smallconsumption levels have been favoured in relation to larger ones. As aresult of the continuous application of this policy, the relationshipbetween the rates charged to different consumer categories has been changeddrastically. The average residential tariff, for example, is today onlyabout one third of the sector average tariff, whereas it used to be almosttwice as large during the first part of the 1970. (see Tables 1 and 2). I/

5. Beginning in 1976, power tariffs began to decline in real terms.Under the Influence of government programs that specifically treatedutility pricing as an anti-inflationary tool, power tariff increases beganto be routinely lower than the cost increases that made them necessary (seeTables 1 and 2).

6. Furthermore, this declining trend was accentuated even more inDecember, 1982, when the power sector changed its billing system. Theoriginal billing system in which a new set of tariffs is applied to allconsumption being billed inmediately after its promulgation was changed toa syetem in which consumption is prorated and one part is billed using theformer tariffs (the part that is assumed to have been consumed b, re thedate of promulgation of the increase) and only the remaining part is billedusing thee new tariffs. The application of the original system alwaysresulted in average tariffs slightly larger than those written into thedecrees. For example, during the period 1976-1982, 'power tariffs billed'(PTB)--the power tariffs actually billed to the customers--were about 62higher than the 'published power tariffs, (PPT)--the power tariffspublished in DNAZe's *Porterias'. On the other hand, because of the lengthof the billing cycle--the systems' required time for reflecting a wholetariff increase in all bills, the application of the new system alwaysresults in PTB that are lower than the PPT. In the case of Brazil wherealmost 60 days pass before the whole increase is reflected in all bills,and where inflation has remained at such a high levels for most of theyears under analysis, the change in the billing system has resulted in asignificant additional subsidy to all customers of the electrical sector,and further weakned its own finances. During the period 1983-1989, forexample, PTB were only 902 of the power tariffs written into the decrees.In 1989 (from January to September), a period when inflation hasaccelerated, the billing cycle effect has reduced PTB to about 742 of theirpublished value. (Table 2 shows the evolution of Brazilian PTB.)

7. The use of power tariffs as an anti-inflationary weapon and thechange in the billing cycle produced a progressive deterioration of thesector average tariff. Since the declining trend began in 1976. theaverage PTB has lost 302 of its real value (272 when the comparison is mad.between the periods 1974-1976 and 1987-1989). as may be seen in Table 2.

1/ The comparison of electric power rates with other countries alsoillustrate the sharp decline of Brazilian residential rates, both inabsolute and relative terms. According to ELETROBRAS' internationalcomparison of 22 selected countries, Brazil had the third largestresidential tariff in 1973 but the lowest one in 1988. See ELETROBRAS(1988), Co.paracao InternDcional de Tarifas de Energia Eletrics197311988, Dezembro.

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E#VXITZ84 OF BAZILIAN PUDS PH TARIFFS (U5$6/M1H) 1/ 2/ IAE:W* esoa Ma, 1969 3/ S1-Oct4

C N l s U N E C A T E C o R YEAR --

Al A2 A3 U As A 4/ 81C3SrH 31<81<100 101<1(8o 201(n31(00 018>001 0l41 62 e3 gm 8 4/ (AnD) 4/

1Q74 20.09 23 43 30.13 40.17 113.e2 30.87 107.13 107.13 107.13 107.13 107.13 107 13 113 82 113.82 16.74 101.14 57.z.1975 26.16 28.80 39.27 47.13 25. 67 37.36 120 43 1* 43 220.43 120.43 120.43 120 43 12- 43 125 67 34.04 114 07 66.1l1976 24.10 29.66 S7.07 46.34 123.34 3677 n14.92 114.92 114.92 114.92 114.92 114 92 7e 7o 12 34 36.22 107 6e 63.3(1977 24.69 28.W9 38.9 46.76 114.36 36.77 106. 6 106.86 106.6 106.56 106.6 106.56 8f 8 a7 114.36 32.49 99.78 60 44.1976 24.36 29.04 39.35 47.76 6".5S 36.61 97.43 97. 43 97.4, 97.43 07.43 97 43 6V 70 105 86 31.85 91.S1 s7 44179 26.17 29.60 40.77 45.64 63.89 36.24 6e.76 9.6e n.6.0 99.60D 93 74 cJ 46 107 71 84.0 90.22 W6.48196 23.63 29.79 41.03 46.20 63.22 6.62 5.32 63.69 63.19 05.41 63.41 76 67 52 26 111.00 34.04 81.70 63.651981 30.70 33.33 48.06 83.87 70.52 43.23 41.85 77.76 77.76 100.53 100.83 73 96 52 85 111.21 a3.4s so.35 57.15192 29.64 34.16 45.27 32.96 66.31 42 02 36.53 70.69 70.69 93.95 95.95 69 66 52 64 108.70 34.60 75 94 54.7419e3 28.w9 32.95 42.82 48.47 63.12 39 43 33.48 64 77 64 77 67.91 67.91 64 ol 47 30 99 se 31.76 69.58 50.741964 28.04 32.34 42 01 47.3 64.30 38 61 31.26 6l.86 61.58 82.76 82.76 60 56 45 41 96.23 30.48 66. 44 49.11905 29.49 34.01 44. to 3.21 66.82 41.18 26 69 W339 53.39 63.04 63e04 S5.03 42 50 97.35 So 77 63.35 49.4196 31.00 33 75 46 43 83.63 72.35 43.29 21.79 44.83 46.67 76.81 78.21 48 11 37 &5 102.16 27.39 59 92 49.501967 34.94 40.30 56 96 60.66 81.54 49.18 19.79 31 46 60.00 106.42 123.84 62.32 49 52 113 07 27 66 72 43 57 OIL1966 3S.03 37.67 62 91 69.82 60.62 52.03 15.74 40.s3 W0.4" 111.70 12B.99 56 93 64 32 116.29 32.66 70.69 89.071909 s/ 28.27 32.24 54.S4 60 83 63.51 43.01 12.33 32.06 39.33 9W.i3 114.07 47 06 51 92 ss.e3 28 12 39.63 50.5<

1/ Source: 0A' Port4r.2/ Power to,iffs EXCLLOE teee and coup.loory loans.3/ 6xengsno rate. US88 00 . 1C21.10084/ Weihted *eerae bd or the pe,contmal partic.pation in the fit.kt of each coanu_r cat.epryS/ Estoatoe bl.4d on tr.nff ap pro,d until Septebe 20D 1989.

EVOUJLUrI OF BRAZLIAN P0W TARIFFS 1L1.ED (US/WM) 2/ 2/ TAMUS$ as of mty. 1999 3/ 31-oct-S8

C O N S U N E R C A T E G o R YYEAR -------------------------------------------------------------------- - ------------- - - - - - -- - -- - _ - --- - ------ - -.--- _--- - -------- -- - --------- - ------- - - - - - -

Al A2 A3 A4 As A 4/ 81(3866 31(81<100 1010141200 201(<81(O0 81>3l3 81 4/ B2 B3 84 8 4/ (A#9) 4/

1974 24.86 29 03 . 37.32 49 7S 141 00 38.24 132.70 12.70 1 .70 12.70 132.70 132.70 141 00 141.00 20.73 125.28 70.6e1975 30.21 33.23 45.31 54.37 144.99 43.10 13.95 138.95 1,1.95 11.95 138.95 1i6.95 138 95 144 99 39.27 131.61 76 2.197s 25.99 31.98 39.96 49.97 131.93 39.65 23 94 123 94 12394 12.94 In.9S4 3.94 es 66 131. 93 37.9 0 l 13 63 3.1977 26.23 30.38 41 42 49 71 121.5l 39.06 113.22 1S3.22 WM3.23 113.22 113.22 113.22 73.18 121.51 34.52 106.02 U4 r1978 21 95 So 95 41.03 50.91 69.6e 39.2S 103.82 1S.62 106.62 1O3.62 108.82 103.82 67 as 112. W 33 94 97 U4 61.2.279 27.13 29.68 42.28 47.32 66.25 37.50 71n.0 103 46 105.48 108.46 106.48 97.21 63 73 111 6 36.34 93.S6 se. 1908 26.81 30 91 42.38 47 94 6S 60 S3.21 57.40 67 o0 67.06 66.63 GB.63 61.63 54.25 113.19 3S.33 84 78 5s 11961 32 76 37 73 51.33 57.52 73.30 46.16 44.69 630.6 63.03 107. 107.13 81.13 66 44 118.75 37.66 63.7" 6l 4.1982 31.02 35.75 47 39 ss 45 69 41 43.96 38.24 73 99 7S.99 100.44 100.44 73.15 14 06 113 78 36 22 79 40 57 71983 28.17 32 48 42.20 47 77 64.18 36.67 32.9e 63.6 63.84 66.6e a6.6s 6es o 46 62 98.15 31.30 60.58 80 .1964 26.39 30 45 39 5s 45.04 60.53 36.54 29 43 s7.97 s7.97 77.91 7. 91 57. 01 42 76 9o s5 20.69 62.63 46.2-1968 28.74 33 is 43 07 49 92 67 09 40.14 26.02 82.04 e2.04 60.94 60.94 ss." 41 43 94 89 20 99 61 73 48.2'1906 27.06 31 21 40 54 46 o 63.15 37.79 19.02 39.13 89.67 67.08 63.27 42.00 32.34 89 18 23.91 52.31 43.2.1987 31.85 36 73 51 92 55.31 74.33 44.83 16.04 46.91 54.70 96.64 111.32 36.61 45 14 104 89 25.23 66.02 62 7t1988 28.62 32.65 54.52 60.e1 69 67 45 09 136.4 36 47 43.78 96.60 111.78 49 34 52.27 1oo 79 28.32 61.26 al 1.1989 S/ 20 84 23 77 40.21 44.85 50.52 33.19 9.09 28.64 29.18 70.13 64.11 34 72 38.23 73 61 20.73 43a98 37.:..

~~--- -- - - - - - - - - - - - - - - - - - - - - - -- - - - - - - - - - - - - - - - - - - - - - - -- - ----- - - - -- - - - --- - - _ - - - -- - - - -- - - - - - - - - - - - - - - - - - -- - - - - --- - - -

1/ So..Ce O4AEb Porte',.e2/ Po-, t...ff. EXCL.DE to..a ond coow.lery lon.3/ E.ehn.g rato L118 00 . NCZSI 100841 We,gted *nera64 blsed on the p*,er*tqol pe't-pv8t-on - the m,k,t o

fasch cen8-u caStegory

5/ Eatet.. .... OFd P. t-1f soppOed Sot. I Spt.eb 20. 1989i

4..

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Electrlc Po"er Rates In Brazil AUX 1.8, Page 4

8. In 1987, to protest the low level of tariffs, the power companiesof important states in the South and Southeast regions, as instructed bytheir respective owners, refused to contribute to the GGP. The Govirnmentresponded to this crisis by creating a new transfer mechanism (the NationalConpensation Reserve for Remuneration--RENCOR), which restricted thedemands that could be placed on the financially stronger companies--i.e..no transfer of financial resources was required of any company if itsreturn on remunerable assets was below 122. In addition, it was alsoagreed that the rates of remuneration of the four major ELETROBRASsubsidiaries would be less than the legal minimum (102) target levelformerly used in establishing their bulk supply tariffs.

9. A policy initiated in 1987 of tariff levels recuperation collapsedin 1989, after an initial success (see the main text, paras. 1.36 to 1.40).As shown in Table 2, the estimated 1989 PTB (US$37.24/MWH) is significantlylower than the observed average for the period 1987-88 (US$51.971JWH),which in turn compares satisfactorily with the observed 1984-86 average PTB(US$45.92). However, even the observed 1987-88 average PTB is smaller(842) than the level observed from 1981 to 1983 and much smaller (only 66Z)than the level observed from 1974 to 1976. In addition, the significantincrease of real investment costs in the electrical power sector haswidened the gap between current tariffs and economic costs. This fact andthe substantial losses made by the sector during those periods in which thedifferential between costs and tariffs was much wider, helps to explain thedifficult financial situation of the Brazilian power sector.

Prices, Taxes and Compulsory Loans

10. Brazilian electricity bills include: (i) a basic component thatresults from multiplying the metered consumption by the corresponding basictariff; (ii) a consumption tax; and (iii) only for industrial consumers, acompulsory loan to the power sector. Until January 1989, the electricityconsumption tax was a federal tax (the Imposto Unico de EnergiaEletricam--IUEE), uniformly applied in the whole country. Beginning inFebruary, 1989, it has been a state tax (the *Imposto a la Circulacao deMercaderias e Servicose--ICMS) that varies from one state to another. Thecompulsory loan is an obligatory investment scheme under which industrialconsumers using more than 2,000 KWH per month acquire ELETROBRAS bonds(20-year maturity yielding 62 annual interest and revalued through monetaryadjustments).. industrial customers are elegible for discounts that aredirectly proportional to the customer's electricity consumption. Thesediscounts may be as high as 98?. 2,

11. As shown in Tables 3 and 4, 'published power prices" (PPP), theaverage published cost of electricity to the customer--i.e., the price thatresults from dividing revenues resulting from published tariffs, taxes andcompulsory loans by consumption--and 'power prices billed' (PPB). theaverage cost of electricity actually billed to the customer--. i.e., theprice that results from dividing revenues resulting from tariffs, taxes and

2/ The repayment of compulsory loans and their corresnonding interestcharges are negligible, because of high inflation ates and themonetary adjustment mechanism.

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ElRltb oF OmnumsAt E DLM FIVE PRICES I/ V/ TAUS 3

