This excerpt taken from the PBR 20-F filed May 22, 2009.
We sell most of the commercial capacity that is not defined as New Energy under long-term
bilateral contracts, primarily with power distribution companies. Such contracts are subject to the regulations that governed the power sector in Brazil before the enactment of the New Regulatory Model for the power sector. Under these agreements, we are compensated for our thermoelectric capacity based on a combination of factors, including whether or not we actually generate energy, the certified power generation capacity of each power plant, and conditions of supply and demand in Brazils power market. Each of these factors are determined by the appropriate regulatory bodies in Brazil, including the Ministry of Mines and Energy, the Operador Nacional do Sistema ElétricoONS (National Electricity System Operator), and the Câmara de Comercialização de Energia ElétricaCCEE (Electricity Trading Board).
Our revenues under these contracts have been reduced by the limited supply of natural gas, which affects the certified power generation capacity of our gas-fired plants. Even as we increase the available supply of natural gas, our earnings under these contracts are difficult to predict because the net margins are subject to adjustments coordinated by the CCEE. Additionally, the contracts do not permit us to directly pass on to our customers changes in the cost of acquiring natural gas. In 2009, 1,124 MWavg of our generating capacity will be subject to the terms of these bilateral contracts, with 1,032 MWavg committed in 2010, 1,030 MWavg in each of 2011 and 2012 and 1,029 MWavg in 2013. The agreements will run off gradually, with the last contract expiring in 2028.
During periods of high international gas prices and low demand for power in Brazil, it is often more profitable for us to sell our gas directly to the market than to generate contracted amounts of energy from our own gas-fired plants. Under these circumstances, we have the flexibility to fulfill our contractual commitments by purchasing power from third parties. In the past, limited
supplies of natural gas affected our ability to generate electricity from our own thermoelectric plants, even when it would have been profitable for us to do so. Problems with our natural gas infrastructure also exposed us to fines when we were unable to deliver contracted amounts of electricity. We paid fines in the total amount of R$434 million (U.S.$236 million) in 2008, R$89 million (U.S.$48 million) of which related to events that occurred in 2007. We expect to be able to fully supply our gas-fired plants when our natural gas distribution network is completed in 2010. At that time, we expect to have even greater flexibility to decide, on a weekly basis, how best to utilize our gas resources in the thermoelectric or non-thermoelectric markets based on prevailing economic conditions.