UJ1 so of ,ty 190s 3/ 31- es-

~~~~~~~~~~~~~~~~~~~~~~~~~~~~- ____- - _- __- - __- ____- .__- __- -- -,_-- -__------------------------------

c o l4 s u E R C A T E c o R YV>R~ ~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~ ---- __-_______ ----_----- ------------------------------------------------------- --

Al A2 A3 A4 As A 4/ bAldIN VIM<= 101<8CK2tl 201<01000 91)>300MM el 41 Er W. 4 B 4/ (A.8) 4/_ _ -__ _-----_ -- _ _ ----. -- _ ___ ._--- _----_ _-- -- -**-*¢- ..----- .--- --- ------- ------- --- --- ------ ------- -- ---- ------

1974 3985 45.38 30.42 e2.5s tsu.e E00.9S Loe.78 INe." IN9." INs." l3e 44 s3 07 11a 42 'ls EC, 1- is la 35 74.22

e9n 47.33 62.e1 40.2e N0.U IS6. 5 58.2n WM. IN. 4S 1S.43 IW 4S l53 43 U47 16 1X2 eP 16C CS 34 '7 140 66 ee.17

ion *2.SD 47.ea s06.2 e4.Je V.e 5 3.S3 111.2b u 1.se ul1.3e Ul.f9 U4s.59 135 ee 7-s OP .F4(4 34 94 128.2B St 62

e977 40.4e 44. S 4e. e 2. 65 1u4.88 s2.0e 107.03 .eAs 181.03 1SI.0S 131.es 127 oD CU I e I"4 ee 32 63 229 f6 n7.49

197e ".Os 49.71 46.71 e7.45 101.17 U. 7B 97.4S U7.I WAI4 UVAI 17.41 121 Sf 6a (l 141 4f 31 es 125 37 7e.13

s979 44.08 *7.20 5o.e2 e4.36 97.1E 54.14 es.48 U7.67 W2.67 UW.67 W7.67 116 13 tl 42 141.29 34.16 112.22 7s.e2

sseo 40.72 4. 73 4e.19 es.20 90.ee u1.2e u8.40 10e.16 10erdse 1o.40 109.40 9e 17 5, :.1 134.53 34 os 99.35 6e.2s

29e3 4e.e " S,7 se.oo 7-0.01 10teu 59.84 41.ee 102.eD 102.9 la. 254S 12.43 96.15 52 83 141 12 35 "4 10o 07 7 .so

aee2 46.S2 $1.01 54.59 e8.62 97. 39 67.07 So. Be 94.7e 94.7B 120.02 120.1 el o 25 !11 t4 13- C0 3-4 -A 94 95 71.Te

19es 40. I " 44. 48.52 eo.os eJ6.62 50.e2 3a.44 e2.80 e2.eo 105.72 105.72 7S.36 47 0 12C, 9e 3' 1s e3.e5 e3.01

1er4 311.52 42.el 47.17 Bfe. 3 3. es 4B.93 s1.2B 77.97 77.97 eB*eew "e.41 73 69 4- E41 its so 30 48 79.26 60.ao

19e6 99.92 44.43 49.31 t . .64 98.06 $1.25 26.70 e9.42 N. 42 ". 07 "9.07 67 94 42 Ml Ile 59 30 n7 76 00 60.53

Mee 42.4S 47.18 52.0e eU.27 9s.44 u4.sa 21.7e e2.42 es.26 04 40 95.B0D 62 2n 37 os 123 2% 27 39 73.8D ea.es

19s7 44.S4 49.70 4I. so 7C.09 9Be0 se.26 19.79 u5.92 74.4e u2.es 1M.6. 73 97 4 953 132 4l1 27 68 e.3.e4 e7.e5

ees 4s. " 47.72 e7.41 7e.9s 97.50 e1.48 15.74 F4.99 B4.52 11s.7s 1U3.04 6e.25 60- 32 133 l 7 32 68. el 78 6e.09

e99s/s 42.e8 47.1 es.01 79.92 84.e3 e1.10 12.5e 41.22 49.97 116.04 137.21 57 72 Ut 7tj 121.29 32.90 ns 2 65S8B

_ ---- _ _ _ .__----~~~~~~~~~~~~~~~~~~~~~ -- -_ -_ _ _ -_ ---------- ------------------ ---- ---- .------ ----------------- -_-

I/ Soure: DWE Pb*rtei..2/ Por orie.. VCW b_ic tariffs tooo and _Mlory lae.s/ Exhs "rrto: US1.00 * MI.reee4/ Woiotd *vter bood an the poreentul p.aticip*tion in the tret f *eac coew r caee

S/ Etim based rm Xtaiffs wrorved "tn6 I S ptore 20, 19e9.

Ewmm oF MMMAM PWR PRICE lULED I/ 2/ TABLE 4

USO as of O4y. 1909 3/ 31-O.v-M

C o Of S U N E R C a T E C D R Y

__~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~- -__ - _- __ - __ - __--- - _--_-_--_----------- - ------ ---------- ----- - -

19eT 49.s7 5e.21 s7.e9 77.4e 11s7.81) es.ls 1 In2, 12.74 12.74 12.74 172.74 Iu4.es 40.50 187. OD 2l.25 asW.ss e .l4

19715 M-. el eo.0 " 4e.7 9. 77 192.27 e7.23 139.91 177.02 177.02 177.02 177.02 le9 78 139.34 192.27 40.11 162.29 seR2.e

19"e 4.6.e ss.ee 41.65 69.41 1W.5P5 a7.84 u.0x 1S2.N9 1W.69 152.e9 a2.e9 34U.S2 as.28 1e6. 7 37 6es u.34 ee.c2

19n 42.9W 47.5 LB 4.92 ee.a? Xb.94 es.ss 11u.n 1U0.07 140.07 14e o7 140.07 1114.4 73.50 1ss st4 34.a? 12.35 02.34

29Te 4e.92 Ss.90 s.90o 71.e7 1D7.e1 59. "4 10s.2 15. 7e 135.7e inS.76 135.76 UM.e3 a7.68 ISO 7 33 94 Uq2 94 ea.25

1979 4s. r 4e.e7 s1.e7 66.74 IOD. 75 ee.u1 n1.oX 12.39 1W.S9 uW.30 132.3C U0f es e9 U46 sl 35e5 s 16.s7 711.73

19eD 42.95 46. " 50.01 ea.51 94.29 bS.29 a7.e6 112.24 112.24 11u.ss 113.5S 1O e. e4 is U39 6' 35.ss lOS.10 71.91so9 5.u s4.se so.eoD 74.7e 107.S2 e2.es 44.7S 109.77 209.77 ina. I ae93 1e2.ee so 41 150 Go 37.e4 109.es 7e.34

1902 4e.49 56.90 a7.14 71.es U09f eo.s8 a0.24 99.22 ". k us.e2 us.62 9s.42 s40 DS "4 03 36.25 99.3s 73.23

lerd as.seB 40.90 *7.e2 -9. e.n 49.09 s2.s" 81.42 $1 L42 104.20 U04.20 7.24 4e.62 lig 24 31 29 e2.45 e2.10

1se4 ae.2e 40.as 4. 40 54.91 78.73 46.07 29.4a 73.40 7S.40 S3.09 9S.09 69.a7 42.7s I08 e2 2a 69 74.U se.7n

lea5 se.so 4a.ss 4e.07? eo.0e es.e4 4e. e 2e.8 e7.e7 a.a7 se.se 96.se ee.2s 42.AS l13 65 29 w 74.09 59.01

s96 a7.04 41.19 45 4e as.s e s.57 47.43 19.02 34.49 55.22 e2.41 83.63 "4.se 32.34 U07.60 23 'DI 64 42 aJ.aoD

29e7 40.42 45.3t We.14 es. e9 90.S is 5.11 U8.04 60.U0 a.ee 1U2.03 124.71 67 43 45.15 uo 70 25.23 76 4s el.es

1*9 So Jes *X.ae 58.42 es.42 e4.50 bs.2e 13t.e4 47.es Ss 91 108.9e Lo.s97 59. is 52 28 115 42 2e 32 70.es sg.ee

loee S/ 31.3s a4.N 47.e4 50.93 e2.42 45.05 9.2e0 se 40 3e.s4 e4.e3 U0l.17 42.S6 "Ale 69 44 2 .26 53 4e 4.21

_ _ _ _ - - - _ _ - _ - -- -.- - _ - - - - - - - _ _ _ _ - - - - _ _ _ _ - _ _ _ _ - - - - - - - - - - - - - - _ ---------- _ _ --------------- - - ---- - --- - --------- -------------

S/ Sorsre: WME's Porsori6.2/ Ame Prices DCADE b eic farifft. be.e _ nd compulsory low.S/ Escage "be: 1.15tl.OO * M=1.1OC4 Weighted * ermv b*4164 an the p re ntul prarticiPstien in tho _rth*t of each crnw_, Caegtotryr.S/ Estiate b*@ d en tsImpWa vproedr unti I Seotemb*r 20. 19es. 8v

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Electric P.,.. Raes In Brazil ANEX 1.a, PageO

compulsory loans billed by consumption--ha'.e evolved along the same pathfollowed by power tariffs (published and billed). However, as shown inTable 5, the fiscal load (the sum of taxes and compulsory loans only)attached to tariffs exhibits a decreasing trend from 1974 to 1988. Theparticipation of the basic tariff component in the average price ofelectricity went from 72? in 1974 to 852 in 1988, regardless of thedecrease in real tariffs discussed earlier. Furthermore, because part ofthe revenues collected through taxation ware transferred to the powersector, this policy reinforced the negative effects of tariff reductions.thus aggravating the financial situation of the sector.

12. It is expected that even keeping the compulsory loan participationconstant at its 1988 (lowest) level of about 5, the powers transferred bythe new Constitution to the states to.set electricity taxes, will increasethe share of the fiscal load in the final price to a percentage of about30? in 1989. However, it is not yet clear what part of this increase, ifany, will be transferred to the power sector.

13. On the other hand, the new fiscal load structures are relativelysimple and homogeneous. Most structures being currently applied by thestates have a unique rate--generally equivalent to 172 or 252 of the bill,subject to two or three exceptions--generally residential and ruralconsumption up to 30 or 50 KWH/hh-m. Only & few states have opted for morecomplex fiscal structures that include, for example, different taxes forelectricity used by an industry as an input and electricity used by thesame industry in Pother* uses, or a whole set of tax brackets that varieswith the amount of electricity consumed.

PRICING CRITERIA 3/

14. The Brazilian electric power tariff policy, as explicit orimplicitly stated in the most recent literature on the subject 4/ , aims atachieving four general objectives: economic efficiency, financialequilibrium, regional homogeneity, and social equity. Economic efficiencyis included by defining a tpriff struvture that reflects the system's LRMCstructure. Financial equilibrium is established by setting tariff levelsbased upon the principle of service-at-cost plus an adequate return oncapital invested. Regional homogeneity is assured by establishing uniformnational tariffs, regardless of regional cost differences. Social equityis taken into account by applying increasing block rates to residential

3/ The regulation of electricity rates ir Brazil is the responsibility ofthe Ministry of Mines and Energy (MME) which exercises its authoritythrough the Departamento Nacional de Aguas e.Energia Eletrica (DNAEE).However, since 1981 DNAEE's responsibility has been greatly redLced bytransferring the authority for final tariff approval to the Secretariade Planejamento da Presidencia da Republica (SEPLAN).

4/ See, for instancet the 1934 Water Code, with its amendments: Decree No.86.463 Octoher 13. ]Q9I: R1itt (1986 and 1988), DNAEE (1985 and 1988),and REVISE (1988a, 1988b and 1989a).

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eV8UJtXU OF BAZILIANd PUA TARIFS Alt A P8CD AETA OF WAZILI*4 PWS PRtICES TAK.E S

____ ------------- __----_ _ -----_ -*------_______ _ _------------------- -------------------- - --

C O N S U E R C A T E C O R Y

YE,k ---

- - - - - - - - - - - - _ - - - - - _ - - -_ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ . _ __-

Al A2 AS A4 A A S/ 81cc4 s 3141100 10141a<00 2011lcc 81)0a0o4 el 3/ 82 83 84 3/ (4.3 3/

1974 s0 52 100 U 75 61 1OD 77 77 77 77 el 100 7S IO0 80 72

175 5 55 1O0 6a 75 64 loo 78 78 78 76 82 1o0 75 100 el 74

1976 57 62 100 72 79 69 too e1 a1 el 82 85 100 79 100 04 78

977 61 64 ea 75 79 71 100 *1 81 1l el 84 100 79 100 me 78

197 65 60 71 65 t 100 78 76 n 76 80 100 75 100 so 74

197959 61 e2 71 6 67 100 78 76 78 78 e1 10 76 loo e0 74

1960 63 67 e5 75 70 72 ICO 78 7e 78 78 80 1OU 63 lo 82 r

1961 65 69 86 77 70 73 100 7n 76 so 00 79 100 79 100 60 7'

192 64 67 83 77 6e 73 100 76 75 80 00 78 10D 79 1oo e0 78

196 71 74 so 81 7s 78 100 76 78 as as 82 100 82 loo 83 el

1984 73 76 89 82 77 79 100 79 79 84 84 a2 100 as 1O0 04 82

1968 74 77 90 83 78 so 100 77 77 84 84 8l 100 83 100 82 82

198 73 76 s9 82 77 0o loo 72 72 81 82 77 100 a3 100 81 6

1967 79 el 92 87 82 84 1oo 78 l es 09 04 200 07 100 86 as

1960 75 79 93 e8 es aS 1oo 74 78 89 90 s3 100 87 100 66 el

1989 B6 68 84 76 el 74 1oo 78 79 es as 82 85 82 85 82 77

I'

,.

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Electrle Power Rates In Brazil A*= 1.0, Pse 5

consumption and subsidizing rural customers, public lighting and watercompanies. Since these objectives often conflict with one another, it hasbeen necessary to accept certain trade-offs among them. These trade-offshave changed through time to reflect changes in the relative importanceattached by society, to each objective.

15. Currently, the Brazilian electric power sector has both an uniformtariff structure and uniform tariff levels. 5/ The tariff structure isbeing redefined (as agreed under several Bank loans) to reflect thesystem's marginal cost structure, while tariff levels continue to be basedmainly upon financial, political and social considerations.

Long Run Marginal Costs and Economic Efficiency

16. Econom.ic efficiency is a main objective of electricity pricing inBrazil since 1977, when the development of a new tariff slstem beganthrough an agreement of technical cooperation between DNAEE and ELETROBRAS,with the participation of all power utilities, with Bank jupport underprovisions of Loan 1300-BR, and Electricite de France (IdeF) consultancyservices. This study was completed in March, 1979 and an improved andupdated version was received by the Bank in September, 1981. The firststep to implement marginal cost based tariffs in the Brazilian power sectorwas taken by the issuance of Decree No.86,463 on October 13, 1981. 6/ Sincethen, implementation of marginal cost pricing has been advancingprogressively, following a better understanding of the principles in thepower sector, and a radical change of attitude towards its acceptance anduse.

17. With the beginning of the implementation of LRMC based tariffs,rate levels began to be adjusted progressively in the direction of marginalcosts. One of the first results of this policy application, was thatrelatively larger increases were authorized for the energy component thanfor the demand component, which produced higher average tariffs forconsumers with larger load factors. Currently, most consumers connected athigh and medium voltage levels are already paying marginal cost basedtariffs.

Methodology

18. The marginal cost pricing methodology being used is based in theapproach developed bv EdeF and includes the definition of a set of

5/ The only exception tn. .spilica.ion of tariffs 15t higher in isolatedsystems.

6/ Decree No.86,463 sayb tnat DNAEE should distribute the cost of servicebetween a demand (KW) and an energy (KWH) charge. in such a way thateach group of consumers pay for the fraction from which it isresponsible. It also authorizes DNAEE to establish hourly, seasonal oruser-related differences in the tariffs, as well as to change meteringand billing practices.

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Electric Power Rot.. in Brazil AMEX 1., Paeg 9

reference tariffs that closely reflects the calculated LRMC structure. 7/By considering the power sector as a single unit (^empresa virtual unica"),the Brazilian power sector adopted a modified methodology that suppressedall regional costs differences and produced a unique set of referencetariffs for the whole country. The resulting tariff structuredistinguishes between bulk supply tariffs and tariffs to final consumers,which in turn are divided into three groups according to the voltage levelat which they are connected to the system. In addition, each group and itsrelated set of tariffs is identified by a specific color: blue, green andyellow.

Bulk Supply Tariffs

19. Bulk Supply Tariffs (BST) are applied to all energy and powerbeing bought and sold between electric power companies. During the lastdecade, BST have been about 402 to 502 of its economic cost. 8/ A processof gradual implementation of BST based on marginal costs began in Janeiro,1989, and is expected to be completed in January, 1990--at least from thepoint of view of the structure. Currently, BST are about 602 of theireconomic cost.

20. It is expected that the introduction of marginal cost basedtariffs for the bulk supply of electricity, will help the Brazilian powersector tot (i) make planning and operations activities more coherent; (11)reflect in the bulk supply prices the economic consequences of decisionsregarding the administration, planning, and operation of the differentcompanies: (ii) distribute among the different companies involved thebenefits resulting from these transactions; and (iv) create incentives forprivate investment--through the provision of rational reference prices forprivate generation.

Blue Tariff

21. The Blue Tariff is the set of tariffs to be applied to the largestconsumers, i.e. those demanding a maximum power equal or larger than 500KW. These tariffs are specifically designed for consumers with high loadfactors, connected to high (69 KV or more) or medium voltage levels (2.3 to44 KW). They are hourly and seasonal tariffs, with demand charges for peakand off-peak hours and energy charges for dry peak, wet peak, off-peak dry,and off-peak wet hours. bmplementation of the Blue Tariff began in 1982 asan option available to selected customers, was made mandatory for them in1986 and was completed in 1987. Currently there are more than 6,000 ofthese consumers, responsible for about 502 of all electricity consumption.and paying about 402 of all revenues collected by the sector.

7/ See DNAEE (1985) for an excellent presentation of this methodology andits application to the Brazilian Power Sector.

SI See REVISE (nd), p.21.

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Electric Powr Res In Srezll AM 1.8, Poge 10

Grtee Tariff

22. The Green Tariff is the set of tariffs to be applied to mediumsize consumers, i.e. those demanding a maximum power equal or larger than50 KW, but smaller than 500 KW. The Green Tariff is an intermediate stepbetween the more elaborated hourly and seasonal Blue Tariff and theconventional systems in the Yellow Tariff. Consumers in this category,usually connected to medium voltage levels (2.3 to 44 KV), have twooptionst (i) a conventional two-part tariff (with charges for energy andpower), basically designed for consumers unable to adjust their load; and(ii) a hour-seasonal tariff (with a relative low demand charge applicableonly to off-peak hours, and strongly differentiated energy charges for drypeak, wet peak, off-peak dry, and off-peak wet hours), designed forconsumers who have the potential to improve their load factors but mayexperience difficuLies in making it permanent. A process of graduallyimplementing the hourly and seasonal version of the Green Tariff began in1988, and is scheduled to be completed in 1991. Meanwhile, consumersclassified in this category are being billed with the two-part version--which is also a marginal cost based tariff. Currently, nearly 50,000consumers classified in this category are responsible for about IOZ of allelectricity consumption and pay about 152 of all revenues collected by thesector.

Yellor Tariff

23. The Yellow Tariff is the set of tariffs to be applied to smallconsumers, i.e. those demanding a maximum power smaller than 50 KS.Consumers in this category will probably be differentiated by final use, asfollowst residential, public lighting, rural and others. Residentialconsumers will be charged based on a system of block tariffs withincreasing energy charges; public lighting based on a single tariff; andrural and others based on a conventional tariff with an unique energycharge. However, those customers able to adjust their loads will be giventhe option of a hour-differentiated tariff with energy charges for peak andoff-peak hours, especially designed to encourage savings during those hoursat which demand is larger. Consumers in this category will be the current30,000,000 consumers (of which 25 millions or more are residential)connected at low voltage levels, which are responsible for about 402 of allelectricity consumption, and pay about 452 of all revenues collected by thesector. Implementation of the Yellow Tariff is scheduled to begin inJanuary 1990, and be completed in 1991.

Existing Tariffs

24. The relationships between LRMC and what has been defined as theaverage 'published power price" (PPP) (see para. 11) and the average "powerprice billed" (PPB) (see para. 11), as of September 19, 1989, is shown inTables 9 and 10 for each consumer category and for Brazil as whole.Overall, the average PPP is already in line with LRMC (see Table 6).However, the tariff adjustment mechanism whi a exists in Brazil, combinedwith the high rate of inflation, means that the average PPB is only 652 ofthe LRMC (see Table 7).

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RGINAL COSTS AM PULISNED PRICES AS OF SEPTEMBER 19, 1989 1/ 2/ TABLE 831-Oct-89

CONSUMlER CATEG¢RY 6MHBER OF CONSUM S 8/ ANIWAL CONSUWTION 4/ MARGINAL AVERAGE DEVIATIONCOST PRICE 6/ FROM MC

CODE TYPE VOLTAGE LEVEL No. X 0 1 US$/ M3H USS/MIN x

Al Mainly Industrial 230KV 89 0.0 21,881 10.8 44.76 40.74 -9.0A2 Mainly Industri al 138KV to OMKV 4B8 0.0 42,188 21.3 48.40 44.46 -8.1A3 Mainly Industrial a0mV to BSKV 904 0.0 10,371 5.2 50.90 52.29 2.7A4 Mainly Industrial 2.8KV to 2SKV 76,701 0.8 46,728 24.8 63.99 69.90 40.6As Industrial & Others Undergroung 997 0.0 1,222 0.8 69.07 110.69 60.1A Average High & Medium Voltge 79,077 0.8 128,868 82.6 54.32 83.00 18.0

e1 Residontial First 80K13/month 4,044,855 13.6 888 0.4 106.92 30.29 -71.4e1 Residential 31 to 100(KH/month 7,668,664 25.6 8,061 8.1 104.86 38.90 -67.6e1 Reidential 101 to 2001(H/month 8,865,484 29.2 14,772 7.5 102.20 43.91 -67.081 Residential 201 to 3001(31/month 2,961,118 9.9 8,943 4.6 98.75 84.60 -34.681 Residential >300K1H/month 1,971,824 6.8 12,914 8.6 92.25 116.69 25.4e1 All Residential Low Voltage 26,818,898 86.2 48,628 22.0 98.95 67.82 -31.6

B2 Rural Low Voltage 1,162,980 8.9 4,824 2.2 123.67 74.95 -39.4Ba Non-residential Low Voltage 8,128,186 10.5 19,658 9.9 98.80 144.09 49.6B4 Public Lighting Low Voltage 14,027 0.0 6,911 8.6 98.40 40.79 -67.7a Average Low Voltage 29,824,0a8 99.7 74,344 87.5 99.46 86.81 -18.7

A.8 All Consumers All Voltage Levels 29,708,118 100.0 198,212 100.0 71.26 71.68 0.4

1/ Source: DNAEE, Boletim de tarifas de *eorgis eletrica, Septmber 21, 1989.2/ Exchange rate as of Septembr 19, 1989 : US$1.00 a NCZ8.81608/ DNAEE's estimsto for 1989.4/ DNAEE's estimte for December 1969.5/ Average prices include revenue resulting from tariffs, compulsory loans and taxes.

-~~~~.

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MARGINAL COSTS AND PRICES BILLED AS OF SEPTEMBER 19, a989 1/ 2/ TABLE 731-Oct-89

CONSUMER CATEGORY NUMBER OF CONSUMERS 3/ ANNUAL COW4MPTION 4/ MARGINAL AVERAGE DEVIATION- -- ---- - -- --------------- --------------------- - - -- ------------ COST PRICE S/ FROMU C

CODE TYPE VOLTAGE LEVEL No. % GUi I USS/MWH US$/MUH %

Al Mainly Industrial 230KV 39 0.0 21,381 10.8 44.76 26.tl -40.8A2 Mainly Industrial 138KV to 88KV 438 0.0 42,186 21.3 48.40 28.93 -40.2AB Mainly Industrial 30KV to 89KV 904 0.0 10,371 6.2 50.90 34.03 -33.1A4 Mainly Industrial 2.3KV to 26KV 76,701 0.3 48,728 24.8 63.99 68.60 -8.6As Industrial a Others Undergroung 997 0.0 1,222 0.6 69.07 71.96 4.2A Average High A Medium Voltage 79,077 0.3 123,868 62.6 64.32 41.00 -24.t

e1 Residential First 30KWH/month 4,044,366 18.6 833 0.4 106.92 19.71 -81.481 Residential 31 to 100KWH/month 7,668,64 26.8 6,061 3.1 104.86 22.11 -78.9Ri Residential 101 to 200KWH/month 8,686,484 29.2 14,772 7.6 102.20 28.58 -72.081 Residential 201 to 300KWHM/onth 2,891,118 9.9 8,943 4.6 98.75 42.03 -6?.4e1 Residential )300KWH/month 1,971,324 8.8 12,914 6.6 92.25 76.28 -18.4B1 All Residential Low Voltage 26,318,893 86.2 48,623 22.0 98.95 44.13 -56.4

B2 Rural Low Voltage 1,162,980 3.9 4,324 2.2 123.67 48.77 -60.683 Non-residential Low Voltage 3,122,186 10.6 19,686 9.9 98.30 93.77 -2.684 Public Lighting Low Voltage 14,027 0.0 6,911 3.5 96.40 28.64 -72.6B Average Low Voltage 29,624,086 99.7 74,344 37.6 99.46 66.84 -43.9

AtB All Consumers All Voltage Levels 29,703,113 100.0 299,212 100.0 71.25 48.66 -34.6

1/ Source: DNAEE, Boletim de taritas de energia eletrica, Septemb.r 21, 1989.2/ Exchange rate as of September 19, 1989 : US81.00 = NCZS83.81603/ DNAEE's estimte for 1989.4/ DNAEE's estimto for December 1989.5/ Average prices include revenues resulting from tariffs, cosmplsory loans and taxes.

i

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Electrlc Power Rstes In Brazil ANEX l.t, Page 1I

25. NV and MV consumers (tariff group A), who account for 632 of allsales, pay an average PPP above LRMC. The A4 category in particular,connnected in the range 2.3 to 25 KV, accounts for one quarter of sales andpays an average PPP which is 402 above LRMC. When adjustments are made forthe billing effect, the average PPB falls bellow LRHC: to 762 and 922 ofLRMC for the A tariff as a whole and for A4 respectively.

26. The *non-residential" LV consumer--mostly comnercial businessesand very small industries (category B3), is charged an average PPP 502 overLRHC. Even the average PPB is essentially at the level of LRMC, with ruralconsumers and public lighting showing largest deviations. The structure ofthe residential tariff is discussed in detail in paras. 29 to 36, but itcan be noted now that residential consumers as a whole are subsidizedheavily in economic terms: the average PPP is 692 of the LRMC, while theaverage PPB is less than half LRMC.

Financial Equilibrium

27. Financial equilibrium is established by setting rate levels basedupon the principle of service-at-cost, plus an adequate return on capitalinvested. The service cost is defined as the sum of: (i) operation,maintenance and administrative expenses, inclusive of purchases ofelectricity; (ii) straight line depreciation of average gross revaluedfixed assets in operation; (iii) amortization of interest duringconstruction; (iv) decommissioning of assets; (v) taxes other than forincome (mainly property taxes); (vi) reversion quotas (an equivalent tax ofup to 42 of assets in operation) 9/ ; (vii) transfers to the NationalCompensation Reserve for Remuneration (RENCOR), a tariff equalizationfacility; and (viii) an adequate return on capital invested, currently setbetween 10 and 122 of remunerable investment. 101

Regional Homogeneity and National Uniform Tariffs

28. Regional homogeneity is assured by having uniform national tarifflevels and structures throughout the country, regardless of regional costdifferences. The social, regional and political benefits that this policyhave provided, have been achieved at the expense of a less efficientallocation of resources. Efficiency costs inside power utilities occurwhen the companies, in order to avoid the transfers, disguise investmentcosts as operating expenses or overspend on their systems' operation,

9/ The payment of reversion quotas was introduced with the purpose ofcreating a reserve fund with which to allow the federal government tobuy from foreign companies, the states and the municipalities the powercompanies' assets at the end of the their concession periods. Thisfund is administered by ELETROBRAS and its resources have been andcontinue to be spent in the expansion of the power sector.

10/ Remunerable investment is equal to net revalued assets plus anallowance for inventory and net working capital, less the differencebetween the prior years' actual and allowable return, lesscontributions and grants.

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Electrlc Power Raton In Brasil AEX 1.8, Pae. 14

maintenance and administration costs, to reduce operating income.Efficiency costs across the national economy occur when potential customerstake decisions based on wrong economic signals, for example, when adecision regarding the location of an industrial plant is made based ontariffs that are lower than the real economic costs. However, this lattercost Is relatively low given the small differences that exist betweenmarginal costs in Brazil's different regions. The average marginal costfor the whole Brazilian system is 142 smaller than the average marginalcost in the South region, 62 smaller than the average marginal cost in theSouth-East/Center-West regions, and 212 larger than the average marginalcost in the North/North-East regions (see Table 8 for a detailed comparisonof marginal costs among Brazilian regions).

Social Equity

29. The Brazilian power sector has adopted a tariff structure for allresidential consumers which has a minimum consumption level (MCL) of 30kilowatts-hour per household per month (KWH/hh-m); and a complementarysystem of increasing block tariffs. In addition, specific discounts areapplied to rural consumers and water supply and sewerage companies. Thiscurrent social policy is based on the following assumptionss (i) any familyrequires a minimum amount of electricity consumption; (ii) althoughrelatively small, the amount of money spent on electricity by poor familiesis important in their overall budget; (iii) family income is positivelycorrelated with household electricity consumption; (iv) rural consumers arein general poorer than urban consumers; and (v) some economic activities,such as water supply, have a high social impact.

30. In September 1989, the minimum residential bill (MRB) resultingfrom the MCL of 30 KWH/hh-m was about NCZ$1.37/hh-m or, equivalent to 0.62of one minimum salary (NCZ$249.48)--see Table 9. However, there is noexplicit guideline relating the MRB to the minimum salary or to any otherspecific parameter.

31. MCLs are usually included in a rate schedule with the main purposeof allowing utilities a full or partial recovery of customer-related fixedcosts. A MCL is equivalent to a fixed rate with the right to consume theminimum level. free of charge. However, this result is not being achievedin Brazil, as testified by the gap between the marginal cost associatedwith supplying the first 100 KWH to residential consumers (US$137/MWH) andits corresponding current tariff (USS20/MWH)--a gap that should be evenbigger for the MCL of 30 KWH/month (see Table 10).

32. Furthermore, there is no explicit explanation of how this MCL isdetermined. Studies by DNAEE 11/ suggest that the minimum electricityconsumption of a typical Brazilian family is between 93 and 117 KWH/month,a range which tesults from adding consumption related to

11/ Bitu, R.S. (1986), Tarifa residencial de caracter social, BancoIntpramerieannn d DfqArrnjl.,. Prornma 1P Analibis d os-- v Disenode Tarifa., Puebla, Mexico.

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REGIONAL MARGINAL COSTS (USI/MVd) I/ 2/ TABLE 8USl as of September 19, 1989 31-Oct-89

CONSUMER CATEGORY R E G 1 0 NBRAZIL

CODE VOLTAGE LEVEL SOUTH SOUTHEAST CENTER-VEST NORTH NORTHEAST

Ao Production 3/ 41.47 41.47 41.47 28.12 28.12 38.34

Al 280 KV 46.66 46.06 48.06 86.04 38.04 44.76A2 188 KV to 8S KV 62.88 52.03 62.03 0.00 0.00 48.40A3 69 KV to 20 KV 64.21 64.82 54.82 89.16 39.16 50.90A4 18.8 KV to 2.8 KV 68.82 64.69 04.s9 62.48 82.48 63.99A Avg. High A Med. Voltage 84.03 67.86 57.85 44.91 44.91 54.32

e1 Residential 107.40 110.11 110.11 84.47 84.47 98.9tB2 Rural 188.77 187.18 187.18 119.98 139.98 123.6783 Non-residential S9.82 100.58 100.5U 96.89 95.89 98.30B4 Public Lighting 96.50 96.60 96.50 84.85 84.36 96.40B Average Low Voltage 106.61 107.76 107.78 89.29 89.29 99.46

A d Average Power Sector r.6e 75.68 76.68 59.02 69.02 71.26

1/ Source: DNAEE2/ Exchange rate as of September 19, 1989 : US81.00 * NCZ*8.31602/ The marginal production cost Includes both the gneration end the Interconnection cost.

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AM 1.8, P 1

EVOLUTION OF RESIDENTIAL POWER TARIFFS AFFORDABILITY TABLE 981-Oct-SO

MINIMUM MINIMUM CONSUWTIONYEAR SALARY BILL BILL FOR MRS/MS 100/MS

(MS) (MRS) 100 K4H (9100) % %CZS/. CZ8/hh-m CZ8/hh-b

1974 0.8652 0.0098 0.0867 2.7 10.91975 0.4eos 0.0186 0.0550 2.9 11.41976 0.e09e 0.0166 0.0720 2.7 10.41977 0.s9s6 0.0240 0.0952 2.5 9.61970 1.4068 0.0812 0.1278 2.2 9.01979 2.1426 0.0389 0.1808 1.6 6.41980 4.0172 0.0546 0.8019 1.4 7.5190l 8.1500 0.0867 0.5829 1.1 7.21902 16.2080 0.1479 1.0861 0.9 6.419:8 80.6800 0.8450 2.8896 1.1 7.61904 95.80 1.0329 7.0621 1.1 7.41965 322.0800 2.071a 20.2896 0.9 6.81066 770.0000 5.6769 48.6086 0.7 5.71997 1,966.0900 10.7526 140.9875 0.6 7.41963 16,519.09o0 104.5658 6o.e8098 0.7 6.2

JU4/89 120,000.0000 0s5.6000 4,488.6640 0.4 8.7JUL/es 149,00.0000 728.6000 6,840.6240 0.6 4.2AUG/09 192,600.0000 994.2000 8,711.4460 0.5 4.5SEP/89 249,480.0000 1,872.2000 12,022.9520 0.6 4.6

---- - --- --- --- --- --- - --- ---- - --- --- --- --- --- --- --- -- --

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RESIDENTIAL CONSUMERS, COKW TION, COSTS AND TARIFFS TABL 1081-Oct-B9

NUiMBER OF AVERAGE MRGINAL TARIFF AVERAGE TARIFF MARGINAL COSTCOMSUMPTION BLOCKS CONSUMERS CONSUMPTION (MT) (AT) (MC) NT/MC AT/KC

KGH/hl- 1/ 1/ ------------ - ---------------- X XThousands KWi/f.%- US8/MIH K US$/IM X US$/i#U x

0 - 80 4,044 17.16 11.95 10.8 20.26 44.7 16.986 140.6 8.7 34.8

81 - 100 7,667 s6.s8 81.07 28.1 22.74 60.1 136.96 140.8 22.7 16.6

101 - 200 8s6s6 141.78 a8.28 84.6 29.87 84.7 100.84 103.6 37.9 29.2

201 - 0oo 2,951 252.54 92.88 88.4 48.20 95.2 100.84 108.6 91.8 42.8

More than 8oo 1,971 546.91 110.74 100.0 77.48 370.7 81.78 83.9 186.4 94.7

TOTAL 26,319 148.26 NA NA 46.87 100.0 97.43 100.0 NA 46.8

----- -- - - -- --- ----------

1/ DNAEE's estimate for December 1989.

i'

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- 70 -

ElectrIc Powr Rote. In Brsall AhM 1.J, Pat* le

lighting (14Kl H)l refrigeration (32 to 42KWH); ironing (4KWH); radio andtelevision (IN WH); and fans, water heaters and stoves (25 to 39KWH). Thisrange contains the upper limit of the second residential block (31 to 100KWH/hh-m), which suggests that 'on social grounds) there is nojustification for the existence of two tariff blocks below the consumptionlevel of 100 KWHIhh-m. 12/

33. More generally, a social electricity policy based on a subsidizedlifeline rate makes good sense in Brazil. Subsidization of a monthlyconsumption level of 100 KWH/hh (equal to the upper limit of the presentsecond residential consumption block) provides relief to the poor families'budget without causing major problems to the finances of the power sector--total residential consumption below 100 KWH/month is only about 12Z oftotal electricity consumption (about S32 of all residential consumption,.In addition, the quality and availability of electricity substitutes forcooking also allows this consumption level of 190 gWH/hh to be inside therange identified as the minimum required for a typical family. Butconsumptions larger than 100 KWH/hh-m should have rates much higher, andclose to marginal costs.

34. However, implementation of this policy should have an appropriatetarget and avoid unreasonable high levels of subsidization. Theelectricity bill for a monthly consumption of 100 KWH/hh has been growingless than the minimum salary during the last fifteen years (see Table 9).The continuous application of this policy for so many years has produced avery large subsidy--whichever standard is used to measure it.

35. Application of alternative subsidization schemes do not appearworth trying in Brazil because their complexity and adminib.rative costprobably outweigh their potential benefits. For instance, the *socialtariffa introduced in 1985 for billing assumed that poor families wereresponsible for all expected problems (waste and inefficient use ofelectricity, and an increase in 'technic 1' and financial losses, forexample) and very few of the expected benefits. 13/

36. Finally, as a complement to the above discussed social pricingpolicy, the Brazilian power sector allows new customers to be hooked-up toexisting facilities, without paying any connection fee. Only when the

12/ Nevertheless, it is important to note tha' these figures are averageestimates, strongly influenced by the larger consumption of householdsfrom the richer and most populated South and South-East regions. Iffurther studies show that. for example, there is a significantdifference between the minimum consumption of.electricity required by atypical family in the South/South-East and the North/North-Eastregions, then perhaps two or even three MCLs should be defined for eachof the Brazilian regions.

13/ This so-called 'social tariff' consists of a flat rate equivalent to amonthly consumption of 50 KWH per l,ousehold, that is applied tofamilies with consumption levels assumed to be so low that rendermetering irrelevant.

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Electric Power Ratee In Brazil AtNEX 1.8, Page 19

connection requires the expansion of the distribution network, is cost-related charge made. This policy facilitates the connection of poorfamilies to the power system.

Explicit Subsidies

37. Subsidies to public transportation, water and sewerage companies,rural consumers, public lighting, selected industrial activities, and otherconsumers have been reduced or abolished during the last years. The policyof giving significant and explicit subsidies to export-oriented producersand industries willing to substitute electricity for other fuels (known as'eletrotermial tariff) lasted from 1981 to 1986. 14/

38. However, the legacy of important subsidies awarded in the paststill continue and will persist for many years to come. Selectedelectricity intensive and export-oriented industries located in theAmazonas region--such as aluminum and ferro-alloy--were given long-termcontracts that will last for many years more. An aluminum plant in theAmazonan region, for instance, has a special contract of 20 years durationwith a 152 discount on the basic applicable tariff, a minimum rate ofUS$10.5 mills/KWH, and a maximum tariff equal to 202 the internationalprice of aluminum. 151 It is estimated that the special contractsnegotiated with two aluminum plants and one ferro-alloy plant alone willhave a subsidy cost to the power sector of more than one billion dollars. 161

39.. Currently, only rural consumers and water supply and seweragecompanies are given explicit subsidies. Rural consumers receive a 1O0subsidy (452 when they are organized as cooperatives), and water supply anusewerage companies a 152 subsidy. The financial impact of this policy isminimal so far, given the small participation of these consumers ir. themarket. However, execution of large programs in irrigation could generatea new and severe financial problem for the power sector, because of thehigh infrastructure costs and the large amount9 of water required.

14/ A clear intensification in the use of electricity during the periou1974-1988 was influenced by the relative stability observed in theindustrial rates during these years, but what was really important .the incorporation of new production technologies more electricityintensive and a trend to substitute oil derivatives for electricity.This policy was even promoted by the introduction of subsidized tariffsunder the weletrotermia' program. The energetic density of theindustrial output multiplied itself by wice from 1974 to 1984,estabiliz_ng afterwards.

15/ ELETROBRAS (1988b), Proieto III - Eletrointensivos: 'Diagnostico eMecanismos", Setembro, pp.32-33.

16/ Ibidem, p.31.

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BRAZIL

ELETRICZTY TRANSMISSION4 AN C01EVATION PROJET

POWE MAKEr FDRtE4AT_____________________

ACTUAL FCAST AUJL WVN (X)

1980 1984 1988 1989 1900 1991 1992 1993 1994 199S 1980-8 1989-93 1989-95

A. By Category (GWh)___________________

Rsidential 957.2 1229.5 1485.0 158.0 1881.0 1664.0 1738.0 1839.0 1986.0 2070.0 5.6 4.6 5 1Industridl 1018.6 1255.0 1411.0 1267.0 1421.0 lr11.0 1648.0 1767.0 1871.0 1905.0 4.2 8.7 7.8C4amercial 406.7 4S9.2 610.0 614.0 626.0 650.0 684.0 724.0 769.0 812.0 5.2 4.2 4.8Other* 267.9 883.S 447.0 806.0 838.0 554.0 617.0 666.0 717.0 770.0 6.6 7.1 7.2Own Consumption 4.3 5.8 9.0 10.0 10.0 10.0 11.0 11.0 11.0 11.0 9.7 2.4 1.6

Total 2684.7 3362.5 3962.0 3932.0 4176.0 4389.0 4695.0 S007.0 8824.0 6646.0 5.1 6.2 6.2

Logo" 356.2 848.2 880.2 1032.0 927.0 932.0 954.0 971.0 964.0 198.0Block *upply 200.7 217.0 225.0 233.0 240.0 247.0 255.0 261.0 8.3 3.1

Total En-rgy Supply 3010.9 8910.7 5042.9 5181.0 5328.0 5.0 589.0 6225.0 6563.0 6902.0 6.7 4.7 4.9

8. Demnd (sW) 0.6 0.7 0.9 0.9 0.9 1.0 1.0 1.1 1.1 1.2 5.0 5.3 6.5____________

C. System Faetor (S) 59.3 64.7 67.1 67.7 66.9 66.8 68.S 66.2 65.8 65.3

0. Lose Indcr (1) 1/ 11.8 14.0 17.5 19.9 17.4 16.8 16.2 15.6 16.0 14.4

E. No.Custme_r,(1000) 860.2 701.8 888.9 679.1 917.4 95S.1 990.3 1027.9 1066.0 1104.4 5.0 4.0 a.9

A. By Category (CG)___________________

Realdent;l 1837.4 2475.8 3497.0 3878.0 3873.0 4094.0 4823.0 4853.0 4786.0 5025.0 8.4 8.5 5.3Industrial 12480.7 14483.3 18859.0 19815.0 20285.0 2T706.0 28298.0 24837.0 26622.0 28044.0 5.1 .5 6.4Comercial 092.3 1161.6 1509.0 1562.0 1638.0 1716.0 1796.0 1878.0 1961.0 2048.0 6.8 4.7 4.6Others 968.6 1371.9 2164.0 2282.0 2422.0 2738.0 2914.0 8076.0 8277.0 3478.0 10.3 8.3 7.6Oan Cenaumption 12.7 24.8 86.0 59.0 74.0 89.0 ee.o 108.0 108.0 102.0 20.9 16.3 9.6

Total S1200.7 19516.6 25827.0 26846.0 28292.0 30398.0 32427.0 84452.0 36654.0 s86s2.0 8.0 6.4 6.8

Loam" 1409.2 1920.8 2367.1 2680.0 2851.0 3sca.o 8316.0 8452.0 8673.0 8880.0Block supply 258.4 188.0 180.0 282.0 207.0 206.0 191.0 176.0 189.0 208.0 -4.4 -8.4 0.1

Total Energy Supply 17876.S 21682.4 28374.1 29725.0 81830.0 38579.0 38984.0 3S806.0 40516.0 42775.0 5.9 e.4 6.8

B. Demand (24) 2.9 3.8 4.4 4.5 4.7 8.0 5.4 5.7 6.0 6.4 S.4 q 8.2_____________

C. System Factor (1) 70.8 75.9 74.0 76.1 76.5 76.2 78.0 76.8 76.6 76.3

0. Lae Index ) 1/ 7.9 8.9 8.8 9.0 9.0 9.0 9.2 9.1 9.1 9.1

E. Nr.Customers(1000) 1399.0 1903.4 2415.4 2589.1 2651.3 2768.6 2875.8 087.1 8090.0 8208.0 7.2 4.1 4.0

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IRAZIL

BE.TRIC1TY TANISSION AND CONSERVATION PROsJT

POWER MKUFORTr-------------------

COELBA

ACTAL FOAST AIAL ROWfTM (6)

1980 1984 1986 1989 1990 1991 1992 19 1994 1998 1980-88 19e9-93 1989-98_ - - - - _ - -- - - - -- _ - - _ - - - - - - - - - - - -- -- -- --- -- -- ---

A. By Ct"eory (Ah)

R_eidentlul 790.9 1168.6 1S80.0 1718.0 1851.0 1992.0 2186.0 2280.0 2426.0 2672.0 8.6 7.4 7.0

Industriml 1388.8 1741.1 2048.0 2045.0 2154.0 2370.0 2814.0 2688.0 2806.0 290.0 5.0 6.8 6.5

Coierelal '85.2 688.1 848.0 916.0 998.0 1070.0 1149.0 1228.0 1308.0 1389.0 7.1 7.S 7.1

Others 4A1.6 765.7 1060.0 1123.0 1276.0 1428.0 1596.0 1743.0 im88.o 2068.0 12.1 11.6 10.4

Own Consumption 5.6 16.2 20.0 21.0 23.0 25.0 27.0 29.0 82.0 84.0 17.2 8.4 0.4

Total 8S0.6 4896.7 5498.0 S820.0 6299.0 6088.0 7422.0 7948.0 P4SO.0 9020.0 7.8 8.1 7.6

Lose" 424.1 482.9 644.0 760.0 804.0 8659.0 904.0 944.0 981.0 1020.0

Block Supply 40.9 2.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0

Total bergy Supply 8855.6 4861.6 6142.0 6580.0 7108.0 7744.0 8326.0 8889.0 9441.0 10040.0 7.1 7.8 7.8

B. Demand (C) 0.7 0.9 1.1 1.1 1.2 1.8 1.4 1.5 1.6 1.7 6.1 6.9 6.8

C. Systea Feator (S) 89.7 60.7 64.4 68.5 68.6 68.7 67.9 67.6 67.4 67.4 1

D. Lowe Index (S) I/ 11.9 9.9 10.8 11.6 11.8 11.1 10.9 10.6 10.4 10.2 w

E. No.Cuate.r(1000) 702.1 1118.4 188.0 162S.5 1716.4 1812.8 1911.8 2014.4 2120.1 2220.9 10.8 5.3 8.4

CESP

A. By Category (Ca)

Bulk SupplyELETRSPDALO 24897.0 30o9S S 29475.0 30800.0 27699.0 27612.0 26444.0 80686.0 81278.0 38800.0 2.1 -0.1 1.2

CPFL 4220.0 9884.0 12408.0 8500.0 8282.0 8892.0 8818.0 9482.0 9887.0 9700.0 14.4 2.7 2.2

ELETROSL 2221.0 26S.0 594.0 596.0 596.0 596.0 896.0 596.0 596.0 596.0 -18.2 0.0 0.0

Obthr. 1687.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0

Totl 8802-.0 41028.0 42472.0 89696.0 86847.0 36600.0 87858.0 40784.0 41426.0 48296.0 8.2 0.8 1.4

LOwewe 2882.9 281.8 8268.0 2899.0 2647. 2664.0 2688.1 2689.4 2698.7 2724.4

CESP' Rtal' Supply 4006.8 M6.6 6988.0 7102.0 7940.1 8498.6 8976.8 9479.4 9998.7 10540.5 7.1 7.8 6.a

Total BEnry Supply 89861.2 49406.1 52668.0 49897.0 4714.6 47762.6 49519.9 s2902.6 54118.4 86560.9 8.7 1.6 2 1

8. Oamand (oW) 7.0 9.8 10.1 9.2 8.6 8.7 8.9 9.5 10.1 10.7 4.7 0.8 2.8

C. Syatee Factor ( 84.2 60.6 59.5 61.9 62.6 62.7 68.8 68.6 <1.2 60.8 >

- - - - -- -- - -- - - - - ---

D. Lose Index (5) 1/ 8.9 8.7 6.2 5.8 8.6 8.6 5.4 5.1 8.0 4.8

E. NW.CUV -r(1000) 469.8 680.1 76C.7 829.8 863.0 902.8 944.4 986.1 1024.7 1068.8 6.8 4.6 4.8

__-_ ---------- ~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~-

Page 84: World Bank Document...Documerit of The World Bank FOR OFFICIAL USE ONLY =iA 3Z277- -72 Rep,rt No. 8233-BR STAFF APPRAISAL REPORT BRAZIL ELECTRICITY TRANSMISSION AND CONSERVATION PROJECT

.

82AZZL

Em.TRICrTY TRANSISSION ANO D06CVATION PROJECT-----------------------------------------------

P KMR KET RK RICAST

CPFL

ACTUAL FQRBAST ANNUAL awh ()1900 1984 1986 1909 199 1991 1992 1998 1994 19S 1980-68 1989-9W 1989-98

- - O - - - - - -- - - - - - - - - - - - _ -- - --- -- -- --- -- -- --- -- -- ---A. y Category (GAh)

Reidential 1409.0 2066.1 2824.0 8017.0 3210.0 8410.0 3820.0 s844.0 4080.0 48s2.0 8.8 6.2 6.2Indwttrial 8504.2 4800.4 51Sh 0 584.0 5640.0 5941.0 62s8.0 6484.0 675s.0 7051.0 4.9 4.9 4.7Cc.rcial 742.4 1006.5 1264.0 1328.0 1897.0 1472.0 1580.0 1633.0 1719.0 1814.0 6.9 8.4 5.4oters 1287.6 1577.8 2010.0 2124.0 2289.0 2850.0 2464.0 28M5.0 2692.0 2818.0 6.2 4. 4.8Oon Cmnsumption 18.1 26.1 28.0 29.0 80.0 81.0 31.0 82.0 32.0 83.0 S.6 2.5 2.2TOt"l 891.8 9206.9 11282.0 11838.0 12516.0 18204.0 18898.0 14S68.0 18276.0 16048.0 6.2 5.3 5.2Las 666.8 599.8 824.0 844.0 848.0 866.0 896.0 928.0 940.0 1007.0slock supply 808.6 850.4 467.8 16.0 17.0 17.0 17.0 18.0 18.0 18.0 6.5 3.0 2.0

Totl Energy aupply 7961.2 10257.1 12573.8 12608.0 18876.0 14067.0 14811.0 15509.0 16262.0 17078.0 5.9 5.1 5.1

S. D_and (aS) 1.5 1.9 2.8 2.a 2.4 2.5 2.7 2.8 2.9 3.0 5.7 4.9 4.8

C. System Factor M 61.1 62.6 62.0 682. 62.4 64.3 63.2 62.8 64.0 65.0

D. Loe Index (1) 1/ 8.4 6.8 6.6 6.8 6.3 6.1 6.0 6.0 6.0 5.9

E. No.Cuetoamr(1000) 909.0 1174.0 1880.1 1437.0 1499.8 1556.8 1620.0 1682.1 1746.8 1815.6 5.4 4.0 4.0

CopoL.

A. By Catewory (Ah)

Rcidmntiml 1020.9 1487.0 2065.0 2188.0 2838.0 2490.0 2649.0 2s9Wo 2970.0 8139.o 9.2 6.4 6.2Indmwbrlsl 2106.0 2766.7 8835.0 3885.0 8987.0 4S53.0 5286.0 S666.0 8961.0 6278.0 7.8 10.2 8.6C,orcial 731.1 978.1 1170.0 1199.0 1260.0 1831.0 1405.0 169,0 1534.0 1602.0 6.1 S.2 4.9Oth0r. 78S.2 1127.9 1672.0 174S.0 1868.0 1940.0 2041.0 2186.0 2229.0 2828.0 10.8 8.2 4.9Own Cmonuaptien 1S.4 6.7 32.0 81.0 49.0 54.0 61.0 84.0 101.0 122.0 7.2 28.8 25.7Total 4818.6 6880.4 8774.0 s999.0 9468.0 10468.0 11442.0 12164.0 12795.0 18406.0 8.4 7.8 6.9Laos" 490.9 562.6 787.9 748.0 787.0 869.0 960.0 1009.0 1062.0 1117.0Block aupply 810.0 1296.4 O15.0 224.0 240.0 254.0 269.0 285.0 800.0 316.0 -4.5 6.2 8.9

Total Energy pply 5414.5 0227.6 9726.9 99e.0 10495.0 11591.0 12661.0 13458.0 14157.0 14099.0 7.6 7.8 6.9

B. Oeend (CM) 1.0 1.5 1.7 1.8 1.9 2.1 2.2 2.3 2.8 2.6 6.5 8.9 6.1__~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~l

C. Sysftm Futtor (S) 59.6 62.7 64.9 68.2 64.1 63.9 65.0 65.4 66.8 66.1

0. Lose Index r 1/ 9.1 6.6 7.6 7.5 7.6 7.8 7.5 7.5 7.8 7.5

i-6E. tdm.Cueaura(100) 798.4 1053.1 1809.7 o867.9 1488.7 1500.8 1568.5 1680.2 1692.2 1888.6 8.4 4.8 8.0

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EB.IRTICrY TR1MISSION AND C6WERVATIDN PROJFI

ELErRSU

ACTiAL F0r6AST M86AL a8TH (

l980 1964 1988 1989 1990 19l9 1992 1998 1994 1998 1980-88 1989-9 1989-95

A. By Comany (Wh)

COPEL 2417.0 151.0 618.0 900.0 937.0 1270.0 1796.0 0.0 ' 0.0 0.0 -15.7cB 30480.0 4307.0 4674.0 4600.0 4611.0 4634.0 4949.0 523s.0 5291.0 8600.0 5.5 3.8 3.8

CEEE 2011.0 3s82.0 8293.0 8100.0 8267.0 882s.0 3478.0 4310.0 4652.0 8200.0 6.4 8.6 9.0

ESL 0.0 805.0 1041.0 1100.0 1034.0 1218.0 1419.0 1677.0 1805.0 2300.0 9.4 13.1

SoWIST 0.0 1398.0 1764.0 8S90.0 2610.0 8048.0 3282.0 6693.0 6071.0 6080.0 14.5 7.6

Own Consumption 220.0 240.0 250.0 810.0 6'20.0 330.0 340.0 350.0 380.0 370.0 1.6 3.1 3.0

Losses 680.0 740.0 770.0 980.0 eeo.0 940.0 1030.0 1260.0 1290.0 1660.0 4.3 7.1 8.2

Total 8246.0 11028.0 12410.0 14860.0 13859.0 14789.0 16244.0 19418.0 19469.0 20880.0 5.2 6.9 5.8 1-4.

a. by Com-nY (S)

COPE. 29.d 1.4 5.0 6.1 6.9 8.6 11.1 0.0 0.0 0.0cELESC 37.0 89.1 87.7 81.0 88.3 31.4 80.s 27.0 27.2 26.8CEmE 2*.4 30.7 26.5 20.9 24.1 22.8 21.4 22.2 28.9 24.9EMRA. 0.0 7.3 8.4 7.4 7.6 8.2 8.7 8.1 9.8 11.0SOUTHEAST 0.0 12.7 14.2 26.2 19.2 20.6 19.9 34.8 81.2 29.0Own Consumton 2.7 2.2 2.0 2.1 2.4 2.2 2.1 1.8 1.8 1.8Lo"" 6.7 6.7 6.2 6.4 6.5 6.4 6.8 6.4 6.6 6.5

TOtal 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0

C. Demad (() 1.6 2.8 2.4 2.1 2.1 2.b 2.8 2.8 2.6 2.8 5.2 2.5 4.9

0. Byed_ hcor (6) 88.8 54.7 89.0 00.8 73.7 67.4 66.2 96.4 88.5 65. 1

E. L_ lnd.s CM) 1/ 6.7 6.7 6.2 6.4 0.5 6.4 6.8 6.4 6.6 6.5

r

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UMAZIL

EmCrY TRANMISSION AND CNS8RVATrN PROJET

PeE iT illS

ACAL FiWST MRML 8O aVH (1)1980 1984 1988 1939 1990 191 1992 1993 1994 1996 1980-se 19e9-a 1989-5

A. CategoY (oh)

Resldmetiol 8S8.2 4188.6 4713.0 4896.0 5097.0 5819.0 5554.0 5806.0 6078.0 6865.0 8.7 4.4 4.5Industrial 478.8 7107.4 6425.0 8u4.0 8807.0 9160.0 9f16.0 9486.0 10808.0 10775.0 7.1 8.7 8.9Cmercial 2682.0 8118.1 8382.0 849.0 8s85.0 8818.0 8997.0 4188.0 4878.0 4652.0 8.1 4.6 4.6Others 1577.0 2040.2 2176.0 8222.0 2614.0 2419.0 2478.0 2588.0 2627.0 2728.0 4.1 8.8 3.4Ow Consumtico 82.7 87.5 45.0 . 7.0 79.0 79.0 79.0 79.0 79.0 4.1 0.0 0.0Total 1270.2 16488.8 18741.0 19289.0 19947.0 20795.0 21624.0 22492.0 2847.0 24824.0 5.0 4.0 4.1Lm. 1341.2 1S6S.0 2128.2 21*.0 2618.0 2812.0 2404.0 2501.0 2609.0 2727.0Slock awply 72.2 12.0 10.8 11.0 11.0 12.0 13.0 13.0 14.0 14.0 -21.6 4.8 4.1

Toal B.rgy Supply 14068.6 18018.8 20879.8 2189.0 22176.0 28119.0 2041.0 21006.0 26090.0 27265.0 5.0 4.0 4.1

S. d (CM) 2.4 2.9 8.4 8.8 8.5 8.6 8.7 8.9 4.1 4.8 4.5 4.2 4.5

C. lipste Factor ( 67.5 71.2 70.4 78.6 72.8 73.5 73.5 78.1 73.1 72.1

D. Los Index ( 1/ 9.8 8.7 10.2 10.0 10.0 10.0 10.0 10.0 10.0 10.0

E. N .Custmr.(1000) 1649.6 2004.4 2160.8 2802.1 2857.0 2418.8 2471.1 2S60.8 2681.4 2683.6 8.4 2.4 2.8

EETR8PAtO

A. by Catesory (01h)

Reai tential 6581.0 7845.0 9780.0 10166.0 10578.0 11049.0 11812.0 12274.0 130L.0 18869.0 5.1 4.8 5.3Indus%. 1aI 19186.0 22767.0 27`15.0 25845.0 26207.0 27187.0 28110.0 29218.0 8042.0 51781.0 8.7 8.6 8.8Commrclal 8642.0 4295.0 52S2.0 582.0 5898.0 5909.0 6079.0 689S.0 6754.0 7187.0 5.0 4.4 4.8others 2672.0 8817.0 8775.0 3973.0 410.0 4246.0 4408.0 4595.0 4810.0 5867.0 4.4 8.7 4.0Dun Conaptin 465.0 819.0 541.0 49e.0 504.0 809.0 518.0 526.0 p3.0 540.0 1.9 1.4 1.4Tote 82446.0 88542.0 45048.0 41874.0 4S968.0 48720.0 50724.0 63009.0 58554.0 18814.0 4.2 4.0 4.3Lo41,. 2750.0 8120.0 8416.4 8678.0 8011.0 8949.0 4114.0 4298.0 4504.0 4780.0

Toetl Bergy Supply 85196.0 41662.0 48469.4 49080.0 30799.0 52669.0 54888.0 s7807.0 60068.0 68044.O 4.1 4.0 4.8

8. Damd (06) 6.0 7.1 7.7 8.4 8.5 8.8 9.1 9.8 9.9 10.4 8.2 3.5 8.6

C. Syte. Factor (1) 67.0 67.0 71.6 66.7 68.4 68.8 58.8 67.9 69.8 69.2

D. Lae Ind.. (1) 1/ 7.8 7.5 7.1 7.5 7.5 7.5 7.5 7.5 7.5 7.5 Uit3

E. We.Cuotours(1000) 3224.0 8797.0 4182.0 4841.0 4800.0 4659.0 4620.0 4964.0 5147.0 5812.0 8.8 8.5 8.4

Page 87: World Bank Document...Documerit of The World Bank FOR OFFICIAL USE ONLY =iA 3Z277- -72 Rep,rt No. 8233-BR STAFF APPRAISAL REPORT BRAZIL ELECTRICITY TRANSMISSION AND CONSERVATION PROJECT

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ANNEX 3.1

BRAZIL Table 1

ELECTRICITY TRANSUISSION AND CONSERVATION PROJECT------------------------------ ______-------------

1990-1993 TRANSUISSION/SUBSTATION EXPANSION PROGRAM

CEMIG

TRANSMISSION SUBSTATIONSLINES LENGTH CAPACITY OBSERVATIONS

KM. UVA.

500 kV. 182 800 a/ About SOX Is newcapacity.

846 kV 426 460

280 kV 98 296

188 kV 1949 196

69 kV 662 891

TOTAL 8201 8901 a/

CERJ

tO0 kV. 0 0 b/ About 162 MVAto be inetalled

846 kV 0. 0 in new substa-tions.

280 kV 0 0

188 kV 164 18S

69 kV 296 246

TOTAL 482 881 b/

Revised Oct.6,1989

Page 88: World Bank Document...Documerit of The World Bank FOR OFFICIAL USE ONLY =iA 3Z277- -72 Rep,rt No. 8233-BR STAFF APPRAISAL REPORT BRAZIL ELECTRICITY TRANSMISSION AND CONSERVATION PROJECT

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ANNEX 3.1

BRAZIL Table 2

ELECTRICITY TRANSMISSION AND CONSERVATION PROJECT

1990-1993 TRANSMISSION/SUBSTATION EXPANSION PPOCRAU

CESP

TRANSMISSION SUBSTATIONSLINES LENGTH CAPACITY OBSERVATIONS

KM. MVA.

440 kV 816 a/ 2678a* a/ IncludesInstallation of

280 kV 120 220 equipmnt relatedto Tsquaracu and

1S8 kV 729 284 Porto Primaverahydro plants.

88 kV 0 8 b/ Of which about1270 MVA is new

69 kV 6 18 capacity.c/ Additionally about166 WVAr of capacitor

TOTAL 1169 ao98 b/,c/ banks will be insta-lled.

COELBA

600 kV. 0 0

B45 kV 0 . 0

280 kV 197 600

18 kV 732 844

69 kV 1778 1194

TOTAL 2702 20S8

Revised Oct.6,1989

Page 89: World Bank Document...Documerit of The World Bank FOR OFFICIAL USE ONLY =iA 3Z277- -72 Rep,rt No. 8233-BR STAFF APPRAISAL REPORT BRAZIL ELECTRICITY TRANSMISSION AND CONSERVATION PROJECT

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BRAZIL ANNEX 3.1__---- Table 3

ELECTRICITY TRANSMISSION AND CONSERVATION PROJECT-------------------------------------------------

1990-1993 TRANSMISSION/SUBSTATION EXPANSION PROGRAM

COPEL

TRANSMISSION SUBSTATIONSLINES LENGTH CAPACITY OBSERVATIONS

KM. WVA.

600 kV. 0 0 a/Include. cons-truction of now

846 kV 0 0 substations and*x_pl.on of *-io-

280 kV 446 1600 tina on.

i86 kV 477 1060

Go9kV 39 808

TOTAL 961 816S a/

CPFL

600 kV. 0 0 b/Include. about71 WVA at 84.6 kV

846 kV 0 0 lovel.c/Include. construc-

280 kV 0 0 tion of now substa-tion and expenslon

18 kV 800 1288 ot existing ones.

69 kV 119 161 b/

TOTAL 719 1860 e/

Revld Oct.B,1989

Page 90: World Bank Document...Documerit of The World Bank FOR OFFICIAL USE ONLY =iA 3Z277- -72 Rep,rt No. 8233-BR STAFF APPRAISAL REPORT BRAZIL ELECTRICITY TRANSMISSION AND CONSERVATION PROJECT

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ANNEX 3.1

BRAZIL Table 4

ELECTRICITY TRANSMISSION AND CONSERVATION PROJECT

1990-1993 TRANSMISSION/SU8STATION EXPANSION PROGRAM---------------------------------------------------

ELETROSUL

TRANSUISSION SUBSTATIONSLINES LENGTH CAPACITY 0BSERVATIONS

KM. UVA.

600 kV. 347 900 Additionaly ELETROSULplans to install about

846 kV 0 0 220 MVAr capacity ofreactc- banks.

280 kV 1101 1282

188 kV 0 0

89 kV 0 0

TOTAL 1468 2162R c

Revised Oct.8,1989

Page 91: World Bank Document...Documerit of The World Bank FOR OFFICIAL USE ONLY =iA 3Z277- -72 Rep,rt No. 8233-BR STAFF APPRAISAL REPORT BRAZIL ELECTRICITY TRANSMISSION AND CONSERVATION PROJECT

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ANNEX 3.1

Table 5

BRAZIL

ELECTRICITY TRANSMISSION AND CONSERVATION PROJECT-------------------------------------------------

1990-1993 TRANSMISSION!SUBSTATION EXPANSION PROGRAM

ELETROPAULO

iRANSMISSION SUBSTATIONSLINES LENOTH CAPACITY OBSERVATIONS

Klr. MVA.

500 kV. 0 0 a/Of which aboutB0 km. is under-

846 kV 77 a/ 882 d/ ground lines.b/Of which about

280 kV 1 0 282 km. Is linereconstruction.

138 kV 572 b/,c/ 8981 e/ c/Of which about70 km. is under-

69 kV 0 9 ground lines.------ ------ d/Power substations.

*/Distribution sub-TOTAL 850 7813 stations.

LIGHT

600 kV. 0. 0 f/Of which about84 km. Is under-

346 kV 0 0 ground lines.g/Additionally LIGHT

230 kV 0 0 plans to install about800 MVAr capacity of

188 kV 109 f/ 2099 S/ capacitor banks.

69 kV 0 0

TOTAL 109 2099

Revised Oct. ,1989

Page 92: World Bank Document...Documerit of The World Bank FOR OFFICIAL USE ONLY =iA 3Z277- -72 Rep,rt No. 8233-BR STAFF APPRAISAL REPORT BRAZIL ELECTRICITY TRANSMISSION AND CONSERVATION PROJECT

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ANNEX 8.2BRAZIL*AUL Tablo 1

ELECTRICI T RANSMISSION AND CONSERVATION PROJECT

INVESTMENT POCRAM (USS million)

CEMIG

X Of10o 1991 1992 1993 Total 1989-98 Investwant

Generation 418.1 604.6 600.6 518.5 2117.0 52.0

Transmloison 120.1 1W0.0 200.0 250.0 728.1 17.9

Diatribution 280.4 286.6 249.4 248.0 974.4 28.9

*Gneral Investmnte 50.7 57.6 66.9 74.2 249.4 6.1

Total Be" Cost 685.8 1081.0 1118.9 10865.7 4088.9 100.0

Price Contingenloe 20.9 77.6 142.9 198.9 440.2

TOTAL 656.2 1108.6 1259.6 1264.6 4E09.1

CERJ

Ceneration 0.3 0.1 0.6 0.6 1.0 0.9

Transmission 11.1 4.8 2.6 2.9 20.9 11.8

Distribution 41.7 40.6 U8.0 84.4 149.9 60.6

General Investments 8.6 2.4 8.1 4.0 18.1 7.1

Total Base Coat 56.7 47.6 89.8 41.9 186.5 100.0

Price Contingencles 1.4 8.6 6.0 7.7 17.7

TOTAL 68.1 51.2 44.8 49.6 208.2

Page 93: World Bank Document...Documerit of The World Bank FOR OFFICIAL USE ONLY =iA 3Z277- -72 Rep,rt No. 8233-BR STAFF APPRAISAL REPORT BRAZIL ELECTRICITY TRANSMISSION AND CONSERVATION PROJECT

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ANNEX 8.2_AZIL l2

ELECTRtICITY TRANSMISSION AND CONSERVATION PROJECT

DNVISETM PROGRAM (USS *IIIi on)

CESP

X of

196 1991 1002 1993 Total 1989-98 Investmnt

Gnoerati on 1154.6 1266.8 1097.6 724.0 4248.6 78.6

Tranmalslon 168.4 65.4 36.2 71.0 841.0 6.2

Dtstrlbutlon 94.6 04.8 07.8 74.2 8W1.1 5.6

General Invesmnte 268.2 188.2 120.3 120.2 686.9 11.5

Total Base Cost 1601.0 1580.0 1821.6 99S.0 6622.6 16W.9

Price Contingenctos 42.0 116.1 169.0 101.8 6e7.5

TOtAL 1728.0 164S.1 1496.6 1171.8 0088.1

COELBA

Generation 28.4 44.9 5.0 0.0 76.8 10.2

Transmission 118.4 111.2 74.7 86.4 886.7 48.7

Distribution 95.6 90.8 67.7 66.8 824.6 42.8

General Inveetmnta 7.8 7.0 7.2 7.3 28.8 8.6

Totel Base Cost 244.0 256.4 164.6 112.0 707.6 100.6

Price Contineaeles 6.1 19.3 19.8 20.5 B6.7

TOTAL 260.7 275.7 174.4 182.5 688.8

Page 94: World Bank Document...Documerit of The World Bank FOR OFFICIAL USE ONLY =iA 3Z277- -72 Rep,rt No. 8233-BR STAFF APPRAISAL REPORT BRAZIL ELECTRICITY TRANSMISSION AND CONSERVATION PROJECT

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ANNEX 8.2BAIL

Table 8ELECTRICITY TRANSNISSION AND CONSERVATION PROJECT

DNESTIENT PRORAIM (US$ million)

COPEL

X of1990 1991 1992 1998 Total 1989-98 Investmnt

Generation 286.2 228.4 166.8 228.6 6C8.6 59.5

Transmission 76.4 76.7 84.5 29.9 213.5 16.2

Distribution 56.0 58.2 58.4 58.1 215.7 15.0

Cnornal Investoento 40.8 43.0 81.2 82.5 147.0 19.2

Total Base Cost 466.9 408.3 285.4 889.1 1434.7 10.,

Price Contlngencles 10.2 80.8 86.5 62.1 139.1

TOTAL 417.1 438.0 821.9 401.2 1578.8

CPFL

Generation 8.0 8.6 1.7 1.7 14.4 8.0

Transmission 36.6 88.7 85.4 50.0 187.7 84.9

Distribution 45.6 46.7 56.6 52.0 199.9 41.6

General Investments 27.5 24.1 26.0 26.4 908.0 20.4

Total Base Cost 116.7 112.5 110.7 182.1 480.6 100.0

Price Contingencies 2.9 6.5 15.2 24.2' 50.0

TOTAL 119.6 121.0 183.9 156.8 630.8

Page 95: World Bank Document...Documerit of The World Bank FOR OFFICIAL USE ONLY =iA 3Z277- -72 Rep,rt No. 8233-BR STAFF APPRAISAL REPORT BRAZIL ELECTRICITY TRANSMISSION AND CONSERVATION PROJECT

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ANNEX 8.2BRAZIL

Table 4ELECTRICITY TRANSMISSION AND CONSERVATION PROJECT

INVESTMENT PROGRAM (US8 *l III on)

ELETROPAULO

X .f1990 1991 1992 1993 Tot 1 1989-98 Investmnt

Generation 75.9 84.8 94.6 84.2 889.8 19.8

Transmission 169.7 142.4 162.9 166.9 640.9 87.6

Distribution 9W.1 182.8 115.5 187.4 475.6 27.8

General Inve-tmente 62.6 76.5 64.0 56.5 263.6 14.8

Total Base Cost 899.8 486.8 487.0 488.0 1769.6 160.0

Price Contingenceos 10.6 82.8 66.9 80.2 178.9

TOTAL 408.8 469.1 492.9 518.2 1888.5

LIWIT

Generation 17.6 88.8 48.7 68.6 163.7 18.1

Transmission 169.1 176.4 206.4 125.6 816.6 49.2

D3stributlon 78.1 62.1 79.5 77.8 812.0 24.9

General Investmente 81.2 46.6 48.7 84.4 160.9 12.8

Total Basa Cost 281.0 U84.9 882.8 295.9 1258.1 16O.6

Price Contingncise 5.8 25.9 48.9 54.2 184.7

TOTAL 286.8 869.8 481.2 86W.1 1867.8

Page 96: World Bank Document...Documerit of The World Bank FOR OFFICIAL USE ONLY =iA 3Z277- -72 Rep,rt No. 8233-BR STAFF APPRAISAL REPORT BRAZIL ELECTRICITY TRANSMISSION AND CONSERVATION PROJECT

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ANNEX 8.2

BRAZIL Table 6

ELECTRICITY TRANSMISSION AND CONSERVATION PROJECT

1989-1998 EXPANSION PROGRAM

INVESTMW PROGRAM (US$ million)

ELETROSUL

U of1990 1991 1992 1998 Total 1989-98 Investment

Generation 608.7 798.6 940.1 1111.9 8446.8 80.2

Transmiasion 114.8 78.6 122.9 12.1 820.4 7.6

General Investments ff.4 187.8 154.8 177.1 629.1 12.8

TotaI 80. Cost (6/69) 775.9 1081.5 1217.8 1881.1 4295.8 166.9

Price Conttngsncis 19.4 75.8 156.7 288.8 488.8

TOTAL 795.8 1076.8 1878.0 1689.4 4764.6

TOTAL POWER SECTOR INVESTMENT PROGRAM

1991 - 1984 1998 - 1991A. By Category -_

(US$ million)

Generation 10898.0 11866.6

Transmisslon 8825.0 7295.1

Distribution 2041.0 8874.1

Othor 640.0 1972.1

TOTAL SECTOR 17899.0 24587.9

B. By Percentage(S)

Generation 62.6 46.4

TransmIssion 22.0 29.8

Distribution 11.7 15.8

Other 8.7 8.0

TOTAL SECTOR 100.0 100.0

Page 97: World Bank Document...Documerit of The World Bank FOR OFFICIAL USE ONLY =iA 3Z277- -72 Rep,rt No. 8233-BR STAFF APPRAISAL REPORT BRAZIL ELECTRICITY TRANSMISSION AND CONSERVATION PROJECT

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Annex 3.3Page 1 of 2

BRAZIL

ELECTRICITY TRANSMISSION AND DISTRIBUTION PROJECT

Rates Adiustment Plan (RAP)

1. The Gcvernment will adjust the rates for the sale of electricityof the Electric Power Sector Companies to: (a) achieve a level of monthlyaverage of revenues per M0.h sold (the basic rate) equivalent to not lessthan NCz^103.40 stated in prices of mid-July 1989, which the Guarantoragrees is equivalent to US$54/MWh; (b) maintain thereafter the basic rateat a level eqt:ivalent to (a) above, and; (c) compensate for inflation everythirty (30) days or otherwise as ftequently as the Bank and the avernmentmay agree.

2. In calculating the rate increases referred to in paragraph 1above, the computer model prepared by ELETROBRAS and attached to this Annexwill be followed. The model reflects values, actual and forecast, of themonthly average and annual average revenues per MWh sold, stated in currentCruzados Novos. The value of each month will be restated in constantCruzados Novos by deflating such monthly value by the variation of the IPCof the current month related to the base period of July 1989. The model isto be reviewed and, if necessary, revised periodically by the Government,through DNAEE and SEAP, in a manner satisfactory to the Bank (such model,as it may be periodically revised hereafter called the Table).

3. To compute monthly values, the Table takes into consideration thefollowing: (a) actual and forecast power market sales per month; (b)consumption by consumer category; (c) rates per category; (d) day of themonth on which the increase is enacted; and (e) percent of average increaseor new structure of tariffs by categories.

4. In connection with the rate increases referred to in paragraph 1,the Government will cause ELETROBRAS to prepare and to submit to the Bankon a monthly basis after review by DNAEE and SEAP (or another competentagency), the following:

(a) an updated table:(b) evidence of publication in the Diario Ofic'al da Uniflo of DNAEE 's

(or the pertinent agency's) approval of the rate increase;(c) comparison of the percentage increase of nowinal rate levels and

changes in the IPC;(d) a summary report containing an evaluation of the development of

costs, a comparison of the evolution of rates and the level ofprices, in accordance with the Manual, and a technical comment ondevelopments which might adversely affect the financialperformance of the Electric Power Sector Companies.

5. For the purposes of the RAP, the following definitions apply:'inflation' is defined as month'.y variation of prices as measured by theIPC; 'IPC means Indice de Precos ao Consumidor as published by theGuarantor's Fundacyo Instituto Brasileiro de Geografia e Estatistica;"DNAEE" means Departamento Nacional de Aauas e Energia El4trica, and SEAP'menas the Guarantor's Secretaria Especial de Abastecimentos e Precos.

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BRAZIL

ELECTRICITY TRANSMISSION AND CONSERVATION PR( jEo 3

Tariff Averages NCZ$ and us$ per MWh Sold(July 1989 prices)

IESEC tn1 M9Y7

Dia AIJEJITO cwrestf rrigio DtA _1101 cwmates corrigido OlA AUEN1TO Corltt tMw*oldn-IN!AL mis.1 --- NAI

(2) CzSAnlb USIAUt _ Czh I) Ct:iNVh IUrs.1'JAN _9_22.D 35,43 '154 39.9 - - 499.2l 31.141EV 9' 31.9 P9S 34,74 1 7.9 3331.93 3?. - - 497.95 33.39.6 12.2 134,97 43 Os 0.4 WAS3 39P11 12 43.1 sa.61 31.4SAl - - 129.68 41,94 -381,45 4,41 74 56.4 704.9 34.16MI - - 129.39 39,24 - ^3.10 39.76 .'4 21.7 99."9 .0.91inl 29.1 129.54 36,2V - -9,9" 39 1 45.0 137.74t 47.79IL 20 8.3 t S1,31.7 3. 37- 1.86 1 1979.9e5 --. 91AN 20 2.5 169,92 36,7 V-.0 37.94 1971,.7W !P4.97Yt 2a 9.5 204.99 4.42 - 39.325 D7,9 It 6.1 1949.91 ;*.,,4UT 2e 2z.0 M." a," - - 376,0 37.76 1 8.1 29'9.41 i1.$9on 29 14.2 V3,22 44," 2 22.? 386.9 37*O 1 t 13.6 23.02 5O,319e 23 12.3 312,34 44,3 443,37 39,-.7 19.S 2'5AS.*3 47.44

IIDIA 372.96 42.13 153,3 39 A 3*99*9 4I It

mm _ W __ _ s:O:::t::::::::s:sDS__

DUI TO cmrft esin corrioie Ot1 aI1, cowrrmtus torriaedo VIA E33O crrortts *orrc3i vgm0|is, _ urns. -------- - 'NI--is) Cull USIll (R aI S/IM (2) KArMI tI3/lto 19.0 2131.24 51.S0 91116 25 14.2 '35,93 39,12 1W/2 9.39/40. 597.76 47,93Ff9 12 IS.0 236.45 52.1 - - 43.11 46.04 29 "4. 912,43 49.93Ns 21 20.9Y 43,11 52.72 - - 44.3 43, 29 .0 1244.29 ,49.9- 21 It.S 510.93 52.3 - 44.37 40,96 29 49.3 1764.14 0.58AI 29 19.20 60139." * 2,53 44 v." .S55 37,41

JUN 11 V.A .S3 52.31 2 2.09 30.69 44,9JIL It 19.53 9 n43 Sl6 05/23 1 .3L 38.* 2.39 32.59an 1/22 20.U/5.30 10.3 52.13 20 V.39 96,61 34." WISEt Ho 2.U 1149,51 5S." 20 3.01 119,21 35.42 2 IIU1 o 24.3 11.3 54 .311 20 35.95 14,38 25,47 INW 91 2.7 2'It,1 54.25 ra 2.0441.3 24.R2 37." 4 OE! 9 25. 29761.7 53.32 53 0.W/ 6.7 7m 43.°2

ot1 t 113S$6 194233 113,33 3CZ31

Note: Rate of Exchange IUS$ - 1,9142 NCZ$

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Annex 3.4Page 1 of 3

BRAZIL

ELECTRICITY TRANSMISSION AND CONSERVATION PROJECT

Financial Covenants and financial Performance Ratios

1. ELETROBRAS agreed to conduct its operations in accordance withagreed ratios of financial performance. Set forth below are thedefinitions of the various ratios and related financial covenants:

Financial Ratios and Financial Covenants: ELETROBRAS

i. Total Coverage: This ratio results by relating gross internalgeneration of funds plus interest and financial charges on debt tototal debt service plus dividends. "Gross tIternal generation"means total revenues related to operations, excluding revenuesattributed to equity equivalency (non-cash revenues due toappreciation of ELETROBRAS's shareholdings in the operatingutilities), plus amounts received as amortization of loans to theoperating utilities, less total operating expenses (such asadministration, taxes, payments in lieu of taxes, and interest andother charges on debt). "Total debt service" means the aggregateamount of amortization (including sinking fund payments, if any)of, and interest and other charges on, debt. "Dividends" meansthe total dividends paid or available for payment to stockholdersby ELETROBRAS. ELETROBRAS agreed to seek Bank concurrence forborrowing if its coverage ratio was less than 1.1.

ii. Ratio cf Debt to Equity: These are calculated and expressed as apercent of total assets. "Debt" means long-term debt orindebtedness maturing by its terms more than one year after thedate on which it was incurred. "Equity" means the sum of totalunimpaired paid-up capital, retained earnings, and reserves notallocated to cover specific liabilities plus reversion reserves."Revereion reserves" means funds of the RGR to the extent utilizedor to be utilized by ELETROBRAS to finance any portion of theinvestment program of the operating utilities. ELETROBRAS agreedto seek Bank concurrence for borrowing if its debt-equity ratiowere greater than 60? to 40Z.

iii. Ratio of Financial Investments: This ratio results by relating theaggregate outstanding amounts of loans and other financingprovided by ELETROBRAS to the operating utilities and Itaipu toELETROBRAS's total outstanding debt. ELETROBRAS also agreed totake all action required to maintain a financing ratio of not lessthan 1. I

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Annex 3.4Page 2 of 3

Financial Ratios and Financial Covenants: Other Beneficiaries

2. ELETROBRAS also agreed to obligate the other beneficiaries throughsubsidiary loan agreements to conduct their operation in accordance withagreed financial ratios. Set forth below are the definitions of the ratiosand related financial covenants.

i. Rate of Remuneration: As defined and calculated according toBrazilian legislation in law 5655 of May 20, 1971 and as amendedto the date of this agreement. For generating companies, the rateof remuneration would range between 6Z and 8?; for companiescontributing to RENCOR, between 102 and 12Z; for companiesreceiving RENCOR allocations, between 8? and 10.

ii. Adjusted Debt Service Coverage: This ratio will be calculated inrespect of any fiscal year by relating the net revenues of therespective beneficiary to its adjusted debt service requirements."Net revenues' means gross revenues from all sources, adjusted totake account of the rates in effect at the t':e of incurrenc' ofdebt, even though they were not in effect during the fiscal yearor twelve-month period to which such revenues relate, less the sumof all expenses of operation and maintenance, plus taxes, if any,but before provision for depreciation and amortization of assets,interest, and other charges on debt. (The concept of *netrevenues' is similar to the concept of 'gross internal cashgeneration"). "Debt-service requirements' means the aggregate dueand payable of amortization and interest and other charges ondebt. 'Adjusted debt-service requirements' excludes from debtservice requirements: (1) amounts which have been paid or will bepaid in such fiscal year by the shareholders of the beneficiarywith contributions to the capital of the respective beneficiarymade or to be made to fund any such payment; (2) amounts ofirterest which have been paid or will be paid with the proceeds ofloans contracted by the respective beneficiary that includefinancing of interest during construction; (3) payments on accountof principal which have been or will be deferred to a later fiscalyear or years with the consent of creditor of the respectivebeneficiary; and (4) until December 31, 1995, payments on accountof principal of debts of the respective beneficiary to commercialbanks in currencies other than cruzados novos which have been paidoc will be paid with the proceeds of loans contracted by thebeneficiary and which are not to be repaid during such fiscalyear. ELETROBRAS would convert enough of its loans and/orcontribute equity, including dividends, to enable 'Its subsidiariesto achieve agreed annual adjusted debt-service coverage ratios.State governments would make the required equity contributions toenable their respective power companies tc perform financially asagreed. For generating companies, the adjusted debt-servicecoverage ratio would be 1.1(X) in 1990 and increasing annuallythereafter. For the other beneficiaries the adjusted debt servicewould be not less than 1.5(X).

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Annex 3.4Page 3 of 3

iii. Debt/Capital Expenditures Ratio: This ratio will be calculated byrelating the aggregate of all debt incurred in respect of anyfiscal year by the respective beneficiary to its capitalexpenditures incurred or expected to be incurred in that fiscalyear. (The concept of 'Debt' is similar to the concept of 'AnnualBorrowings"). "Debt' excludes long-term "roll-over" borrowing forforeign-currency loans -- that is, 'debto excludes payments onaccount of principal of debts to commercial banks in currenciesother than cruzados novos which have been paid or will be paidwith the proceeds of loans contracted by the respectivebeneficiary and which are not to be repaid during the same year.*Capital expendituresn means the aggregate amount of capitalexpenditures during any fiscal year incurred on account of fixedassets, including interest charged to construction, related tooperations. The individual beneficiaries would limit their annualborrowing to no more than 652 of their capital expenditures in thesubject fiscal year, except for the beneficiaries contributing toRENCOR, who would limit their annual borrowing to no more than70X.

iv. Total Debt/Total Net Fixed Assets Ratio: This ratio will becalculated in respect of any fiscal year by relating the debt ofthe respective beneficiary to its total net fixed assets. 'Totaldebt' means long-term debt or indebtedness maturing by its termsmore than one year after the date on which it was incurred.*Total net fixed assets' means the gross value of fixed assetsplus construction work-in-progress and deferred charges to fixedassets, as revalued, less accumulated depreciation andamortization of deferred charges to fixed assets. Allbeneficiaries would maintain a ratio of total debt to total netfixed assets not greater than 671.

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Annex 3.5Page 1 of 2

BRAZIL

ELECTRICITY TRANSMISSION AND CONSERVATION PROJECT

Key Indicators of Historic Financia: Performance

1985 1986 1987 1988 1989

Companyt CELESC

Rate of Remuneration (2) 2.J -0.7 3.2 3.4 NADebt Service Coverage (x) 1.0 3.O 3.2 2.5 NASelf Financing (2) 74 97 83 97 NADebt/Total Assets (S) 41 36 37 35 NA

Company: CEMIG

Rate of Remuneration (2) NADebt Service Coverage (x) 1.6 1.4 2.6. 1.2 NASelf financing (2) NADebt/Total Assets (X) NA

Company: CERJ

Rate of Remuneration (2) 2.2 5.1. 1.3. 0.3. NADebt Service Coverage (x) 2.7 5.1. 4.3 9.9 NASelf Financing (2) 25 32 26 57 NADebt/Total Assets (2) 3 2 2 4 NA

Company: CESP

Rate of Remuneration (Z) 6.5 5.5 7.5 9.2 NADebt Service Coverage (x) 0.6 0.5 0.6 0.6 NASelf financing (X) 107 95 114 102 NADebt/Total Assets (2) 58 55 60 64 NA

Company: COELBA

Rate of Remuneration (Z) 5.3 1.1 0.3 6.6. NADebt Service Coverage (x) 2.6 1.5 0.9 1.6 NASelf financing (Z) NA NA NA NA NADebt/Total Assets (2) 53 57 60 62 NA

Company: COPEL

Rate of Remuneration (Z) 6.2 3.7 9.8 6.9 NADebt Service Coverage (x) 1.9 1.2 2.0 1.9 NASelf financing (2) 43 13 52 33 NADebt/Total Assets (2) 57 55 57 56 NA

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Annex 3.5Page 2 of 2

Company: ELETROPAULO

Rate of Remuneration (Z) 9.2 9.3 12.9 9.3 NADebt Service Coverage (x) NA 1.2 1.5 1.8 NASelf financing (2) -48 -2 -43 -32 NADebt/Total Assets (2) 77 71 68 59 NA

Company: ELETROSUL

Rate of Remuneration (2) 6.6 5.1 4.8 3.8 NADebt Service Coverage (x) NA 1.8 4.3 1.5 NASelf financing (2) NA NA NA NA NADebt/Total Assets (2) 67 66 52 43 NA

Comp* : ESCELSA

Rate of Remuneration (2) 9.5 8.0 12.2 3.2. NADebt Service Coverage (x) 2.8 2.0 3.8 4.0 NASelf financing (X) 54 24 64 32 NADebt/Total Assets (Z) 24 21 21 21 NA

Company: LIGHT

Rate of Remuneration (2) 6.3 4.8 10.5 12.0 NADebt Service Coverage (x) 1.4 0.8 1.2 1.3 NASelf financing (2) 121 19 96 48 NADebt/Total Assets (Z) 53 46 47 47 NA

Company: PAULISTA

Rate of Remuneration (2) 6.0 5.5 14.2 2.9 NADebt Service Coverage (x) 6.2 1.4 2.4 0.9 NASelf financing (2) 129 35 34 0 NADebt/Total Assets (2) 80 54 54 43 NA

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Annex 3.6Page 1 of 3

BRAZIL

ELECTRICITY TRANSMISSION AND CONSERVATION LOAN

POWER SEC. A ELECTRICITY REVENUES

1. Consumer bills contain the following charges:

(a) The basic tariff, which on a nationwide basis provided about 93Zof revenues collected from consumers for electricity service in1988.

(b) The Sole Tax (ICMS - Imposto de Circulacao de Mercaderias eServicos) on residential, commercial and sn.all industrial1

consumer bills, which provided about 2X of sector revenues in1988. All of the proceeds of this charge accrue to stateGovernments and municipalities, which under the new Constitution,may decide how these funds are used. Formerly, forty percent ofthe proceeds of this tax, called the Imposto Unico de EnergiaEletrica remained with the Federal Government and about 602 wasreturned to the sector: 5O0 from the Federal Government and stateGovernments and 10? from municipalities.

Cc) The Compulsory Loan (5? of electricity revenues in 1988), anobligator-y investment scheme under which industrial consumersusing more than 2,000 KWh per month acquire ELETROBRAS bonds(20-year maturity yielding 6Z annual interest and revalued througha monetary adjustment that makes reimbursements in real termssignificantly lower than original receipts).

2. The basic tariffs are set at a level designed to cover:

(a) operating, maintenance, and administrative costs;

(b) taxes other than income, principally property taxes;

(c) straight-line depreciation on gross fixed assets at rates of 5Zfor thermal facilities, 4X for distribution and 3X for hydrofacilitiea;

(d) a charge on plant in service reduced by the sum of accumulatedconsumer advances, contributions and grants (the 'ReversionBase'). This charge which was recently modified by the RENCOR(para. 5 below) consisted of:

Mi) Reversion Fund (RF), a tax of up to 4Z of the Reversion Base(utilities are levied in proportion to their rate ofremuneration). This fund was used to compensate utilitycompanies when their concession reverted to or were taken

11 Industries using less than 2,000 KWh per month.

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Annex 3.6Page 2 of 3

over by Government. Presently, it is used by ELETROBRAS tofinance electricity utility expansion programs throughoutBrazil;

(ii) contributions to RENCOR, a mechanism designed to assist inthe transfer of revenues from the financially strongercompanies to the financial weaker companies.

(e) a fuel tax earmarked to pay the fuel expense in eachinterconnected system;

(f) a return of between 102 and 122 on remunerable investment.

3. The remunerable investment consists of:

(a) plant in service including capitalized interest, plus monetarycorrection;

(b) less acc-mulated depreciation, monetarily corrected;

(c) less the year-end sum of contributions from custom.ers andgovernment grants;

(d) plus other remunerable assets, including an allowance for workingcapital; and

(e) less the accumulated excess (or plus accumulated deficit) inprevious years remuneration (CRC account).

4. RENCOR. In 1988, Federal and stare power authorities agreed to replacethe Global Guarantee and Reversion Funds (GGF and RF) with the ReservaNacional de Compensacao de Remuneracao (RENCOR) enacted by decree-law 2432transferring revenues from the financially stronger power utilities to thefinancially weaker companies. The GGF and RF ceased to function in 1987because certain state-owned companies, claiming that the Federal Governmenthad not set tariffs at levels consistent with the minimum rate ofremuneration (102), were successful in withholding their contributions tothe GGF and RF.

5. The main features of the new scheme are:

(a) the requirement for utilities toi make lpaymentq tt! REIIOR o.ily whenthey have achieved the legal maxinitm rat'o of remuitiati"ln. 12.(all state-owned lower titiljtio~ Iav- l0pn grant-d 1lw letgalminimum rate of remuneration. 10):

(b) the division of RENCOR funds into three parts: Ci) one part istransferred to utilities earning loss than the legal minimum rateof remuneration, as GGF funds were transferred: (ii) one part istransferred to ELETROBRAS. as RF futids were transferred; and (iii)one part remains in the utilities:

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Annex 3.6Page 3 of 3

(c) the use by the utilities of credits in the 'Conta de Resultados aCompensar' - CRC - (which registers accumulated shortfalls belowthe legal remuneration acknowledged by the Government) to satisfyamounts due to ELETROBRAS because of prior nonpayment to the GGFand RF; and

(d) miscellaneous items such as fines for delays in payment to RENCOR,other voluntary compensations of pending debits and creditsbetween utilities and the Governmient, monthly adjustments of thefiscal tariff, a transm_ssion charge for Itainu energy, andallowance for emergency or temporary tariff .harges for certainutilities without undermining the principle ot uniform nationaltariffs.

Page 107: World Bank Document...Documerit of The World Bank FOR OFFICIAL USE ONLY =iA 3Z277- -72 Rep,rt No. 8233-BR STAFF APPRAISAL REPORT BRAZIL ELECTRICITY TRANSMISSION AND CONSERVATION PROJECT

BRAZIL

ELECTRICITY TRANSMISSION AND CONSERVATION PROJECT

ELETROBRAS: Actual (1986-88) and Forecast (1989-93)Financial Projections

Income Statement

___ _ _ _______ _ _ _ _ _ _ an --- ._

tA11 1 an I I WAS I WAN 2 mA. _... .. __.... .. - -- -------

M.CEnw mis WAmmS MIs.am* . au. 2 itmi a. 2 W6.3 P 2 1fn.4 166 269. U.S 13139681 [wedI8 I SM49O 3.9 3.1 1 544.4 hiM:1 Is 19906 111. 94 M9.0 ".9 22. 15 01.1 Miii u5 ." m

41#.2 4U 2116.6)-IM 1. .U6. a.s 64. 1.1.701 57 99.44 35.4 19. ISA 19.3Otwadeuga ~ ~ ~ ~ ~~~~.?2.21 33.2 2.4 It,0I40I.al.u xa Pac l c N Nst, ai aa 4.f 14 411111A1

= SF .ttro - ud^ff@- tttzj 2 iS27.4 V." ii 3th. W t3.W a Mj I,. * se-sKu(siswslmass £127.4 41.95 :t in.. 903.91- § 9§ l. 05 1 5t2,) .t 1344 13.5 I 4X3. 51,75 I 14. 49.99 9t44.9Eawga 4uf 15t III 66 42. I ,2j 432 Iih 13.3 41,4 1 3.A 4842 1 94j 4..32 t 1,4.5 .2a i35.4 tbvnaa Maaaaakrd,a 16.4 -v i4 . 6.142 En, 91. .1 t..2 1 it."9. 9n.44 Mal 9.3 59.5 I

Uln"lS Admistr& awt I t . S tF|w #t, **2| . .] Zt22

efuESIa 866 W1186 I223.6 13.41 5.5 -2.91 9. . a 6e.5 41.6 I MW 6.1,4 I 103 6.26.5 a 26.5 36.0 a 7u.o ia.aI.)UaE,4 LuIm_ " a 2. 6.19 4.2 0.2 .9 Go" t.3 6." 9.3 .45 19. 6.6 1.2 S." 1. 4.44I*kamLi 64316614 1241,9-90,54 8z3.2 -2.64 11616,41-8.16 O. 6.6 90.65l il 0.6 06.0Wo 6.46 90.6 6.606 0.6

otiL s AM Ivar K 836 976.3 41.62 164.21 -4.29 19.3 1.65 i MgA 41.92 1164.0 44j6 a 39.4 46.3 I 516 51.6 I 53.0 51.3

4-59101506 93*61 NMI BE3 MO .6 . .6.0 0.6 0.4 9.3LOSI 2 41u .1 8.92 54.6 2*0 54.6 2.92 1M. 2.29

laSOW2O U M CMIUIIC 916.2 41.62 (94425 -6,2f 191.3 ?.6 16. 411 A 5 P1A.3 0 4 sMA 411.1 1461.6 41,92 I6 620 .aS

Id00.

Page 108: World Bank Document...Documerit of The World Bank FOR OFFICIAL USE ONLY =iA 3Z277- -72 Rep,rt No. 8233-BR STAFF APPRAISAL REPORT BRAZIL ELECTRICITY TRANSMISSION AND CONSERVATION PROJECT

BRAZIL

ELECTRICITY TRANSMISSION AND CONSERVATION PROJECT

Sources and Applications of Funds Statement

inwugi m SUM I IAMs mi

411I"~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~4 stu

sit"U04193 o6 mi 48 08 we ("1.) 91 16.3 2.1 215,2 6.44 05.2 9.09 W.101.3 .5010Ibataft faic useam I MA3. AsU27 31. 1 t-*u.tna.paPwmef 0si6w4t 153.1 0.31 9 15.l14 195.1 W:.l-teairnss eaPumSfth Ist ft Oad W.41 0.0 .4.4 4115.01 664, 14.1t-W"Bgamgde Ft Spotatf u.dm.'m. I5. 132810 I . 2. 0. 6. 4813.t-imnsiiui. is teigaigact - d.. 261~~~~~~~~~~~~~~~~~~~~~~3,1 01 166 0.*~~~~~~~~ ~ ~ ~ ~ ~ ~ ~ , '9*3~~~~~~~~~~~~~~Ie :

dot sai ... 4. 1I

ODItESUtIo 2792.2 61.4 213. W 581l I 4.2 2923.4 04.51 3 W161 ,94.6 2963.4 11.5 3 21.6 67.54 2679.5 6592

to bacen de Crediste blinf 4.,4w 11.. ..*.1, I a,ina crsitee Uterma 191.1 Amos 1111 35161 1 95.2 VII23. 1 39.4 I 103.2£.swi ftctgisIo CevIis 1. 72 0. 00 4 4.3.0, .Ittft~ia ft C,di6o Cu Irate tua.ft)fsa. 0 1 52. 1641.0 124. in4. au64 31. 2416.0 M0.&TOTAL GA mufs 0623. 10.0 W.3 10.6 4 39.2 60.6 93, 60.0 0 W.1 10,40 0 19.2 £0.n 4 W.9 W106 I W.% 10.0

iausraIW I FSEIAIEkJIINUUM6 9954.2 16,? 0 229.6 6. 244. 92.46t 2 15.4 "1153 2 201.1 01.05 3 MIS. 1H.1 3 530.1 10.5 3 510.2 ii.1,Cmtlan,au 2$13.6 2294.41 2144A.7 2 413. 2 W6.? 3 29.1 2 52.7 250.2Muega& ). 4. 0.0 9.lliAZpt 51, lt5 . *.0 0.0o :.I,iuwI!ui ruI*AsI £ 06.6 24,42 21.3 0.o IP.A 4.* 66.4 ,16,0 1.9 19,14 '16.0 21.01 a 10. I22.61 943.1 261.50cistrelala 62.0 I1'? 6.656.4 Mot9 9Mot 02.6 96.1

(41 in~~~~~~~. 0.0fA 6.0 0.6.3 0.

WillS WttCIOIS LullS £132 40.44 22.1 13.5 24.4 31.9 10.9 10.9 10. eWvM(asa K CAPItA1 CIICAIMII L16118 61.? 0.04 (13.,) 4.60 (20.2 0.5 11014.0 5.20 (25.0) 4,:62 151.1) -6.22 92f -2.01 ft2b.51 -2.00u,s'ts 4623,5) -0,53, 26.9 .0.6 1.2 0.4 4.3 0. .0 0.0 s 40.3) 3.60 0#.# 0.0 1.0), 0,011.J

10306 606 Al. .C4COII ~ ~ ~ ~ ~ ~ ~~l.tol 4 W2. 06 03,3 £40.0 4 31.2 MA.O 3 432.2104.0 001.160.0 4 10.2 10.0 4 412.9 66.01 4 W6.2 1006.00 Fj.---- ,---..... ...- ------------------------------------------- -- ------.

Page 109: World Bank Document...Documerit of The World Bank FOR OFFICIAL USE ONLY =iA 3Z277- -72 Rep,rt No. 8233-BR STAFF APPRAISAL REPORT BRAZIL ELECTRICITY TRANSMISSION AND CONSERVATION PROJECT

BRAZIL

ELECTRICITY TRANSMISSION AND CONSERVATION PROJECT

Balance Sheet Statement

-- - --- ___----............... - - - ---.-- _._

............... 5 . ................ _ ._ ._ .. __ __ .. 6-_.9 ._ _. _----------- ------ - 3 W 2 I WAN I M I we a WN.

tille RifA 64 &u1neo 411160 1.. 3A.. 1 56.21 M.5 0.6 26.6 5,6 MA .9 67.4 s.u 5 r2.p Lft M. 6IIwulasa l232 a." 1141.5 0. 1 j 121 ,t 12 0. 124 l,3 24 0.14 12.4 a.i1go a e tot r f12.4 9.44 62 0a.15 U.S" 9 211 .0 9,6 141 22 1* 16.1 t1. "4A 11.t vdIV .Ci""lE a SIF kw 12.1 4.21 19.2 01 hA 9.3 112.) 9.36." 27 IU91 6 1.7 1a 11..27 I 8.*2.#ir. 11.1~~~~~~~~~W 9112 It. 93 kw * 3. 9 2.6 6.23 I 92. 0.1 0, 4.5 9 .6 I,

WSIM511 I. IVA(CS3 s t14 V37.1 U. 1211.1 1 I,3 15y . 9* M9 ,. 19 W. 3.9 21 4q.5 53.93 23 2 . 39.2 21 31 W.653

I FS E toSS 462.2 41.31 9 61 2.1 10 US. 41. H .9 6.3 12 925.4 2954 14 241.4 29.13 IS S.9 2. S? 116.4 3.12

Ulm4 AM1OS .0 63 22.0 64.6 3. .W 31 0. . 0,I 22.7 0.0" 22.1 0.04 3.1 0*6I01. 40 riv 25 22.9 1.0 26 294,2 140 2 14.0 £1. 8 6U 30415 116. 26 3191.0 56. 4641 ,0 10.3 3q 3V.1 j3.

96313 hUalf Omi03o 421.2 1.49 314.4 1.26 2I12.31, 412. 1.41 @04.9 1.3 woo9 1.62 13. 3.02 91.9 2.01f0arli t tuuiec,iataotn a (sanAsms 231.9 0.92 34.9 1.68 1341 2942 0 3112.2hgur ~~~~~~131,1 0.62 0.0 ON.3 5.1 3 "I.6 'it I4. R,711111ISMI I F116.aIOI 14 132. 35S.1 14 610.1 15,6 s11401 M .62 14 39.? 42. 15 112.4 42.64 11W 36. 051 £9 64.4 a.92....... 4191.. 16.,3_,,1.3 14.,5 at _. 1613 24 040 3 M3 O&I. audi 64.wI 2512.; aaim. ~ 10.10 4.3 t. 6 4 tOIC 26~~~~~~~~~~~~21.7 11.17 2854.3 1.a. wet 4 f 13.11 5

O0s3M6664l1166680 302566f" t!- J II IHi I I

W 20.44.H 101.f CZ1 a1U 3.43,WKDM3Lww.~~iaigagamaa.i 7~~418.2 .4 143.6 tol 91 13 &4)JD" msivu ~~~~36.2 60. it' 0.,7 5041 0.23 's# 54.5 $.Vl sos4. 0.15 50.1 0.33 54.5 sell

W44 OS t*1SIVD 25 322.9 340.3 24 29.2 $110.41 a3174.300two a9 324 t10.1 a03.4In.*36 . U69.011. 644t.914 0. =3.I1, "k

0~

Page 110: World Bank Document...Documerit of The World Bank FOR OFFICIAL USE ONLY =iA 3Z277- -72 Rep,rt No. 8233-BR STAFF APPRAISAL REPORT BRAZIL ELECTRICITY TRANSMISSION AND CONSERVATION PROJECT

BRAZIL

ELECTRICITY TRANSMISSION AND CONSERVATION PROJECT

Indicators of Financial Performance

... .... .. .............. ...................... - __ -------- -... -- - .. ------ . ... _ . _ ..................... ... . ........-. -_._-- --------- -

;*- - ----- ------- - - - - - ------- ---------- -----.---- l - .--------* hisd_ M Ceetw. 1dabwwri_) A RAG 0.2 *1.1 .1 eWe,s4*s a Macsam Idri_mma L *n n ts 12 .Liquid* MI* Wi'ee0 eMma. a. eatrmm.OL.ui.Eet.mI. 32 0. 0.

it; ames i,q.a,dtIIdal 4*'li^Sb- Ms 042 0.42 0 0 ti Ia

rbuf 4*r bt'w 4 I.,iim }. Uwmaaesl Cm4 05,1 4 *|5

| tX X 8 dx t~~~~~~~~~~ie 4*1i

ks 6.42~~~~~~~~~~~~~~~~14

42'-*' t "inX 1M~t co U ,tB4. .5:".".MU~~ 4* 0.70 0* 011 KOil Cd 0.641

Us @iet(ti~U SiCII*g,aca 04 0.51 *. 0P.M 0*

" i _ t *^ vlitF " *Fte_|* tSsZ *:% *:% :;; : :* ' - '~~~~~~~~~~~~~43 U" "A, ue o.f. 111.K.M _,- -0 - --2 .-.- ."-

1~~~ul 4* Pasyus 2.44 1.12 5.2 s~~ ~~~~~~~~~~~~.n s*;64

2:fl~~~~~~~~~~~~~~~~~~~06108 0.68~fi

Page 111: World Bank Document...Documerit of The World Bank FOR OFFICIAL USE ONLY =iA 3Z277- -72 Rep,rt No. 8233-BR STAFF APPRAISAL REPORT BRAZIL ELECTRICITY TRANSMISSION AND CONSERVATION PROJECT

- 101 -

ANNEX 8.6

BRAZIL

ELECTRICM TRANSMISSION AND CONSERVATION PROJECT

ESTIMATED DISBURSEMENT SCHEDULE

(USS milion)

IBRD Filal Year Dtubursoments du- Cummulating Disburse-and Somestr ring Semester mntc at End of Semester

1991

Dec.81,1990 85.0 1/ 85.0

June 80,1991 16.9 45.0

1992

Doc.81,1991 40.0 8S.d

June 30,1092 40.0 126.0

1998

Dc.31,1992 660.0 165.0

June 38,198 C0.0 285.0

1904

Doc.81,1998 50.9 285.0

June 80,1994 40.0 825.0

1995

Doe.81,1994 45.0 87060

June 89,199S 15.0 U85.0

NOTES:

I/ Initial deposlt In the Spaeil Actcount at the Central BDnk.Loan Closlng Date : June 80,1995

Page 112: World Bank Document...Documerit of The World Bank FOR OFFICIAL USE ONLY =iA 3Z277- -72 Rep,rt No. 8233-BR STAFF APPRAISAL REPORT BRAZIL ELECTRICITY TRANSMISSION AND CONSERVATION PROJECT

BRAZILELECTRICITY TRANSMISSION AND CONSERVATION PROJECT

IMPLEMENTATION ARRANGEMENTSProlect Implementation Unit

ELETROBRAS PROJECT EXECUTING BCDY(SUPPORT)

FINANCE tDIRECTORATE - _ SPECIAL PROORAMUS(DEF) . - COORDNATION - COPE

PLANNING 8 . _EN INEIN - - - - - - -- - - -DIRECTORATE _

(DPE) .__ _ i _ .- ~ - - CON0TROL]

SYSTEM : _OPERATION _

DIRECTORATE I - -

COORCDNATION DIRECTORATE-

(DCO)

IBUSIESS EALUATION PROCUREMENT SUPERVISION ADMINISTRATIONI MANAGEMENT I-| DIRECTORATE : Beneflciaries/ Coordination Supervision Loan Disbursement

(DGE) l Project Evakiathon and Morltoring and Mondtorig and Applications

FK\W46277

sKw4e2n~~

Ix

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BRAZIL

ELECTRICM TRANSMISSION AND CONSERVATION PROJECT

TECHNICAL PERFORMANCE INDICATORS

CEMIC

1988 1987 1966 1996 1990 1991 1992 1998 1994 1996

Numbr of Customers (1000) 2200 23e6 2416 2639 2651 2784 2878 2987 3099 3208

Number of Employee 16990 17490 1865 189804 19803 20813 21762 22633 23504 24377

Customers per Employee 129 182 130 136 134 133 132 132 132 132

Energy Los ses ) 5.8 8.8 8.1 9.0 9.0 9.0 9.0 9.0 9.0 9.0

0

l

CERJ

Number of Customers (1000) 812 644 669 879 917 953 990 lU2 1os 1104

Nuubr of Employees 6172 5100 6132 8067 0351 6447 6581 6720 6816 6953

Cust_mrs per Employee 167 106 142 145 144 148 1S 15a 156 169

Enorgy Losss M) 14 16 16 17 17 16 16 15 14 14

0 ;

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BRAZIL

ELECTRICITY TRANSMISSION AND CONSERVATION PROJECT

TECHNICAL PERFORMANCE INDICATORS

CESP

1966 1967 1988 1989 1990 1991 1992 1993 1994 1995

Number of Customers (1888) 858.2 741.4 768.7 628.6 883 902.8 944.4 986.1 1B24.7 1083.3

Number of Employees 16824 15179 15918 15922 16311 18618 1686 18969 17263 17661

Customers per Employee N.A. N.A. N.A. N.A. N.A. N.A. N.A. N.A. N.A. N.A.

Ener9y Losse (3) 24.2 26.6 26.6 26.5 24.8 23.6 22.5 21.6 20-9

COELBA

Number of Customers (1B9) 1361.4 1445.6 1538 1828.5 1718.6 1612.6 1911.8 2014.4 2120.1 2228.9

Number of Employees 7748 7798 7726 7834 7884 m9 6214 B665 9029 9290

Customers per Employee 175 185 196 221 234 233 288 288 236 246 'Energy Losses (3) 12.5 12.0 10.6 10.3 10.1 9.9 9.8 9.7 9.B 9.5

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BRAZIL

ELECTRICITY TRANSMISSION AND CONSERVATION PROJECT

TECHNICAL PERFORMANCE INDICATORS

COPEL

1988 1987 1998 1989 1990 1991 1992 1993 1994 1996

Number of Customers (I60) 1107.6 1243.1 1309.7 1367.9 1483.7 1600.6 1668.6 1630.2 1692.2 1765.9

Number ot Employees 8941 9310 9437 10379 10726 10916 11129 11301 11412 11674

Customers per Employee 133 1U4 189 132 134 1s7 141 144 148 162

Energy Louses (M) 7.9 8.1 7.5 7.C 7.6 7.6 7.6 7.5 7.8 7.6

CPFL

Number of Customer (1096) 1286.4 1316.1 1380.1 1487.0 1499.3 1668.8 1620.0 1682.1 1748.8 1813.6

Nui mr of Employees 740a 7877 7687 8006 8206 8411 8621 8636 9049 9268

Customrs per Employe 171 178 182 179 l83 185 188 190 193 198

Energy Losses (M) 6.8 8.8 8.8 8.9 8.8 8.3 6.3 8.0 6.0 6.1 I X

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BRAZIL

ELECTRICITY TRANSMISSION AND CONSERVATION PROJECT

TECHNICAL PERFORMANCE INDICATORS

ELETROSUL

1966 1967 196 1969 1986 1991 1992 1993 1994 199C

Number of Customers (10U) 9 9 9 9 9 9 1O 1O 1O 10 A

Nu b r of Employ.e 4876 4439 4412 6998 7709 8051 8149 6149 8149 6149

Customer per Employre N.A. N.A. N.A. N.A. N.A. N.A. N.A. N.A. N.A. N.A.

Energy Lonee (X) 5.3 5.4 6.0 5.4 4.9 4.8 4.2 4.0 8.9 8.6

ItF

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RAZIL

ELIC1RICITY TRANSMISSION AND CONSERVATION PROJECT

TECHNICAL PERFORMANCE INDICATORS

ELETRWAULO

1986 1987 1988 1909 1990 1991 1992 1908 1994 1095

Number of Customers (1S") 8898.2 4926.1 4182.0 4841.0 4600.0 4859.0 4820.0 4984.0 6147.0 6512.0

Number of Employ e 21271 2060 21128 22448 23121 28026 24740 26683 26391 27224

Customers per Employee 188 195 198 198 196 196 195 195 195 196

Energy Lie (M) 7.4 7.2 7.1 7.1 7.1 7.1 7.1 7.1 7.1 7.1

Number of Customero (1666) 2166.7 2196.4 2106.8 2202.1 2857.9 2418.8 2471.1 2630.3 2651.4 2688.0

Number of Employee. 14002 14162 14644 15078 16662 18822 16640 16061 17821 17667

Custore por Emplory 164 165 164 15" 147 140 148 149 149 149 X

Energy Loses (M) 10.1 9.9 10.2 9.0 9.0 9.0 9.0 9.0 9.0 9.0 'J'

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ANNEX 3.11Page 1 of 2

BRAZIL

ELECTRICITY TRANSMISSION AND CONSERVATION PROJECT

REPORTING REQUIREMENTSTechnical and Financial)

The following periodic reports will be submitted by ELETROBRAS tothe Bank with respect to the beneficiaries:

1. Updated five-year investment vrogram and financial Dlan

Date of presentation: By November 30 of each year

Statements: - Market Projection- Investment by Company and Major Project- Cost of Service- Flow of Funds- Income Statement- Balance Sheet

2. Annual Financial Monitoring ReDort (of previous year)

Date of Presentationt By August 31 of each year

Statements: - Cost of Service- Flow of Funds- Income Statement- Balance Sheet- Financial Indicators

The consolidation required for the preparation of the abovestatements will be certified by independent auditors satisfactoryto the Bank.

3. Annual Budaet

Date of Presentation: By December 31 of each year

Statement: - Programa de Dispendios Globais (PDG)

4. Quarterly Budaet Monitorins Report

Date of Presentation: 45 days after the end of the quarter

Statement: PDG

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ANNEX 3.11Page 2 of 2

5. Quarter Y Market Report

Date of Presentation: 45 days after the end of the quarter

Statement: Boletim Trimestral de Acompanhamento de Mercadoissued by DEMEIELETROBRAS

6. Monthly Financial Report

Date of Presentation: 15 days after end of the month

StatementlFormat: A table prepared by DNAEE setting forththe structure of the consolidated cost ofservice for the electric power sector plus(a) an evaluation of the development ofcosts; (b) a comparison of evolution ofpower tariff indices and tne level ofprices; and (c) a statement of measures tobe taken to correct developments whichmight defeat the objectives of the PSRP.

7. Quarterly Project Implementation Progress Report

Date of Presentations 45 days after the end of the quarter

Statement/Formats Relat6rio Trimestral de AcompanhamentoFisico de Obras by DEME/ELETROBRAS

8. Quarterly Monitoring Report of ELETROBRAS'program to enhanceQuality of Power Supply

Date of Presentations 45 days after the end of quarter

- Statistics of Power outages/curtailments- Reliability levels- Evaluation of industrial consumption under subsidized

tariffs- Structure of power supply (hydro, nuclear, oil, and coal)

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WmiL

8TmICIY TRMSSOISCN MSND COS6ERVAT1 P8tJlal

BMNWlIC H4ALIS'V

yearCost Stream (USS *illIon) Benef;t Streams (US* aslion) S/

Capibal Costs Operation and Muintenance 4/ Total Total Ierest.------ -~~-~- ~ ~-~ -~------------ --- Coet Sales Sales Total Nst

Gneration Tran_mision Distribution Other Total Generation Tranemioason DOtterbution Purchases Toatl -- (Os) (Osh) bnftIt BweneItI

ca~1990 28.4 113.4 9W.8 7.8 244.6 0.0 1.1 1.0 2.2 4.2 248.8 6299.0 95.8 S.2 -248.71991 44.9 111.2 93.8 7.0 256.4 0.0 2.2 1.9 9.6 18.7 270.1 685.0 426.0 23.0 -247.11992 8.0 74.7 67.7 7.2 184.6 0.0 8.0 2.6 21.6 27.2 181.8 7422.0 961.2 S1.9 -129.91998 0.0 86.4 68.3 7.3 112.0 0.0 8.4 8.2 88.8 44.9 16.9 7945.0 1700.0 91.8 -68.1194 0.0 0.0 1.4 8.2 59.4 6S.0 68.0 8460.0 2640.0 142.6 76.61W9 0.0 0.0 8.4 8.2 72.0 78.6 78.6 9020.0 3200.0 172.8 94.21996 - I/ 2/ 8/ 0.0 0.0 8.4 8.2 72.0 78.6 78.6 9020.0 3200.0 172.8 94.2

2040

Present Vsle of Costs (18 sIIion) 120.2Preent VSlue of Benefits Cl# mlIliion) 1649.1Total Not Praeent Value ( m million) 878.9Internal Rat. of etrn (eu : 15.8

CPFL

1990 8.0 88.6 48.6 27.6 116.7 0.0 0.4 0.S 8.4 4.2 120.9 12533.0 135.8 7.8 -111.6 I1991 8.0 88.7 48.7 24.1 112.8 0.0 0.7 0.9 18.7 18.8 127.0 1322.0 848.6 29.8 -90.81992 1.7 85.4 58.8 26.0 118.7 0.0 1.1 1.5 30.9 38.5 152.2 18918.0 1258.6 66.8 -84.41998 1.7 58.0 82.0 20.4 182.1 0.0 1.7 2.0 54.6 56.8 190.4 1406.0 2185.6 118.0 -72.4 1-1994 0.0 0.0 1.7 2.0 86.0 89.7 89.7 15294.0 8440.0 185.8 98.1195 0.0 0.0 1.7 2.0 106.8 109.0 109.0 16068.0 4212.0 227.4 118.S1t" - 1/ 2/ a/ 0.0 0.0 1.7 2.0 105.8 109.0 109.0 16068.0 4212.0 227.4 118.5

2048

Preent Vslue f Costs (US illion): 1218.9Pr_est V Iw of Benefits (USS million): 2164.9Total Net Present Value (UN million) : 981.0Internal Rats of Return ): 32.6

alFEL

1990 228.2 75.4 5.0 40.8 406.9 0.0 0.8 0.6 0.7 2.0 408.9 9708.0 97.0 5.2 -403.71991 228.4 78.7 88.2 48.0 408.8 0.7 1.5 1.1 4.5 7.8 411.1 10722.0 S99.6 82.4 -878.81992 168.8 84.5 58.4 81.2 288.4 1.4 1.9 1.6 11.2 16.1 301.5 11711.0 1492.8 80.6 -220.9199 228.6 29.9 68.1 32.s 8S8.1 2.1 2.2 2.2 19.4 28.8 864.9 12449.0 2560.8 189.4 -225.51994 0.0 2.1 2.2 2.2 29.0 88.5 85.8 1809S.0 8872.0 209.1 178.61995 0.0 2.1 2.2 2.2 84.2 40.6 40.6 13782.0 4859.0 246.2 208.6196 - 1/ 2V 8/ 0.0 2.1 2.2 2.2 84.2 40.6 40.6 1*782.0 4589.0 246.2 208.6

2040

Preast Va lu of Cost (US1 milIIon) 1498.9Prea_t Value ot benfits (8SS million): 28684Total Nt Presaet V Iue eSI atilIIon) 871.8Srternal Rate of Return (): 17.2 lbw

ID4

I.A~

1/ Generating plant span life Is ssumed at 50 years.Corresponding replaceent value Is mdc at year 80. 1_2/ Transmission I ine.epan IfeItt aemu-ed at 80 years.Correeponding replacement value is mde at year go.8/ Distribution networkelepan if* i- asued at 20 yeare.Correeponding repltcrent value is mde at year 2D.4/ Costa are ba_e on the folloin esumption-: Generation: US6 83.00011year

Transmision: 1S of capital invetaent per yearDistribution: 85o a capital investmnt per yearElectricity Purchesb: 25 USII/IS

o/Avesra retai taXrif: 70 WSjSi

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BRAZIL

LBRICrTY TRANSMISSI& IV CW4 ATION PROJWT

IONOIC ANALIs

YearCast Stream (US ml I ion) 8enefit Stream USS million) S/

Capital Coots Operation and Maintenance 4/ Total Total Increst.-- - ------ - ------------------- Caste Sales S.o ." Total Mat

Oseratlon Tranealian Distribution Other Total Generation Tran_m;lan Distribution Purchas TotI ---- (awh) (*oh) Benef its Benet ts

EETROSLL

1990 600.7 114.8 0.0 80.4 775.9 0.0 1.1 0.0 0.0 1.1 7.o 13910.0 0.C 0.0 -777.01991 798.8 70.6 0.0 137.3 1001.5 1.6 1.9 0.0 0.0 8.5 1006.0 18910.0 0.0 0.0 -1005.0192 940.1 12.9 0.0 164.8 1217.8 8.2 8.1 0.0 0.0 6.8 1228.6 16214.0 782.4 42.2 -1181.31W9 111t.9 12.1 0.0 177.1 1301.1 4.8 8.2 0.0 0.0 8.0 1309.1 18168.0 8406.4 183.9 -1125.21994 0.0 4.8 8.2 0.0 0.0 8.0 8.0 18179.0 4269.0 280.5 m.5199 0.0 4.8 8.2 0.0 0.0 8.0 8.0 19S20.0 6610.0 802.9 294.9196 - 1/ 2/ 0.0 4.8 8.2 0.0 0.0 8.0 8.0 20691.2 6781.2 866.2 388.2

2040

Presnt V lue of Casts (UQS1 ml llIon) 8419.5Present V l uf Boneis I(US ml lion): 8432.0TOtal Nt Present Vslw S millian): 12.5Internal Rat @ Return Ms: 10.0

1990 75.9 169.7 90.1 62.6 896.8 0.0 1.7 0.9 8.1 10.7 409.0 46988.0 322.8 17.4 -391.51991 64.6 142.4 182.8 76.5 486.3 0.2 8.1 2.2 83.5 89.0 475.8 48720.0 1838.4 72.8 -406.0I12 94.6 162.9 116.5. 4.0 487.0 0.4 4.8 8.4 80.8 88.8 525.8 50724.0 82o.o 178.8 -3s .4 I-a1996 84.2 165.9 187.4 80.5 438.0 0.6 6.4 4.8 1S2.7 164.5 802.5 53009.0 6106.0 829.8 -272.68 I-1994 0.0 0.6 8.4 4.8 254.5 266.8 268.8 S554.0 10180.0 549.7 2e8.5 I-199S 0.0 0.6 6.4 4.8 328.6 885.8 855.8 58314.0 12940.0 698.8 868.5199 - 1/ 2/ 3/ 0.0 0.6 6.4 4.8 328.5 335.3 335.3 s8814.0 12940.0 698.8 363.5

2040

Present Value of Caosts (US *i Illo) : s74.1Presnt Value of 8enefits S millI n) 6S48.4total Net PresentVlue V U I e illion) : 2674.4Internal Rats of Rturn S)": 27.4

LtON

1990 17.6 109.1 78.1 81.2 251.0 0.0 1.1 0.7 8.0 4.9 285.8 19958.0 141.8 7.8 -228.21991 88.8 176.4 82.1 48.6 343.9 0.1 2.9 1.6 18.2 17.7 361.8 20807.0 62. 33.6 -325.01992 40.7 205.4 79.5 48.7 382.3 0.2 4.9 2.a 30.4 W7.9 420.2 21687.0 1482.2 77.3 -642.9198 58.6 125.8 77.8 84.4 29S.9 0.8 6.2 8.1 65.8 64.9 860.8 2956.0S 2604.0 140.6 -220.21994 0.0 0.5 6.2 8.1 89.9 '9.5 99.5 23481.0 4231.0 228.S 129.019s 0.0 0.3 6.2 8.1 112.4 122.0 122.0 24538.0 5288.0 285.6 165.6199 - 1/ 2/ 3/ 0.0 0.8 6.2 8.1 112.4 122.0 122.0 24538.0 M88.0 285.6 163.6

2040

Present VlIue of Coats CS miillion) s 1948.5Preenl Value of efit. S M ml I Ion) 2896.Totnl Net Pr _st Value US *illon) 747.1Intenal Rate of Return 1 17.4

NOM:

1/ seerating plant span life is aseu_ed at 80 yore.Correoponding replacement value Is md, at year 60.2/ Tranailesion li iiespan if. is uood at 30 yeara.Corresponding replacement value Is mad at year 30.8/ Distribution nstsorkalepan I ife is aesuge at 20 years.Carresponding replacent valua is made at year 20.4/ Casts are basd an the folloaini amueptiana: gesneratio; US$S 3000/W/yeur

Tranemsion: 1S at capital inventent par yearDistribution: 9 of capital investeent per yoer

S/ Averags retai I tariff 70 USI/WthAverag bulk tariff: 38 U6S/MI

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BRAZIL

ELTRzICT TRMNIa9SIW AND CONSEVATIN FPR0JET----------------------------------------------

EtOIINIC ANISYS_______________

YearCoot Streams (USI million) Benefit Streams (CUS m;l ion) 5/

Capital Coate Operation *nd Mointonance 4/ Total Total Incrust.--------- --- _ -------_-- -- _ _-_ -- _----------C-S--------------------- Coat Sale Sale. Total Not

(Ineration Tranainaelon Diotrbuton Other Total Oneoration Traneuimaion Distribution Purchase Total ----- (Cah) (Coh) Benfito Bnfit.

1990 418.1 128. 238.4 50.7 838.8 0.0 1.8 2.4 2.2 5.8 641.1 28499.0 290.2 15.7 -82.51910 84.8 150.0 236.6 57.6 1061.0 1.0 2.8 4.8 10.6 19.0 1050.0 30543.0 1898.0 75.5 -974.861992 600.6 200.0 249.4 66.9 1116.9 2.0 4.8 7.3 25.1 39.1 1156.0 32618.0 3342.0 180.5 -975.51i99 813.5 250.0 248.0 74.2 1068.7 3.0 7.3 9.7 45.8 68.5 1151.2 34628.0 6064.0 327.5 -823.71994 0.0 3.0 7.3 9.7 73.5 93.5 93.5 36843.0 9795.0 528.9 435.41995 0.0 3.0 7.3 9.7 86.9 108.9 108.9 3889S.0 11847.0 639.7 530.91996 - 1/ 2/ S/ 0.0 3.0 7.3 9.7 88.9 108.9 106.9 38895.0 11847.0 639.7 530.9

2040

Preent Value of Cost. (U* Imilion): 4168,8Preeent Volue of Benefit. (UI millIon): 6069.4Total Not Prevent Value (USI million): 1910.5Internel Rat. of Return (S) 15.9

CERJ

1990 0.3 11.1 41.7 3.6 56.7 0.0 0.1 0.4 1.3 1.8 568. 4401.0 50.4 2.7 -55.81991 0.1 4.8 40.8 2.4 47.6 0.0 0.2 0.8 4.7 5.7 53.3 4622.0 189.2 10.2 -43.11992 0.6 2.6 33.0 3.1 39.3 0.0 0.2 1.2 11.8 13.1 52.4 4935.0 471.6 23.5 -27.01998 0.6 2.9 84.4 4.0 41.9 0.0 0.2 1.8 22.1 23.8 65.7 5284.0 884.0 47.7 -18.0 1_1994 0.0 0.0 0.2 1.5 35.8 37.5 S7. 5s579.0 1430.0 77.2 39.81998 0.0 0.0 0.2 1.S 44.0 45.7 45.7 5907.0 1758.0 94.9 49.31926 - 1/ 2/ 8/ 0.0 0.0 0.2 1.5 44.0 48.7 45.7 5907.0 1758.0 94.9 49.3

2040

Proest Val uIe af Coste (W ill ion : 506 2Preent VaIu of B8nefit. (UImllion)I 697 0Total Nrt Proent Vaue e (LS million) 393.8Internal Rate of Return (X) 82.4

CESP

1990 11S4.6 168.4 94.8 268.2 1681.0 0.0 1.7 0.9 0.0 2.6 163. 3 49897.0 0.0 0.0 -1683.61991 1286.6 65.4 64.8 136.2 1530.0 2.0 2.8 1.6 0.0 8.9 1338.9 49897.0 0.0 0.0 -1565.91992 1097.8 36.2 67.0 120.3 1321.6 4.0 2.7 2.3 0.0 9.0 1330.6 49897.0 0.0 0.0 -I330.61993 724.6 71.0 74.2 120.2 990.0 6.0 8.4 8.0 0.0 12.4 1002.4 52906.0 2404.8 129.9 -872.61994 0.0 6.0 8.4 8.0 0.0 12.4 12.4 54115.0 4218.0 227.8 215.41998 0.0 6.0 8.4 3.0 0.0 12.4 12.4 56361.0 6864.0 389.9 347.41996 - 1/ 2/ 8/ 0.0 6.0 S.4 8.0 0.0 12.4 12.4 s9954.7 10057.7 548.1 530.7

2040

Prean tValue of Coot Q(J *mltion): 4620.1_revent Value of Senefitt (WI mtilion) 6787.9

Total Not Preent Value (USI milion) 2117.8Internal Rat of Return M: 12.9

I/ Ooneratlng plant opan ife t- aesueod at 50 yeare.Corroepondineg reoacelnt value ie made after year 50.2/ Transmission Ilneospen life is aoumed at 80 yeare.Corromponding replacesent value is made after year 30.3/ Distribution n.tw4rbe'opan life ie aeeured et 20 yearo.Cr. ,. esonding replaceenst value is mde after yeor 20.4/ Cost. are bosed on tho fol losing asuption-: Coenerion: .18 3,000/14/year

Tra_mie-ion: 1S of capital Investment per yearDistribution: 35 of capital Investment per yearElectricity Purchaae: 25 USII/Wh

s/ Averape retaol tariff: 70 USWI/bh and everage bulk teriff: 86 USSI/Wk.

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ANNEX 3.13Page 1 of 8

BRAZIL

ELECTRICITY TRANSMISSION AND CONSERVATION PROJECT

DEMAND MANAGEMENT AND CONSERVATION PROGRAMS

1990-91 PART A OF PROCEL

The demand management and conservation programs have been divided into fourgroups given their nature and components. A detailed description isincluded belowt

A. Programs on Load Management

1. The Load Management Programs (LMP) included in the project belongto two different categories: (i) indirect load management (or pricing), and(ii) direct load management and control. Both categories of LMP activitymodify the shape of the power system load curve by reducing total systemcosts. These conservation programs generally require continuous activityas opposed te investment programs in end-use or supply efficiency whichrequire only a single action.

(i) Indirect Load Managemen- (Pricing)

2. The most successful and frequently less costly LMP to implement isbased on the use of price measures which result in modifications ofconsumption patterns. These modifications tend to smooth (even-out) thesystem load curve. This type of LMP provides symmetry between the system'savailability of peak relief and the availability of increasing load duringoff-peak hours. In October 1981, Brazil started to implement measuresbased on the results of a comprehensive study of long-run marginal cost(LRHC) tariffs undertaken by DNAEE (in association with ELETROBRAS) andBank financing. The results of this study are being put into effect overseveral years in the framework of currently enacted legislation. Today,most industrial consumers connected so medium and high voltage levels arebeing billed using time and seasonally adjusted marginal cost basedtariffs.

3. By 1989, as a result of the implementation of the new tariffsystem, about 2,100 MW (2,000 MW after implementation of the Blue Tariffand 100 MW after implementation of the Green Tariff) have been displacedfrom peak to off-peak hours resulting on a remarkable change on the systemload curve shape (see Figure 1). This change represents savings equivalentto about US$3,150 millions, as a result of deferring the installation ofpeaking capability. This is a consenrative estimate as it reflects onlyexisting consumers; new consumers will be connected to the system withloads already modulated in response to the new tariffs.

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ANNEX 3.13Page 2 of 8

4. Consolidation of the pricing system (i.e., complete application ofthe whole set of marginal cost based tariffs, and customers familiarizationwith and complete understanding of them) is expected to produce additionalsavings in new investments of about US$ 2,250 millions, through thedisplacement of about 1,500 MW from peak to off-peak hours (see Figure 1).It is expected that: ti) before January, 1992, the continuous applicationof the Blue Tariff would displace an additional load of about 500 MW frompeak to off-peak hours, (iJ) also before January, 1992, the consolidationthe Green Tariff would displace another 500 MW; and (iii) during the firstsix years of application of the Yellow Tariff, an additional 500 MW of loadwould also be displaced.

5. Other results from the consolidation of the pricing system whichare already benefitting the power sector and which are expected to be morenotable in the near future are: (i) a greater integration of consumers andbuppliers ai a result of a more adequate set of price signals thatintegrate their interests into the decision making process; (ii) asignificant increase in end use efficiency which will result in benefits toproducers, distributors and consumers. Marginal cost based tariffs provideconsumers with the best possible set of signals to rationalize the use ofelectricity. On the supply side this will allow for a more coherentprocess of expansion and operation planning; and it will help to improvethe systems' actual operation (including a reduction in peak losses), aswell as the allocation of benefits resulting from sales and purchases ofelectricity between power companies; and (iii) a better definition ofsupply costs which will allow for a better definition of price levels foreach group of consumers, and improved appraisal of the cost of political,economic, and social constraints. The knowledge of the marginal coststructure allows evaluation of subsidies and economic transfers betweenconsumer groups, thus facilitating political, social, and economicdecisions. Additionally, it may serve as a basis for defining alternatJveelectrical power pricing strategies. 1/

6. The benefits obtained are the result of more than ten years ofefforts allocated to the power sector in order to provide optimal tariffpolicy. The proposed project seeks to support and strength these effortsthrough an economic evaluation of changes in the load curve and a nation-wide evaluation of the components nf the load curve itself. The cost ofthese two programs has been estimated at about US$680,000.

7. In addition, the proposed project includes an increased focus onthe improvement of the average system power factor which will reducereactive power flows and thereby reduce losses. The cost of this programhas been estimated at about US$1.3 million, and its benefits related toloss reduction are estimated at about 3,000 GWH per year--for Blue Tariff

/ These estimates are based on actual "effective" power prices billed(about 35 below marginal costs, as shown in Annex 1.3, Table 7). Ifprices were increased to reflect their respective marginal costs,estimated benefits would look even more impressive.

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ANNEX 3.13Page 3 of 8

customers. This would imply an increase in system power factor from 0.85to 0.89 in 1990. 2/ These electricity savings would result on savings ininvestment of about US$9 million by only installing capacitors, and ofabout US$750 millions by savings equivalent to 500 MW which corresponds todeferral in the installation of additional capacity (see Attachment for adetailed technical summary of this program and remaining ones included inthe DMC component). To achieve these savings, it is necessary to changethe existing reactive energy tariffs.

8. In addition to the above measures,the implementation in 1985 ofsummer time (clock adjustment) was another successful application ofindirect load management. This measure changed the load curve for theperiod October to February and temporarily reduced the risks of blackouts.The net result was an one time decrease of about 0.5% in energy consumptionand of about 3Z in power demanded during peak hours.

(ii) Direct Load Management and Control

9. Direct LMP are generally implemented through utility controlledcustomer side reductions on water heating, air conditioning cycling, andindustrial load reduction programs, such as interruptible rates. Theutility provides a signal to the customer or directly to the customer loadto reduce and/or to interrupt consumption. These programs provide for peakload relief and emergency load relief when the system is unable to continueto supply the load. Programs of this nature have been developedextersively within the United States to focus on high energy use loads inthe residential, commercial and industrial sectors. However, experience todate with these programs has indicated that they are frequently expensiveto implement and maintain in other than the large industrial and commercialsectors.

10. Brazil's experience with direct LMP is very limited, with themajor exception of rationing (load shedding) programs which have beenimplemented when power systems were unable to supply the electricitydemanded. The proposed project seeks to complement the positive resultsobtained so far by the Brazilian power pricing system, through pilotprograms on direct load management that use: (i) centralized telecommands;(ii) decentralized telecommands; and (iii) devices specially design torestrict demand. These pilot programs have an estimated cost of aboutUS$3.2 million. Expected benefits are: (i) better definition of thecentralized and decentralized telecommand equipment and systems and theiradaptability to the Brazilian power system; (ii) better definition of thetechnical and the economic feasibility of power distribution load controlautomatization equipment such as timers in terms of low-cost loadmanagement and also the use of hour-seasonal metering equipment. It isexpected that this automation will improve load management and control atthe level of circuits and distribution networks, which will .esult in

2/ DNAEE estimates that additional timing of this measure could result inan increase of the power factor to 0.92.

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ANNEX 3.13Page 4 of 8

optimized operation of power system through loss reduction, rationalizationof operation, and conservation of energy; (iii) evaluation of theadvantages and convenience to use hour-seasonable tariff schemes on highand medium voltage level consumers and the evaluation of equipment andsystems presently available in the national market for doing so; and (iv)cost-benefit evaluation of adapting existing demand management equipmentand systems as "demand controllers". In their most simple configuration,these systems connect and disconnect previously selected (in priorityorder) loads, when the user's power demanded is larger than the maximumlevel agreed to. In the more advanced configurations, microprocessorsystems allow for automatic monitoring, management, and control of the loadin close to real time. As an aggregate, it is expected that these benefitswill result in an electricity conservation of roughly 400 GHW per year at acost of about US$400 millions (or the equivalent of installation of roughly300 MW of additional generating capacity during the period 1990-1992).

B. Programs on Energy Efficiency

11. The energy conservation investments included in this component aregenerally related to end-use industrial and commercial consumers and topublic lightning. As a result, such investments have not, to date inBrazil, been considered in the power sector's least cost investment planwhich considers only supply options. The end-use energy benefits derivedfr-' these programs are, however, significant. In fact, their average LRMCis estimated to be about US$15/MWH, which is significantly lower than theaverage LRMC of the sector's least cost investment plan (about US$71/MWH).The proposed project includes the following programs on energy efficiency:electrical furnaces, public lighting, power sector buildings, commercialbuildings, public buildings, laboratory equipment, training, energy auditand studies, industrial demonstrations, and information. The first threeare implementation programs and, therefore, require significant investmentin equipment. The remaining programs are a preparation for and'anappraisal of future subprojects, and include only studies.

(i) Electrical Furnaces

12. The objective of this program is to improve the operatingefficiency of selected electrical furnaces through the development andimplementation of improvements in operating procedures. The programincludes diagnostics, technical studies, preparation of guidelines andanalysis of incentives in 75 electrical furnaces among 21 industries.These targeted electrical furnaces account for about 658 MW or 70? of thetotal demand of the 200 units existing in Brazil. Complete execution ofthe program would take 24 months and cost about US$6 million. The programis expected to increase by about 52 the operating efficiency of thisprocess, which is equivalent to generating additional energy at a cost ofUS$5/MWH, substantially lower than the actual marginal cost of distributionbetween 88KV and 138KV (US$48/MWH). As shown in Table 1, savings inelectricity are estimated to be 202 GWH/year, equivalent to deferring theinstallation of about 33 MW of additional generating capacity, which givesan avoided cost of about US$49 million. In addition, other indirect

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ANNEX 3.13Page 5 of 8

benefits resulting from this program are: ti) its replicability in Brazil'sremaining electrical furnaces; (ii) reduction of other inputs such aselectrodes and refractories; and (iii) a demonstration effect to otherindustries.

(ii) Public Lighting

13. Brazil has about 770,000 public lighting points which still,0'operate with incandescent bulbs. The objective of this program is toincrease public lighting efficiency through the replacement of 175Wincandescent bulbs with 80W fluorescent lamps and 5OW high pressure sodiumfluorescent lamps (HPS). The program expects to replace 100,000incandescent lamps in 1990 and 1991, and 120,000 in 1992 (852 withfluorescent lamps and 152 with HPS). The capital cost is estimated atabout US$7.7 million, while labor installaticn expenses are estimated atabout US$12.3 million. Annual maintenance costs are estimated at aboutUS$5.2 for incandescent lamps, US$1.3 for fluorescent, and US$2.5 for HPS.Ballast losses are 12W in fluorescent and 8W in HPS. This program isexpected to save about 103 GWH/year, equivalent to deferring theinstallation of 27 MW of additional capacity, which gives an avoided costof US$40 million. As shown in Table 1, the resulting conservation cost isUS$26/MWH, substantially lower than the actual marginal cost associatedwith the provision of this service (US$96/MWH).

(iii) Power Sector Buildings

14. The objectives of this program are: (i) to reduce electricityconsumption in buildings belonging to the power sector through themodernization and improvement of lighting and air conditioning systems, and(ii) to advertise the results as examples of energy conservation incommercial type structures. The program has a cost of about US$7.5million, based on an estimated investment cost of about US$15/m2 and anarea of 500 thousands m2. Buildings expecting to qualify for this programwill be required to demonstrate that they would be able to increaseefficiency in at least 202. Savings of about 36 GWH/year are expected,which are equivalent to deferring the installation of 10 MW of additionalcapacity. These savings give an avoided cost of US$15 million and, asshown in Table 1, a conservation cost of US$39/MWH. The actual marginalcost of providing electrical service to this type of customers is aboutUS$96/RWH, considerably higher than the expected conservation cost.

(iv) Commercial Buildings

15. The objective of this program is to reduce the consumption ofelectricity in commercial buildings. The subproject includes diagnostics,optimization studies, and consultancies on the construction of newbuildings. The program has an estimated cost of about US$1.6 million, andis expected to produce recommendations that eventually would reduceelectricity consumption by 230 GWH/year after their implementation. Thisis equivalent to deferring the installation of about 59 MW of additionalcapacity.

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ANNEX 3.13Page 6 of 8

(v) Public Building

16. The objective of this program is to reduce the consumption ofelectricity in public buildings and advertise the results as examples ofenergy conservation. The subproject includes diagnostics, optimizationstudies, and acquisition and installation of lighting and air conditioningequipment. The program has an estimated cost of about US$0.5 million.Buildings expecting to qualify for this program should demonstrate thatthey have the potential for saving enough electricity, for the resultingconservation cost to be below US$30/HWH, which is substantially lower thanthe actual marginal cost of providing electrical service to this type ofcustomers (US$96/KWH).

(vi) Eauipment for Laboratories

17. The objective of this program is to support CEPEL and otherlaboratories engaged in energy conservation activities. The programinicludes the acquisition of equipment valued at US$5 millions. With theseequipment, these laboratories will be able to initiate 7 new projects.

(vii) Trainini and Education

18. The objective of this program is to support energy conservationthrough a massive education program targeted to all educational levels.Activities to be financed under this program includes publication of190,000 booklets; 160,000 lectures; and 75 scholarships to undertake threeyear post-graduate studies in the areas of architecture and engineering.The program has an estimated cost of about US$1.7 million.

(viii) Energv Audits and Studies

19. The objective of this program is to optimize electricity,consumption in selected industries. This program has two components: (i)addressed industries connected up to 69 RV and includes diagnostics anddevelopment of technical studies in energy system optimization; and (ii)addressed to industries connected above 69 KV (usually large electricityconsumers) and includes not only the acti7ities mentioned above but alsothe possible participation of new consultant service firms in presidingenergy conservation advice to the private sector. The first component hasan estimated cost of about US$0.9 million, while the second one isestimated to cost about US$0.8 million. Once the program is implemented,expected savings are estimated between 15Z and 35? of total electricityconsumption by these industries.

(ix) Industrial Demonstration

2u. The objective of this program is to advertise the results obtainedwith the optimization subprojects, inducing other industries to adapt thebenefits obtained from these subprojects. The program would helpindustries with high potential for conservation, to finance the purchase ofadequate equipment subject to their commitment to allow the experience to

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ANNEX 3.13Page 7 of 8

be monitored and used as example of energy conservation. This program isscheduled to begin in 1991, once PROCEL had assimilated all experiencesresulting from the audit and optimization programs (para. 19). Its costhas been estimated at about US$1.5 million. Its expected savings areestimated at US$25/MWH, substantially lower than the actual marginal costof distribution to industrial customers above 69 KV (US$48/MWH andUSS45/MWH) and below 69 KW (USS51/HWH and US$64/MWH).

(z) Information

21. The objective of this program is to inform the public on the lastdevelopments regarding conservation, through the utilization of allavailable media communication, such as radio, television, posters,seminars. The program has an estimated cost of about US$8 million.

C. Programs on Loss Reduction

22. Installation of capacitor banks on transmission/distributionnetworks is a highly cost-efficient means of: (i) reducing power systemlosses (as the electricity produced at the utility generating anddistributing costs is not billed as this energy is dissipated through theoverloaded installations as a result of thermo-electric effects or it isnot accounted for because of the utility's billing and metering policyinadequacies); and (ii) improving system power factor and voltage levels.The installation of capacitor banks offers a convenient and practical meansof relieving power installattens (lines and source equipment such asgenerators and transformers, of wattless current, i.e., reduces the laggingcomponent of the circuit current by increasing the reactive powercomponent. The net benefit on the utility is the substantial reduction insystem facilities investment. The proposed EMP component within the PROCELprogram provides the installation of about 500 MVAR capacity of capacitor(reactors) banks at an estimated cost of US$21 million. It is expectedthat this component alone will displace the necessity of installing about100 MW of generating capacity i.e., about 420 GWh/year (US$20,000,000).This is also equivalent to reducing the beneficiaries' system losses byabout 3Z from 14,000 GWh to 13,580 GWh during 1990.

D. Proirams on Cogeneration

23. Within the context of the electrical power sector in Brazil,cogeneration offers a potential development resource. Actively discouragedor prohibited within the current administrative legislative structure,industrial and agro-industrial cogeneration facilities may offersignificant economies to the supply of electric energy. To date there havebeen only a limited number of paper studies carried out which evaluate thepotential for cogeneration in specific sectors. One of these studiesfocuses on the potential for cogeneration using bagasse from thesugar/alcohol production processes as input to gasification and electricalgeneration.

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ANNEX 3.13Page 8 of 8

24. There are a series of studies and a set of demonstrations thatneed to be completed before a full scale cogeneration development effortcould be mounted in Brazil. These are of two types. The first isengineering and institutional, the second engineering and physical. Theexisting engineering and institutional issues hamper the integration ofcogeneration alternatives in the developments and operations of the powersector. These issues are related to resource allocation and availabilityof the resource relative to the strength and structure of the Braziliangrid and to the relative location of the regional demand for electricpower. Other issue relates directly to the legal and/or administrativerequirements for interconnection of privately owned and operated generatingschemes with the integrated power system. This requires definition of therules for interconnection and, even more specifically, the rules forpayment for generation. The engineering and physical issues relate to theunderstanding of the adaptability of technologies used in the sugar/alcoholproduction process. Specific technologies for cogeneration using residualssuch as bagasse are well known and are implemented to greater or lesserextend in a number of sugar producing countries. There is a new set oftechnologies currently available which utilize gasification techniques withhighly sophisticated turbines. While proven, they require furtherevaluation in the Brazilian context.

25. The proposed project would include a program with the followingobjectives: (i) to allow the Government, the power sector, and eventualprivate investors to have more information and a better understanding ofthe issues involved in a fully integrated cogeneration scheme; (ii) toprovide those economic agents with a methodological base for appraisingthis program; and (iii) to gather enough elements for financing an eventualcogeneration investment program. This program is estimated to cost aboutUS$1 million and includes the following activities: (i) an estimation ofhow many of the 4,000 MW to 5,000 MW potentially available are feasible forcommercial development; (ii) an evaluation of how this potential mayincrease as a result of an increase in the industrial activity; (iii) ananalysis of foreign experiences and of their applicability to Brazil; (iv)an analysis of the feasibility of this development being carried out by thesame industries which have the potential; and (v) a study of theinstitutional and legal implications of such an initiative.

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